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Hedge Funds To Be Tested Tuesday

Have you ever seen those television commercials that consist of “real life” testimonials for products? I remember watching TV in the late nineties and “John Smith,” stockbroker, would rave about some great vacation destination. After stocks came crashing down, “Jane Zinfandel,” real estate investor, took up the baton and went on about how much she loves her exercise equipment. When the U.S. housing market collapsed, “Joe Brown,” hedge fund manager, appeared on my TV set and let me know who makes the finest luxury automobile. The “coolness” factor of these occupations rose exponentially while hot money flowed their way. Once the flow reversed, however, it became a different story. And for hedge funds, this reversal of fortune might have been reached. Louise Story of the New York Times wrote yesterday:

First, the money rushed into hedge funds. Now, some fear, it could rush out. Even as Washington reached a tentative agreement on Sunday over what may become the largest financial bailout in American history, new worries were building inside the nearly $2 trillion world of hedge funds. After years of explosive growth, losses are mounting — and so are concerns that some investors will head for the exits.

No one expects a wholesale flight from hedge funds. But even a modest outflow could reverberate through the financial markets. To pay back investors, some funds may be forced to dump investments at a time when the markets are already shaky.

The big worry is that a spate of hurried sales could unleash a vicious circle within the hedge fund industry, with the sales leading to more losses, and those losses leading to more withdrawals, and so on. A big test will come on Tuesday, when many funds are scheduled to accept withdrawal requests for the end of the year.

“Everybody’s watching for redemptions,” said James McKee, director of hedge fund research at Callan Associates, a consulting firm in San Francisco. “And there could be a cascading effect, where redemptions cause other redemptions.”

Recent performance for the industry has not been stellar. Story noted:

Now, the heady returns of the industry’s glory days are over, at least for now. This is shaping up to be the industry’s worst year on record, with the average fund down nearly 10 percent so far, according to Hedge Fund Research…

Returns are not in yet for September, but hedge fund managers say this month is even worse than the summer. Some funds were hurt by new rules from the Securities and Exchange Commission on short-selling, a tactic for betting against stock prices. The commission made it more difficult to short all stocks and temporarily banned the strategy in more than 800 financial stocks. In particular, this hurt convertible-bond managers, who often buy bonds that can be converted into shares and short the underlying stocks.

The short-selling ban lasts until Thursday evening, but it is widely expected to be extended.

As a result, some hedge funds are going under. According to Story:

A growing number of hedge funds are closing down. About 350 were liquidated in the first half of the year. While hedge funds come and go all the time, if the trend continues, the number of closures would be up 24 percent this year from 2007.

Source:

“Hedge Funds Are Bracing for Investors to Cash Out”
Louise Story
New York Times, September 29, 2008

Quotes For The Week

This week, the QFTW (plural!) have to do with the looming government bailout of Wall Street and the financial system:

It’s astonishing, devastating, and very harmful for America and American citizens. It means we’re in for the worst recession since World War II, as well as higher long-term interest rates, higher inflation, higher taxes, a weaker dollar and substantially lower stock prices.

-Jim Rogers, legendary investor and CEO of Rogers Holdings, in the September 22, 2008, issue of the New York Sun

CBS News found 21 former staffers from the Senate Banking, Housing and Urban Affairs and House Financial Services Committees are now lobbyists for financial firms. Their job? To lobby those in Congress who will shape the financial bailout. The former staffers now represent hedge funds, private equity firms, investment banks and the failed mortgage giants Fannie Mae and Freddie Mac.

-CBS News, September 26 2008

The bottom line is the Democrats want to give this money to the banks because most of it’s going to go to the large New York city banks, and those folks are generous supporters of the National Democratic Party, senators and congressmen running for re-election, and Barack Obama.

-Peter Morici, University of Maryland business professor and multiple-time winner of MarketWatch’s “Forecaster of the Month” award, September 28, 2008

You have the former Chairman of Goldman Sachs asking for 700 billion dollars, and in his initial request, asking for it in such an un-American way that I think he should have resigned. I think Paulson has terminally misunderstood the nature of the American system. Not just no review, no judicial review, no congressional accountability. Give me 700 billion dollars, 700 BILLION dollars! I’ll be glad to spend it for you. That’s a centralization of power that is totally un-American.

-Newt Gingrich, former Speaker of the House on ABC’s “This Week with George Stephanopoulos” roundtable, September 28, 2008

Manhattan Real Estate: Has The Day Of Reckoning Arrived?

I’ve been tracking the Manhattan real estate market for a while now. In spite of the carnage taking place in other regions of the country, this posh area has appeared to be pretty resilient. Not anymore, according to some Manhattan insiders. Last week, Brian Ross of ABC News looked at whether or not the “Day of Reckoning” had finally arrived for the Manhattan housing market, and wrote:

Manhattan’s finest co-op apartments may have already lost a fourth of their value as a result of the financial crisis, and the worst is yet to come, says leading New York estate broker Kathy Sloane, of Brown Harris Stevens.

An owner of a five-million dollar Park Avenue apartment, only an average residence by investment banker standards, “may be lucky to achieve $3.5 million” a month from now, said Sloane, whose clients have included celebrities, the super-rich and prominent families including the Clintons.

“If someone saw a bid between $3.8 million and $4.2 million from a qualified buyer, take that bid,” said Sloane in an interview to be broadcast on 20/20 Friday night.

“You can be Lehman Brothers or you can be Merrill Lynch, meaning you can go down with the ship,” she said, “or you can say, look, there’s a huge storm about to crash and we need to get to higher ground and make a plan.”

Ross also spoke to Newsweek contributing editor and Manhattan resident Holly Peterson about how the turmoil on Wall Street is affecting local real estate conditions. Ross wrote:

Prices for some apartments in premier Park Avenue and Fifth Avenue co-operative buildings have soared well beyond $50 million in recent years, pumped up by the super-sized salaries and bonuses of investment bankers and hedge fund operators.

Now, they may not be so welcome.

“Five years ago, if you were an investment banker that meant big bucks and automatic entry. And today it is a dirty word,” said author Holly Peterson, the wife of a multi-millionaire investment banker and the daughter of multi-billionaire financier Pete Peterson.

*Well known for her send-up of Park Avenue society in the book, Manny, Peterson says co-op boards will be afraid to approve investment bankers for sales “because they know your stock is worthless.”

Across Manhattan, says Peterson, “the gilded age is over.”

“People who are worth thirty, forty, fifty millions dollars lost it all,” she said. “And now they have their apartments, and their country houses and their ski houses but they have mortgage payments on all of those. And they have no cash.”

Source:

“Top Broker: NYC Real Estate Already In Steep Decline”
Brian Ross
ABC News, September 18, 2008

It’s A Hedge Fund Hell

Seems like yesterday hedge funds were all the rage. Now, however, the industry is trying to deal with its worst returns since 1990. James Quinn of The Telegraph (UK) wrote yesterday:

The $2,000bn (£1,122bn) global hedge fund industry is experiencing its worst performance in 18 years as a result of the continued credit crisis and wider economic malaise.

The industry, which has until now prided itself on out-performing other money managers, has become one of the many victims of the general downturn affecting financial markets.

Hedge funds are experiencing the worst returns since 1990, the year that Hedge Fund Research began tracking performance, with the average fund down by 4.7pc on the year to August 28.

Well-known funds such as those managed by Atticus Capital, TPG-Axon, Citadel and Lone Pine Capital, are reported to be down between as much as 6pc and 25pc so far this year.

Yesterday, New York-based Ospraie Management LLC informed investors it will close its biggest hedge fund after losing 38.6 percent this year alone on bad commodity stock bets. The Ospraie Fund opened in 1999 and had $2.8 billion under management as of last month. After the blowup, Ospraie Management is left with three funds consisting of more than $4 billion of assets, which is down from $9 billion in March. Ospraie was once the largest commodity hedge fund firm.

Squirrel Nut Zippers, “Hell” (1996)
YouTube Video Link

Source:

“Hedge funds suffer worst returns for 18 years”
James Quinn
Telegraph (UK), September 9, 2008

Hedge Funds: Flash In The Pan?

On Tuesday, Jay Miller from the Wall Street Journal’s MarketBeat Blog talked about recent hedge fund performance. Miller wrote:

Hedge funds had a rough July as bets on rising commodity prices and falling financial stocks failed to pan out, according to research firm Morningstar Inc.

The Morningstar 1000 Hedge Fund Index fell 3.07%, its worst monthly performance ever.

“In July, the bet on long commodities and short financials didn’t work as well for hedge funds,” said Daniel Farkas, hedge fund analyst for Morningstar…

“It’s unusual for hedge funds to underperform equities in down markets, but hedge funds haven’t been able to navigate the credit crunch that started last summer,” Farkas said.

Hedge funds have had a tough time as of late. Back on July 10, I noted in a post that hedge funds, which often promise to make money in all markets, were in the red during the first half of the year. Chicago-based Hedge Fund Research reported that the average hedge fund was off 0.75% since January after slipping 0.68% percent in June, and that more funds went out of business during the first 6 months of 2008 than in the same period a year ago. In addition, fewer new funds were started.

There’s no shortage of hedge fund critics either. Recently, I read a piece that was suggested to me entitled “4 Reasons Investors Should Avoid Hedge Funds At All Costs,” which appeared on the website Bankaholic.com back on May 22. The author, Johns Wu, wrote:

But be warned, hedge funds are not all that they are cracked up to be. In fact, for an educated and conscientious investor, hedge funds can be a nightmare.

You can read the rest of the insightful article here.

And what about their most famous critic, the “Oracle of Omaha” himself- Warren Buffett? Back on March 13 I wrote in a post:

Just last week, the “Oracle of Omaha,” Warren Buffett, appeared on CNBC and warned of the volatile nature and exaggerated glamour of hedge funds:

CNBC: How do we see the end of this–of this explosion in hedge fund mania?
BUFFETT: Over time there will be a disillusionment when the–and incidentally, it won’t be disastrous or anything of the sort. There’ll be—there’ll be the occasional blowups here and there. But over time, when people find out that it’s not the holy grail, you know, the money will flow elsewhere. You know, people will–people always go through the rearview mirror, what’s been popular and has worked recently, and this will be like all the rest.

To be fair, hedge funds have been beating equity indices on a year-to-date basis. From MarketWatch on August 8:

Hedge funds tracked by Greenwich Alternative Investments fell in July, but continue to perform favorably against equity indices on the year. The Greenwich Global Hedge Fund Index (“GGHFI”) and the Greenwich Composite Investable Index (“GI2”) posted losses of -2.31% and -1.72% on the month, respectively. This compares to returns in the S&P 500 Total Return (-0.84%), MSCI World Equity (-2.53%), and FTSE 100 (-3.80%) equity indices. Year-to-date, GGHFI and GI2 have shed -3.00% and -1.82%, respectively, while equity indices have produced double digit losses. 32% of constituent funds in the GGHFI ended the month with gains.

“July highlights several popular hedge fund trades unwinding in a short period of time. While hedge funds as a group clearly had a weak month, their year-to-date returns still greatly outpace traditional long-only investment vehicles,” notes Margaret Gilbert, Managing Director.

Sources:

“It’s Hard to Be a Hedge Fund”
Jay Miller
Wall Street Journal (MarketBeat Blog), August 12, 2008

“4 Reasons Why Investors Should Avoid Hedge Funds at All Costs”
Johns Wu
Bankaholic, July 22, 2008

“Hedge Funds Lose Ground in July”
MarketWatch, August 8, 2008

Credit-Default Swaps May Produce Another Bear Stearns

Back on January 16, 2008, I wrote a post about an article I had read earlier that day by the Washington Post’s Steven Pearlstein. In “Caught in a Downdraft and Starting to Panic,” the 2008 Pulitzer Prize winner talked about the danger from credit-default swaps. He wrote:

Despite the brave exhortations from the CNBC Squawk Box, we are nowhere near the end of the financial unraveling that is necessary for an economic bottom to be reached…

Looking ahead, the final phase of this unraveling is likely to implicate the giant market in credit-default swaps. Those swaps are essentially contracts that allow sophisticated investors to bet on whether a company, a government entity, or even a securitized package of loans will default on its debt obligations. And they can place these bets whether they own the underlying security or not.

Because these contracts trade on unregulated derivatives markets, nobody knows who holds the losing side of the bets. But it’s a good guess that if defaults rise even to historically normal levels, a big hit will be taken by highly leveraged hedge funds, some of which may be unable to pay off on their bets and simply collapse. That, in turn, would trigger even further losses by banks and other investors that, unlike pure speculators, rely on those instruments to insure against default.

The credit-default swap has become so central to modern global finance that its size — the amount insured, in effect — is estimated at $43 trillion. If the losing side is unable to make good on even a fraction of a percent of those contracts, it could set in motion a financial chain reaction that could easily rival the subprime debacle.

Recently, I’ve noticed increased chatter about credit-default swaps in my research. Just today, I came across the following piece by the Wall Street Journal’s Donna Kardos in the MarketBeat Blog. Kardos wrote:

A growing proportion of U.S. firms are seeing credit-default-swap counterparty risk as a serious threat to global markets, and think another major financial company will go under due amid the global-markets crisis, according to a study by research firm Greenwich Associates.

The study’s results, which say the proportion seeing CDS counterparty risk as a serious threat is approaching 85%, highlight the perceived concern of another financial firm going down. Only 27% of the institutions surveyed think there won’t be another casualty along the lines of Bear Stearns, Greenwich consultant Frank Feenstra said in a statement.

The research firm said of the 146 U.S. and European banks, hedge funds and investors it surveyed, most “believe another major financial-services firm will fail as a result of the ongoing crisis in global markets — and they expect it to happen sooner rather than later.”

Almost 60% of the respondents expect another big financial firm will collapse within the next six months, while another 15% see it happening in six to 12 months.

Source:

“Who’s on the Other Side of That Trade, Anyway?”
Donna Kardos
Wall Street Journal (MarketBeat Blog), August 12, 2008

Hedge Funds, Mutual Funds Fall Behind In First Half Of 2008

Looks like the first six months of the year haven’t been too kind to U.S. hedge funds and stock mutual funds. According to the Internet news site NewsMax.com yesterday:

U.S. hedge funds, which often promise to make money in all markets, were in the red during the first half of the year but did not lose nearly as much as mutual funds, according to data released on Tuesday.

Hedge Fund Research said the average hedge fund is off 0.75 percent since January after slipping 0.68 percent in June.

Data from the Chicago-based firm, which specializes in alternative investment information, revealed that more funds went out of business during these first six months than a year ago in the same period. In addition, fewer new funds have started up.

“Please Stop The Pain”

The first half of 2008 wasn’t much better for mutual funds either. According to NewsMax.com:

Still, hedge funds compare very favorably with U.S. stock mutual funds, which lost an average of 10.09 percent in the first six months of the year, according to Lipper Inc, a unit of Thomson Reuters.

Sector stock funds lost 6.07 percent and world stock funds fell 11.54 percent, the Lipper data show.

It’s a good thing fund managers haven’t put a dime of their own money in domestic stock funds (46% of the time) and foreign stock funds (60% of the time) they’re paid to manage, right?

Source:

“U.S. Hedge Funds Lose in First Half, Mutual Funds Worse”
NewsMax, July 9, 2008

Some Hedge Funds On The Verge Of Blowing Up

I read some time ago that quite a few MBA students aspired to work for hedge funds when they graduated. Sounds good. I just hope they also have a “Plan B” figured out. According to Suzy Jagger of The Times (UK) this morning:

Several hedge funds with assets of more than $4 billion (£2 billion) were on the brink of collapse last night or had halted withdrawals, despite moves by the US Federal Reserve this week to ease America’s deteriorating credit crisis with a $200 billion collateral lending facility.

The potential closure of six funds came as a leading private equity executive, who declined to be named, said that such funds were “snapping like twigs”, with one failing every day.

Just last week, the “Oracle of Omaha,” Warren Buffett, appeared on CNBC and warned of the volatile nature and exaggerated glamour of hedge funds:

CNBC: How do we see the end of this–of this explosion in hedge fund mania?
BUFFETT: Over time there will be a disillusionment when the–and incidentally, it won’t be disastrous or anything of the sort. There’ll be—there’ll be the occasional blowups here and there. But over time, when people find out that it’s not the holy grail, you know, the money will flow elsewhere. You know, people will–people always go through the rearview mirror, what’s been popular and has worked recently, and this will be like all the rest.

The Times went on to identify the troubled hedge funds, which include:

• Drake Management- Warned investors yesterday in its $3 billion Global Opportunities Fund that it was considering closing the fund. The fund has already blocked investors from withdrawing their cash. According to Jagger, “Drake is also understood to be considering whether to close two other hedge funds, the Drake Low Volatility fund and the Drake Absolute Return.”
• GO Capital Asset Management- Preventing investors from withdrawing capital from its $881 million Global Opportunities hedge fund.
• Two New Zealand investment trusts- According to Dutch bank ING, it has frozen the two trusts, which were highly-exposed to mortgage-backed bonds.

Sources:

“Hedge funds on the brink as US Federal Reserve cash fails to ease crisis”
Suzy Jagger
The Times (UK), March 13, 2008

“Warren Buffett Answers Your Emails on Squawk Box: Transcript (Parts 1-11)”
CNBC, March 3, 2008

No Sympathy For Wall Street

“Shanna, they bought their tickets, they knew what they were getting into. I say, let ‘em crash.”

-Airplane! (American comedy film. 1980)

I have this strange feeling that Washington Post columnist Steven Pearlstein is not Wall Street’s biggest fan. Maybe it has something to do with his piece from this morning entitled “Time for Wall Street to Pay,” in which he wrote:

I’d be lying if I didn’t admit there’s part of me that takes some perverse satisfaction from the ever-widening crisis that has engulfed Wall Street, humbling its most powerful institutions and exposing its hypocrisy and corruption.

Pearlstein was just getting started:

Over the ensuing two decades, Wall Street has been brilliant at dreaming up other financial innovations that picked up where junk bonds left off. These included complex futures and derivatives contracts; loan syndication; securitization; credit default swaps; off-balance-sheet vehicles; collateralized debt obligations, or CDOs; and blank-check initial public offerings.

As the industry and its cheerleaders constantly remind us, these innovations have helped to lower the cost of capital and make the business sector more efficient and globally competitive. But what we are now discovering — or perhaps rediscovering — are all the ways in which all this glorious financial innovation has weakened the economy and the society it serves.

Pearlstein listed how Wall Street’s “innovations” have taken their toll on America and its economy:

For starters, these innovations have helped to create a cycle of financial booms and busts that have a tendency to spill over into the real economy, contributing to a heightened sense of insecurity.

They have shortened the time horizons of investors and corporate executives, who have responded by under-investing in research and the development of human capital.

They have contributed significantly to massive misallocation of capital to real estate, unproven technologies and unproductive financial manipulation.

They have made it easy and seemingly painless for businesses, households and even countries to take on dangerous levels of debt.

They have given traders a greater ability to secretly manipulate markets.

They have given corporations clever new tools to hide risks, liabilities and losses from investors.

And by giving banks the tools to circumvent reserve requirements and make more loans with less capital, they have enormously increased the leverage in the financial system and with it the risk of a financial meltdown.

But far and away the greatest damage from all this financial wizardry is the obscene levels of compensation it has generated for a select group of Wall Street executives and money managers.

Regarding this last point, Pearlstein warned that because “huge bonuses paid in the good years are never required to be paid back in the bad years,” this creates an “asymmetric compensation system that encourages excessive leverage and risk-taking.” Furthermore, he lamented at the fact that the prospect of earning untold wealth on Wall Street has attracted “an enormous amount of young talent that could have been more productively used in science, engineering, medicine, teaching, public service and businesses that generate genuine long-term value.” He asked:

Is it not fair to ask whether the United States can remain the world’s most prosperous and innovative economy when half of the seniors at the most prestigious colleges and universities now aspire to become “i-bankers” at Goldman Sachs?

At which point, Pearlstein went nuclear:

So I hope you’ll forgive me, dear readers, when I say that the best thing that could happen to our economy is for a dozen high-profile hedge funds to collapse; for investment banking to enter a long, deep freeze; for a major bank to fail; and for the price of a typical Park Avenue duplex to fall by 30 percent. For only then might we finally stop genuflecting before the altar of unregulated financial markets and insist that Wall Street serve the interest of Main Street, rather than the other way around.

Yes, I know it’s harsh and vengeful solution, and there will be lots of collateral damage. But as I look out over the destruction sweeping across the financial sector, I just can’t silence the small voice in my head that keeps repeating that old ‘60s expression, “Burn, baby, burn.”

Merrill Lynch, PIMCO: No Avoiding Recession

President Bush said today at a White House news conference that the nation’s economic “fundamentals are strong,” and that his administration will “consider all options” to prevent a recession from happening in the United States. The White House may be late to the party, according to two articles I came across today.

The Toronto-based Globe and Mail said that a Merrill Lynch recession probability indicator is pointing to a “painful and pronounced downturn next year” for the U.S. economy. According to the Globe, Merrill Lynch uses the U.S. National Bureau of Economic Research’s definition of recession, which is a significant decline in economic activity lasting more than a few months and evident across economic measures including GDP, employment, and retail sales. Their recession probability indicator looks at a combination of the yield curve and corporate spreads, and is now signaling that there is a 100% probability that a U.S. recession will take place within the next 12 months. David Rosenberg, Merrill’s North American economist, warns, “Clients should be taking recession risks very seriously.” The odds have grown since October, when the indicator was at 75%. Only this past summer did the tool show no threat of recession.

While Merrill Lynch’s recession probability indicator may warn of an inevitable recession on the horizon, Bill Gross of Pacific Investment Management Company, LLC (PIMCO), one of the world’s largest fixed-income managers, says the U.S. economy has already gone into recession, according to the Financial Times (UK). In an interview with the Times, Gross said, “If I had to be bold I’d say we began a recession in December.” The U.S. recession would last “four to five months,” he thought, but warned it could be prolonged if the White House and Congress neglected to “take some rather unperceived and unforecasted measures in terms of fiscal stimulation.” Gross explained:

What needs to be done is something fairly radical compared to Republican orthodoxy, which means spend money and absorb the deficit as opposed to pretending that you’re fiscally conservative.

According to the Times:

He said: He was highly critical of the complicated financial instruments that have exacerbated the credit squeeze, saying the trend of over-leverage was a “dying concept” that will “lead to an implosion at the edges . . . of this new financial marketplace.” He also had stern words for hedge funds, describing them as a “con”. A hedge fund, he said, was “an unregulated bank. A bank isn’t a con but a bank is a regulated entity. A hedge fund is not . . . it’s been a con on the government in terms of their unwillingness to regulate the industry.”

Say fella, what hedge fund do you work for?

Gross called for the Federal Reserve to bring interest rates down to 3%, and was critical of U.S. attempts to stabilize credit markets, describing the “Super SIV” and plans to freeze mortgage teaser rates as a “temporary fix.”

It’s interesting to note that PIMCO switched out of mortgage-backed securities last year, and for the first half of 2007 fell behind its competitors. Since that time it has outperformed the market as subprime-related losses mount.

Trends Expert Says Dollar May Fall 90%

Not surprisingly, the following story wasn’t picked up by the mainstream financial media. Back on November 19, UPI reported that Gerald Celente, trends researcher and director of the Trends Research Institute, told the Hudson Valley Business Journal (NY) that the United States is headed towards “The Panic of 2008,” where a financial crisis will send the U.S. dollar tumbling as much as 90% and the price of an ounce of gold soaring to $2,000. Celente told the paper:

We are going to see economic times the likes of which no living person has seen… The bigger they are, the harder they’ll fall.

Celente, who correctly forecast the subprime mortgage crisis, the dollar’s decline, and gold’s rise, said that the subprime fiasco was just the first “small, high-risk segment of the market” to collapse. He predicts that derivative dealers, hedge funds, buyout firms and other market players will also unravel. Massive corporate losses will also be an integral part of the “Panic,” which will result in a lower U.S. standard of living.

Gold: Barbarous Relic Or Investment Superstar? Part 3

In part one of this three-part series about gold as a hedge and investment, I talked about its detractors. In part two, I discussed how U.S. dollar weakness, geopolitical risk, and supply/demand factors contributed to gold’s meteoric rise in price this year. In this last installment, I will look at the different forecasts for the precious metal.

As I type this, the spot price of gold is hovering around the $800 level. The metal reached its highest ever price of $850 per ounce back in January 1980. Gold prices touched $845.58 an ounce two weeks ago on November 7. Back on October 30, MarketWatch reported that Bear Stearns was predicting an average price of $775 per ounce of gold for 2008 and $750 for 2009. Consensus forecasts were for $721 in 2008 and $703 in 2009, the brokerage noted, citing Thomson Financial data. Meanwhile, Credit Suisse forecast that the precious metal would reach $838 an ounce in 2008, $950 in 2009, and $1,050 in 2010. Credit Suisse analysts argued:

A number of drivers collectively support the gold price… Our studies indicate in the long term global gold production will begin to decline as the diminishing number of new reserves fails to compensate for dying mines. The decline in global gold production will likely be accelerated, should the gold mining industry continue to incur significant year-on-year inflation rates which are not offset by similar or significantly higher gold price increases year-on-year.

On Monday, Philip Klapwijk, executive chairman of Gold Fields Mineral Services Ltd, a precious metals research consultancy, told the audience at the London Bullion Market Association’s precious metals conference in Mumbai, India, that gold may reach $1,000 an ounce by next year. He said continued weakness in the U.S. dollar, surging crude oil prices, and continuing geopolitical tensions are pushing the price of the metal higher.

A poll of the audience at the London Bullion Market Association conference on Tuesday showed gold was forecast to rise to $843.70 an ounce by September 2008. The survey was issued electronically to about 150 delegates including traders, bankers, analysts, producers, and fund managers at the two-day global conference on precious metals. Attendees also predicted that central banks would sell 470.40 tons of gold in 2008, down from an estimated 550 tones in 2007.

On Tuesday, Reuters said that the survey also revealed the following:

• 51% of the responses said investor interest was “the most important factor that would sustain the commodities super cycle,” followed by 35% who saw physical demand as having the maximum impact.
• 52% said the U.S. dollar was the “main factor” to influence gold prices, while 19% said moves in oil and other commodities would affect prices.
• Nearly half of those responding said micro hedge funds were having the most important influence on the price direction of precious metals, while 17% saw institutions having the maximum influence.

It’s interesting to note that MSN Money pointed out today that over the past 30 years, the correlation between gold and the U.S. dollar has been greater than 70%, according to CIBC World Markets analyst Barry Cooper.

Dr. Marc Faber, managing director of Marc Faber Ltd. and publisher of the Gloom, Boom & Doom Report, told Bloomberg on November 15 that gold may “easily” rise to a record $1,000 an ounce in 2008 as the U.S. dollar weakens and Asian central banks diversify their reserves. Dr. Faber is famous for advising his clients to get out of the U.S. stock market one week before the October 1987 crash, and for urging them in 2001 to buy gold, right at the beginning of a six-year rally.

Dr. Faber noted that:

The price of gold will continue to go up and probably very substantially. In the long run, it’s very clear that central banks are basically increasing the supply of money and the supply of gold is obviously very limited.

Yet, Faber also realizes the likelihood for corrections during gold’s ascent, like what happened after gold prices touched $845.58 an ounce two weeks ago. He said, “I don’t know of any market that goes up in a straight line. A continued correction from here wouldn’t surprise me; it’s a correction, a setback, in an ongoing bull market.”

Harry Schultz, who is in the Guinness Book of World Records as the world’s highest paid financial consultant and also publishes the International Harry Schultz Letter, says gold will advance past the thousand dollar mark in 2008. Over the past three years, Schultz’s investment letter is up 40.39% annualized versus 13.98% annualized for the DJ Wilshire 500. On October 8, MarketWatch reprinted the following from the newsletter:

With an election coming, the Fed went for bandaging a slipping economy which affects votes and sacrificing the dollar, which is harder for the public to measure. Big rate cuts, like this 50 points, are always an act of desperation. Such cuts have usually been followed by recessions. More cuts will follow. It set the future in cement for the U.S. dollar. Cement overshoes. Currency debasement never produces wealth. Fed knows this, but took a political decision. Nothing new about that. Much higher inflation now guaranteed … My tentative targets (by end of 2008): 14% (inflation), $1,600 (gold) and $45 (silver).

Schultz added:

Gold is starting into the most exciting part of its long-term bull market, the so-called second (and monetary) phase. Herein we normally see the biggest percentage gains, matched by biggest corrections as we saw in the ‘70s gold rush: in 1974, gold corrected 25% in 4 months (most gold shares fell 50-70%); in 1975-76 gold fell 50% (most shares fell 70-90%) and took 2 1/2 years to get back to old high before then rocketing to new highs. But that makes for great trading opportunities. This is the phase where the BIG money is made, by those who go with the tides. In and out, in and out…

Finally, there is Richard Russell, who gained wide recognition from a series of over 30 Dow Theory and technical articles that he wrote for Barron’s during the late fifties through the nineties. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-66 bull market. And almost to the day he called the bottom of the great 1972-74 bear market, and the beginning of the great bull market which started in December 1974. Russell wrote in his November 7 issue of Dow Theory Letters (as reprinted on Gold-Eagle.com) that:

If gold can close above its 1980 peak price of 850 — it will have overcome a resistance level that has held it back for 27 years! Thus, a decisive closing above 850 could bring about at least a doubling of the current dollar price for gold.

Therefore, Russell sees a potential gold price of at least $1,700. Yet, Richard Russell’s commentary from November 7 is notable in that he suggests gold’s future performance will reveal the fraud inherent in the U.S. monetary system:

It really is sad. Here’s gold and silver (“specie”) mandated as the only money by the Constitution of the United States. Yet our citizens have been kept in the dark about gold for generations. Instead, Americans have been touted on the value of fiat money, rudderless money. This fiat money is created by a private banking cartel (the Fed). This transfer of US money-creation has never been authorized by a Constitutional amendment.

Russell hammers his point home:

I’ve said this before, but I’ll repeat it — the whole system of fiat (paper) money is the greatest fraud ever perpetrated on the American people. Our defense against this “counterfeit” money is, and always has been, Constitutional money — gold and silver. Federal Reserve Notes (currently termed “dollars”) are a blatant lie. Today, rising gold is dragging that lie out into the open. Ultimately, the truth will out. Rising gold is shouting the truth – “gold is money, Federal Reserve Notes are a lie and an abomination.”

(Note: The author disclaims any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

Wall Street Superstar Predicts Worst Recession Since 1930s

The New York Sun interviewed hedge fund superstar Jim Melcher on Monday, who is “worried about a recession. Not a normal one, but a very bad one. The worst since the 1930s. I expect we’ll see clear signs of it in six months with a dramatic slowdown in the gross domestic product.” Melcher heads Balestra Capital, a $350 million New York-based hedge fund which has increased in value by 175% as of the interview. Melcher is known for his uncanny ability to spot nearly every market meltdown over the past 25 years, including the stock market crashes of 1987 and 2000, the bond woes of 1994, and the emerging market crisis of 1998.

According to the Sun:

Mr. Melcher, a market bear, had some pretty discouraging words. ‘What I think is not good for the country, but good for me.’ he says. His basic advice to the country’s roughly 80 million stock players: Run for the hills — the worst is far from over… Our bear figures the next six to 12 months will be awful for investors as the market goes down ‘pretty substantially.’ His frightening outlook calls for an additional 20% to 30% decline from current levels. A drop of that magnitude would put the Dow down in a range of roughly 9,100 to 10,400.

Global equity markets will not be immune from the carnage either:

Given his grim expectations, he says there is no equity market in the world he would play right now. ‘When the American market goes down, other equity markets around the world should follow,’ he says.

The hedge fund operator added that the downturn in housing is far from over, credit markets continue to deteriorate, consumption is slowing, and unemployment will rise sharply. Higher inflation is around the corner as the Fed and central banks around the globe debase their currencies. Finally, Melcher is worried about the prospect of foreign investors pulling their money out of American assets due to the falling dollar, the credit crisis, and a slowing economy.

The New York Sun reporter asked Jim Melcher, “Is the world coming to an end?” He replied, “I don’t think so, but as I mentioned, the ingredients are in place for the worst kind of a recession, which means it’s the wrong time to own stocks.”

Hedge Funds Predict U.S. Recession In 2008

Hedge fund managers are predicting that the U.S. economy will enter into a recession next year, according to a Reuters article released last night. Rothstein Kass, an auditing and tax services provider, sponsored the survey which consisted of 239 hedge fund principals with a median $492 million in assets under management.

More than 61% of respondents said they believed a recession was “very likely” in 2008. 87% percent predicted that market volatility would continue or increase for the remainder of 2007. Not surprisingly, only 17% of those surveyed said an economic downturn would be bad news for their operations, with 66% suggesting that a recession would actually bring about investment opportunities.

The Wall Street Journal reported back on September 11 that hedge funds lost 1.3% last month, which was their worst performance since May 2006 and the first losing month this year, according to Hedge Fund Research Inc., a Chicago hedge-fund research firm. Funds of funds, or funds that invest in other hedge funds, did even worse, losing 2.1% in August.