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Gold is just rebounding from the Q3 setback. But what exactly was happening, or will happen to gold, the near-3 trillion dollar industry?

Q2, we have seen temporary easing of physical demand (jewelery market) and very unusual volatility for gold, prices ranging from $567 to $725. This high volatility has not been seen since the mid-80s, and is unlikely to continue as gold is historically not a volatile metal due to ample near-market supply. 

Gold's correlation with other instruments: not highly correlated, particularly with equities. This is one of the best investment attributes of gold, a great diversification tool for modern portfolio theory. 

Out of the 7 gold ETFs, I'm a fan of IAU because of iShares' other products (no I do have a professional relationship with iShares or Barclays). It's up 32% YTD, vs 30%- for spot gold and 10%- for S&P 500. Here's performance of IAU over past 18 months: 

Gold forecast survey by analysts from bulge-brackets and specialty boutiques. As seen here, gold is still outperforming analyst expectations no matter how bad Q3 was:

Also, there was a significant decline in investment holdings of index-linked commodity futures. June's total global assets in commodity benchmarked investments were $120 billion. By October, it has declined to $90 billion. The decline was not only due to the price drop of major commodities, but also "grass is greener elsewhere", particularly equities. 

What's happening in the future? Jewelery accounts for 77% of demand for gold since 2001, and the long term outlook is positive due to rising consumer income, purchase power, favorable demographics (women/seniors) and attitude changes in developing countries. Industrial demands (11%) are also likely to rise since next generation electronics and consumer goods use gold as raw materials.

When comes to supplies, mining (62% of total supplies) activities continue to suffer. It takes 10 years to open a new mine and god knows how many for earth to supply us with new gold. Lowering supplies will cause prices to increase, and increasing prices will stop producers from selling gold forward, or even buying back previously hedged positions. 

Long story short: I'm bullish on gold. 

Sources: LMBA, World Gold Council, SeekingAlpha, Global Insight, Bloomberg

Here's some notes I took today regarding the Latin America economy. The region is looking strong and yes I do own iShares MSCI Brazil Index ETF (EWZ) . Despite some hiccups toward mid-'06, it has performed wonderfully for me. Also there's my updated global markets notes/outlook.

• Stabilization: double-digit economy growth vs. triple-digit two decades ago
• Commodities: 40% of market cap
• Lowering budget deficit
• More attractive FI market: @ same yield @ rating as U.S. FI market, Latin America's rating more likely to be upgraded soon
• Mexico, Brazil & Argentina strong
• More consumer savings & credit (20%/yr)
• Cheapest equity @ <10x earnings vs. >11x in Asia & >15x for rest of developing world
• Strong sectors: consumer/industrial, retail, media, energy

Per my friend’s request, here’s data from my research and my personal opinions regarding the AmSouth (ASO) /Regions (RF) merger.

Data:

• Combination of both firms (Regions)
  • 37,000+ employee, however up to 10% of positions duplicated; no official job loss numbers announced
    
  • “Both RF and ASO have poor track records of achieving targeted merger integration synergies in a timely manner”
  • Jackson W. Moore, RF chairman, president and CEO will serve as chairman of the board
  • C. Dowd Ritter, chairman, president and CEO of ASO will serve as president and CEO
  • Transaction announced in May, approved by shareholders in October, to be closed in November
    
• RF:
  • Strong 3Q earnings due to:
    • Cost control (layoffs a factor)
    • Better credit quality
    • Lower loan loss provisions
    • higher spread income
    • Weaker fee income
  • $150M cost savings in 07;$350M in 08 (achieves full run-rate)
  • Divesting 52 branches
  • Recent (Oct.) Neutral/Buy ratings upgrade by Lehman, Banc of America, Punk Ziegel, Friedman Billings Ramsey
  • Volatility risk: low
• ASO
  • Declared dividends in July
  • Announced share repurchase in April to be used for merger announced in May
  • Buy upgrade, raising target price: Friedman Billings Ramsey, Ryan Beck, Punk Ziegel
  • Sell/equalweight downgrade: Sandler O`Neill, Morgan Stanley
• AmSouth/Regions Consolidated Balance Sheet
• AmSouth/Regions Consolidated Income Statement

Conclusion:

• Not so much a “merger”, but more of an acquisition as RF is absorbing ASO and keeping its name
• Less merger synergies than expected
• Main reason for merger: cost savings, larger economy of scale
• No foreseeable growth in 07
• Upgraded ratings due to financial sector’s strong performance during economic slowdowns, not long-term
• ASO will most likely go through a significant culture change when adapting RF’s identity. This has happened numerous times historically within the financial sector. For example Wachovia & First Union’s merger; although First Union was the lager firm, Wachovia had better reputation and its identity was retained.

If you are reading this and are a manager, you may want to check out the Managing During Mergers and Acquisitions podcast (part 1, part 2) from Manager Tools.

Just some notes I took lately. And yes, I am optimistic.

• Economy
• Typical cycle
• Geopolitical risks calming down
• Inflation somewhat controlled
• Concerns shift from inflation to economic slowdown
• $70B monthly trade deficit
• Lots of liquidity in market
• Indicators
• CPI, most important
• Core raising
• Biggest producer prices/industrial production decline
• Temporary increase on vehicle prices
• U.Mich Consumer Confidence Index up
• Housing slowdowns negatively affect new construction/raw materials, however hasn't spread to other areas

• FI
• Treasuries rose
• Invest in short term instruments
• If economy growing at 2.5%~3% and bonds stabilize, good value

• Equities
• Put options
• Health Care sector cheap
• Defense industry good
• Financial sector does well during economy slowdown
• Consumer/retail sectors good b/c of holiday season
• Earnings drive market up

• Commodities
• Precious metals – defense against declining dollar
• Winter will produce demand for electricity/heating oil
• Gold down, goes against market
• Energy price down, more $ in consumer pocket for holiday season

• Currencies
• Yuan: cheap
• Dollar: potential lowering in value
• More attractive to invest overseas

• International
• France: 8%~9% growth
• Italy/Germany: new market, changing job market

Core 2 Duo (Conroe core) to be released tomorrow, 7-27-06, preliminary testing shows strong price/performance ratio over AMD lineup.