When Nothing Else Matters, Gold Does!

Gold has long been perceived by many to be a long term investment safe heaven. Some even think that the timing in buying gold is not important, as the metal always tend to appreciate in value over time, especially when all else fails.

Yesterday was a classic example where the price of gold shot up by a whopping 10% in one day, due to investors switching to this piece of classic metal as a result of the worsening global investment climate triggered by the worsening US Financial crisis and credit crunch! A number of high profile takeovers and bankruptcies in the U.S. have certainly caught the attention of global investors in terms of guessing which financial institution may be the next to fall from grace! So instead of putting up with the risks, the theme of yesterday's sentiment appeared to be "liquidate first, decide later". Which explains why global markets (led by Down Jones) had another free fall yesterday.

Nevertheless, bear in mind that the price of gold has fallen by around 25% from mid July 2008 to about USD740/ounce recently. It is no coincidence that gold prices dipped after the recent major correction of crude oil prices and the recent appreciation of US Dollars. For the smart investors, many had exited gold upon the anticipation on crude oil movement. Who says timing is not important?




Some analysts even claim that yesterday's rise could potentially spell another major bullish trend for the price of gold. If you believe in this prediction, perhaps it's right time to buy gold again?

Are You Exposed To AIG Insurance?

Following the troubled American International Group's (AIG) rescue plan by the US Government, sentiment against AIG has grown in Asia for the past two days, particularly in countries such as Singapore, Taiwan, Hong Kong and South Korea. A number of policy holders were seen asking for policy cancellations, in view of the company's current financial turmoil and fearful of potential losses from another potential bankruptcy.

The fears were understandable, given that the bailout from US Government will not guarantee its survival.

Bear in mind that early redemption values for insurance policies are often undesirable and come with high "costs". In some cases, the policy holder may also suffer "financial losses" due to early termination.

In Malaysia, the company is known as American International Assurance (AIA), a wholly owned subsidiary of AIG.

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Temporary Sight of Financial Relief for AIG

A temporary sight of relief for the financial markets for now, at the very least, following US Government's decision to bailout AIG with up to USD85bilion two-year loan rescue package. The US government will get a 79.9% equity stake in the insurer in the form of warrants called equity participation notes. The two-year loan will carry an interest rate of Libor plus 8.5 percentage points.

The loan is secured by AIG's assets, including its profitable insurance businesses, giving the US Government some protection even if markets continue to sink. And if AIG rebounds, taxpayers could reap a big profit through the government's equity stake.

The decision marks a quick reversal from US Government's earlier stand on their refusal to bailout Lehman Brothers.

Could Lehman Brothers Avoided Bankruptcy?

Just as I mentioned recently the worst ain't over for the US financial credit crisis, despite Fannie's rescue package, global financial markets were absolutely rocked by the news that one of the largest US investment bankers, Lehman Brothers, have filed for bankruptcy! This seems to be the only available alternative for Lehman as they could not find a white knight rescuer and the US Government's reluctance to bail them out after series of recent bailing out events.

Lehman Brother's financial position is in such a terrible state that their market capitalization was only USD60billion as at the end of August against their assets of USD600billion! Having so little capital meant that a further small decline in assets would wipe out the value of the company!

Questions were raised about Lehman's viability and why they did not initiate a rescue plan much earlier? Considering the earlier actions of the likes of Bear Stearn (acquired by JP Morgan), Fannie and Freddie, and the latest acquisition of Merrill Lynch by Bank of America (for USD50billion stocks deal)

The Chapter 11 filing represents the end of a proud 158-year-old company that survived world wars and the Asian financial crisis but could not survive the global credit crunch!

Perhaps if Lehman had reacted earlier on their foreseeable problems and bite the bullets, the outcome could have been a lot different!

Next up, a possible collapse of insurance giant American International Group (AIG) could be on the cards, as they are seeking USD40b financing from US Federal Reserve!

Also watch out for the development of Citigroup, Bank of New York, Japan’s Aozora Bank Ltd and Mizuho Financial Group as these were among the top unsecured creditors to Lehman. Their financial position could be seriously damaged by the bankruptcy.

For the record, Dow Jones responded with more than 4% free fall on Monday!

The Power Saga Continues

Just barely 3 months after the Malaysia Government imposed a windfall profit levy on Malaysia's Independent Power Producers (IPP), the Government has reversed gear again. Perhaps realizing the damage done in the previous policy, the windfall profit levy has been scrapped going forward. However, the one-time payment is still in force.

Recall that after the imposition of the tax levy, the decision had been severely criticised and Malaysia's bond market had been severely bashed, due to the power sector being the largest issuer of bond fund in the country. In addition, sourcing for new bond funds had been made extremely difficult recently due to the downward rating of Malaysia's bond market.

The latest twist has a negative effect on Malaysia's national utility company, Tenaga Nasional Bhd, as it has to continue bearing the increase in energy costs in the country. Moreover, the expected power reform between Tenaga and IPPs have thrown into more uncertainties. As it stands, the share price of Tenaga has corrected by almost 9% today in the KL Stock Market. However, this should be a positive rerating move for the Malaysia bond market.

The Government is expected to release its master energy blueprint this year to further reform the energy sector in this long power saga.