Weekly Update from Puru

Global stock markets are selling off in a state of panic as jittery investors run for the hills. Yesterday, Dubai World, the government-owned investment company announced that it sought to delay repayments of its US$59 billion worth of debt. This development sent shock waves around the financial markets and once again, fear has gripped the investment community.

It is worth remembering that Dubai was one of the most leveraged states and its property market was hit especially hard during last year's financial crisis. So, is it really a surprise that it wants to delay its debt repayments? More importantly, should investors see this as an apocalyptic event? It is our contention that this senseless liquidation of assets is overdone and in the next few days, calm will return to the financial markets. After all, Dubai is not a dominant economy and Dubai World's debt burden of US$59 billion is pocket change when compared to the trillions of dollars of credit losses in the West. Therefore, we do not see this as a game changing event. In fact, we suggest that long-term investors seize this market correction as a buying opportunity. If our assessment is correct, this panic will subside in a few days time and that may be a good time to add to your long-term investment positions. We continue to like China, India and Vietnam as long-term investment destinations.

Over in the commodities markets, the price of crude oil has slipped to US$75 per barrel and this is in line with the ongoing 'risk aversion' play. It is possible that the price of oil will stay under pressure for as long as the stock market correction continues, however, the bull-market should resume thereafter. We are holding on to your positions in energy companies and have no intention of selling our holdings. Elsewhere in the energy patch, it seems as though the price of uranium is trying to find a floor and long-term investors should consider allocating capital to promising uranium mining stocks. Our homework suggests that the uranium market faces severe supply and demand imbalances and this should result in a multi-year bull-market (more on this subject in December's issue of Money Matters).

In the precious metals sector, both gold and silver are facing some selling pressure as investors dump 'risky' assets. This morning in Asia, the price of silver is down by roughly 4.5% and the price of gold has shed almost 2%. In our view, this sell-off will soon be over and long-term investors should ride out this pullback. Remember, precious metals are in a gigantic bull-market and the ongoing upleg should continue until spring next year. We suspect that within the next six months, the price of gold will climb to US$1,400-1,500 per ounce and the price of silver may climb to US$25-26 per ounce. Accordingly, we are holding on to our positions in gold and silver mining stocks and we suggest that you do the same.

Over in the currency markets, the US Dollar is benefiting from the 'risk aversion' trade. Now, unless Dubai defaults on its debt, we believe the US Dollar rally will be short lived. Therefore, we suggest that you keep your positions in the Australian and Canadian Dollars. In addition to the US Dollar, the Japanese Yen is also getting assistance from the 'flight to safety' trade, however Japan's economic fundamentals are awful, so we don't expect this rally to last either.

Finally, over in the fixed income markets, government bonds yields are declining as investors rush to the 'safety' of government debt. In our view, this flight towards 'safety' is ridiculous because various governments in the West are already bankrupt and we do not see the point in lending money to insolvent entities.