In an article by Jack Crooks in the Asia Times (‘Ominous: the US deficit vs. the dollar’ Oct 14, 2004), the author quotes Peter Peterson (Chairman, Institute of International Economics): “At 5.4% of GDP [gross domestic product] in the first quarter of 2004, the deficit is substantially higher than its previous record (3.5% of GDP) in 1987, when the dollar fell by a third and the stock market took its "Black Monday" plunge.”

Things actually got much worse in the second quarter of 2004 as the US trade deficit rose to $ 166.2 billion (or $ 664 billion annualized), or 6.5% of GDP.

The green rectangle represents the plunge that the dollar took during the mid-80’s, which was followed by a stock market collapse in Oct 1987. Look at how much worse the deficit is now (the red line) compared to where it was in 1985! What does that mean in terms of how much further the US$ has to fall to compensate?

Stephen Roach, chief economist at Morgan Stanley believes that we are in for rough times ahead. "Economic history is utterly devoid of examples of current account adjustments that are not accompanied by significantly weaker currencies." He anticipates massive risks to the global economic system, saying at the Global Economic Forum in Feb 2004 that “Modern day central banking is on the brink of systemic failure.”

As GCC currencies are linked to the US dollar, is your asset portfolio guarded against the eventuality of a US$ and a US equity/bond market decline, or even plunge?

The Commodities Markets

The direct beneficiary of weakness in the US$ are gold and silver, as they represent an alternate form of money to paper currencies. So let’s review their performance first. Note: the black line on the charts is the weekly price, while the blue line is the 50 week average, which smoothes out the volatility and shows the current trend.

The photos are of Canadian companies involved in production of these commodities. Note: Canada’s rankings are only related to production in Canada, whereas Canadian companies are exploring for, and mining, resources all over the world.

PRECIOUS METALS

GOLD

(Canada is the fifth largest producer of gold in the world)

SILVER

(Canada is the sixth largest producer of gold in the world)

PLATINUM

(Canada is one of the top five producers in the world)

Oil, Copper, Nickel, Steel, Zinc, Natural Gas and other industrial metals/commodities are being primarily driven by an insatiable demand from China and India as these countries are becoming the new industrial base for global production, and creating an enormous middle class that has its own growth needs while supplying the rest of the world.

Between 1999 and 2002, most of these commodities had hit multi-year lows, curtailing supply as marginal production mines and wells had been abandoned and those industries decimated. When demand suddenly began to ramp up unexpectedly (China’s current oil demand is up 40% from the year before!), supply takes years to catch up as old projects are re-commissioned and new exploration begins. In the meantime, the balancing act between demand and supply is performed by the price mechanism.

The net result: Look at the powerful performance of S&P 500 Commodities Index, over the last three years.

As I write, there has been a sharp downward adjustment in the price of copper, zinc and other base metals below in the last couple of days. This is a natural reaction to a rapid upward movement in price in the last few months. A sustained decline in base metal prices is only likely if global demand were to fall on a consistent basis, in the form of a recession in major markets.

OIL AND GAS

Canada is a player in the fossil fuel markets, with oil and gas production largely concentrated in the province of Alberta. There are a number of senior and junior oil and gas producers and exploration companies listed on Canadian stock exchanges.

OIL

Oil, as I do not need to tell my Middle Eastern audience, is at an all-time high at US$ 54 (though not in real terms). Indications are that the price is likely to rise rather than fall, in the long term.

It is ironic that we are at this point, since many analysts did not expect oil to pierce $ 40 in a sustained manner and were predicting a decline back towards the $ 30 mark. Similarly, conventional thought in 2001 was that gold would not break $ 300, then $ 400 (in 2002). Mainstream analysts do not expect it to rise much further, just like most analysts who said (when oil was $ 35) that the oil price was too high to go any further!

NATURAL GAS

BASE AND INDUSTRIAL METALS/COMMODITIES

URANIUM

(Canada is the largest producer in the world)

COPPER

(Canada is one of the top five producers in the world)

NICKEL

(Canada is one of the top five producers in the world)

ZINC

(Canada is one of the top five producers in the world)

In addition, Canada ranks first in the world for the production of potash, and ranks in the top five for the production of cadmium, coal, titanium concentrate, aluminum, salt, molybdenum, gypsum, cobalt and diamonds.

REAL ESTATE IN VANCOUVER

As you may have seen in Issue 7, Vancouver is a beautiful city. Real estate, which has been in a worldwide boom due to low interest rates, has also done well as an asset class here in the last several years. As I have gotten queries about real estate values here, I am providing some information on the market and a random sample listing.

These are prices for single family detached homes (villas, rather than apartments or duplexes). The first line lists the price for a benchmark home (i.e. a typical property within all of Vancouver), which is currently C$ 505k or Dhs. 1.5 million. The price index was 100 in June 1991.

The second line is for an area (West Vancouver) which is the equivalent of Jumairah in Dubai (except that it sits on a mountain and has much nicer views: of lush green mountains in the Coast Mountain range and of the Pacific Ocean!). In this exclusive area, the price for a benchmark residential property is almost double, at C$ 940k (Dhs. 2.7 million). As you can see in the last three columns, prices have been on the rise in the last few years.

Apartment prices are about half of the prices of detached houses in these respective markets.

To make it fun, I’m going to show you a very high end property, something that most people just dream of. This is a premium property in an exclusive part of West Vancouver.

Here’s the property description written by the real estate company: “Custom designed contemporary home of extraordinary quality with 180 degree views of Downtown, Lions Gate Bridge, Ocean, Mt. Baker and beyond. Offering more than 8,000 square feet with a dramatic open floor plan, with high ceilings & cove lighting. Five large bedrooms, 6.5 bathrooms with open showers, Finnish sauna, wine cellar, games room, large garage & ample storage. World class construction with Euroline windows, top of the line stainless appliances, Budurus hot water in-floor heating, central air-conditioning, and extensive use of zinc. Impressive south facing swimming pool and SPA overlooking the city!”. The price for this property is C$ 3.9 million or 11.4 million dirhams.

And then here is something a touch more modest!

Here's the Description: “Brand new, prime 'Cariboo Height' location in Burnaby. 4,579 sq. ft. 6 Bedrooms. Quiet cul-de-sac. Attractive champagne rock features with acrylic stucco and tile roof! Large foyer with warm, elegant entrance. Large formal L/R & D/R with maple hardwood throughout. Bright, roomy kitchen, quality maple cabinets. Attractive granite countertops. Large family size with gas fireplace. Elegant open stair case to 4 bedrooms up. Large view master bedrooms with huge ensuite bath. large Jacuzzi. Fully finished basement with separate outside entrance. Warm natural gas radiant heat throughout. Prime location! Superior quality. Superior family floor plans”. The price for this property is C$ 799,000 or 2.33 million dirhams.