Baltimore — (TFN): It’s not an award I would want. First Putin, then Obama, now Bernanke. Big Ben is not joining the best of company with his “Person of the year” award. If history is an indication, the Fed boss’ approval rating will be significantly lower in the next twelve months.

As if being the master of the secret domain known as the Federal Reserve isn’t a hard enough job to handle, Time goes and slaps Bernanke on the cover and tells us the award is due not because of where Bernanke got us today, but because of where we have not ventured.

In other words, it’s like giving out a Nobel Prize to a guy with big plans for humanity, never mind the fact the goal of world peace is further away than ever before and Iran proved today it is just a step away from nuking Israel.

I am not sure what Time’s policy is on awarding this title posthumously, but it may be something worth investigating. After all, the true ramifications of letting one, unelected politically motivated man in charge of a great nation’s monetary future isn’t a near-sighted event. It could be a while to we learn Bernanke’s true merit.

Who knows, this time next year, China’s president, Hu Jintao, could be gracing the glossy’s cover as we hail his decision to extend our debt obligations for just a couple more years while we get things back on track.

I am not saying Bernanke didn’t do a decent job. I’m saying we should wait before sending him any praise. Last I checked, one out of every ten of my fellow Americans was in the unemployment line and currency risk is rising across the globe.

But that can’t have anything to do with free money flowing from the Fed, can it?

*** By now, you’ve got to know my thoughts on gold… sell the stuff. I was all about the precious metal this time last year, but that was a different situation and time. Now, you can’t turn on the radio, TV or open the newspaper without hearing some pitchman’s take on the stuff.

Remember the contrarian motto: when everybody else wants in, you want out.

For those of you that are viewers of late-night cable news parodies, I am a huge fan of Comedy Central’s Colbert Report. When trends get out of control, his dry humor has a way of bringing things back to Earth.

That’s why when Colbert talked about the sudden rush to the gold markets this week, I knew we were in trouble.

Here’s what I told TFN readers this morning:

“Finally an up day for gold. After sliding for nearly two weeks, the precious metal is moving far enough into positive territory today to bother noting it.

“Did Glen Beck up his marketing? Did Rush bring on a few more listeners? Or is this yet another example of the Colbert bump?

“Does it even matter? Nope, when gold is getting this much attention, the only thing that matters is how quickly you dump your position.

“Gold is supposed to be the safest investment around. Just as real estate investors love to say, there is only so much of the stuff. Unfortunately, we all know how well the real estate folks are doing these days.

“Back in the day when gold actually backed the nation’s debt and played an integral role in the monetary system, a horde of gold made sense. But today, when it’s only value comes from the fact we say its valuable, gold’s no different than a fiat currency.

“If the economy collapses like so many gold bugs are sure is about to happen, wouldn’t you rather have something of tangible value? Colbert is right. Sheep are the way to go. Better yet, follow the natives and take advantage of a buffalo’s ability to provide food and shelter.

“While I’m pushing the argument over the top, many investors are using similar logic in their bullish pursuit of gold. It has created a micro-bubble that is ready to burst.

“That is not good news for the investors that have piled into the junior gold miner sector.”

Keep reading to learn why.

*** I cannot believe this is not getting more press. If you think a handful of bank failures dealt a blow to your portfolio, wait until you see what happens when a few heavy-hitting governments begin to drop.

The good-old-boy network is alive and well on Wall Street. Just about every major financial firm has some vested interest in its “competition.” But it is nothing like the international scene where friendships and rivalries date back centuries and nuclear weapons are used as bargaining tools.

Less than a month ago, Dubai started the default-scare trend. Since then, we’ve heard from Greece, Austria and Spain. Earlier this week, Mexico made the list when Standard and Poor’s cut our southern neighbor’s credit rating.

This is not good news. It proves that, although the dollar looks weak, it’s stronger than its competition. In all things financial, value is relative.

Over the next few weeks, the dollar is going to strengthen, the Dow will drop and gold bugs will wonder what all the hoopla was about.

With most investors working on polishing their year-end portfolio, now is a good time to get in position to take advantage of the upcoming action. Come January 1, it’s a whole new game.

The current global credit crisis has created distortions that make many investments look bad. These same distortions have made leveraged multicurrency investments better.

Governments and central banks have lowered interest rates in numerous countries, including the U.S. This means that four currencies can be borrowed at Jyske Bank with low lending rates.

Those currencies are the U.S. and Singapore dollar, the Swiss franc, and the Japanese yen.

The rates, depending on the amount borrowed, are:

U.S. dollar: 4.125% to 4.875%
Swiss franc: 4.25% to 5%
Japanese yen: 2.5% to 3.25%
Singapore dollar: 3% to 3.75%

The multicurrency distortion is created because deposit rates on other currencies have risen.

Interesting deposit rates are on Turkish lira, Australian and New Zealand dollars, Icelandic króna, Hungarian forint, and South African rand.

These rates are:

Turkey: 14%
Australia: 6.875%
New Zealand: 8%
Iceland: 5.25%
Hungary: 7%
South Africa:10.25%

If one wished to leverage investments with the least risk (other than Forex), one could simply borrow the four currencies above and invest in deposit accounts in the six high-rate currencies.

Take, for example, an investment of $100,000 leveraged with a $200,000 loan of $50,000 borrowed in each of the four low-rate currencies. This raises $300,000 to invest.

The average loan rate (at the highest rate) is 4.21%…and $50,000 is invested in each of the six high-interest-rate currencies.

The average interest rate earned is 8.56%. The annual interest earned is $25,687.

The loan cost is $8,420. The income after loan payments is $17,267 or 17.26% on the $100,000 invested.

This is not bad. Such a portfolio is well diversified from a currency and geographic perspective. There is still a currency risk and investors should never leverage more than they can afford to lose.

Every investment has risk. The key to good multicurrency investing is to be sure that the premium you are paid for taking the risk is good.

In my opinion, 17.26% is more than a fair premium, but we can do even better with bonds, as I’ve been discussing in my multicurrency education service.

Gary Scott
For International Living

Source: Borrow Low, Deposit High

The stock went from about 12c to $10 in under a year. It was called the Fruta Del Norte deposit and geologists will still be talking about it going to their graves.

The latest drilling shows there are almost 14 million ounces of gold in the ground. Given that an ounce of gold costs some $900, you get an idea of the fortunes that were to be made when that mine came into production: not just for everyone involved in the company, but also for the locals and indeed for the country. Unfortunately, that country was Ecuador.

The Ecuadorian authorities, in their infinite wisdom, passed a new mining mandate in April 2006, invoking an immediate 180-day suspension of all activities on virtually every mining concession in the country. What’s more, they abolished some 88% of existing concessions. In a single stroke those fortunes were all but wiped away.

Aurelian wasn’t alone: IMC, Iamgold, Dynasty, All Metals, Corriente, Lowell’s and Ascendant Copper were all hit.

The moral of the story is one I have banged on about many times: the risks in mining are enormous, whether it’s geo-political risk, currency risk or stockmarket risk, i.e. mining shares don’t always track metal prices. So to be sure, you must own the physical metal itself. And if you are going to speculate in junior mining stocks, it’s much better to do so in safe countries.

Where’s safe?

Once such place is Mexico. Her rock is famously rich in gold and silver and her people, who have been mining for centuries, are expert. Mining is deeply set in their culture. With an emerging middle-class and a stable government, respectful of property rights, it’s a reasonable place to do business. The peso is pegged to the US dollar, so thanks to the latter’s weakness, operating costs have been kept low.

It’s possible that, as output from the famous Cantarell oilfield declines, the Mexican government will turn to mining to replace lost revenue – particularly if the silver price ever does what we all hope it will – but for now it is comparatively safe.

The problem is there are more junior mining companies in Mexico than there are Dalmatians in a Disney film. So how do you find the right one?

Well, there are lots. One in particular that I like and recommended back in March as a buy below $4 is Gold Resource Corporation (US:GORO), run by the Reid family. Bill Reid used to run US Gold. He sold out to Rob McEwan, but kept a couple of assets back for himself, which he then rolled into GORO, a new company he set up with his son Jason and his brother David. He then raised some money and set to work developing those assets.

Typically, if you participate in a fundraising for a mining company, you will be given a share at a discount and a warrant. Many investors sell the share as quickly as they can and keep the warrant, thus getting their equity out while still getting the benefit from any serious upside. This process puts unnecessary selling pressure on the stock and, later on, should warrants get exercised, creates undesirable dilution for shareholders.

But Reid never issued a single warrant. What’s more he raised money from sources he believed would remain long-term investors, rather than short-term speculators. So GORO, despite the bear market elsewhere in junior mining stocks, has been tightly held, short of selling pressure and has maintained a nice steady uptrend since its listing at $1 back in 2006. It’s now trading at $6.

Reid’s family own a huge share position in the company, which means that when they act they do so in the best interests of shareholders. When the stock came under selling pressure earlier this year, Reid quickly found out who the seller was – a fund who had to get out to meet margin calls elsewhere – and set to work looking for a buyer, which he duly found. The selling pressure was relieved and the stock resumed its uptrend. The right guy to have on your side.

But that selling pressure meant that you had a chance to buy the stock as recommended below $4. If you did, congratulations. Last week the board announced the appointment of a top operations manager and followed next day with the best drill results to date. The stock cruised on up and you are now up 50% in just a couple of months. GORO remains on course to start production later this year or early next. Needless to say, I own stock.

Buy gold or buy oil?

Finally, a quick alert on the gold-oil ratio. It’s a very useful tool that a lot of traders use: how many barrels of oil will an ounce of gold buy? At the moment the ratio is about 6.85 barrels of crude per ounce of gold. Even with the gold price up so much since last summer, that’s an extreme. We’ve only been at these levels five times in history: during the oil crisis of 1920; in 1976, 1982, 2001, and 2005.

During the post 1929 fall-out, the ratio got to 70 barrels per ounce of gold. But the mean is about 15 barrels, and a reversion to the mean would entail the gold price, measured in oil, doubling from here. I wouldn’t dare to ‘short sell’ oil, it’s too risky a trade. Nevertheless history is telling us to take some of your profits on your oil trades and move them into gold.

Turning to the wider markets:

Weakness in Wall Street was the catalyst for Europe’s late afternoon fall, with the Dow Jones Industrial Average losing some 200 points from its four-month high to close 1.5% down 12829. Figures showing ‘core’ producer prices rising at their fastest pace since 1990 helped to spook traders, while oil prices continued to soar. But the broader S&P 500 and the tech-heavy Nasdaq both ended the day down just 1%.

Once we see that happen – and I’m convinced we will – you can kiss goodbye to the dollar.

Right now, business from the Middle East is about the only thing keeping the greenback above water.

But it’s already starting to drown!

You see, oil – the Gulf’s greatest export – is priced in dollars. It’s traded in dollars. Therefore a huge part of their foreign currency reserves are invested in dollars.

Trouble is… the dollar’s plunging. And the only thing propping it up is this Middle East investment.

But they’re losing patience by the day!

And no wonder…

As the Fed slashed interest rates in a desperate attempt to stave off recession, they’ve unwittingly landed their unlikely saviours up the proverbial creek!

Thanks to their peg to the dollar Gulf States have seen record rises in inflation – between 7% and 10% by Dec 2007, up from just 1.4% in 2005.

Why don’t they just go ahead and dump the dollar now?

The fact is they are SO heavily invested in dollar-denominated assets it would be domestic political and economic suicide if they were to instantly pull the rug. Dollars accounted for 67% of Gulf Corporation Council state assets in 2007.

So it’d be bad for business to do it now, but they are working very hard on diversifying their investments.

Already the Qatar Investment Authority, the emirate’s sovereign wealth fund, is looking at investment opportunities in countries like China, Japan, Korea and Vietnam to diversify currency risk, says head of strategic and private equity, Kenneth Shen.

So here is my prediction…

Doom for the dollar… boom for Vietnam

Economic necessity will see the Gulf de-peg from the dollar and establish a single currency.

Backed by the region’s massive energy reserves, the new Gulf currency will emerge as one of the world’s major currencies alongside the dollar, euro, sterling and the yen.

It’ll result in falling inflation in the Gulf and lay the basis for a sustained economic boom in the region. Gulf investment houses will then become major players on the global stage.

Gulf merchant banks should be a big beneficiary of this. But another market with their coffers open, ready for filling – and which you won’t expect – is Vietnam.

You see, as Gulf investors begin looking for new opportunities to invest their petrodollars, many of them are waking-up to the potential of Vietnam.

Just listen to Bader Al-Sa’ad, CEO of Kuwait’s sovereign wealth fund, the Kuwait Investment Authority:

“The government has a will to change the economy; there is a huge jump in direct foreign investment year over year,” he says. “They are learning from the Chinese experience and it is easier to enter Vietnam than other emerging economies . . . We are interested in buying a stake in a financial institution but these stakes are not cheap.”

With Vietnam’s market now some 50% below its peak last November, Mr. Al-Saad may soon get his chance.

I’m predicting it’s going to be a big winner as the tide of petrodollars hits this gloriously undervalued Southeast Asian state.

For clever way to ride this trend, click here.

Regards,
Manraaj Singh
Editor Profit Hunter