1. E x c h a n g e T r a d e d F u n d s M a g a z i n e - A s i a
All you need to
profit from ETFs
NOVEMBER/DECEMBER 2010
www.etfsmag.com
ASIA EDITION
The leading source of Exchange Traded Funds research in Asia for professional investors
Why has
Currency
Volatility
Jumped?
Asian ETF Awards 2010
Platinum in 2011?
Is There an Alternative to Gold?

3. in asia From the Editor / Contents – Page 01
From the Editor’s Desk
Contents
It’s been a busy few months for us in China. The press
uses a lot of ink writing about the country’s consumer and
industrial growth. But they overlook what is going on with
the burgeoning growth of family wealth and the increasing
sophistication of the banking industry and investment
markets in China. Wealth management in China is growing
at a phenomenal rate, some banks are experiencing a
100% annualised growth in assets under advice. However,
China isn’t Hong Kong or Singapore, it’s very unique and
the whole wealth management proposition is uniquely
Chinese. At the heart of this is the fact that the banks see
the development of wealth management as part of the
natural evolution in assisting their clients to navigate an
ever challenging local regulatory and tax environment (for
example, it is clear now that an Inheritance Tax will be
introduced over the next 2-3 years). Wealth management
clients are not merely treated as a new source of revenue
to milk commissions from. Wealth management in China is
truly about the partnership between the bank as trusted
advisor and the client – it’s not about giving them access
to the current ‘hot ‘ product. China is poised to develop
probably the most efficient and client centric wealth
management market globally because it doesn’t have to
deal with the legacy practices that hinder more developed
markets from actually delivering what their clients seek.
And, more importantly the banks view themselves as being
in partnership with their clients. Considering the wall
of money building up in China and the likely changes to
facilitate more foreign investments – you need to get your
head around China sooner rather than later.
Our inaugural Asian ETF Awards were a great success and
demonstrated how far the regional market has developed
over the last few years. The quality of the nominees was
particularly high and the selection committee found it
challenging to pick the winners. As investors you can
have confidence that the providers in Asia we selected
for nomination operate robust and dynamic businesses
(we grilled them and undertook some comprehensive
due diligence that is available to each of you). They also
share our view that ETFs should play an increasing role
in regional capital markets (not just merely from a self-
serving perspective). So as investors, feel free to contact
us about what you want from the providers in the future.
The scope for product development is endless, but as
always all good ideas need to have investor support. And
you are the people they want to service, but at this stage
they are only providing a slither of what they could provide
you with. Don’t be shy, we will as always act with the
utmost discretion on your behalf.
Andrew Crawford
Editor
From the Editor / Contents – Page 01
ETF Awards Dinner
Asian ETF Award Dinner 2010
News
Latest news in ETFs
Touching the Void
Where are We Now?
The U.S. Dollar is a Third Rate Currency
Technical Trading Ideas
For SPDR GLD Trust
pg 02
pg 07
pg 14
pg 16
pg 20
pg 23
In 2010 it was all about Gold
In 2011 it might be all about PLATINUM
Why has Currency Volatility Jumped?
Is There an Alternative to Gold?
China Wealth Management Forum
China Wealth Management Forum 2010
From Quantitative Easing to
Stagflation?
Market Data
Macro Monthly November 2010
Next Issue / ETFs Asia Magazine Info
Coming up next issue and publishing details
pg 26
pg 28
pg 35
pg 38
pg 41
pg 44
pg 48

4. Page 02 – ETF Awards Dinner
Asian ETF Award Dinner 2010
The inaugural Asian ETF Awards were a great success thanks to the support we
received from Asia’s leading ETF recruiter, Zak Allom from Kinsey Allen. The
awards ceremony was held at the China Club in Hong Kong and was the who’s
who of the Asian ETF industry.
We were also very honoured to welcome some
distinguished overseas guests including Jim Ross, the
Global Head of ETFs at State Street, Dan Draper the
Global Head of ETFs at Credit Suisse, Deborah Fuhr from
BlackRock and Mr Imai the Head of ETFs for Nikko AM. We
would like to especially thank the panel of judges who
selected the winners:
Dr Miodrag Janjusevic, SAIL Advisors
Mr Sammy Yip, Lippo Investments
Michael McGauchy, Stonewater Capital
Zak Allom, Kinsey Allen
The selection process was very rigorous and required
nominees to submit a 15-page due diligence questionnaire
on their funds and business. This was followed by a
20-minute ‘beauty parade’ interview by the selection
committee held in Hong Kong. Then the award winners were
selected by a committee vote – which involved a fair amount
of lively discussion amongst the judges. Our aim was to
ensure every winner was the leader in their category.
For all those providers who participated – thank you very
much for your efforts.

5. ETF Awards Dinner – Page 03
Michael McGaughy presents Marco Montanari, Head of db
x-trackers ETFs Asia, with the Best New ETF in Asia Award for the
DB x-trackers CSI300 Index Series
Michael McGaughy presents Jimmy Chan and Timothy Tse with Best new ETF in Asia for
the Value China ETF
Zac Allom, Managing Director Kinsey Allen International presents Kelly Driscoll of State
Street Global Advisors with the best ETF product in Australia: the SSgA SPDR 200 ETF
Mr Jim Ross, Global Head of ETFs at State Street Global Advisors makes some opening
remarks at the Inaugral Asian ETF Awards Dinner
Deborah Fuhr Managing Director Global Head of ETF Research and
Implementation Strategy presents Chew Sutat from the Singapore
Stock Exchange the award for the Best ETF Exchange in Asia

6. Page 04 – ETF Awards Dinner
Zac Allom presents Nick Good of BlackRock iShares the award for the Best ETF provider
in Asia
Marco Montanari picks up the Best ETF in Asia award from Zac Allom for the DB
x-trackers CSI300 Index Series
Mr. Fan Yue, Director of Fund Supervision Department, Shenzhen
Stock Exchange is presented with the award for the best Listed
Fund Exchange in Asia
Joseph Ho was presented with a special award in recognition of his
contribution to the industry

7. China Listed
Funds Forum
2011
Organised by:
March 31st
, 2011
0830 to 1700h
Futian Shangri-la Hotel,
Futian District,
Shenzhen, China
Why attend?
• Co-organised by the Shenzhen Stock Exchange – find out
directly from Asia’s best and largest Listed Funds exchange how
they see their market evolving over the new few years and the
opportunities that presents for both local and foreign investment
professionals
• Top tier local and overseas speakers – you will be hearing
from and have the opportunity to meet the leading lights of
China’s Listed Funds market and the global ETF industry
• Senior level forum - with a line-up including CEOs, CIOs, Chair-
men and more, we ensure that you hear from and will meet the
people that matter
• Exclusive Presentations - regulatory updates, exchange prod-
uct overviews and future looking input locally as well as from
industry leaders in the US and Europe
• Learn from the leading providers in China and Offshore
about innovative new product launches, changes to QDII/QFII on
the horizon, investor behaviour and trends in China
• Buy-side focussed – we will endeavour to have China’s top
Listed Fund and ETf investors attending
Partnership opportunities are available for the event. To find out
more information please contact Mr. Roger Zhuang, Director of
China Operations for Republic Partners at roger@republicltd.com.
The China Listed Funds Forum
will be the largest gathering
of China’s burgeoning listed
funds market and will focus
on giving foreign investment
professionals with a window
into Asia’s fastest growing
exchange traded funds market.
www.republicltd.com

8. Page 06 – ETF Awards Dinner

9. Sensible AM Launches
a Hong Kong Physical
Gold Backed ETF
Sensible Asset
Management,
the joint venture
between Ping
An of China and
Value Partners
launched
another
innovative ETF in
Hong Kong this month, the Value Gold ETF.
Breaking new ground, the Value Gold ETF is the first gold ETF
in the world backed by physical gold bullion that is stored in
Hong Kong. Under safekeeping at the Hong Kong International
Airport Precious Metals Depository Limited, the Value Gold ETF
provides investors with a convenient and efficient way to invest
in the gold bullion market.
Standard Bank is the Metal Provider, which is responsible for
the quality of the gold – its ‘fineness’ – to have a minimum
fineness of 99.5%, and to meet the London Good Delivery
standards as set out in the Good Delivery Rules published by
the London Bullion Market Association.
Investors benefit from having access to the gold bullion
market by way of trading the Value Gold ETF on the Stock
Exchange of Hong Kong, like other exchange-listed securities.
The Value Gold ETF handles the purchase and storage of the
physical gold bullions.
Mr. Cheah Cheng Hye, Chairman and Co-Chief Investment
Officer of Value Partners said, “we break new ground, offering
an investment vehicle that was previously not available – the
world’s first gold ETF, where the gold is physically stored in
Hong Kong, under Hong Kong law and under the sovereignty of
the People’s Republic of China.”
“Apart from its relatively low transaction charges,” Mr.
Cheah said that, “this is the new fund’s distinguishing
characteristic – the gold bullion is kept in Hong Kong, in the
new precious metals warehouse at Chek Lap Kok airport. Not
in New York, or in London or in Zurich, as may be the case
with other gold funds available to the investing public.”
“This is a fund backed by physical gold,” he continued,
stressing that “the Fund is not allowed to purchase paper-gold
contracts or derivatives – only real gold with a small amount of
cash to pay for expenses.”
State Street was the main
mover in new Asia ETFs over
the past fortnight, adding
two more products to its
range. In Hong Kong, the
firm has launched the SPDR
FTSE Greater China ETF,
which invests in Hong Kong,
Taiwan and mainland China.
The underlying index is a new Hong Kong
dollar-based version of the FTSE Greater China
benchmark, which is significantly broader than
those tracked by the most popular China and
Hong Kong ETFs, with around 350 stocks. It
currently has about 32% of the basket in Hong
Kong companies, 28% in Taiwanese firms, 39% in
Chinese companies listed in Hong Kong, and about
1% in mainland-listed stocks, all through B shares
due to restrictions on foreigners investing in the
larger, more liquid A share market. Financials are
the largest single benchmark at 35%, followed by
industrials (15%) and tech (13%). The anticipated
total expense ratio (TER) is 0.7%.
Interestingly, it looks like this could be the first
of many launches from a firm that was an early
leader in the field but has lost ground in recent
years. State Street launched Asia’s first equity
and bond ETFs, both in Hong Kong, and the
first ETF in Singapore, but has produced little
in either market since then. However, its new
product is structured as an umbrella trust with
a master prospectus, which State Street says
should allow it to easily roll out several ETFs a
year using the same core structure, with add-on
filings for each new fund.
The launch provides yet more evidence of the
Hong Kong Securities and Futures Commission’s
(SFC) cautious attitude toward ETFs and their
risks at present. Even though this is a physical
product – rather than the synthetic ETFs that
most concern the SFC – it has taken longer than
intended to get approval; State Street filed for
registration in January and had originally hoped
to list by June, the firm told Asian Investor.
State Street Looks to
Expand in Hong Kong
Source: Cris Sholto Heaton
News – Page 07

10. After winning the coveted Best ETF Provider in
Japan at our recent Asian ETF Awards, Nikko has
unveiled three new funds on the Tokyo Stock
Exchange, giving local investors access to US and
emerging markets.
The Listed Index US Equity fund (1547 JP) will be
the first ETF listed in Japan to offer exposure to
the S&P 500 index, allowing domestic investors to
gain efficient local access to the US market.
The Listed Index Fund China H-share ETFs (1548 JP)
tracks mainland Chinese companies listed on the
Hong Kong Stock Exchange by replicating the Hang
Seng China Enterprises index. The fund aims to
capture the movements in stock prices of mainland
Chinese companies.
The Listed Index Fund S&P CNX Nifty Futures
(1549 JP) fund invests in futures contracts to gain
exposure to the S&P CNX Nifty Futures index.
Nikko AM head of ETFs Koei Imai says “the firm will
continue to expand its range of equity and fixed
income ETFs.“
Elsewhere, the most concrete promise of new products was
in Australia, where iShares announced that it is planning
four new ETFs, all focused on the local market. These are
trackers for the MSCI Australia 200, S&P/ASX 20, S&P/ASX
High Dividend and S&P/ASX Small Ordinaries indices.
The high dividend ETF will be the third of its kind in
Australia after launches by State Street and Russell, while
the small cap fund is the first such product announced. No
details such as TER or even proposed launch date were given
as the registration filings have not been completed, posing
the question as to why iShares felt the need to put out a
press release before the ink is dry.
Perhaps the firm fears being left behind in one of Asia’s
fastest-growing ETF markets. Assets under management in
Australia are up around 50% year-on-year, with the lion’s
share in domestic equity and commodity trackers. And while
iShares has an extensive list of international ETFs cross-
listed from elsewhere, these new products will be its first
to focus on the domestic market. It may have to fight to
make up ground on State Street, which has around A$3.2
billion in AUM in three funds, up 40% year-on-year, as well
as Vanguard, which has seen AUM in its main fund quadruple
this year to around A$220 million.
Seoul-based Mirae beefed up their ETF range with the addition of the
first ETF tracking the Nasdaq 100 index in South Korea.
The Mirae Asset Management Tiger Nasdaq 100 ETF (133690 KS) gives
domestic investors with exposure to the 100 largest, global non-
financial securities listed on the Nasdaq exchange, including well
known companies like Apple, Google and Microsoft.
There are now 23 ETFs linked to the Nasdaq 100 index with more than
$400bn in global assets.
Nikko Lists Three
ETFs in Japan
iShares Lines Up New
Australia ETFs
Mirae Launches Nasdaq 100 ETF in Korea
Page 08 – News

11. On the topic of cross-border ETFs, Thailand’s Securities
and Exchange Commission has said that it would allow
foreign ETFs to be sold directly to Thai investors and listed
on the Stock Exchange of Thailand (SET). The goal is to
expand Thai investors’ options given that the local ETF
market remains underdeveloped, with just three products
currently listed and under US$100 million in total AUM.
As mentioned in this column some months ago, SET has said
it will provide seed capital to four new ETFs in order to
broaden the range, but further details of the products have
yet to emerge. And a decision earlier in the year to allow
feeder ETFs in Thailand that would invest in ETFs overseas
does not seems to have excited the financial services
industry much, since no such products have been launched.
In contrast to China, it seems pretty debatable as to
whether foreign providers will care much about these
new rules. Most will surely have bigger targets for
cross-listing than Thailand, although it’s possible that a
financial group aiming to become a regional heavyweight,
Thailand Allows Foreign ETFs
But Does Anyone Care?
such as Malaysian bank CIMB, might consider it
worthwhile if the requirements are easy to fulfil.
On the plus side, however, this does show that Thailand is
pushing ahead with opening up and extending its market.
In addition to the move on ETFs, the SEC has this week
approved in principle the establishment of infrastructure
funds and, as discussed in our previous roundup, intends
to introduce a framework for real estate investment
trusts in the near future.
Source: Cris Sholto Heaton
In China, local investors
in funds now have
access to foreign
bonds via the Qualified
Domestic Institutional
Investor (QDII)
scheme for the first
time – and seem to
be showing some
early interest. Fullgoal Asset
Management, the Chinese asset management arm of Bank
of Montreal, opened subscriptions to the country’s first
QDII overseas fixed income fund last month and this week
reported that it had attracted RMB828 billion in assets.
That compares with an average RMB550 million raised this
year by other QDII products.
Fullgoal’s product is a fund of funds, investing in foreign
bond funds from providers such as Pimco and BlackRock,
which invest in the US, Europe and Asia Pacific. But it may
not have its niche to itself for long: local firm Yinhua Fund
Chinese QDII Scheme
Gets First Bond Fund
But No ETFs Yet
Management is reported to be about to launch a fund of
funds that will invest in US Treasury Inflation-Protected
Securities and other inflation-protection thematic funds.
Launched in 2006, the QDII scheme allows mainland funds
to invest in assets outside China, subject to quota limits.
At the end of June, it had 81 approved institutional
investors with a total quota of US$64 billion, according to
Reuters, although both numbers will have risen since then.
The current line-up includes 23 mutual funds with a QDII
licence, according to data provider Wind, plus a frozen
product from Hua An Fund Management that was caught up
in the Lehman Brothers bankruptcy.
Investor interest in these funds seems to be growing
again after a period of disillusionment sparked by poor
performance in the first few launches. Investment
consultancy Z-Ben Advisors says that at least 12 funds are
in the pipeline and thinks there could be at least 60 on the
market by end-2011.
So far, the vast majority of QDII products are actively
managed stock funds, with just one index fund launched in
April (a Nasdaq 100 tracker from Guotai Asset Management).
Rumours about a number of overseas-focused ETFs to be
launched under the scheme have yet to turn into anything
more substantial.
News – Page 09

12. Citi has recently filed
with the U.S. SEC to
offer a Long/Short
Alternative to VIX ETFs.
From the supplement
we were able to glean
two key attributes of
these new offerings.
Firstly, the Index is a new index established by Citigroup
Global Markets Inc., as index sponsor. The Index is
published by the Chicago Board Options Exchange (the
“CBOE”) and is a measure of directional exposure to the
implied volatility of large-cap U.S. stocks. As a total return
index, the value of the Index on any day also includes
daily accrued interest on the hypothetical notional value
of the Index based on the 3-month U.S Treasury rate and
reinvestment into the Index. The methodology of the Index
is designed to produce daily returns that are correlated
to the CBOE Volatility Index (the “VIX Index”), which is
another measure of implied volatility of large-cap U.S.
stocks. However, the Index is not the VIX Index, and
returns on each of these indices may differ substantially.
Secondly, the ETFs will be offered as ETNs with an index
methodology uses a combination of returns on (a) a long
exposure to third- and fourth-month futures contracts on
Citi to Launch a Long/
Short Alternative to the
VIX ETFs
the CBOE Volatility Index (the “VIX Index”) published by the
Chicago Board Options Exchange, Incorporated (the “CBOE”)
(the “VIX futures contracts”), multiplied by a factor of two,
(b) a weighted short position in the S&P 500® Total Return
Index (Bloomberg L.P. ticker symbol “SPXT:IND”) (the “S&P
500® Total Return Index”), as reduced by the Treasury
Return determined by the formula described below under
“—Composition of the Index—Treasury-Based Interest Accrual
Component; Calculation of the Index Level” (the “Treasury
Return”) and (c) an interest accrual on the notional value
of the Index based on the 3-month U.S Treasury rate and
reinvestment into the Index, all as described below.
The weighting of the S&P 500 Total Return Index short
position is determined monthly by a regression over a
6-month backward-looking window of (a) the difference
between the VIX Index daily returns and twice the daily
returns of the relevant VIX futures contracts versus (b) the
S&P 500® Total Return Index as reduced by the Treasury
Return. See “Risk Factors Relating to the C-Tracks—The
Index May Underestimate the Volatility Levels” in this
pricing supplement.”
In summary the new Citi product aims to find a balance
between the iPath S&P 500 VIX Short-Term Futures ETN
(VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ)
by using an intermediate point in the VIX term structure
and adding leverage. Most investors have found that the
biggest problem with VXX has been the negative roll yield
associated with the persistent contango in the VIX futures.
At the other end of the spectrum, the problem with VXZ is
the amount of basis risk between the VIX and VXX.
Vanguard continued its blitz of new ETF products recently in the US, rolling out
an international counterpart to its highly successful real estate ETF (VNQ). The
Vanguard Global ex-U.S. Real Estate Index Fund will seek to replicate the S&P
Global ex-U.S. Property Index, a benchmark that includes real estate investment
trusts (REITs) and real estate operating companies (REOCs) in emerging and
developed markets outside the U.S.
“Modest exposure to real estate investments in a broadly diversified investment
portfolio can help moderate overall portfolio volatility and serve as a hedge
against inflation,” said Vanguard’s chief investment officer Gus Sauter in a press
release. “With international real estate securities representing a growing portion
of the overall real estate market, a counterpart to our domestic REIT Index Fund
is a natural addition to our index fund lineup.”
The launch of VNQI represents the latest expansion of the Vanguard ETF product
lineup. In September the company rolled out nine ETFs linked to popular S&P
indexes, including the S&P 500, S&P MidCap 400, and S&P SmallCap 600.
In Australia, Vanguard have launched the Vanguard Australian Property Securities
Index ETF (ASX:VAP AU)… more to come!
Vanguard
Launches Real
Estate ETFs
Page 10 – News

13. More Hedge Fund ETFs
on the Way
BlackRock
Established Global
iShares Investment
Strategy Group
U.S based ETF provider, ProShares recently filed plans with the
U.S. SEC for their first Hedge Fund Replication ETF. The proposed
fund would track the performance of the Merrill Lynch Factor
Model – Exchange Series. That benchmark is designed to maintain
a high correlation with hedge fund beta, as represented by the
HFRI Fund Weighted Composite Index, an equally-weighted
composite of more than 2,000 constituent funds.
The fund won’t invest directly in hedge funds, instead it will
aim to replicate an index based on a model that establishes
weighted long or short positions on six factors on a monthly
basis: the S&P 500 Total Return Index, ProShares UltraShort
Euro ETF, MSCI EAFE U.S. Dollar Net Total Return Index, MSCI
Emerging Markets Free U.S. Dollar Net Total Return Index,
Russell 2000 Total Return Index, and one-month USD LIBOR [see
Door Opens For Hedge Fund ETFs].
Currently, IndexIQ is the best known provider of hedge
fund replication ETFs; the firm’s lineup includes the broad
IQ Hedge Multi-Strategy Tracker (QAI), as well as the more
targeted IQ Hedge Macro Tracker ETF (MCRO) and IQ Merger
Arbitrage ETF (MNA). Other players in the hedge fund ETF
space include iShares, which offers the actively-managed
Diversified Alternatives Trust (ALT). That product seeks to
maximize absolute returns from investments with historically
low correlations to traditional asset classes, while minimizing
volatility by taking both long and short positions. Credit
Suisse also jumped into the space recently, rolling out both a
fund designed to capture returns available through a merger
arbitrage strategy (CSMA) and a long/short offering (CSLS). Both
of the Credit Suisse products are structured as exchange-traded
notes (ETNs), meaning that they are debt instruments whose
return is linked to the performance of an underlying benchmark.
In total, there are seven ETFs in the Hedge Fund ETFdb
Category, with aggregate assets of nearly $350 million [see
Closer Look At Hedge Fund ETFs].
Source: ETF Database
The Global ETF
behemoth,
BlackRock
has recently
announced the
launch of their
Global iShares
Investment
Strategy Group
to bolster their
research efforts with more thorough coverage on
ETF investment trends and insights.
Russ Koesterich will head the group and fill the role
of global chief investment strategist.
Michael Latham, global head of iShares at
BlackRock, says Koesterich combined deep
macro investment knowledge with a profound
understanding of iShares and the needs of clients.
Koesterich has played a leading role driving forward
investment strategy in the Scientific Active Equity
division since 2005, and will be fuelling thought
leadership on behalf of iShares.
The Group is will provide iShares' clients with
expert information on economic and investment
topics, including insights into the asset classes,
sectors and markets in which iShares offers access
to investors.
Latham says the move was part of a commitment
by iShares to provide clients with the best services
in addition to the largest ETF product line-up in
the market.
The group is intended to work closely with iShares
research, product and client teams, providing
expertise in both broad market insights and
customized investment solutions.
With the resources of the larger BlackRock
organization behind them, iShares' new Strategy
Group will be able to leverage the large collection
of investment professionals available for the benefit
of their clients.
News – Page 11

14. U.S. based ETF provider, Global X, recently launched
their Gold Explorers ETF (GLDX), the first pure play fund
offering exposure to gold exploration companies. The
new fund will offer exposure to this unique segment of
the gold mining life cycle by tracking the Solactive Global
Gold Explorers Index, a benchmark that measures the
performance of companies engaged in exploration for
precious metals. The index underlying GLDX consists of
about 30 different securities, with a heavy tilt towards
Canadian (70%) and U.S. (18%) securities. It should be
noted, however, that many of the component companies
maintain operations–exploring for gold reserves–
throughout the world, not only in the country where the
stock is listed.
GLDX offers investors a new way to establish exposure
to gold by focusing on one of the most speculative and
risky points along the precious metal’s supply chain. A
look at the fund components sheds some light on the
nature of exposure offered by GLDX. NovaGold Resources
(NG), one of the largest components of the underlying
index, describes itself as a “precious metals company…
with the objective of becoming a low-cost million-
ounce-a-year gold producer.” During the third quarter of
2010, NovaGold generated revenue of only C$ 462,000,
and posted a massive operating loss. But the company
maintains ownership interest in some of the world’s
largest undeveloped gold projects in the world, and
engages in exploration projects to expand known deposits
or discover new gold reserves. If the gold reserves at
Global X Launches First Ever Gold Explorers ETF
existing projects prove to be massive and reasonably easy
to access, NovaGold could hit it big. “Gold exploration
companies offer high risk-return characteristics with the
potential to strike a gold mine, literally,” CEO Bruno del
Ama said. But NovaGold, like many other companies that
make up GLDX, is currently losing cash by the boatload–
and there is no guarantee that it will ever become cash
flow positive.
So GLDX offers exposure to the smallest–and often
riskiest–firms engaged in the general gold production
industry without concentrating risk in any one project
or company. “We believe an ETF is a fantastic structure
to provide access to this segment of the gold mining
industry,” said Jose C. Gonzalez, Head of Operations at
Global X. “This is the venture capital of gold, and GLDX
offers the opportunity to capture the fantastic returns
of one company striking gold while smoothing over the
losses generated by failed projects.” This fund could
be appealing to investors interested in accessing the
potentially high returns generated through exposure to
gold explorers, but without the time, knowledge, or risk
tolerance to select individual exploration companies.
GLDX allows investors to instead bet on the entire
industry in hopes that near-record gold prices will spur
explorers to find new deposits, which could lead to
enormous gains for a few lucky companies.
The Bank of Japan (BoJ) is committing
$6bn to buying ETFs as part of its
recently sanctioned quantitative easing
plan, Standard Life Investments says.
The firm's global investment strategist
Richard Batty says the BoJ is allocating
$60bn to buying assets as part of its
policy to keep current interest rates at
around zero and suppress longer-term interest rates.
Batty says although the $6bn allotted to buying ETFs is a small
figure, it is an "interesting departure" by the BoJ, which will
look to boost asset values and buy more ETFs going forward.
He says: "$6bn is not enough - but this is a signal of what
the BoJ wants to do, it's part of a staged quantitative
easing measure."
Japan Commits $6bn to ETFs in QE Plans
He says Japan is currently
experiencing a liquidity trap, where
people are not willing to spend or
borrow enough, which is also posing a
danger for other economies.
As a result, the BoJ is moving towards
this quantitative easing plan of buying
assets such as ETFs and Japanese Reits.
Batty adds: "If there are zero interest rates, BoJ can buy
assets to push up the value, then the owners who sell these
assets to the central bank will make a wealth gain."
Source: ETFM
Source: ETF Database
Page 12 – News

15. • ABF Pan Asia Bond Index Fund (the “Trust”) is an exchange traded bond fund investing primarily in
local currency government and quasi-government bonds in eight Asian markets, comprising of China,
Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand.
• Investment involves risks. Investing in the Trust may involve a higher risk as it involves exposure to
bonds in both developed and emerging Asian markets. Investors should be aware that the Trust is
different from a typical unit trust. The trading price of units of the Trust on the stock exchange may
differ from the net asset value per unit of the Trust.
• In the case of turbulent market situation, investors may suffer significant loss.
• Investment is a personal decision. Investors should consider the product features, their own investment
objectives, risk tolerance level and other circumstances and seek independent financial and professional
advice as appropriate before making any investment decision.
Uniquely Asian • Universally Appreciated
PAIF is an authorized unit trust in Hong Kong and Singapore only. Authorization does not imply official recommendation. Nothing contained here constitutes investment
advice or should be relied on as such. The past performance of PAIF is not necessarily indicative of its future performance. Investors should read the prospectus
including the risk factors carefully before deciding to purchase units in PAIF. The prospectus for PAIF is available and may be obtained from State Street Global Advisors
Singapore Limited (the Manager) (Singapore Company Registration number: 200002719D) and authorized participants. The value of PAIF and the income from them, if
any, may fall or rise. The semi-annual distributions are dependent on PAIF’s performance and are not guaranteed. Redemption of PAIF’s units could only be executed
in substantial size through designated dealers and the listing of PAIF on the stock exchanges do not guarantee a liquid market for the units, and PAIF may be delisted
from the stock exchanges. 1) Fund size grew to US$2.04 billion as of April 30, 2010, from US$1.1 billion since listing on July 7, 2005. 2) This is PAIF annualized returns
since listing on July 7, 2005 to April 30, 2010. PAIF’s net-of-fees returns in USD terms on NAV-to-NAV basis, taking into account transaction fees and on the assumption
that all distributions are reinvested. PAIF historical annualized returns: 4/2006: 9.90; 4/2007: 9.86; 4/2008: 9.22; 4/2009: 6.55. 3) PAIF is not guaranteed or endorsed
by the governments of the eight investment markets. 4) PAIF is denominated in US Dollar. 5) The estimate is reached by multiplying a board lot size of 10 units of PAIF
by the closing price of US$118.75 as of April 30, 2010, excluding brokerage commissions, transaction costs etc. 6) Annualized ratio of expenses to weighted average
net assets for the period July 1, 2009 to 31 December, 2009, which is computed in accordance with the revised Investment Management Association of Singapore’s
(“IMAS”) guidelines on disclosure of expense ratio. Brokerage and other transaction costs, interest expense, foreign exchange gains/losses, tax deducted at source or
arising on income received and dividends paid to unitholders are not included in the calculation of expense ratio. This advertisement is issued by State Street Global
Advisors Singapore Limited and has not been reviewed by the Securities and Futures Commission.
Just as rice is a staple in Asia, Asian local currency bonds have become a core driver to fuel the growing appetite of investors worldwide.
Since its launch in July 2005, ABF Pan Asia Bond Index Fund (PAIF) has grown in size, price and value:
Fund Size Up 86% to US$2.04 billion1
Annualized Returns 7.43%2
Source: State Street Global Advisors (as of April 30, 2010)
PAIF is an Exchange Traded Fund (ETF) investing in local currency government and quasi-government bonds in 8 Asian markets3
:
CHINA • HONG KONG • INDONESIA • KOREA • MALAYSIA • PHILIPPINES • SINGAPORE • THAILAND
The PAIF Advantage:
• The first and only Asian bond fund listed on Stock Exchange of Hong Kong (SEHK) & Tokyo Stock Exchange (TSE)
• Gain market & currency diversification with a single fund4
• Opportunity to receive income (semi-annually)
• Low entry price (approximately US$1,187.50)5
• Low total expense ratio (0.20% of the Net Asset Value (NAV) p.a.)6
• Trades like a share (stock code, SEHK: 2821/TSE: 1349)
To learn more about PAIF, please call customer hotline: (852) 2103 0288,
or visit www.abf-paif.com, or contact your financial advisor.

16. Page 14 – Touching the Void – CheckRisk
The EU is lurching from one crisis to the next. The so called solution to the Irish
solvency problem is never going to be resolved with a liquidity solution. The
injection into Ireland of €85bn at a 5.8% rate is nothing more than a band aid on
a severely wounded patient. The likelihood that Ireland will default on its debts
at some point in the next few years is almost assured by the bailout terms.
Meanwhile, Germany and France will now be forced to
look at Portugal, Spain and Italy. It is clear that the current
bailout fund is insufficient to support all three states. In fact
if Spain was to falter, it is hard to see how the euro could
survive. Readers will know that our stance on the euro for
over two years has been, in the words of Private Frazer,
that the euro is doomed. Our view is more technical than
ideological. The point being that without fiscal and political
unity, the euro is vulnerable on virtually all levels.
“What really broke Germany was the constant
taking of the soft political option in respect of
money. The take-off point, therefore, was not a
financial but a moral one.”
Adam Fergusson, When Money Dies, the Nightmare of the
Weimar Hyper-Inflation. (1975, William Kimber & Co Ltd)
The above quotation is about the Weimar republic’s hyper-
inflation in 1923. It is depressing that so many of the same
mistakes are being made today, and that few of history’s
lessons have been learnt. That being said, the memory of
Touching the Void
hyper-inflation lies deep in the German psyche and is likely
to resurface as further bailouts are required.
The end game is difficult to predict. If it is market led then
the collapse will be swift and ugly with many unpredictable
risks emerging. It is safe to assume that EU leaders will
do everything in their power to stop that outcome. Even
so, it is not safe to think that they will succeed. Following
the Irish bailout market reaction has been muted, with
European bond markets falling. If markets decide that the
whole euro area is becoming too risky, then a collapse
becomes more likely.
The alternative end game is not much better; death by a
thousand cuts. In this scenario the EU manages to struggle
on with monetary union. The critical period to survive is
the first half of 2011. During Q1, refinancing of sovereign
debt will be very much on the agenda. Italy has a rumoured
€85bn of critical debt roll over, and Spain may have as much
again. Portugal too, has critical financing requirements in
Q1. If the burden falls on the Germans (which essentially

17. CheckRisk
CheckRisk’s pre-investment market risk analysis analysis
delivers to investors a series of Risk Analysis Profiles (RAPs) that
evaluate market risk in multiple asset classes and markets. The
system works on analysis of rates of change of risk factors, risk
clusters, and the risk of bridging which is a contagion effect. It
has also been designed to measure the ratio of perceived risk
(behavioural inputs) to real risk (economic inputs) this allows us
to gauge how “risky” the market has become. Subscriptions and
more information are available at www.check-risk.com
Our analogy of climbers
roped together; with
Germany and France as
mountain guides rings true.
Greece and now Ireland have
slipped and are hanging free.
Portugal, Spain and Italy are
just holding and the pressure
on the lead climbers Germany
and France is immense. For
the moment ice axes and
crampons are straining but
holding. It will not be the
weaker climbers who decide
to cut the rope, but the
mountain guides, when they
realize that they too will be
pulled from the rock face and
fall into the void.
it does if rates move too high) then there may be a crunch
point. Certainly it is clear that Angela Merkel is facing
increasing hostility at home for bailing out the rest of
Europe. If that political pressure becomes too much, it is
unlikely that she can be re-elected without abandoning the
euro project.
Proper risk analysis shows that the Irish, and Greek bailouts
are transfers of risk to the European Union, they do not
eradicate risk. The Irish, ahead of the banking problem,
had a very soundly managed economy from a budget deficit
perspective. The fault lies in the lack of regulation of the
banking system and the collusion of government in the
process of allowing debt to fund excess growth. The Irish
government either knew of these risks and chose to ignore
them or was oblivious to them. The point stands that the
bailouts are merely kicking the can down the road. The bond
markets already appreciate this fact. It is less clear whether
the EU’s leadership has fully appreciated the futility of back
stopping bankrupt nations.
The lesson to be learnt from the Irish bailout is that the
moment the Finance Minister, Brian Lenihan, gave an
unconditional bank guarantee to the Irish banking system,
the stage was set. Perhaps, it was not clear at that time
to him that the tsunami of debt in the Irish banking system
would overwhelm the Irish state. But that is no excuse;
clearly he or someone in the Irish ministry of finance should
have known. The risks had been building over a long time
and advisors like CheckRisk LLP were aware and speaking
actively of the risk. It is therefore legitimate to pose the
same question on a wider European scale. Does the EU
leadership not fully appreciate the tsunami of debt it is now
underwriting or about to underwrite?
Our analogy of climbers roped together; with Germany
and France as mountain guides rings true. Greece and now
Ireland have slipped and are hanging free. Portugal, Spain
and Italy are just holding and the pressure on the lead
climbers Germany and France is immense. For the moment
ice axes and crampons are straining but holding. It will not
be the weaker climbers who decide to cut the rope, but the
mountain guides, when they realize that they too will be
pulled from the rock face and fall into the void.
Risk Analysis
The major risks to the euro are as follows:
1. An increase in euro area bond yields blocking Portugal,
Spain and Italy from accessing bond markets. This would
necessitate an increase in the bailout fund, perhaps a
doubling to €1.5tn which would have to be banked rolled
by Germany and France.
2. The political fallout of further bailouts is clearly a major
risk to Merkel and Sarkozy.
3. It is essential to properly evaluate the difference
between a transfer of risk and the eradication of risk. At
present only transfers of risk have occurred.
4. A currency trade war with the US dollar may soon kick
off. Obama’s US economic recovery is highly dependent
on exports. If the euro comes under pressure that is a
boon to European exporters and a problem for the USA.
CheckRisk – Touching the Void – Page 15

18. Page 16 – Where are We Now? – Robin Griffiths
Where are We Now?
It is very unusual to find that bonds, equities and gold all go up at the same time,
but recently almost all asset classes have done this. It seems that excess liquidity
goes equally into all different asset classes, so that in effect there is only one
market, and only one trade, risk on, or risk off.
Written by Robin Griffiths, Technical Strategist Cazenove Capital
The reason is that politics has intruded into economics on
a far greater extent than we have been used to. The US
Federal Reserve is not the only central bank to be printing
money. The Chinese Central Bank also has printing presses.
In non-communist countries, even bastions of capitalism,
the fact is that more than 50% of people’s income is now
dependent on the state.
In the ‘old normal’ the month of September would have been
the weakest of all months. It was not so this time as the Fed put
in billions of dollars by using Permanent Open Market Operations
- POMO for short. After late October in a normal year the market
picks up again into the strongest six months. We expect a rise
till late May next year. However if seasonality is not working now
then maybe we will not get our year end rally.
On the four year cycle, which is driven by the Presidential
elections, we are now in a very favourable time. It is after
the mid-term election that the cycle turns up. On our own
road map, which shows the shape of a bull and bear cycle
round the four year pattern, we should be in a positive
period now at least till March 2011.
If indeed we are on the standard road map then the four
year low was last in March 2009. We would have a run up
through next year and top out in early 2012. 2013 would be
the next bear phase.
However I have always argued that we are, in the western
markets, in a secular downtrend. In which case the rise
only lasts into next year and the fall takes place earlier.
On this road map there is a high probability of going back

19. ADVERT – PIMCO
All the benefits of an ETF.
All the benefits of a world-class asset manager.
Nothing may be more important to your clients
than the safety and security of their investments. In
today’s markets, it might be hard to know who to
trust when looking to protect and preserve assets.
That’s why so many investors today are fleeing to
quality. And virtually no other investment manager
represents quality like PIMCO.
You can give your clients all the benefits of an
exchange-traded fund together with all the benefits
of a world-class money manager like PIMCO.
Outstanding expertise and analysis. A robust
and proven investment process. Active and index
strategies. Together with the transparency, access
and convenience of an ETF.
PIMCO ETFs. One more well-engineered solution
from PIMCO.
For more information, please contact us at
(888) 400-4ETF (4383) or ETFs@pimco.com.
Or visit www.pimcoetfs.com.
Well-engineered solutions.
For qualified investors only. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.
PIMCO products offered in the United States are distributed by Allianz Global Investors Distributors LLC, 840
Newport Center Drive, Newport Beach, CA 92660, (888) 400-4ETF (800-400-4383).
Bringing together the best of both.
www.pimcoetfs.com

20. down to the lows of 2009. In a worst case scenario it may
even go lower.
The major question is, “Has QE2 been able to drive markets
back to the standard pattern or not?” We do not know
the answer, but that may not matter. Much of the money
produced by the Fed’s printing press goes overseas to drive
the markets we always did like, even higher than we thought
they would go. We still come down long of gold and silver,
and liking the markets of India, China related, and Brazil.
If we plot the rise in the US stock market in Euro or more
importantly Swiss Francs, then to us it has been falling.
Overseas investors cannot make money buying US dollar
denominated stocks as the currency is being trashed quicker
than the market can rise.
If we read the History of the Decline and Fall of Great
Powers, then normally the great power is finally attacked by
an invading barbarian, like Atilla the Hun. In the case of the
USA this did not happen. The US chose to deliberately give
away their advantage and trash their currency as a matter
of deliberate and wilful policy.
The bottom-line is this: we are in times when politics enters
into and overrides economics and normal market moves. In
Europe the Euro, Ireland, and Greece will not fail for the
same reasons. Major trends are driven by political decisions,
and so many of the normal rules of technical analysis may
be temporarily suspended.
‘Where ignorance is bliss, ‘tis folly to be wise’
Markets are rising, but they are being driven by injections
of truly huge sums of printed money coming from central
banks, especially the US Fed. We do know enough not to
fight the Fed. However the Fed itself is now under pressure.
The Democrat losses in the mid-term elections mean that
the Fed will not have its QE2 confiscated, but any idea of QE
3, 4, or 5 may be cancelled.
Currency wars are upon us. It is a brave man that thinks he
knows where this conflict ends. Restrictive barriers are already
coming into place. This negative development, if allowed to
continue, ends very badly indeed, if history is any guide.
Those things which cannot continue, don’t
The really big debate is about inflation or deflation. In
the West and especially the USA we are likely to see
unemployment at a structurally high level for many years
to come, and house prices have not bottomed. They might
have another 20% to fall.
The only way out of the defaulting problem, with lack of
title to deeds, is to change some laws. This may happen,
but it takes time. Without this fix, the problems are huge
and the Banks are not out of the mess. The second shoe in
the banking crisis is still to drop. The share price of Bank of
America has fallen 40% since June.
Meanwhile much of the money that the Fed prints goes
overseas. On the 18th November the Fed used another
POMO, this time of over $8.5billion. This is the biggest yet
and is after and in addition to QE2. Much of this money goes
overseas and blows inflation bubbles there.
The problem is that in the West the Fed is worried about
deflation in the future, but in Asia they have inflation right now.
There are good economists arguing the deflation case; Gary
Schiller and David Rosenberg come to mind. However in Asia
the Chinese and Indians are acting right now to cool the
inflation that they already have. Can we really have the east
inflating and the West deflating, is not the world too joined-
up for that outcome to persist?
On balance I think the best outcome that can be achieved is
that the West in general, and the USA in particular, will bump
along for many years in sub par growth. GNP will be positive
in the range 1.5% to 2%, but there will be regular recurring
crises. Some will come from the high unemployment issues,
others will come from bank or even sovereign debt crises,
but on balance we will muddle through. There will be cyclical
bull and bear phases, but within a secular trend that is mildly
negative and going nowhere.
The alternative to this is a breakdown and a depression. All
of the Fed’s actions are justified if it succeeds in avoiding
a depression. Unfortunately the price of this success is the
trashing of the dollar.
In Asian economies, especially China, must, and will, move
away from just making cheap stuff to sell in America.
They will need to allow wages to rise, and probably their
currencies at a modest rate of 5% a year. In this way we will
all muddle through.
A new currency matrix not dominated by the dollar will have to
form. It will include, and we need to own, some gold and silver.
Page 18 – Where are We Now? – Robin Griffiths
Robin Griffiths, Technical Strategist Cazenove Capital
For over 30 years Robin Griffiths has been one of the most
respected technical analysts of world stock markets, bonds,
currencies and commodities. He became a technical analyst
with WI Carr, based first in Hong Kong and then Tokyo before
returning to London. During this time he started to develop his
own trading system, analysing stock and market trends. He was
then chief technical strategist with HSBC for over 20 years and
in 2008 he joined Cazenove Capital.

22. Page 20 – The U.S. Dollar is a Third Rate Currency – Brad Zigler
The U.S. Dollar is a Third
Rate Currency
To many investors’ surprise, the Yankee dollar’s earned only a third-place ribbon
for its depreciation against gold over the past 12 months.
To many investors' surprise, the Yankee dollar's earned
only a third-place ribbon for its depreciation against
gold over the past 12 months.
With all the recent hoopla and headlines about gold
making new highs against the greenback, the destruction
derby of the world's reserve currencies is actually won
by the euro, with sterling close behind.
Over the past year, the U.S. dollar lost 29.8 percent vs.
bullion compared with a 39.7 percent tumble for the
European common currency and a 34.5 percent decline
in the British pound. Bringing up the rear is the Swiss
franc, with a 23.1 percent loss, and the Japanese yen,
which gave up 16.4 percent to gold.
Gold Value In Reserve Currencies
Written by Brad Zigler
Oddly enough, the U.S.
dollar’s the least volatile
reserve currency when
it comes to bullion
purchasing power. Its
standard deviation is just
15.3 percent over the past
year. This may not seem
like a testament to the
Fed’s steady hand on the
nation’s economic tiller, but
it’s something. It actually
bespeaks the wait-and-see
attitude of the central bank
after last year’s stimulus
and accommodation.
Oddly enough, the U.S. dollar's the least volatile reserve
currency when it comes to bullion purchasing power.
Its standard deviation is just 15.3 percent over the
past year. This may not seem like a testament to the
Fed's steady hand on the nation's economic tiller, but
it's something. It actually bespeaks the wait-and-see
attitude of the central bank after last year's stimulus
and accommodation.
USD EUR GBP JPY CHF
150
140
130
120
110
100
90
80
Oct ‘09
IndexedValueofGoldinCurrencies(19Oct‘09=100)
Jan ‘10 Apr ‘10 Jul ‘10 Oct ‘10

24. the Fed's handling of the dollar. What's economically
expedient may not be politically fruitful.
On the other side of The Pond, sterling's been the most
volatile currency, flopping about with a 17.8 percent
standard deviation. Largely, this reflects the rising and
falling fortunes of the former Labour government. Just this
week, the coalition government's declaration of austerity
measures sent the pound into free fall vs. bullion.
The Longer Perspective
With all this, one can't ignore the longer-term trends.
Since the euro's introduction in 1999, the pound's lost
more ground to bullion than any other reserve currency.
Sterling's average annual loss in gold purchasing power
has been 15.3 percent. The U.S. dollar follows with an
average loss of 14.8 percent per year. Meantime, the
euro's given up an average 13.1 percent each year.
Gold Value In Reserve Currencies
Kinda makes you wonder who'll take the pennant next
year, doesn't it?
Page 22 – The U.S. Dollar is a Third Rate Currency – Brad Zigler
The likelihood of Fed intervention increases when
commodity prices—a basic metric of inflation—rise or fall
significantly compared with Treasury securities. In the
chart below, the red Fed Indicator line dances within a
neutral zone—a condition that compels the central bank
to watch, but not act. A sustained move in the indicator
above the upper band would signal an increased
likelihood of accommodation—or lower money rates and
a weaker dollar. A dip below the lower band flashes a
higher probability of tightening, or higher rates and a
stronger dollar.
Fed Operation Indicator
Keep in mind that this indicator is just that—an
indicator. It measures the likelihood of Fed intervention,
not its certainty. Political considerations—which can be
substantial—are put aside here.
For now, the Fed's keeping a fairly even keel—even
though it's been economically painful for employees or
the unemployed. There's nascent inflation, reflected
in the blue line's recent trajectory, which complicates
TRJ/CRB Index Aggregate Treasury Index Fed Indicator
140
130
120
110
100
90
80
70
60
50
40
2.00
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Dec’07 Mar ‘08 Jun ‘08 Sep ‘08 Dec ‘08 Mar ‘09 Jun ‘09 Sep ‘09 Dec ‘09 Mar ‘10
IndexValues(28Dec‘07=100)
FedIndicator(<.95Bearish,>1.05Bullish)
Jun ‘10Sep ‘10
USD EUR GBP JPY CHF
550
500
450
400
350
300
250
200
150
100
50
1 Jan ‘99 23 Aug ‘00 15 Apr ‘02 6 Dec ‘03 28 Jul ‘05 20 Mar ‘07 9 Nov ‘08
IndexedValueofGoldinCurrencies(01Jan‘99=100)

25. The markets have managed once
again to take investors on a wild ride
this week, with the S&P 500 breaking
and closing above the psychologically
important 1,200 level. The rally on
Thursday was an overwhelmingly
positive reaction to the Fed’s decision
to pump more money into the market,
sending both equities and commodities
sharply higher. Friday’s positive
unemployment report represented
another round of good news, giving
investors hope that job creation is
beginning to accelerate.
Technical Trading Ideas:
for SPDR GLD Trust
Gold has been no stranger
to the headlines in
2010, as the precious
metal has surged higher
thanks to lingering
anxiety over the global
economic environment,
concerns about long-term
inflation, and consistent
weakness in the U.S.
dollar. The yellow metal
has repeatedly touched
new highs throughout the
year, generating handsome
returns for several large
hedge fund managers who
have established huge
positions in bullion.
Gold has been no stranger to the headlines in 2010, as
the precious metal has surged higher thanks to lingering
anxiety over the global economic environment, concerns
about long-term inflation, and consistent weakness in
the U.S. dollar. The yellow metal has repeatedly touched
new highs throughout the year, generating handsome
returns for several large hedge fund managers who have
established huge positions in bullion. And some think
that the gold rally still has more room to run; Goldman
Sachs recently set its 12-month price target at $1,650
an ounce, an increase of more than 20% from recent
Technical Trading Ideas – Page 23

26. Trade Ideas
When trading gold (or physically-backed gold ETFs),
it is extremely important to exercise caution since
bullion prices are subject to price volatility and shifts
in investor psychology–making it difficult to gauge
appropriate entry points. Also, it is critical to note that
the Stochastic Momentum Index is signaling that GLD is
overbought from a monthly time perspective, as well
as from a weekly and daily view. If GLD is to chase its
next price target of $156.16, it first needs a reasonable
retracement so it can build support as it prepares to
make the next move higher.
Once again, we can use the Fibonacci Retracement tool
to identify significant price levels that GLD is likely
to retrace to, considering that it is overbought from
multiple time perspectives. If we draw the retracement
from the start of its last uptrend to its current peak, the
first price level suggested for GLD is $134.74, and the
next comes at $133.60.
A conservative suggestion for trading GLD is to watch its
1-hour Stochastic Momentum Index as it retraces, and take
note of whether GLD is building new support at a higher
price level. If the view on gold is aggressively bullish,
one strategy is to add to GLD positions as the fund dips
by keeping an eye on the 15-min Stochastic Momentum
Index. It’s not impossible for GLD to continue to climb
higher aggressively, as its Daily Stochastic Momentum Index
was overbought from the end of September through the
beginning of October.
closing prices. The bank cites this week’s price action
and U.S. monetary policy developments–which could spur
eventual inflation–as significant factors in driving the
price of gold higher.
As interest in gold has surged, so too have assets in
physically-backed ETFs, a popular tool for all types of
investors to establish exposure to precious metals. The
SPDR Gold Trust (GLD) is the second largest U.S.-listed
ETF by total assets, currently standing at about $57
billion. GLD, which stores gold bullion in secure vaults,
has climbed to all-time highs this week, managing to
close above its previous high of $134.85 set on October
14th. GLD has been in an uptrend since its appearance
on the exchange in 2005, as gold prices have steadily
climbed higher. The last significant correction that GLD
experienced was in the second half of 2008, when it
retraced from slightly above $100 to $66 per share.
Technical Insights
One popular technical analysis approach to trading GLD
is to draw a reverse Fibonacci Retracement from the
peak to the low point of its last correction (mentioned
above). This process reveals key price levels that
many technical traders will consider when evaluating
GLD’s recent rally. Looking back, we can see that GLD
struggled with the 161.8% level–a key threshold in
reverse Fibonacci retracements–before managing to
break through last month. With this level in the rear
view mirror, the next significant price level when looking
at Fibonacci Retracements is 261.8%, which corresponds
to a per share price of about $156 for GLD. Given
current economic conditions of low interest rates and
a falling dollar, the technical prediction for GLD seems
reasonable (it is, in fact, well below Goldman’s more
bullish prediction).
Page 24 – Technical Trading Ideas
Source: ETF Database

28. Page 26 – Gold & Platinum
In 2010 it was all about Gold
Gold set continues to set new record high prices, and the London Bullion Market
Association – at its annual conference recently went as far as forecasting that the
“yellow metal” would advance to $1,450 over the next 12 months.
With the U.S. Fed, the Bank of England and the Bank of
Japan all reaching near-zero interest rates and moving
toward more “quantitative easing” – pumping money
into the global economy – the case for gold looks more
convincing than ever. However, I think all the focus on gold
has made many investors neglect platinum, with prices
languishing over the past 2 years.
In 2011 it might all be about
Platinum
Yet there are other precious metals that stand to benefit
from the same inflation-hedging-related demand that’s
driving gold to record after record.
So why Platinum? Well there are three good reasons why we
think it might outperform gold over the next 12 months as it
heads back to pre-GFC price levels:

29. Chinese automobiles do use less fuel than their “gas
guzzling” U.S. counterparts, but they still need a catalytic
converter. In the last year or so, Chinese manufacturers
have tended to use palladium converters, while the
European manufacturers used platinum. But rising global
auto demand and the two metals’ recent convergence in
price has made platinum relatively more attractive.
Therefore platinum demand, driven by the worldwide
automobile industry – including a certain amount of the
rapidly growing Chinese and Indian auto sectors will display
continued strength.
The other interesting twist is the strong level of demand
from investors in China for platinum. In the case of
platinum, demand takes the form of platinum jewellery,
whose sales in China rose from a 2008 level of 1.06 million
ounces to a 2009 all-time record of 2.08 million ounces – an
amount equal to about 35% of the world’s platinum mine
output of 5.9 million ounces.
Since annual catalytic converter demand is estimated to
run at 50% of world platinum output, it’s easy to see the
potential for a supply/demand imbalance and a jump in
platinum prices.
Chinese automobiles
do use less fuel than
their “gas guzzling” U.S.
counterparts, but they still
need a catalytic converter.
In the last year or so,
Chinese manufacturers have
tended to use palladium
converters, while the
European manufacturers
used platinum. But rising
global auto demand and
the two metals’ recent
convergence in price has
made platinum relatively
more attractive.
1. It’s scarce
Platinum is probably the rarest of the precious metals with
annual production of around 7 million troy ounces. South
Africa is the world's leading producer, with almost an 80%
market share in 2009. Russia was a distant second, with
11%. Relying primarily on one source for platinum is a big
concern. Every miners' strike, political tremor or other
production disruption triggers a ripple in the trading pits.
2. Demand is rising quickly
As mentioned, platinum is needed for catalytic converters
in automobiles. Current fuel cell technology also uses
platinum, which unlike many metals, is non-magnetic.
While about half the platinum production is used for
vehicle emissions control, about one-sixth goes toward
jewelry, with smaller percentages used in electronics and
other industrial uses. Some even is needed for certain
cancer-fighting drugs. Platinum's unique properties make
it popular for jewelry. Fine watches often have platinum
cases, because unlike gold, it never tarnishes and doesn't
wear. Recycling of catalytic converters is leading to
the recovery of a substantial amount of platinum. But
demand continues to rise, especially as China's demand for
automobiles continues to increase. Concerns over climate
change are also expected to lead to increased use of the
antipollution devices in more industrial equipment. But
production isn't expected to drastically increase, in the
near term, to meet the rising demand.
3. Investment demand is increasing
Holding platinum itself is possible, with the New York
Mercantile Exchange among the exchanges trading futures
and options contracts, but not really that practical for most
Asian investors. Instead, investors have taken notice of
platinum exchange traded funds. The first platinum ETFS
appeared in first on the Johannesburg Stock Exchange, and
most recently in the US and Europe. As a result the level
of investment-related demand for platinum has increased
significantly, and is set to continue for the foreseeable future.
Well that all sounds pretty logical. Platinum’s main
competitor is palladium, which is quite a bit cheaper, but
considerably less effective. So the pricing of the two metals
tends to move in sync, with platinum being three-times to
four-times as expensive as palladium. However, over the
last 12 months palladium prices have risen by more than
35%, bringing the platinum/palladium price ratio down to an
exceptionally low level around 2.5.
If we consider that the primary market for automobile
catalytic converters is China, whose automobile market
last year passed its U.S. counterpart to become the largest
in the world, and where sales in August this year were up
about 18% ahead of its 2009 totals.
Gold & Platinum – Page 27

30. Page 28 – Why has Currency Volatility Jumped? – CrossBorder Capital
Why has Currency
Volatility Jumped?
The latest plunge in the US dollar has been met with
consternation in many World capitals. Emerging
market (EM) economies that shadow the greenback
have been forced to purchase some US$250 billion
of US Treasuries over recent weeks simply to hold
down their soaring units. An angry Brazilian official
provocatively dubbed these actions a ‘currency war’.
Written by CrossBorder Capital
Many other debt-burdened major developed economies will be forced to follow
the US. But it also seems likely that China, like-Japan in the 1980s, will fight
American (and wider Western) attempts to force it to revalue its currency
upwards. China’s stubbornness will drag out the adjustment process for all.
Western currencies will try to leapfrog each other downwards against the
Chinese RMB, in much the same way that forex markets did eighty years ago in
the wake of the 1930s Depression. It is not the Euro, the Yen or even Sterling
that will gain from this process, but the gold price. Some years ago we tackled
the long-term prospects for emerging market currencies in a research note. Our
conclusion then, as now, is that economies enjoying faster productivity growth
should also see their real exchange rates rise.
Currency Wars?
Is this the Time for a New Gold
Standard? Central Banks frequently
try to demonetise gold. They fail
because gold is always an asset the
private sector wants to hold. A new
gold standard would not require
Central Banks to accumulate gold.
All it needs is for them to operate a
'price rule', i.e. a gold price target.
Latest mayhem in currency
markets reflects the secular rise
of emerging markets. Western
economies have lost the unequal
struggle, which has devastated
their financial systems and led to
vast debt accumulation. Western
paper units need to devalue,
but the reluctance of emerging
economies to allow this has led to
competitive devaluations.
The main winner will be the gold
price. But like a similar episode
in 1980s Japan, domestic asset
bubbles will feature across
emerging economies.

31. The real exchange rate is simply the nominal exchange rate
adjusted by (relative) price changes. Thus, fast-growing EM
economies will likely experience either a strong nominal
exchange rate, or relative price appreciation, or some
combination of the two effects. In practice, there are four
possible ways that the real exchange can increase:
1. rising nominal exchange rate (e.g. stronger RMB/weaker US$)
2. faster consumer price inflation in, say, EM
3. strong gains in asset prices across EM
4. slower inflation or even deflation in the US (or West).
Each nominal paper currency has two moving parts: the
nominal gold price measured in the home currency and the
nominal gold price measured in the competitor currency. The
optimal economic strategy is for the fast-productivity growth
economy to allow its currency to appreciate against gold,
while other economies maintain a fixed parity with gold.
This permits productivity-induced cost deflation to adjust
the nominal exchange rate, without the potentially nasty
monetary side-effects elsewhere. In this ideal case, the RMB
would today rise against gold and the US dollar would remain
stable against gold. Monetary inflation, a.k.a. ‘QE’ would be
absent, and the inflation risks therefore mitigated.
We are far from this ideal World. Like the previous Bretton
Woods fixed exchange rate system, the international
adjustment process today is asymmetric. Strong economies
rarely act voluntarily, which means that it is the weak that
must move first. Thus, ‘the strong’ creditor economies are
not forced to appreciate their nominal exchange rates,
whereas ‘the weak’ deficit economies are ultimately
corralled by market forces to either devalue or seek outside
capital. In contrast, the much-lambasted Gold Standard
operated as a rule-based symmetric adjustment process,
with debtor and creditor nations both compelled to adjust.
Or at least it did until the US and France each fatally
decided to break the rules in the late-1920s. The reputation
of the Gold Standard has suffered unfairly ever since.
A Japan-like Bubble Threat
Nominal exchange rates, like national soccer teams and state
anthems, have become political counters. Inertia frequently
rules. The important fact for investors today is that nominal
exchange rates are often ‘sticky’, particularly upwards. So,
if many consumer and traded goods prices are increasingly
determined globally, the only national ‘prices’ left to adjust,
and so shift the real exchange rate, are domestic asset
prices. Therefore, the more that, say, the Asian currencies
shadow the US dollar, the greater the odds that policy-makers
will inadvertently inflate a domestic asset price bubble, be it
in real estate, stock markets and even domestic art works.
Real exchange rates are, therefore, propelled upwards by faster
productivity y growth. The jump in emerging market productivity,
perhaps unsurprisingly, coincided with the Fall of the Berlin Wall
in 1989 and the subsequent unshackling of their economies. The
Capitalist labour force more than tripled in size as some 3-4
billion new workers became economically enfranchised. Moreover,
rapid integration with the Western production system was
encouraged by their dramatically lower wage rates, which often
stood at fractions of the prevailing Western levels. Even today
Chinese manufacturing labour is paid a measly 88 cents per hour,
compared to the equivalent of some US$51/ hour in Germany:
a stark difference of some 60 times. The EM’s subsequent
economic ‘catch-up’ has thus become virtually unstoppable.
Their faster productivity growth, at annual rates of 4-6%, is more
than double the West’s prevailing circa 2% productivity trend. In
short, differential productivity has demanded an appreciating
real exchange rate, and to date much of this rise has occurred
through asset markets because local policy-makers have targeted
specific US dollar parities. China, for example, has long been a
key advocate of ‘stable’ nominal exchange rates.
Concerned by the so-called Asian ‘savings glut’ and spurred
by the latest economic downturn, US policy-makers are
already pressurising China to allow the RMB to rise more
significantly. Indeed, the recent slide in the US dollar might
even be viewed as an unsubtle attempt to raise the tempo
of the debate. But, pace a minor appreciation against the
greenback, the RMB has largely matched the dollar’s fall
against other currencies. This, in turn, has and likely will
cause further rounds of competitive currency devaluation.
And, as one unit after another tries to leapfrog its rival, the
only winner will be the gold price.
Looking ahead, perhaps, there are really only two things
that investors need to know:
• Chinese policy-makers misinterpret Japan’s experience
with the Yen
• China has ‘stated’ a desire to match America’s gold
holdings in Fort Knox.
China is still ‘consulted to’ by Robert Mundell, the 1999 Nobel
Prize winner, architect of the Euro and long-time devotee
of fixed-exchange rates. Under Mundell’s tutelage, Chinese
analysts point to Japan’s bubble-economy experiences to
counter current demands that she too allow her currency to
rise against the US dollar. They argue convincingly that by
yielding to American hectoring and letting the Yen appreciate,
the Japanese devastated their domestic economy, punishing
it with two decades of economic malaise.
Dangerously, this view contains partial truths. After
extensive retooling following the early 1970s oil crises,
Japanese industry came into the new decade leaner, meaner
and with a much-envied productivity performance. See
Figure 1. Unquestionably, the ‘strong’ Yen was a deliberate
response to this industrial success and it proved a major
CrossBorder Capital – Why has Currency Volatility Jumped? – Page 29

32. Page 30 – Why has Currency Volatility Jumped? – CrossBorder Capital
contributor to deflation from the early 1990s onwards. But,
paradoxically, it cannot be blamed for earlier economic
failures in the 1980s. Rather, the decision not to allow the
Yen to appreciate faster during the early 1980s directly
contributed to Japan’s ‘bubble economy’.
Japan’s woes did not start with a strong Yen, although
undeniably the strengthening Yen through the 1990s prevented
the Japanese economy from recovering from the bubble and
so allowed economic difficulties to persist. In other words,
criticising Japan’s strong Yen policy misses the point.
Paradoxically, an earlier and larger rise in the Yen from the
mid-1980s might have prevented the bubble from inflating in
the first place. But worried that their exporters might lose
trade competitiveness, Japanese policy-makers struggled
to dampen the Yen’s rise. They bought large amounts of US
Treasuries, both directly and via Japanese institutions, and
chased trophy assets, such as Pebble Beach golf course, CBS
and New York’s Rockefeller Center.
These actions to re-cycle dollars not only heightened the
pace of domestic monetization, but by holding down the
nominal exchange rate, they added to the pressure behind
rising domestic prices. Because many Japanese high street
prices were either ‘controlled’, such as the dominant rice
price, or else not open to foreign competition, the burden
of adjustment switched to the asset markets. Stocks and
real estate soared, while the skyrocketing price of golf club
memberships and the worth of the land area of Tokyo’s
Imperial Palace became global symbols of the asset mania.
Therefore, it would seem that China faces the curse of
history, where those that do not learn lessons are slated to
make the same mistakes. Because many emerging markets
are themselves likely closet-targeting the parity of the RMB
as much as they are the US dollar, these concerns generally
apply across the entire EM sector. Thus, the resolution of
fast-productivity growth largely comes through rapid asset
price appreciation. In short, the more that EM policy-makers
resist the necessary rise in their nominal exchange rates,
the more we will see asset price bubbles in EM.
Figure 1
Figure 2
Figure 3
8
7
6
5
4
3
2
1
0
Japan
USA
WesternEurope
EastAsia
HK
Singapore
Taiwan
Korea
LatinAmerica
EasterEurope
Russia
Africa
WORLD
1975 – 1990
1990 – 2008
Developed
Emerging
Developed
Emerging
Already, as we noted, EM policy-makers are being ‘forced’ to
monetize large US dollar inflows. Figure 2 highlights the jump
in their estimated holdings of US Treasuries since the latest
US dollar slide from late-summer 2010. This monetization has
helped to propel domestic credit growth forward. EM credit is
now barrelling along at a near-20% clip, compared to negative
loan growth in the West. See Figure 3.
200%
150%
100%
50%
0%
-50%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
02/04/99
02/04/00
02/04/01
02/04/02
02/04/03
02/04/04
02/04/05
02/04/06
02/04/07
02/04/08
02/04/09
02/04/10
77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
Yet lately, cross-border financial flows into EM have dipped
sharply, notably during the first half of 2010 when a risk
‘off’ investment psychology became widespread. See Figure
4. Interestingly, this recent exit of foreign capital failed
to dent EM stock markets probably because cash-rich (or
credit-fuelled) domestic investors took up the slack. Many
may recall a similar pattern in Japan around the mid-1980s
when the build-up of domestic liquidity led to domestic
Japanese institutions taking over the reins and driving the
Tokyo stock market, often to the surprise of once-powerful
foreign investors.
High on the wish list of EM policy-makers are the controls
necessary to halt these potentially damaging volatile
foreign inflows. Already we have witnessed token gestures
from Brazil and Thailand. Others will likely also try. But

33. Figure 4
12m Moving Average
Actual
200,000
150,000
100,000
50,000
0
-50,000
-100,000
-150,000
-200,000
Jan‘82
Jan‘84
Jan‘86
Jan‘88
Jan‘90
Jan‘92
Jan‘94
Jan‘96
Jan‘98
Jan‘00
Jan‘02
Jan‘04
Jan‘06
Jan‘08
Jan‘10
the reality is that, by definition, EM do not possess either
the range of policy instruments or the depth of domestic
financial markets necessary to counter these inflows.
Ironically, the most effective monetary policy tool is a rising
nominal exchange rate. What’s more, imposing capital
restrictions flies in the face of parallel demands for trade
openness. Why should the West welcome EM imports if EM
close the door to Western capital?
Increasing Demand for Gold and Increasing Supply
of Paper Monies
We have been emphasizing the high importance of currency
choice in asset allocation decisions. Which currency
to hold wealth in has become the central question for
investors? Two weeks ago in an article in the People’s Daily,
an ‘official’ stated China’s desire to emulate the size of
America’s gold stock. It is already on its way.
In 2000, China owned 395 tonnes of gold but has since increa
sed holdings to 1,054 tonnes, admittedly a still tiny 1.5% of
her whopping forex reserves by value. This gold stockpile looks
even smaller set against America’s 8,134-tonne gold mountain.
If China attains her aspiration, she will absorb the equivalent
of t he entire World gold production for three years. Other EM
may copy this appetite for gold, either directly or indirectly,
by increasingly holding RMBs in their reserves.
It looks as though the price of gold could be heading further
upwards simply for EM demand reasons alone. However,
there are other factors, namely the need for the West to
‘print money’, that are also driving gold higher.
Separately, we figure that for developed economies to
purge themselves of this crisis, the nominal gold price must
double. In short, global QE will benefit gold.
Does Capitalism allow all regions of the World to grow rich
together, or does history confirm that one region often
becomes very rich despite, or at the expense of another
becoming absolutely poorer? Whichever is correct, Western
economies are unquestionably following a slower absolute
growth path. Many contemporary commentators feared
that this fact came as early as the 1970s, but others argue
that it occurred from the early 1990s, perhaps as the direct
counterpart to (i.e.’cost’ of) the Emerging Market boom?
For years this slower industrial trend was hidden by the rapid
secular expansion of credit and debt, pumped into economies
in a vain attempt to lever returns and bolster growth.
Our long-held thesis is that the collapse in the marginal
productivity of Western industry crunched new capital
expenditure and forced down global interest rates. Although
this fact was obvious to bond investors through falling long-
term interest rates, it was hidden from equity investors by
accounting conventions that simply report average rather
than marginal returns on capital. In other words, often
aggressive cost-cutting was the truth behind buoyant cash
flows, rather than prosperous new investments.
Whatever the source of this cash-flow, it lay un-invested in
new plant and instead accumulated in short-term money
markets. Rapacious Western banks eager and able to
expand their balance sheets hoovered up these cheap and
abundant funds from the fat, swollen wholesale markets.
Underlying returns were skinny and borrowers often
questionable, but performance was flattered by extensive
leverage. The crunch occurred because banks and their
highly leveraged subsidiaries could not roll-over their
financings. The headlines for the 2007-08 financial crisis
were written about ugly investment bankers and festering
sub-prime loans, but the reality is that this was a classic
refinancing crisis borne of skidding industrial profitability.
These sliding profits had their roots in heightened
It looks as though the price
of gold could be heading
further upwards simply
for EM demand reasons
alone. However, there
are other factors, namely
the need for the West to
‘print money’, that are also
driving gold higher.
CrossBorder Capital – Why has Currency Volatility Jumped? – Page 31

34. competition from EM. The West can no longer so easily
compete and is now forced to share World markets.
Staring into the eyes of history, we realise that we have
been here before. The 1930s saw a similar transition as
economic power shifted from Europe to the USA. The
associated wealth transfer largely occurred through the
conduit of exchange rates. The American dollar was the
big winner over the following decades. In much the same
way, the British pound sterling was the big winner after the
Napoleonic Wars, at the start of the nineteenth century.
The economic record of the nineteenth century, and more
ominously the military record of the twentieth century, is
testimony to what can go wrong.
The fiscal lesson from the nineteenth century was the high
frequency of debt defaults. Even the USA defaulted on
its European borrowings. It was admonished by Europe’s
bankers who promised: ‘...they will never borrow another
dollar, not a dollar.’ Debt default was hastened by the
proximity of so-called debt traps. These curse economies
whenever the growth of tax revenues falls below the cost
of debt service. In other words, when the real interest rate
exceeds the pace of GDP growth.
Many remain blind to this threat because the bulk of post
-war experience featured GDP growth rates that exceeded
real interest rates. Yet the longer span of history confirms
that this positive gap is indeed a rare event. More often
high real interest rates are the bogey. What is more, it
seems reasonable to suggest that increasingly the level of
global real interest rates will be set by the ‘high’ marginal
return on capital in the EM. If true, this would load huge
pressure on Western borrowers to quickly reduce their debt
burdens. Faced by a similar problem in the early nineteenth
century, Britain engaged in a radical downsizing of her then
‘small’ State; a policy that many now dub laissez-faire.
Other countries could not make the appropriate sized cuts
and defaulted on their debts. Then, the Gold Standard
meant that currency devaluation was not an option. Default
was the only course. Today, currency devaluation is a real
option for many. But what do they devalue against? One
obvious candidate is gold; another is the EM currencies.
By implication, rising gold prices usually mean rising
commodity prices, so we should also include the resource-
based currencies in this group.
Figure 5 shows the US debt/GDP ratio since the early
-1920s. In our opinion, this needs to roughly halve from
circa 300%-plus to a figure nearer, say, 150%. Another way
to measure this debt burden is to express it in gold terms.
This is shown in Figure 6. The recent surge in the nominal
gold price has already helped to inflate balance sheets
sufficiently to significantly lower this real debt burden.
However, there is plainly more to go, and our estimate of a
necessary further doubling of the US dollar gold price from
current levels appears to be in the right ‘ball park’.
In other words, Western governments will likely be forced
to engage in further doses of QE to deliberately weaken
their exchange rates. This action need not lead to faster
consumer inflation as many fear. High street inflation tends
to result from excessive debt, and explicitly from too much
‘unproductive’ debt. This, in turn, is typically the result
of excessive consumer and government debt. Printing
money does not necessarily add to debt, but it does almost
certainly change the average maturity and duration of debt
because the State is issuing more short-term liabilities. A
forced shortening in asset duration is unlikely to have any
implications for faster high street inflation, but it will have
significant implications for asset price inflation.
If investors in aggregate are forced to hold shorter duration
assets than they desire, they will react by trying to exchange
these for longer duration assets, such as commodities and
equities, thereby driving up their prices. This was the
experience of America in the mid-1930s, in the wake of the
Depression. Figure 7 highlights what then happened to asset
Page 32 – Why has Currency Volatility Jumped? – CrossBorder Capital
Figure 5
Figure 6
All Sectors
Ex Financials
400%
350%
300%
250%
200%
150%
100%
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
1922Q4
1928Q4
1934Q4
1940Q4
1946Q4
1952Q4
1958Q4
1964Q4
1970Q4
1976Q4
1982Q4
1988Q4
1994Q4
2000Q4
2006Q4
1922Q4
1928Q4
1934Q4
1940Q4
1946Q4
1952Q4
1958Q4
1964Q4
1970Q4
1976Q4
1982Q4
1988Q4
1994Q4
2000Q4
2006Q4

35. prices following a liquidity expansion. The big winners then,
like now, were commodity prices. Financial asset prices,
stocks and bonds, performed well. Real estate delivered
a more modest, but still positive performance. Consumer
prices were essentially flat. A similar performance ranking
colours our latest experience following QE1.
on from currency war towards a more divisive trade war, as
in the 1930s. The modern World may also reach a third state:
commodity war. If policy-makers are forced to fall-back on
monetary policy and ever-greater doses of QE, we know from
experience that commodity prices could sky -rocket in price.
Thus, using an average gold/oil ratio of 13 times, our target
gold price of US$2,500/oz. would be consistent with an oil
price of close to US$200/bbl. Similar projections might apply
to other commodities. Taking a broad picture, such significant
jumps in commodity wealth could spur nationalist spirits
to monopolise these resources, so deliberately limiting the
access of foreign mining and processing companies.
Already, Venezuela is nationalising strategic assets and
China has restricted the export of rare earth metals. This
economic imperialism previously featured in the lead-up
to WW2. For example, the increasingly militaristic regime
in Japan realised that it had to shift away from near-80%
dependency on US oil supply. Its designs on the then Dutch
East Indies (Indonesia) led to America freezing Japanese
bank accounts in the US to contain its further purchases
of US oil. Japan retaliated by attacking the US Pacific
fleet that had recently moved to Pearl Harbor in order to
anticipate a Japanese attack on the East Indies. So began
the Pacific War.
Conclusion
The current backdrop for EM looks eerily similar to that faced
by Japan in the mid-1980s. These parallels are worth spelling
out because in our view we are again travelling this same
bubble-path. Japan then, like EM now, enjoyed more rapid
productivity growth than the US (or indeed the entire West).
Two facts underscore the current relevance of this model.
First, emerging markets today are collectively even more
‘trade focused’, and therefore probably even more worried
about maintaining their exchange rate competitiveness, than
Japan was twenty-five years ago. Second, the increasingly
pivotal Chinese economy has allegedly ‘learnt’ from Japan’s
sufferings that the strong Yen ultimately destroyed Japanese
prosperity. The first statement is irrefutable. The second is a
dangerous misinterpretation.
A legacy of the 1930s is the perception that economies that
were among the first to devalue became the first to emerge
from recession. If this encourages a greater willingness to
devalue, then the desire of the fast-productivity economies
to match these moves warns that paper currencies will
spiral downwards in value as national governments try to
leapfrog each other to gain a competitive edge. Gold is the
unequivocal winner from this process.
We firmly believe that had a Gold Standard, or its
equivalent, been operating, many of our recent
Figure 7
Figure 8
The other feature evident today that parallels the 1930s is
heightened paper currency volatility. 2010 will likely suffer
the highest currency volatility since the 1970s; itself a post
-1930s peak. See Figure 8. The reasons are similar. First,
spurred to gain an edge through competitive devaluation,
QEs are occurring sequentially. Second, nagging solvency
concerns come-and-go, without ever being resolved. Thus,
the renewed doubts about the integrity of peripheral
European debt are again debilitating the Euro.
160%
140%
120%
100%
80%
60%
40%
20%
0%
-20%
60%
50%
40%
30%
20%
10%
0%
Consumer
RealEstate
Commodities
Wholesale
Cotton
Silver
PerpetualBond
Oil
StockPrice(S&P500)
Gold
Zinc
PalmOil
Copper
Tin
Steel
USFedMonetaryBond
WWI WWII
Today debt worries are being addressed everywhere in the
same way: governments are slashing deficits and households
are rebuilding their savings. Taken together, in a flow of
funds context, these twin directives will push all economies
towards positions of trade surplus.
Clearly, for the World in aggregate this is impossible.
Therefore, it is likely that trade tensions will emerge, leading
CrossBorder Capital – Why has Currency Volatility Jumped? – Page 33

36. CrossBorder Capital
CrossBorder Capital implements investment Strategy. It was
founded in1996 to exploit a gap in the investment arena by
focussing on Central Bank liquidity. The liquidity research is
unique in the industry. Many of the world’s top institutions and
fund managers subscribe to CrossBorder’s analysis of global
liquidity flows and credit market research. Based on IMF data,
this research is led by Michael Howell, who has developed
it from the early 1980s. Nobody else has either the liquidity
database or the length of experience in analysing the flows and
direction of liquidity.
Page 34 – Why has Currency Volatility Jumped? – CrossBorder Capital
problems, such as excess credit growth and whopping
debt burdens, may never have happened. The Gold
Standard, however, has a bad reputation among
economists and policy-makers who both misinterpret
the 1920s and 1930s experience of gold, and more
generally fail to understand the basic principle that
money circulates because it has value, it does not have
value because it circulates. This is more than a pleasing
paradox. It goes to the heart of what we dub the quality
theory of money. Avoidance of the problems associated
with the earlier Gold Standard is plainly not an excuse
for having unstable money.
Figure 9 shows the US dollar gold price under the regimes
of four Fed Chairmen. It is plain that America’s policy goals
have flipped many times. Despite a short-lived period of
stable money in the early 1990s, the Fed has promoted
periods of crushing monetary deflation, e.g. ahead of
the 1997 Asian Crisis, and cynical monetary inflation,
particularly under incumbent Chairman Bernanke.
Part of the solution to our long-term problems might,
therefore, involve some return to a Gold Standard and
stable money. However, not only is this alone insufficient,
but it would be a singularly inappropriate policy to enact
just now, before Western nations have purged themselves of
the excessive debts built up in the previous crisis.
Once debt levels have been reduced to manageable
levels, new monetary arrangements can be forged. Some
guarantee against monetary inflation is needed. But if this
ultimately takes the form of gold, the rules of the game
need to be modified to ensure that fast-productivity growth
economies agree to appreciate their currencies. Previous
monetary arrangements have failed whenever the weak
deficit economies are forced to undertake the burden of
adjustment. It is the strong who must take up this challenge
if future World monetary arrangements are to survive.
In the meantime, investors should substantially raise their
exposure to gold, commodities, resource-based currencies
and general emerging market assets. History teaches us
many lessons, but the over-riding one is the importance of
getting the currency decision correct.
Major wealth transfers typically always occur through
the conduit of fast -changing currency parities. Thus,
Australians have lately become the World’s richest
people per capita. Holders of the British pound and the
former Hungarian pengo have suffered the other side
of the coin, i.e. falling wealth. With China muscling
forward, it can only be a matter of time before the RMB
becomes a major World currency, and alongside Chinese
wealth levels will leap.
Figure 9
1,000
500
300
200
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Monetary
Inflation
Monetary
Deflation
Bemanke
Boom
Worlddoom
Dec 5th
‘96
“Irrational
Exuberance”
Deflation and
Financial Market
Crisis EMROM
Brief Periods of
Monetary Inflation
Target
Money Supply
Volatile gold
Target
Price of Gold
Stabile gold
Target
Inflation
Falling gold
Target
Avoidance of Deflation
Rising gold
Neutral Money
Goldspan
Asian
Crisis
Russian
Crisis
Brazil
Crisis
Argentina
Crisis
Monetary
Deflation
Irrational
Exuberance
Structuring Law
Real Interest Rates
Sustained Monetary
Inflation
Volcker
I
Greenspan
II
Fed Tightening
Liquidity
Fed Easing
Liquidity
Greenspan
III
Bemanke
IV

37. Is There an Alternative to Gold?
Many investors believe that the combination of cost deflation and monetary inflation
is going to combine to bring about a sizeable increase in currency volatility, citing
a similar period between the end of the depression and the start of the Second
World War. It was a time where investor sentiment towards sovereign bonds swung
dramatically as investors balanced whether governments would be able to afford the
dramatic increases in debt required for government social welfare programmes. This
was reflected by volatility in the foreign exchange markets.
Could the recent increase in currency volatility that we
are now seeing be an echo from the past? If so are the
traditional “normal” key asset allocation decisions, such
as the relative weightings of bonds to equities, going to be
swept aside by massive currency swings?
To mitigate these swings many commentators advocate
investors should move at least some portion of their assets
into Gold and treat it as a currency. This may be a partial
solution, and certainly the growth and popularity of gold
market access products is to be welcomed, but buying and
holding gold can never be a complete solution. That is because
the gold market is a relatively small when compared to the
many trillions of US$ traded every day in the foreign exchange
markets. If gold did become “just like any other currency” it
could easily be overwhelmed in a real panic.
Peter O’Neil Donnellon – Is There an Alternative to Gold? – Page 035

38. Page 36 – Is There an Alternative to Gold? – Peter O’Neil Donnellon
If currency volatility is going to be a major headache
for asset allocators then the obvious solution is in the
currency options market, where commodity producers
and suppliers have traditionally insulated themselves
from the worst of any currency movements. However
hedging predictable future shipments of commodities or
goods is one thing, applying the same strategy in the fast
moving world of financial services another.
The financial funds industry has a reputation of being
somewhat reactive rather than proactive when it comes
to launching new products. This year’s launches tends
to have been last year’s “hot theme”, (anyone seen
any good new “green fund” launches recently?), here
at least it has the chance to get on the front foot.
Existing currency ETFs tend to be mostly directional
pairs, long dollar, short euro etc. There are some
notable exceptions particularly DB’s Currency Harvest
product, launched at a time when global interest rates
were much higher and the “carry trade” characteristics
much more persistent, it has struggled in the new low
interest environment.
There are a couple of existing currency volatility indices
out there that could easily be adapted to provide a hedge
against unexpected spikes in currency volatility and profit
from it. Intriguingly one is even designed to be “short vol”
and would have to be inverted but they both tell a similar
story. Prior to the financial crisis forex volatility was
persistently low and fairly predictable but since the crises
volatility has been increasing.
The Barclays Capital FX Volatility Index family consists
of three indices. Each index uses a different quantitative
and systematic underlying strategy and is composed of 12
cash settled forward volatility agreements on the main
currency pairs. In the AlphaVol strategy a systematic
mean optimiser model is run to determine the weights
of each of the forward volatility agreements in the
index. The model generates buy or sell signals, allocating
greater weight to forward volatility agreements with a
higher expected return.
The BetaVol strategy uses a systematic ranking model
that generates buy or sell signals based on the expected
return of each asset. The allocation takes long positions
in the assets with the highest return and short positions
in those with the lowest return. The allocation takes
no position in assets that rank in the middle. However,
the Beta Volatility index is always net long volatility.
The SBetaVol strategy is similar but uses optimised
component weightings.
The DBIQ ImpAct FX Volatility Index was designed some
time ago to track a bearish currency volatility view so it is
systematically short volatility swaps across the six currency
pairs with the highest turnover in the FX options market.
This subset of currency pairs accounts for approximately
70% of the total market turnover, and the behaviour of
implied and historical volatilities is highly correlated to that
of indices that include more currencies.
None of these products are in a useful investor friendly
form, and DB would have to invert its short vol view but
as the risk of currency volatility increases there will be
increasing demand for these products. The choice for
international investors is stark: either find some strategy to
mitigate increased foreign exchange volatility risk or reduce
their international capital allocations.
The financial funds industry
has a reputation of being
somewhat reactive rather
than proactive when it
comes to launching new
products. This year’s
launches tends to have been
last year’s “hot theme”,
(anyone seen any good
new “green fund” launches
recently?), here at least it
has the chance to get on the
front foot.