Exit Equities for Cash, Bonds or Gold?
Source: GoldSeek, Peter Cooper (11/30/09)
". . .investors cashing out of equities might be well advised to follow this new trend"
Those exiting equities and bonds will receive UAE dirhams in exchange. This currency is dollar pegged but already pays 3.5-4% on deposit accounts, way above anything available on US dollars.
If last autumn's financial crisis is a guide, then the UAE banks may well raise rates higher. Depositors got 6% then to encourage them not to cash out into US dollars. Backed by 10% of the world's oil reserves, the UAE is arguably the richest nation on earth.
Investors wanting to stay in liquid assets can choose between US bonds or Dubai government-related debt, which is bound to be squeezed just as hard as local equities today in an across the board sell-off.
The question then is whether you want to hold either US or local government bonds. Bond markets, like any other capital market, can fall as well as rise.
It is more complex for UAE investors. If the global financial markets also correct, then the position is far more difficult to judge than if the problem remains UAE-isolated.
A strong correction in financial markets would therefore seem unavoidable as the liquidity shock of the stimulus shots wears off. Last Friday the global markets showed a microcosm of what to expect in a big sell-off.
The dollar rallied, bonds rose sharply and oil and gold sold off. But in only a matter of hours, a sharp fall in the gold price attracted new buyers and almost restored the price. It seems equity sellers took their dollars and immediately bought gold.
In that case, investors cashing out of equities might be well advised to follow this new trend.