Tuesday, December 27, 2011

A Different Way to Invest in Gold

When people think about investing in gold, they think of the traditional methods. These methods include gold bullion and coins along with gold stocks, funds and exchange traded funds.
There is another way to invest in gold that is rarely though about...that is investing into emerging market economies with large gold mining sectors.

The countries where the gold mining industry makes the biggest contribution to GDP are not places where you may think of like South Africa. But it is smaller countries such as Mali and New Guinea where gold a big part of the nation's GDP. Other countries where gold mining contributes a decent percentage of GDP include Tanzania, Ghana, Uzbekistan and Peru.

In Tanzania, for example, the value of gold exports has tripled over the past five years to $1.5 billion. And this is due solely to rising gold prices.

Of course, to further benefit from the expansion of the gold mining industry, these frontier market countries will need to continue stabilizing their politics and also put in more incentives, such as tax breaks, for overseas mining companies to establish operations in their country.

Since these are frontier markets investors may wonder to invest into their gold mining sector. The best way to do that is through gold mining companies which are heavily exposed to these countries.

One example is AngloGold Ashanti ADR(NYSE: AU) which has invested in Ghana, Mali, Tanzania and Guinea in the past few years. It also started exploration activities in Gabon and the Congo.

Another company to consider is Harmony Gold Mining ADR (NYSE: HMY) which has expanded its exploration activity in Guinea extensively.

Finally, Kinross Gold (NYSE: KGC) has expanded its operations greatly in West African nations.

Investors should keep in mind that in addition to the risk that gold prices will fall, there is still a large political risk in many of these countries. So investors may want to scale in to their positions.

Thursday, December 22, 2011

Apple and Google Score in the Holiday Season

The battle in the smartphone market during the Christmas season seems to have come down to a two-horse race between the iPhone from Apple (Nasdaq: AAPL) and smartphones with the Android operating system developed by Google (Nasdaq: GOOG).

In the third quarter of 2011, the number of Android-powered smartphones knocked the iPhone into second place overall with Korea's Samsung overtaking Apple to become the world's largest seller of smartphones.

However, analysts have expected Apple to bounce back smartly in the fourth quarter following the launch of its iPhone 4S in October. And the analysts may be right. In the U.S., the iPhone 4S has been the best selling phone in the run-up to the Christmas holiday.

The success of the iPhone and Samsung's line of Android-powered smartphones seems to have pushed aside the competitors this holiday season. Competitors such as HTC and Research in Motion (Nasdaq: RIMM) have warned of very weak holiday sales.

An analyst an Bernstein, Pierre Ferragu, said this about Apple and Android-based smartphones: “We now have a strong conviction that the two ecosystems won't leave much room for any alternatives.”

It remains to be seen though whether this will continue to be true in the months ahead.

Thursday, December 15, 2011

The New Safe Haven Investment - Diamonds

Not only are diamonds a girl's best friend, but they may also be a friend to investors looking for a safe haven from market storms.

The supply and demand scenario for diamonds offers a scenario which points to higher prices.

On the demand side, wealthy Chinese and Indian consumers as well as those from the Middle East have lit a fuse under the diamond market.

Last year, Gareth Penny, the CEO of the leading diamond company DeBeers, spoke about Chinese demand: “If you look back 20 years, there was no diamond acquisition culture in China. But today in Beijing, Shanghai, and Guangzhou, there is an obvious launch pad. 40% of brides in those cities are getting diamond engagement rings. It was zero 15 years ago."

Now consider the supply side of the equation. There have been no new discoveries of large diamond mines for more than a decade. And even if one was found, developing a new mine takes 10 to 12 years.

Diamond prices have already jumped in the past year fueled by Asian demand. The value of top quality polished diamonds of 5 carats have risen to roughly $150,000 a carat, up from the $100,000-$120,000 range of a year ago.

No wonder then that DeBeers, which is owned by Anglo American, said its earned more from its diamonds in the first six months of 2011 than in any previous six month period.

Another factor to consider is that diamonds are still cheap, with prices still well below their inflation-adjusted 1980s peak.

So if one believes in the bullish scenario for diamonds, how can an investor get in on it. Besides buying a diamond for someone special, there is one pure play in the stock market on diamonds.

It is a company called Harry Winston Diamond (NYSE: HWD). The company owns a 40% interest in the Diavik Diamond Mine in Canada. It is also a luxury retailer known as a premier diamond jeweler with many locations in emerging markets.

Friday, December 9, 2011

Arab Spring Drives Up Oil Prices

The United Arab Emirates' oil minister, Mohammed Al Hamli. recently defined a “reasonable” price for as oil as between $80 and $100 a barrel. This is quite a jump up from just five years ago when OPEC oil ministers said that a “reasonable” price for oil was about $50 a barrel.

But a look at the price that Middle East countries need to survive economically today explains why oil ministers are now targeting such higher prices.

Not long ago the International Monetary Fund provided a timely update on the so-called 'breakeven price' for oil needed by Middle East producers to balance their fiscal budgets.

In the IMF's latest semi-annual “Regional Economic Outlook: Middle East and Central Asia” report, it estimates that the breakeven oil price for the UAE has now risen about $80 a barrel, up from $60 a barrel in 2008.

For Saudi Arabia, the IMF estimates that $80 a barrel is the breakeven price, up nearly $30 a barrel in just three years.

Part of this increase in the breakeven price can be explained by the sharp increase in spending earlier this year in response to the 'Arab Spring'.

But even before 'Arab Spring', budgets in Middle East countries were ballooning nearly out of control as governments try to deal with little non-oil revenues, rapid population growth and a very generous welfare system where governments pay almost everything for their citizens. These include payments for utilities, fuel, education, housing and health.

The rapid rise in breakeven oil prices means that key members of OPEC now have a strong incentive to defend much higher prices.

It also means that Middle East countries are unlikely to spend any large amounts of money in building spare oil production capacity. This is simply no money in their budgets for such undertakings.

The bottom line for investors and consumers is that oil prices would be extremely unlikely to below $80 a barrel for more than a brief period of time.

This is obviously bullish for oil. Investors can participate easily through the use of an exchange traded fund. The ETF which best reflects global oil prices the United States Brent Oil Fund (NYSE: BNO).

Wednesday, December 7, 2011

The Importance of Angola to the Oil Market

Libya has been at the forefront of oil investors for much of the year. The nation of Angola has also been a source of supply disruptions in 2011, helping push crude oil prices higher.

Angola has been a true success story. Over the last decade, it more than doubled its production. Output rose from 750,000 barrels a day in 2001 to a peak of nearly 2 million barrels a day in January 2010.

The bad news for the global oil market is that the west African country, which joined OPEC in 2007, has seen its output fall significantly this year.

In 2010, Angola pumped an average of 1.85 million barrels of oil per day. But in 2011, it has managed to pump out just an average of 1.65 million barrels a day of oil.

Investors may shrug their shoulders and say 'so what?'. After global oil production is roughly 87 million barrels a day and Angola producers about 2 percent of that total.

However, Angola is far more important to the global oil market than appears at first glance.

Angola pumps a particularly low-sulfur crude, which is highly sought after by Chinese and Indian refineries to produce high quality gasoline and diesel.

China bought about 45 percent of the country's oil production last year. The United States and India are the next two biggest buyers, accounting for another third of Angola's oil exports.

So the global oil market has looked with interest as Angola's oil production stalled due to a lack of new projects and glitches in several existing oil fields. There were technical problems (water injection among others) in the Saxi-Batuque field operated by ExxonMobil (NYSE:BP) and the Greater Plutino field operated by BP PLC ADR (NYSE: BP).

The good news now is that the production problems are being solved. In addition, new oil fields are coming onstream.

The Plazflor field, operated by France's Total SA ADR (NYSE: TOT), will add 200,000 barrels of output while several projects from BP will bring another 150,000 barrels online. Additionally, Exxon's Kizomba-D cluster fields will add on another 150,000 barrels a day.

In total, Angolan production capacity should recover by 400,000 barrels a day year-on-year, alleviating some pressure off high oil prices which is good news for consumers.

Thursday, December 1, 2011

The Whys of Drug Shortages

There is an event going on the pharmaceutical sector which could put lives at risk...but it's not what you may first think.

It's not drugs being recalled for causing dangerous side effects. What is happening is an actual record shortage of much-needed medicines.

Pharmacists Are Worried

The American Society of Health-System Pharmacists said last year its members could not obtain an unprecedented 211 prescription drugs through the usual channels. The Society also reported more than 89 shortages of products in the first three months of this year alone.

The organization convened a national conference on the issue last November and has devoted a special section of its website – www.ashp.org – to drug shortages.

Cynthia Reilly, director of its practice development division, reflects widespread concern among pharmacists. She said, “The clinical impact is significant, with the potential for morbidity and mortality.”

She says pharmacists are spending many hours managing drug shortages and conducting inventory work rather than looking after patients. She also warns that even when alternative treatments are available, they are not always the most appropriate and could lead to dosing and other errors.

Separately, figures from the Food and Drug Administration show a surge in “stock-outs” with 178 drugs in short supply in 2010. This compares to only 65 drugs in 2005.

The growing number of “stock-outs” has sparked rising concern in the healthcare sector for good reason.

Shortages of Critical Drugs

Most of the medicines experiencing shortages are are for generic, off-patent medicines. But they do include some of the most important life-saving therapies, such as drugs to treat acute leukemia and bone marrow cancer.

Dr. Richard Schilsky, chief of oncology at the University of Chicago Medical Center, was the former head of the American Society of Clinical Oncology. He said, “For some of these drugs there is no substitute.”

Yet a growing number of patients in the United States are indeed experiencing problems, sometimes with life-threatening consequences.

One such example occurred due to production problems at Genzyme's Boston plant for its patented 'orphan drug' Fabrazyme. This drug is used treat the rare genetic disorder Fabry's disease. Genzyme was recently bought out by Sanofi-Aventis ADR (NYSE: SNY).

What is behind these shortages of needed drugs? It is being partly driven by intensifying industry consolidation, with a lot of merger and acquisition activity in the sector. This has reduced the number of suppliers and spurred cost control efforts.

These newly-merged companies are simply disengaging because of a lack of profit in producing these drugs.

Coupled with pricing pressure on medicines, some manufacturers have preferred to cease production of those drugs with low margins produced in low volumes.

Another factor is the globalization of the pharmaceutical supply chain. The rise of producers in places like India and China has added further to pricing pressures, as well as a shift to “just in time” production. Ms. Reilly of ASHP commented on this situation, “There is no buffer stock any more, so [pharmacies] don't even have a week's supply of drugs.”

Of course, there is regulation. Mike Benedict, pharmacy director at the Denver Health Medical Center, pointed to drug regulatory shutdowns of manufacturing centers. This, he says, leaves hospitals to stockpile drugs for injections and turning to secondary wholesalers who charge more for medicines they know are in short supply.

Calls for Reform

These shortages of medicine have sparked calls for wide-ranging reform. These reforms include calls for tougher powers given to be given to the FDA and intensified voluntary efforts by generic drug manufacturers to tackle the drug shortfalls.

There have also been calls for fresh financial incentives to ensure adequate provision of older medicines that are in short supply. Others have called for the lowering the regulatory costs of approving some medicines.

However, right now no one really seems to have the right answer.

Perhaps the best solution may be to give pharmaceutical companies incentives to again produce enough of these types of older drugs that are such a necessary part of many people's lives.