The dynamics around food are pretty straightforward: there are more and more people to feed, with less and less land available to grow food on. It’s a classic supply and demand imbalance. It is also an investment opportunity – but how to do it?

Until recently, it has been difficult for Australians to play the food industry, whether through soft commodities such as wheat and sugar, or through meat or fish. Oddly for a country that is a major producer of agricultural products and livestock, there are very few major listed companies that are exposed to those themes: the big exception used to be AWB, but in 2010 it was taken over by the Canadian group Agrium. There are still some out there – Goodman Fielder is a big example – but the dominance of the Australian market by banks and resource-linked companies is reflected in a relative paucity of food and agriculture stocks.

Yet the case for food investment is strong from both the long and short term perspective. To start with the bigger picture, the world population is today around seven billion; it only passed the three billion mark in 1960. Moreover, all those people are living longer. The proportion of the world aged over 65 – negligible as recently as the 1950s – is increasing fast. Just under eight people in every 100 on earth are over 65 today, and by 2050, it will be more than 16 in every 100. “The increased size and age of the population means we see additional demands for food, water, resources and everything else,” says Douglas Hansen-Luke, CEO for the Middle East at European fund manager Robeco, known for its work on the so-called megatrends that will shape our world over the coming decades. “It leads to scarcity.”

At a number of points over the last decade, food scarcity has become deeply problematic: there was an incident before the global financial crisis when Bangladesh, for example, was unable to secure rice at international auction because other countries were hoarding their own stocks. Had Bangladesh not had an excellent rice harvest that year, we could have seen severe shortages in a desperately poor country, and associated social unrest. Governments around the world are making food security a priority. “The absence of food security will make it much harder to pursue a broad range of other policy goals,” notes the UK-based Government Office for Science 2011 report on the future of food and farming. “It may also contribute to civil unrest or to failed states; it may stimulate economic migration or fuel international tensions.”

More pragmatically, that shortage suggests an investment case; UBS and Goldman Sachs are among the banks that have argued for a greater allocation towards soft commodities this year. Closer to home, a 2009 report from the Australian Agribusiness Group pointed out that less than 0.01 per cent of superannuation funds went into Australian agriculture, and that a greater proportion – as is common in international pension funds – would have insulated super funds from the global financial crisis. Soft commodities are a long term investment prospect and a diversifier too; and since food is usually a core part of inflation, they work as a hedge.

Shorter term, it’s trickier to be sure about the direction of any commodity in these uncertain times. “It’s not apples and apples,” says Ric Deverell, head of global commodities research at Credit Suisse, and a former Reserve Bank of Australia economist. “There are quite different balances in different markets: corn is fundamentally very tight, while wheat is nowhere near as tight.” But he says “the central tendency in most of these markets will be for markets to move sideways for the next year.”

That said, he says corn is “the tightest market we have seen since the 1970s; when it’s that tight, it only takes small changes in supply and demand to have very large movements in prices.” In that environment, weather patterns, a good or bad crop or some other macro consideration can have a major impact on prices. “If next year is an average season, some of the tension we saw because of crop failures fades away – but gee, it’s vulnerable.” And on top of that, he says the incremental global rate of corn consumption has doubled since 2003, partly because of its use in creating ethanol fuel – 40% of the US corn crop will be used in this way in 2012.

Also relevant are changing patterns in food consumption in emerging markets, and changing attitudes in different countries to self sufficiency. As always, China is a huge driver here: growing use of fish, meat and dairy products in the Chinese diet have had ripple effects all the way to Australian or South American pastoral businesses, while China’s decision to be self-sufficient in wheat and corn has had knock-on effects too – such as in soy, which it is now the biggest importer of, having reduced the amount of soy it grows domestically in order to achieve those wheat and corn ambitions. Clearly, seeing a way through all of these patterns and shift is enormously difficult, but the general long-term trend is up.

So how to play it? Late last year, it became much easier to invest in soft commodities when a series of new exchange-traded funds was launched by BetaShares. Exchange-traded funds behave like a share, in that you buy and sell them on a stock exchange, but they give you exposure to an index or an asset class, and so are a straightforward and low-cost diversifier.

BetaShares launched two new ETFs relevant to food: an agriculture product, and a commodities basket. The agriculture one tracks the performance of the S&P GSCI Agriculture Enhanced Select Index, which is made up of the big four commodities in agriculture: corn, wheat, soybeans and sugar. The commodities basket is broader, covering 24 separate commodities including energy and metals, but it also includes a wider range of food-related commodities: eight agricultural (the big four plus cotton, coffee, Kansas wheat and cocoa) and three livestock (live cattle, feeder cattle, and lean hogs). All of these commodities are established markets with a particularly long trading history in the United States.

Drew Corbett at BetaShares feels the new products fill a gap. “We’re trying to allow people access to different asset classes,” he says. “People have been able to invest in soft commodities overseas for 10 years now through access products [like ETFs], and now people here can access some assets they previously didn’t have a low cost solution to invest in.” He notes that in private portfolios, asset classes such as these can account for up to 10 to 15% of an overall portfolio, and argues retail investors in Australia should be allowed the same opportunity for diversity. And he also agrees with the macro point. “If you look at emerging market population growth, there is going to be substantial demand and pressure on food and agricultural commodities to keep up.”

One point to note about ETFs like this is that unlike a share index ETF, these can’t be backed by the underlying investments. Think about it: you’d have to have a vast warehouse full of corn and wheat that couldn’t be used (or, in the case of the oil ETF, a tanker) to back the fund. Instead, BetaShares backs its ETFs with cash, in order to reduce counterparty risk, a worry in some other ETFs.

CFD providers have watched the emergence of these ETFs with some interest, since they have provided the opportunity for investors to trade soft commodities for years without receiving a huge amount of takeup. At IG Markets, for example, you can trade cocoa (London or US), coffee (robusta or Arabica), orange juice, two kinds of sugar contract, cotton, lumber, oats, corn, soyabeans (including meal and oil), wheat (London, Chicago or milling), rough rice, live and feeder cattle, lean hogs or rapeseed. But, by and large, people don’t. “It’s not one of our most traded products, but more specialised investors will use it – we get a lot of farmers who trade these products, for example,” says Chris Weston at IG Markets.

He argues that anyone who is looking at ETFs should take a look at CFDs first. “CFDs are a much more cost effective way of trading commodities than ETFs,” he says. “They are cheaper, they track the spot or futures price more effectively than an ETF does, and we offer you a price identical to the futures price.” CFDs allow significant leverage, which magnifies both gains and losses.

Anyone who does invest in commodities needs to think about the currency. Commodities are generally quoted in US dollars, and as anyone who’s invested in gold in recent years will know, that can make all the difference if you have made your investment in Aussie dollars. The BetaShares products hedge for the currency. People using CFDs can add a currency hedge in a separate contract if they want to.

In this article we haven’t discussed the tax effective investment schemes that have sprung up around areas like wine, truffles and almonds; schemes like these tend to be used by investors for different reasons, chiefly tax. But in the big picture themes of agriculture and livestock (see box), expect more investment vehicles to emerge.

BOX: Beefing up

Alongside the grains and other soft commodities, a less-invested arm of the commodity world is livestock.

Alongside some of the ETF and CFD investments covered in the main story, a few other ways have been devised for Australians to gain exposure to this asset class.

There is a Beef Stock Market in Roma, Queensland, popular among people in the livestock industry but actually open to anyone with an Australian business number and an internet connection. The market sets a price, per kilo, to buy cattle, and also indicative prices for selling the cattle – one price for when a professional livestock manager suggests it be sold, and one for outside that period. Investors can buy a cow or a herd in this way.

During ownership, investors pay grazing fees – currently $1.15 per kilo gained, paid by direct debit every time your cattle are weighed – and at sale time, there’s an agent’s commission of 4% of the full sale amount, a compulsory industry levy of $5 a head and perhaps additional sales costs including transport to market and weighing. Whatever else is left – the difference between the buy and sell price, based largely on the weight gained in the meantime – goes to the investor.

The market provides this costed example of how it might work. You want to spend about $10,000 on cattle. The purchase price is $2.24 per kilo, and the average weight purchased 254.36 kilos, meaning you buy 16 head of cattle, weighing 4,069.76 kilos, for $9848.82. An invoice goes through for payment within 48 hours. While you own the cattle, every few months they are weighed and the portfolio updated with current weights, while your weight based grazing fee is charged to your account. Let’s say the average weight gain is 195.37 kilos and fees $1.14 a kilo; your grazing fees will be $3,594.81.

Then the livestock manager tells you the animals are in sale condition at an average of 449.73 kilos apiece. If you agree to go at this – the ‘finished sale price’ – the livestock manager goes ahead. Let’s say they sell at $2.22 per kilo, with no additional marketing or transport costs (a farm-gate sale); the portfolio of animals would have been sold for $15,974.41. Once levies, commissions and so forth are taken out, the bottom line is a return of $1,811.80 on your just under $10,000 initial investment, or a return of around 18%, which would have taken about a year to achieve. Clearly, though, there are a lot of unpredictable variables involved; this is just a costed example.

One of the leading producers of sheep and cattle in Australia is Macquarie, which is understood to have about 220,000 cattle and 240,000 sheep across more than three million hectares of land, all of it held as a method of giving investors exposure to Australian livestock. This tends to be the preserve of private or institutional investors; an example of a completed fund backed by Macquarie is Paraway Pastoral, formed in 2007, which runs 18 large-scale sheep and cattle stations across New South Wales, Queensland and the Northern Territory.

While Macquarie declined to comment on any specific funds, citing regulator issues, executive director Tim Hornibrook explains the broader investment case. In some cases, it’s similar to that for other foodstuffs around the world: too many people. “The investment case is a fairly simple one: we’ve got more people in the world eating more food but less land to produce that food on,” he says. “That is causing a structural imbalance between demand and supply, causing a shift in agriculture prices above their long term average. Over the last 40 years arable land available for agricultural production has basically halved. So whereas once upon a time we used to each have a football field we could go and farm on, today we have two fifths of a football field.”

On top of that are changes in what people eat and can afford. “There are not only more people, but those people are getting wealthier, and there is a strong correlation between wealth and diet,” he says. “As you get wealthier, you tend to consume more proteins, and that once again puts pressure on demand and supply.” To meet demand, animals are tending to be produced more intensively – pigs in piggeries, cattle in feed locks – which in turn puts further pressure on the grain and oilseeds used to feed the animals.

But some elements of livestock in Australia are very distinct to this country. “Australia is in a fortunate position,” says Hornibrook. While it ranks second as an exporter of beef globally, behind Brazil, it ranks first by value, “because we get a higher price in recognition of being a consistent provider of high-quality, disease-free meat.” Most cattle in Australia are grass-fed, which is cheaper than the feedlock system common in the US and also considered more humane, and also reduces linkages to rising grain prices. Australia has a lot of land to allow a pasture-based system; it is closer to the key Asian markets than Brazil, with cost and time benefits; and more than anything else, it is disease-free, without ever having suffered an outbreak of an export-restricting disease, a function of being an isolated island with strict quarantine and a national livestock identification system. “Once a cow leaves a farm in Australia it has to wear an electronic ear tag,” he says. “You could be anywhere in the world and order an Australian steak and I could trace it back to the paddock where it was born.”

All of these things make Australian beef (and lamb) a very compelling investment case, but for retail it’s still very hard to play. Macquarie does, though, have a track record of starting out with somewhat esoteric investment classes with institutions and private wealth, then gradually offering retail exposure to them, so that may change in future. In the meantime, the most obvious exposure is through listed companies, the principle example being Australian Agricultural Company, Australia’s biggest exporter of live cattle to Indonesia.

Gold is supposed to be the ultimate safe haven asset: the commodity that keeps its value when all around is falling. Why, then, did it fall through September when global markets were in their worst state since the global financial crisis?

Gold lost more than US$300 per ounce in the second half of September. Having hit an all-time high of US$1,900 an ounce in April, at the time of writing it was at US$1,627. There had been fears of a bubble following gold’s precipitous rise in US dollar terms (a crucial distinction – for Australians, the climb in their own currency wiped out much of those gains) over the last two years; does this represent the popping of the bubble, and time to get out?

Gold professionals think not. Terry Hanlon, president of Dillon Gage Metals, a US commodity dealer, says declines in gold (and also silver and platinum) were a consequence of people taking profits to offset losses they had made in equities. “Investors who needed to raise cash quickly sold liquid assets, like metals, to do so,” he says. Another reason is that oil prices have fallen, reducing concerns about inflation, which is usually a driver of gold prices since gold is seen as an inflation hedge.

Hanlon believes gold will recover its lost ground, since it is still seen as a hedge against economic downturns in the US and elsewhere. He notes that in October 2008, as the world entered the worst of the financial crisis, gold fell 18%, before gaining it all back and moving up 23% in the subsequent two months.

The private banking community is working out how to position its clients. “Our advice is that gold was bound to have a bit of a correction, because it was becoming exponential in terms of its price appreciation in the last few months,” says Arjun Mahendra, managing director for investment strategy for Asia at HSBC. “But our basic advice is to start accumulating below US$1500 for another burst upwards. It remains in demand as central banks are debasing their currencies and facing inflation.”

Fund managers tend to see the balance of risks to the upside as well. Speaking before the sharpest decline, Blackrock’s director Malcolm Smith, who handles much of the manager’s commodity portfolios, told Smart Money there were four things that could end the bull run in gold, and that he didn’t see any of them on the horizon: a rapid reduction in uncertainty in the financial markets, a rise in real interest rates around the world, a reassertion of strength in the US dollar, and a rapid increase in the supply of gold. “None of them seem particularly likely, therefore the gold price seems supported,” he says. “The question on gold is: do you believe the world economy gets better or worse? If you think worse, then gold is potentially quite interesting. There are lots of investment banks pointing to a gold price about $2,000.”

BlackRock gets its gold exposure through mining names, including Australia’s own Newcrest Mining, which he says has “incredibly strong growth potential, with cash cost of production below industry averages.”

For investors who do want to position themselves for a rebound in gold, equities are worth considering. “There are three reasons you would look at a gold equity over gold,” says Smith. “One is operational leverage: a movement in gold can mean a lot more” for a gold stock. Another is growth potential. “A lot of our focus tends to be on companies that have potential for improvement.” The third is dividends. “Many gold companies to not have a track record of dividends, but you’re seeing it start.”

The other side of the argument is that gold was in a bubble and has further to fall to get out of it. “Gold and precious metals as a safe haven are somewhat overplayed,” says Lee Boon Keng, head of the investment solutions group for Asia for the Swiss Bank Julius Baer, again speaking before the sharpest part of the decline. “They have become not safe havens but speculated commodities. Would I put gold as an important part of my portfolio right now? At this price, probably not.” While gold has fallen since his comments to Smart Money, it probably hasn’t fallen enough to change that view.

So, buying opportunity or the start of a fall? The jury is out – but if you believe gold thrives in periods of economic uncertainty, then the outlook is surely good.

Asia represents an important, and potentially vital, source of LNG demand. It is the part of the world with the fastest economic growth rates, not just in China but in other fast-industrialising high-population countries such as India, Indonesia and Vietnam; and in most cases, these countries face a shortage in energy.

Today, though, it’s the more mature markets in Asia that constitute the greatest demand. “The main users of gas in Asia currently are Japan, Korea and Taiwan,” says Sonia Song, regional head of oil and gas research for Asia Pacific at HSBC. All three of them purchase their gas in LNG form, in prices linked to oil. Japan in particular is a growing market for gas demand, partly because of the problems it has had with nuclear energy. “With the Japanese nuclear moratorium, there has been a step change in demand for gas, which we expect to continue in the long term,” says Song.

For the future, though, it’s the high-growth markets that should provide the more dynamic demand for LNG. China, for example, is showing increased demand, and has also agreed to oil-linked prices for long-term contracts. “Some of these give a degree of upside protection to China, but prices remain oil-linked, just with a lower sensitivity,” Song says. “We expect Chinese demand for gas to grow at around 10% a year.” Specifically, imports of LNG are expected to double to 40 million tonnes per year by 2015, and double again by 2020.

India is another important potential market. India does have impressive domestic gas supply – 126.1 million standard cubic feet per day in the 2011 financial year – but imported LNG has been increased at a compound average 7% a year since 2007, and stood at 33.1 million standard cubic feet per day in FY2011, according to India’s Ministry of Petroleum and Natural Gas. “With domestic supplies likely to be stable, increased demand for gas in India will have to be satisfied by increased imports of LNG at the regas [regasification of LNG] terminals in Dahej and Hazira,” says Song. New import terminals are being built in Dhabhol and Kochi, which gives a clear indication of the momentum India expects in LNG imports. But India’s perennial struggle is infrastructure development, and its attempts to boost its own gas distribution networks have made slow progress.

The impact of this demand on Australian LNG exporters is interesting, and being closely watched by analysts and fund managers. “Australia is in a very nice sweet spot in terms of power demand,” says Malcolm Smith, Director at BlackRock in London, and part of the commodities team there. “But it remains to be seen exactly how much demand for natural gas there will be in Asia. You are seeing more natural gas and coal-based methane coming on in the Chinese market. And a huge amount of new supply has come to the market, mainly US-based from shale gas. When I speak with Australian analysts they are incredibly bullish, and there may be a good story, but it is too early to say for sure.”

Also on the supply side, a potentially very significant project is taking shape in Asia itself, in Papua New Guinea, where the PNG-LNG development – one that should completely transform the PNG economy, for better or worse – is about half way through its construction period. Nomura says it expects delivery of PNG LNG by early 2014; its confidence in the project is one reason it recently upgraded Oil Search, the Australian company most closely linked to the project, to buy. Oil Search itself says the project is expected to produce 6.6 million tonnes per annum of LNG, and that 9 trillion cubic feet of gas – in addition to 200 million barrels of associated liquids – should be produced over the project life. The gas will be liquefied at an LNG plant near Port Moresby and then shipped to international gas markets.

There are many other plants under development too, but HSBC believes it’s still going to fall short of growing Asian and European demand. “We believe that the number of new liquefaction plants currently planned will be unable to meet this demand and so Asian buyers will be in competition with Europeans leading to a tight market for spot LNG cargoes,” says Song. “We have already seen signs of this trend emerging with several LNG cargoes with default destinations in Europe being diverted to Asia.”

We all know about gold: it’s hovering around record highs, adopted as a safe haven by investors the world over looking for a place to escape from global market volatility. But what about other precious metals? Australians can also invest in silver, platinum and palladium, but their outlook – and the dynamics that drive their prices – are far less well known here.

Aside from gold, ETF Securities offers exchange-traded funds over silver, platinum, palladium and a basket combining them. While its funds in the less celebrated metals are popular globally – it has holdings worth US$1.8 billion for its global silver ETFs, $1.7 billion platinum and just over $1 billion for palladium – Australians have so far had much less interest in them. The Australian ETFs hold A$75 million for silver, $8 million for platinum and just $2 million for palladium.

Should more investors take a look? First it’s important to understand what drives prices. “Silver is very interesting,” says Danny Laidler, head for Australia at ETF Securities. “It’s 50-50 between being a store of value and industrial usage, whereas gold is predominantly just a store of value asset which goes well when there is volatility in equity markets. So silver has safe haven aspects, like gold, but also offers exposure to economic recovery.” Silver is used in a host of industrial applications, particularly around technology and photovoltaic applications, so any increase in global economic activity is to the benefit of the metal. “Lots of investors are taking a bar-bell approach to recovery: they want to participate in that recovery but are also concerned about risk,” Laidler says. “Taking that approach, silver fits well.”

Silver has, though, had a volatile year. “Earlier this year we saw it go from 30 to 50 [US$ per ounce], and then the margin to invest in silver on the futures market was changed, which caused a reduction in the price,” says Malcolm Smith, Director at BlackRock in London, and in charge of commodity-related portfolios. “Short term movements are quite fitful and it is difficult for investors trying to trade around that. We don’t try to do that: we take a medium to long run view.” His view is positive, although as a fund manager he typically expresses that view through holdings in stocks, particularly in Mexico, which traditionally has dominated silver production. As he points out, the cash cost of production of silver is around $10 to 15, so with silver trading at around $40 per ounce (US$40.58 at the time of writing), they’re making good money.

Platinum and palladium are both vital for automobile production, and specifically the catalytic converters used to reduce vehicle emissions; catalysts in diesel engines usually use platinum, and gasoline engines palladium. Platinum also has a certain precious-metal allure to it – it’s 15 times rarer than gold. Both are particularly concentrated in certain markets: Smith says South Africa is responsible for 75% of world platinum supply, and Russia for much of the rest, while much of the world’s palladium (how much is a debated point) is held in stockpiles in Russia. Smith says platinum in particular, with the uncertainty of supply that comes from one dominant market in Africa, is susceptible to supply issues, which in turn impacts the cost of the metal. Laidler adds that some people buy these metals “to get exposure to BRIC markets,” but notes that the biggest impact in recent months has actually been the earthquake in Japan, since so much automotive production is handled there.

Whatever the drivers, the metals do offer diversification, lacking an obvious correlation to other asset classes. They all tend to perform well during periods of inflation and so, like gold, are commonly used as a hedge against that.

Australians appear to be beginning to show some interest: Laidler says half of the inflows into the silver product have taken place in the last six months or so.

Apart from ETFs, Australians can buy equities exposed to these metals. Australia hosts one of the largest silver mines in Cannington, run by BHP Billiton, although clearly buying BHP gives exposure to a lot more than silver. Pure-play silver miners are more frequently Latin American. Seeking platinum exposure through stocks really requires investing in South African equities, which may be beyond many investors’ risk profile.

It’s also possible to buy silver through the Perth Mint, which sells a wide range of coins and bars in silver, and also offers depositary and storage services. These coins and bars are valued according to spot market prices and there is a ready and liquid market for them.

Also, from next month, a new option will enter the market. On October 4, the Australian Bullion Exchange (ABX), the first physical bullion exchange in Australia, will open its doors.

Similar to the UK’s London Bullion Market Association, the ABX will not immediately be something where retail investors can log in and buy and sell; it is instead an over-the-counter market that seeks to connect buyers and sellers, with that buying and selling only conducted through approved brokers called members. ABX won’t be setting prices in its own right – it will go off international spot prices – but aims to provide “a large liquid market that has not existed in Australia before now,” according to Thomas Coughlin, CEO of the new Brisbane-based exchange. Initially the market will offer gold, silver and platinum bullion, and will offer custodian and storage services as well, with metals secured in a Brisbane vault.

Where this will be relevant to retail investors, Coughlin says, is that “by launching a centralised market, what we’re intending to do is foster competition, which should lead to increased cost effectiveness and accessibility. Our view is that costs in the physical bullion industry in Australia are way too high.” The market’s first phase will link brokers, financial advisors and other institutions; it’s in the planned phase two, a programme called ABX Connect that will link up to trading platforms, that this will probably have greater impact to Smart Money readers. ABX appears a small enterprise at first, launched by a fund manager, an accountant and a lawyer and with just three members of the board at launch (floor members will be offered directorships along the way); but it will be interesting to see how it is used and what investment products come off the back of it.

Note: this was a sponsored report and not editorially independent, but is included here as a resource

SECTION 1 – interview with Alisher Ali, Chairman, Eurasia Capital

EM: Set the scene: what is the opportunity in Mongolia today?

AA: Mongolia has so many things going for it. It is physically located next to China, which has become the de facto engine of growth in the global economy. It has been blessed with natural resources. And you have the government and political system: the country is a true democracy, so as a result there is a good chance of the country being able to manage effectively not only its mineral wealth but the economic growth that will come with the development of those mineral resources.

So we have been early believers in Mongolia. We opened our office in 2008 in the same week as the Lehman disaster, and even though the timing may not have been perfect, we are still proud of the fact that we saw the opportunity for Mongolia’s growth potential and investment opportunities much earlier than many others. We built the infrastructure, we focused on building relationships with government entities, and with the corporate sector and international investors. Now we have the largest investment bank in the country, well positioned to capitalize on opportunities. The mission for Eurasia Capital is to provide a bridge between Mongolia and the international markets: to give international investors access to Mongolia growth, and to facilitate the entrance of Mongolian companies and banks to raise capital internationally.

EM: What shifts have you seen in the business climate since 2008?

I’ve appeared at least 20 times in studios for interviews with Bloomberg, CNBC, Al Jazeera and others to talk about Mongolia. And I always get the question: why haven’t we heard about Mongolia before, with its massive resources? The reason was that for years, the Mongolian government, parliament and public in general have had intense debates about how to develop those resources. It took a long time and was frustrating for foreign investors trying to bring big mining projects into production. The big example was Ivanhoe Mines, which discovered the Oyu Tolgoi deposit a decade ago yet only signed the landmark agreement allowing it to develop it in October 2009. But when we set up here there was no doubt in our mind that the government would decide to develop its strategic projects and large mines. The question was when.

The 2008 crisis hit Mongolia very hard: by the first quarter of 2009 the government was running out of money, foreign exchange reserves were depleted and investors were fleeing. It led to a bailout with support from the IMF and a number of bilateral agreements. But that crisis, in my view, had a silver lining, because it helped the government and public to focus on the key need to develop mineral resources. It became clear they had no luxury to wait and debate further. So we were all relieved when, on October 6 2009, they finally came to agreement with Ivanhoe and Rio Tinto. That was a turning point. It was a big sign: this country is ready for business. It was a crucial milestone and the catalyst for a change in investment sentiment towards Mongolia. The country has never looked back since then.

EM: Where are the opportunities in investment? Everyone knows about the mining, but how about the knock-on effects in the economy?

One of the main reasons for us spotting the opportunity in Mongolia early on was our early experience in Central Asia, especially Kazakhstan. Our time in frontier markets and Eurasian countries allowed me to see the parallels: that once you have momentum, and the development of world class resources, you are going to see knock-on effects. Yes, mining is going to be the largest and most important sector for Mongolia, but there will be other sectors and the opportunity is not going to be confined only to mining.

In January 2010 we produced a report called Mongolia Outlook 2010 – a historical document in the development of our firm. It was positive and optimistic about Mongolia at a time when the turnaround wasn’t obvious, but we said that Mongolia was going to go through a multi-year bull market: that there would be growth in GDP and in FDI. Beyond that macro vision, we made two important calls which were – this is important – executable investment recommendations for international investors. The first was that the Mongolian tugrik was going to appreciate and influence FDI. There is no derivative or spot market, so investors had to initiate bank deposits with Mongolian banks, which at that time were offering 16% in tugrik local currency deposits. Those investors who followed our advice made over 25% return after subtracting all costs, a combination of high deposit rates and the appreciation of the currency.

The second important call was that we recommended investors start investing in local equities. In January 2010, this was considered an optimistic call: the local market collapsed in 2008 and was also negative in 2009 in dollar terms. But we were confident the worst was behind us and estimated the market would gain 70% that year. In fact, it went up almost double that amount. In 2010 the tugrik was the second best performing currency globally, and the stock market was the best in the world.

From the beginning I have trained our research team to think in a way so as to come up with actionable recommendations. We look at opportunities in the currency markets, in fixed income, in public equities – domestic and international – in private equity, infrastructure and property, then tailor recommendations around them. We have built indices allowing investors to track performance of Mongolia-related companies listed in countries around the world.

EM: What funds and businesses have you built to do this?

Eurasia Capital Management is a Central Asian investment and fund management business. Silk Road Management, which started in 2008 as a wealth management advisory firm, is now being transformed into a Mongolia-focused investment management firm. We aim to build the largest such institution in the country. Our first product was the first ever venture capital and private equity fund focused on Mongolia, the Mongolia Human Capital Fund, which raised US$30 million from investors. The idea of this fund is to focus on non-resource sectors where human capital is going to be crucial in the success of the business: areas such as media, healthcare, education, professional services industries and information technology. These are industries in their infancy stage that are going to benefit from strong economic growth.

We have plans to launch funds across different asset classes. We intend to launch a publicly-listed Mongolia-dedicated fund. And we have teamed up with a Korean group, Goran Capital Partners, to launch a Mongolia-Korea resources fund and to tap the interest of Korean institutional investors looking for investments in Mongolia. We tailor investment products around the interests of investors.

Eurasia Capital itself has been recognized by several international publications; this year it was named the best investment bank in Mongolia by Euromoney magazine.

SECTION 2 – interview with Ganhuyang Chuluun Hutagt, Vice Minister of Finance, Mongolia

Euromoney: At a time when the rest of the world is struggling, economic projections for Mongolia are extremely positive. Is the outlook realistic?

Minister: The outlook will be as good as the demand for what we are producing. In recent years what we possess in terms of minerals has attracted a lot of investor interest, based on global demand for these commodities: copper, uranium, gold, coal, iron. There will be demand for our products despite what happens with Chinese inflation, the American budget and debt ceiling, and European defaults.

EM: What is a realistic expectation for GDP growth?

Minister: It will depend on what’s going to happen in the US and how it will affect production in China, and what appetite China will have for Mongolian commodities. I don’t think the Mongolian government can become too arrogant: I advocate we watch out for negative trends, and manage risks. Consecutive crises have shown that they do have an impact on the Mongolian economy.

Despite that, the outlook that is being projected by the international community, our development partners and ourselves is pretty positive. We will have tremendous growth in our economy based on mining and the building of physical infrastructure to make our products more available to international markets: border ports, railways, roads, airports. We are going to need to build new cities in the new mining areas, currently mostly in the Gobi. Most of the business will happen around the mines and in the value chain. We need new power plants, new houses, and even here [Ulaanbaatar] with growing incomes we have a minimum of 200,000 people who will need houses and apartments. You don’t need too much imagination to think of the investments behind these numbers in terms of water, sewage, energy, roads, schools and hospitals. It entails huge business opportunities, but mining can support it only through steady and growing cashflows.

What will be the role of the state in all this investment?

The role of the state is going to not diminish in the near future. At this stage of development the government needs to take a leading role, creating not only the environment and good opportunities for foreign investors, but also intervening in managing the economy, supporting our traditional industries such as agriculture, as we did today [in an issue of bonds to support agricultural producers and SMEs]. We need to help our industries in this tough environment with foreign competitors coming in and cheap imports, aggravated by the impact of the strong tugrik. We will need to continue direct involvement such as the development bank, to build public services. This year we budgeted MNT627 billion for capital investments, and the number will go above 1 trillion this year. Altogether in the past 20 years put together, the capital expenditures were only MNT1.6 trillion; in two years we are doing what was done in 20.

What will be the role of the private sector in this?

The private sector has plenty on its plate already. Almost all of the banking sector is in private hands: out of 70,000 registered companies, only 100 are state-owned, although they include the champions.

How do you rate ease of doing business in Mongolia?

We have fared pretty well. Mongolia is one of the friendlier environments in which to do business. Because we are latecomers we can implement some systems immediately: for example we rank one of the top countries in terms of extractive industries transparency. If you compare us with some Eastern European countries, we are pretty similar; if you compare us to former Soviet Republics, we are way better.

And what still needs to be done?

Last year the government announced the year of Business Environmental Enabling Reform, or BEER. The results of it are yet to be fully reflected, but the government made an important decision to continue with reform here in 2011.

Can you explain the mandate of the new Development Bank? For example will it fund small business as well as long-term infrastructure?

It’s not for small business, it is to support large national projects and to help the government invest in energy, infrastructure and to help us utilize our mines more efficiently. It is specifically stated in the law what sort of projects will be funded, and they will include housing. The bank is operational – it has not yet funded projects, but we have given them the guarantee to issue MNT800 billion of bonds. They are working hard to issue those bonds, get the funding and start financing projects.

Are you considering a sovereign wealth fund?

We have set up a stabilization fund, which by the end of the year will have MNT180 billion. When it hits 5% of GDP we will start investing it actively; in the meantime it’s in cash. I will do my utmost to make sure the government makes the right decisions and does not have incentives to spend it all right now. It is a big responsibility for our future.

What are its sources of funding?

Any income that is in excess of certain fixed prices for coal and copper. We also have the Human Development Fund; we put revenues from the mines in that fund and will start investing this money outside of the country to protect our economy and insulate it from foreign currencies, as well as preserving wealth to share with future generations.

You said Mongolia is dependent on demand for commodities. What is being done to diversify the economy away from such reliance on mining?

Traditionally Mongolia has been an agrarian economy: livestock and anything related to it like meat, pelt, felt, wool and cashmere. They are all industries of high potential. Food security is a big concern for us; Mongolia has become self-sufficient in terms of wheat, which is a success. We could focus on and develop other industries: our increasingly educated workforce will be able to drive industries such as tourism and financial services to become major contributors to the economy.

The financial services industry had a rough time in 2009. How is its health today?

Over 95% of the financial industry is commercial banks. The system is doing well: it is growing, NPLs are decreasing on the back of the economic boom, and the stock market has consistently outperformed most others. But we start from a low base and there is a need for reforms. We need to approve the draft law on securities – hopefully this year – and reform in the pensions system will need to happen. We need to overhaul our insurance sector. And with this we will create local institutional investors who will help us create robust, dynamically growing local stock markets.

The world is watching the forthcoming Erdenes Tavan Tolgoi IPO. How transformative will it be for Mongolian markets?

The current capitalization of the local stock exchange is $2 billion; we are talking about $10 billion in an IPO of one company. That’s the magnitude, and if we decide to float some percentage locally it will have a huge impact. Right now 10% is owned by the Mongolian people and another 10% will be sold to Mongolia-based companies. This will provide a strong incentive for international investors to come in early and take part in the trading of those securities.

What is the idea behind giving shares in it to every Mongolian citizen?

It gives people a feeling that they are benefiting from the big national treasure directly. It’s a good lesson to all Mongolian citizens in terms of managing capital, really understanding what a stock market is and how it works, and what being a shareholder entails. It brings accountability to the person, whereas if the state was to manage the wealth for our own citizens, it is more indirect. Tavan Tolgoi will be a better governed organization because it is owned by individuals, not just the faceless state.

With the US and Europe in turmoil, what is your resilience to external shocks?

I don’t think we have been particularly resilient at any time in history. We depend on our buyers; we have one rail line. Economically we are dependent on two neighbours: we import all of our gas from Russia, we export most of our coal to China.

What message do you want to give to foreign investors about Mongolia?

It makes sense to get exposed to Mongolia. It is the top opportunity globally in terms of our mineral resources. We possess almost all the elements in the periodic table. We are tripling coal exports this year. The ambition with our partnership with the London Stock Exchange is that one day Asian investors can trade on the Mongolian exchange with their stocks listed in London, on the same platform, the same systems.

Cashflows are exploding, the budget is in surplus and we have record high cash levels in our treasury. We will one day make a decision on sovereign bonds: we are issuing local currency and giving a very good return to our investors. Debt to GDP is just 17%, so we can borrow, and I think we want to borrow to make investments and increase the capacity of the economy.

SECTION 3: ECONOMY

Economy

Mongolia has experienced rapid economic growth since the global financial crisis. Eurasia Capital, an Ulaanbaatar-headquartered investment bank, estimates that Mongolia became the world’s second fastest growing economy in 2010 in terms of US$ GDP growth rate at current prices, with a 44% year-on-year increase, driven by the 12.9% appreciation of the Mongolian tugrik (MNT), the national currency, against the dollar over that period. This means that Mongolia outperformed the BRIC emerging economies as well as all other leading frontier and high-growth economies globally. Fueled by investment in the mining sector and a significant increase in exports, real GDP growth reached 6.1% last year, according to official data, versus 2.7% in developed and 7.1% in emerging and developing economies. And it is getting better still: in the first half 2011 it was up 14.3%, or in nominal terms 29.1%. The second quarter, with 17.3% year on year growth, was the fastest expansion since 2005.

Significant investments and demand from China, the major market for Mongolian products, have allowed Mongolia to double coal output to more than 25Mt in 2010, up from 13Mt a year earlier. Coal exports increased 2.9 times in 2010, overtaking copper for the first time, and in 1H2011 Mongolia overtook flood-hit Australia as the largest coal exporter to China. Crude oil production rose 17% to 2.2MMbbl, and iron ore output more than doubled to over 3.2Mt. Major manufacturing industries, such as food and beverages, grew 24% in 2010.

Mongolian foreign trade surpassed its historical high in 2010. Trade turnover surged 53.5% year-on-year to US$6.2bn. 2010 was a record year for exports, reaching US$2.9 billion, with a 53.8% annual expansion driven primarily by Chinese demand (it bought 85% of Mongolia’s exports), commodity price increases and volume expansion. Record level exports have been the primary driver of Mongolia’s impressive economic growth. And they are getting better still: Mineral exports jumped 72% year-on-year in the first half of 2011, with coal up 135% and iron ore exports 122%.

Increases in international prices for Mongolia’s major export commodities boosted already substantial export earnings. The price of coal, the largest 2010 export earner for Mongolia, rose more than 14% over 2010, with copper, gold, iron ore and crude oil gaining 28%, 26%, 52% and 8%, respectively.

Eurasia Capital expects Mongolian foreign trade to grow at an even faster rate in 2011. A positive outlook on commodity prices, increased output from existing operations, the launching of new mines, and strong growth prospects in major trading partner markets – particularly resource-hungry China – should fuel increased exports from Mongolia. Eurasia now believes that Mongolian economic growth should beat its original projection of 10% GDP growth for 2011.

Foreign direct investment (FDI), which was considered frozen until as recently as 2008, hit a record high of US$1.6bn in 2010, according to official data, further underpinning the economy. The mining sector was the major destination for FDI.

China was for many years the only major FDI player into Mongolia, accounting for US$2.5 billion between 1990 and 2010. That is changing. Canadian FDI, the second biggest in Mongolia, increased more than 140 times in 2010 to US$147.8 million. Investment from Hong Kong is also climbing.

By sector, geology and mining have attracted US$3.15bn in FDI – 65.3% of the total – since 1990. The majority of this investment has come since 2008, when the mining industry began to entice resources giants around the world. Hong Kong and Canada’s FDI focus is mainly on mining and related activities, while South Korean and Japanese investments have targeted trade and service, engineering construction, and financial sectors. The biggest investor, China, has followed varied targets covering almost every sector. Infrastructure is likely to attract more FDI in coming years, with 1100km of Mongolian railways planned, for example.

Remarkably, Mongolia is thriving with limited inflation. Prices rose around 13% last year, and there were concerns from the World Bank that an expenditure plan – including major increases in salaries – could push inflation over the 25% mark. Yet according to N Zoljargal, deputy governor of Bank of Mongolia, the central bank, inflation has instead declined to around 6.5% year on year in June. In any case, he says, Mongolia is an exceptional case when it comes to considering inflation. “Mongolia has for so long been under-invested,” he says. “So when you see a flow of new cash wealth, how much of it do you sterilize and how much do you let trickle into the economy? That is the challenge we faced in 2010, we are facing it now and we will probably live like this for the next few decades.” Last year the bank sterilized around 30% of net inflows in foreign exchange, feeling that it was short-term and speculative; this year, it has sterilized far less.  “Yes inflation is a worry, with banks over-extending credit in the good days; people argue the economy is getting too hot,” he says. “I say we are nowhere near to that: we are just warming up. Everybody has their own temperature.”

Indeed, some argue inflation should actually be higher, and monetary policy looser. “Economists say that if there is inflation, just take out money from the economy,” says Sambuu Demberel, Chairman and CEO of the Mongolian National Chamber of Commerce & Industry, and a key economic advisor to Mongolia’s president and prime minister. “It’s nonsense. We need money in circulation: the more money the better. People in real sectors want money to create business and profit, but the majority of SMEs don’t have access to lending. We need decisive action to change our monetary environment to drive the economy.”

Rich mineral resources

Mongolia hosts world-class mining deposits, including estimated coal resources of over 160Bt, ranking fourth in the world after the USA, Russia and China. Erdenes Tavan Tolgoi, one of the world’s largest untapped coking coal mines, is a vivid example of a world class resource: it is estimated to contain 6.4Bt of thermal and coking coal worth approximately US$390bn. The Government of Mongolia is in the process of finalizing the deal with international bidders.

Another world class mine is Oyu Tolgoi, which is one of the world’s largest undeveloped copper-gold deposits, rivaling Escondida and Grasberg. Oyu Tolgoi contains approximately 37Mt of copper and 1,300 tonnes of gold, with a project cost of US$5.9bn. Based on conservative calculations, the monetary value of the Oyu Tolgoi project is approximately US$252bn. It may become as much as US$424bn if measured, indicated and inferred resources are taken into account.

Balanced Political Environment

Mongolia is to hold parliamentary elections in the summer of 2012. The newly elected parliament will oversee the implementation of major mining, infrastructure and industrialization projects, which will define Mongolian politics, economy and society for years to come.

The parliamentary election in 2008 saw a brief period of turmoil, but the formation of a coalition government between the two main political parties, the Mongolia People’s Party (MPP) and the Democratic Party (DP), has resulted in a stable functioning government. Domestically, the coalition government has focused on expanding investments in Mongolia’s vast natural resource wealth, diversifying the economy, job creation and improving living standards. Internationally, the government has maintained good relations with Mongolia’s traditional partners, Russia and China, as well as expanding relations with countries beyond its traditional partners.

In June 2011, Mongolia and China agreed to upgrade bilateral ties to a strategic partnership level and to bolster economic ties. The agreement is expected to bring more Chinese investments and financial support into resource and non-resource sectors and infrastructure development. Mongolia also enjoys strategic partnership status with Russia. In terms of “third neighbor” relations, Mongolia has held high-level meetings with Japan, the USA, Korea and India, among others: it expects to sign an Economic Partnership Agreement, roughly equal to a free trade agreement, with Japan in 2012. During the visit of Mongolian President Tsakhia Elbegdorj to the USA in June 2011, the Obama Administration stated that it was committed to developing a broader, deeper and more strategic relationship with Mongolia, including expanded commercial, political and cultural ties. India is actively pursuing cooperation with Mongolia in nuclear energy and mining.

With upcoming elections, the coalition government is eager to start the Tavan Tolgoi coking coal project in partnership with major international mining players. Large mining deals, infrastructure development and poverty reduction will remain recurring themes of parliamentary elections in 2012. There is a wide political consensus among major political parties about the development needs of Mongolia. Therefore, regardless of the election results, the country should be expected to stay on its current course of resource-driven growth.

SECTION 4: CAPITAL MARKETS

Public equities: Best Performing Market Globally

Despite its relative tiny size in global market terms, the Mongolian Stock Exchange (MSE) is increasingly gaining importance for local and international investors intending to gain exposure to the Mongolian market. Naturally, most of the market is resource-related.

Mongolia has so far this year maintained its title as the world’s best performing equity market. Having gained 138.4% (173.7% in US$ terms) last year, the MSE Top-20 Index has continued its global outperformance in 2011 at +43.8% at the time of writing. By comparison, the MSCI Frontier index gained 16.6% in 2010 and is down 11.6% so far in 2011; the MSCI EM Asia index gained 12.9% in 2010 and is down 0.7% year to date; and the Shanghai Composite Index fell 14.3% and 5% respectively.

After the Mongolian Stock Exchange benchmark surged 123.3% within the first two months of the year, hitting 32,954.97 on February 25, it went through a significant correction, losing 43.8% by the end of May. This volatility is a function of speculation, low liquidity, a small free float in listed companies, and unrealistic and uninformed investor expectations. Improved investor sentiment driven by the expected launch of Tavan Tolgoi coal mining operations and proposed IPO, the strategic partnership agreement between the MSE and the London Stock Exchange (see box), and a strong outlook for commodities, contributed to the surge and underpin further growth.

The MSE market capitalization grew 2.5 times in 2010, passing the landmark US$1bn in November 2010  and reaching US$1.7 billion by July 2011. The top five stocks (Coal groups Baganuur, Tavan Tolgoi, Shivee Ovoo and Sharyn Gol, and beverage group APU) contributed 82.1% of this growth. The combination of expected double-digit economic growth, and the experience of other commodity-linked emerging markets, suggests that the momentum has just begun: Kazakhstan Stock Exchange’s market capitalization grew 100-fold to US$100 billion between 2000 and 2008, while the Qatar Stock Exchange grew 31 times from 1997 to 2007 to US$95 billion. Stock market penetration – total market cap representing just 20% of GDP – is relatively low compared to other emerging and even frontier markets, underlining the growth potential.

The MSE, with its huge gains, is still challenged by companies with small free floats and low trading volume. Average daily trading volumes were US$234,000 from January to February 25, and US$33,000 from then to May 30. It is likely that the lack of liquidity will remain a concern in the short term.

The Mongolian government has approved a list of state-owned enterprises that are slated for privatization starting from 2011. These SOEs are in mining, mineral processing, construction materials, power distribution and generation, telecommunications and airline industries. Many will pursue a listing locally on the MSE to serve as a vehicle for privatization and then seek additional listings in regional or international markets to raise capital for expansion and modernization.

The leader among these expected privatizations is the highly anticipated IPO of Erdenes Tavan Tolgoi, expected early next year, and potentially worth over US$10 billion. This government-owned company holds the licence for Tavan Tolgoi, the world’s largest undeveloped coking coal mine. The government has distributed 10% of the company’s shares to Mongolian citizens, with a lock-up period that has not yet been decided, and plans to sell another 10% to Mongolian companies and offer 30% on a combination of domestic and international markets. It should substantially boost MSE market capitalization and liquidity while also enfranchising citizens in the capital markets. “The entire population of Mongolia will become shareholders,” says Munkhtushig Dul, Deputy Director and head of finance and logistics at the MSE. “When that happens, new brokerages will have to develop, as will the capital markets themselves.”

“There are several separate pipelines of new listings,” he adds. “First there are the big strategic mineral deposits, which by law should have no less than 10% listed on the MSE. Then there are many companies with huge assets in Mongolia who are not listed here: we are hoping to repatriate them to create more involvement in the Mongolian markets. And then there are local privately held companies: cell phone companies, food companies, very strong businesses that will need more money.”

There have been no new IPOs on the MSE in the last two years, but it is expected this will change dramatically in the coming years as a number of leading domestic private companies are expected to launch IPOs first internationally and later on MSE. Mongolian private business groups that are expected to launch IPOs at a group or subsidiary level include MCS Holding, Petrovis Corp, Bodi Group, Newcom Group and Monnis Group. New IPOs, whether from state or private sources, should ease liquidity concerns and therefore volatility.

Many Mongolian companies – now over 20 – have listed overseas, often instead of domestically, in locations including Toronto, London, Hong Kong and Australia. But Mongolian authorities do not see this as capital fleeing the country. “I don’t see it as a bad sign,” says Bayarsaikhan D, chairman of the Financial Regulatory Commission of Mongolia. “Companies are using the opportunity to raise funding in large amounts.” The hope is that companies that have listed overseas will come to list more of their stock domestically as the Mongolian market gains in scale and sophistication.

Eurasia Capital believes the outlook for Mongolian equities in the short to long term is very positive. This year, it expects the MSE to retain its title among the top three equity markets, if not the best.

BOX: The LSE partnership

Mongolia took a historically important step to develop its capital markets when MSE and London Stock Exchange (LSE) signed the landmark Master Service Agreement to manage the MSE on April 7 2011.

Through this agreement the MSE will be modernized with the LSE’s support over the next three years. LSE will introduce an integrated securities trading system, create an effective legal and regulatory environment, and will bring infrastructure, technology and human resources capability in line with international standards. LSE has appointed a management team at the MSE to oversee its development and privatization, and has brought in Millennium IT, the leading global exchange technology provider, to assist with trading, surveillance and post-trading infrastructure.

The partnership should bring modern market rules, procedures and operations, as well as broadening tradable asset classes to derivatives and ETFs. The ultimate aim is for MSE to become a regional resources hub for international investors. In future it may even attract resources listings from neighbouring countries.

“The main purpose of the agreement is to bring the stock exchange to international standards,” says Bayarsaikhan. “A lot of work has been done so far on the legal framework, on IT, and in corporate governance and transparency. The future is bright and all the professional players in the market are working hard.”

In Eurasia Capital’s view, this partnership should accelerate the process of MSE becoming a viable source of capital for Mongolian companies and an efficient channel for wealth distribution from mineral resources among the Mongolian population.

Private equity

Flurry of M&A Activity

In recent years Mongolia has seen a flurry of M&A activity, particularly in the resources sector. M&A volumes doubled from 2009 to 2010 to a record level of over US$1bn, most of it in mining, and chiefly coal; international interest has grown dramatically since the investment agreement on the Oyu Tolgoi (OT) mine was signed in late 2009. The origins of acquiring companies were diverse but Hong Kong and Australia led the charge: Hong Kong was involved in US$473mn worth of M&A deals through injections of resource assets into existing publicly listed companies.  Australian companies have not only bought assets but held IPOs.

This year M&A activity is more vibrant still. Total deal value for the first half of 2011 increased 45% year on year to US$636mn, and had reached US$690mn by July 27; Eurasia Capital expects another record year. Close to 50% of the announced deals were reached in participation with Australian companies, suggesting Mongolia will continue to be on the radar of cash-rich mining companies that have strengthened their cash positions through improved operational efficiencies and high commodity prices. The Erdenes Tavan Tolgoi deal will impact this year’s numbers: some bankers estimate the overall worth of the asset at US$15-20bn.

Fixed income: Bond Market Kicking off

Until very recently, not many people knew of the existence of the bond market in Mongolia. But it is becoming more active. The market has been waiting for the right time and conditions while building knowledge, experience, and infrastructure. News about bond issues is not on-and-off anymore; the market is underway.

The Mongolian Government is being cautious in approving new issues, knowing the damage any default would cause to the reputation and credit rating of the market. Government issues have focused on national benefit: for example, in September 2010 it issued a MNT60bn bond, half of which was offered to the public, to fund the “4000 Apartments for Public Servants” project. So far, offers worth MNT69.6bn out of a planned MNT72bn have been launched for project funding.

Backed by confidence in Mongolia’s expected growth, the government is planning another offering to support the cashmere and wool sectors, and small-to-medium enterprises.

Through the Development Bank, established in 2010, big industrial, infrastructure and mining projects will be funded and the government will issue MNT800bn bonds for necessary funding as new projects come up. The Bank also supports those projects by providing guarantees to the loans. Both domestic and international investors can participate.

Corporate bonds will become an interesting area for investors. For most of the companies who intend to tap the debt markets, it is a testing period: they need models to follow, but there have been only 12 issues since 2001. But by waiting, they risk losing out to competitors. Just Agro has made the first move this year to attract bond investors with a MNT30bn bond offering. If successful, other companies may follow.

Trade and Development Bank (TDB) is the only bank in Mongolia to tap the international bond markets so far, with a US$75mn deal in 2009 (successfully repaid), and two new bonds in 2010. Other banks, Khan Bank and XacBank, have followed suit and announced smaller debt issues. But bank deposits, offering more than 11% returns in MNT, remain favoured by many local investors.

BOX: Currency

After an impressive 12.9% appreciation in 2010, the Mongolia tugrik (MNT) has been relatively volatile this year, appreciating 1.6% year to date by August 4. Eurasia Capital believes it will remain a strong currency to hold. This confidence comes from expected capital flows to the large projects in the mining industry and infrastructure: FDI was US$1.5bn in 2010. The revenues from the two mega-projects of Tavan Tolgoi (coal) and Oyu Tolgoi (copper and gold), both under development, will consolidate the MNT for many years to come. Mongolia’s exports of mineral resources will dramatically increase when the necessary infrastructure, including the rail lines, become ready.

The currency is comparable to other resource driven currencies, such as the Australian dollar or Brazilian Real, which have experienced large appreciation. The MNT has emerged as a new resource currency and is increasingly correlated to the export commodities. It represents an excellent carry trade opportunity.

SECTION 5: PROPERTY, INFRASTRUCTURE AND FINANCIAL SERVICES

Property

As mining has brought wealth to Mongolia, the property market has experienced speculation and rapid expansion. After the highest ever price for a luxury residential apartment was registered at US$8000/sqm in the new Blue Sky Tower, an April Fool’s joke by a local broker about Donald Trump’s plans to build 120-storey “Trump Tower” for US$1bn in the center of Ulaanbaatar was picked up and distributed by some respected online sources.

Although Mr. Trump is not planning to build a tower in the capital city of Mongolia, the property market is poised to benefit from the country’s mining-led economic growth. Already, the residential, office, retail and hospitality property segments have consistently grown over the last few years, with supply struggling to meet demand. The market in Ulaanbaatar stabilized in 2010 following the turmoil of 2008-2009, and has benefited from increased inflows of foreign capital. Industry experts expect a period of accelerated growth.

Residential property prices in Ulaanbaatar have nearly quadrupled since 2002, although the global financial crisis corrected the steep market growth up to 3Q2008. The past year’s strong economic growth, national currency appreciation and speculative inflows of foreign capital for Mongolia have driven residential property prices up nearly 20% in the capital; the average residential property prices in 2010 was around US$900 per square meter, although much of that can be attributed to the 12.9% MNT appreciation.

Although foreign investors have an impact, the growing number of wealthy Mongolians is also significant, boosted by successful capital raising by mining companies. Fundamental demand for housing in Ulaanbaatar and nationwide will be a key driver of near-term growth. Since 2005, the population of Ulaanbaatar has increased 22% to 1.16 million, which represents over 40% of the total Mongolian population. More than half of Ulaanbaatar’s inhabitants live in traditional “ger” settlements, whilst the others live in old buildings that are deteriorating fast. Facing the need to accommodate its population, the Mongolian Government has initiated several measures that stipulate construction of mid-budget accommodation through government support. These initiatives include programmes such as the “100,000 Apartments Project” which aims to alleviate the strains on infrastructure services, social services and pollution.

Despite the newfound wealth, more than one third of the Mongolian population lives below the poverty line. Increasing prices might deter low income earners from buying property. However, 2010 was marked by a revival in the mortgage market as major Mongolian banks have started providing loans to the population, albeit at high rates – currently from 11% to 28.8%, with required downpayments as high as 50% (but more commonly 30% and sometimes 10% if the construction company takes on some of the risk).

Ulaanbaatar is again crowded with construction cranes, just as before the 2008 crisis. Maybe Mr Trump will really build a Trump Tower in Ulaanbaatar during the next few years.

Infrastructure

Mongolia’s mining boom may stutter if the country cannot solve its infrastructure problems. Infrastructure is regularly listed among the major inhibitors of Mongolian growth, and vast investment is needed, probably in excess of the current GDP of the country.

The Concession Law, adopted in 2010, sets the legal framework for private sector participation in the development of infrastructure projects. The Mongolian government has approved a list of 121 projects in road and railroad construction, power generation and transmission, industrial development, urban development, telecommunications, education and healthcare, inviting private sector investments. Both foreign and domestic companies can participate in the projects individually or jointly. Concessions can be gained via open tender, competitive bidding or direct contract.

The development and expansion of railroad infrastructure is one of the most pressing issues in the Mongolian economy. To support its mining sector, Mongolia is currently focusing on extending its railroads to major mining areas within the country, as well as on opening trade corridors and export routes to neighbouring countries. In the next five to ten years, the country is planning to build about 5,700km of new railroads, providing easier access to Mongolian minerals and exports to neighbouring and international markets. The railroads will be constructed in three stages. The first stage, which has already started, envisages construction of a new 1,100km main rail line from the Tavan Tolgoi coal deposit to Choibalsan, the town connected to Russia by the existing railroad. The new main line will intersect the existing Trans-Mongolian Railway in Sainshand station in Gobi region. Mongolian Railways was selected to implement the project. The project is in feasibility study stage. It is expected to be completed in the next 4-5 years.

In the near future, major infrastructure projects in Mongolia may offer numerous investment opportunities. Construction of new railroads would create opportunities for investors, construction and operating companies. A new US$10 billion development, the Sainshand Industrial Complex near the Chinese border, will be a hub to process Mongolian raw materials for export, and should spur investor interest. A number of other government-priority projects will be open for private bidding in the coming year.

Financial services

Mongolia’s banking industry endured a difficult financial crisis in which two banks failed. But there is a sense that it has returned to health on the back of the growing economy. N Zoljargal, Deputy Governor of The Bank of Mongolia, the central bank, says the banking system has “never been better than it is today. It is very healthy.” Those banks that survived the crisis are now strong. “During the crisis our banks were well managed, beefed up their liquidity, and since then have seen high growth in assets.” Non-performing loans, which at one stage topped 20%, are now around the 6% mark, he says, and “coming down dramatically” as previously troubled businesses in construction and other areas pay back their loans. As Zoljargal says: “It the economy is growing 10%, it’s hard to produce NPLs. You have to be doing something very wrong.”

Some local banks with distinct strategies look healthier still. Xac Bank’s NPLs peaked around 7% and today stand at 1.7%, according to CEO Bat-Ochir Dugersuren, because its portfolios are well diversified. Xac Bank is an interesting study: founded in 1998 under a UNDP program, it is fundamentally a microfinance institution, with a governance and shareholder structure unique in Mongolia (EBRD and IFC are stakeholders, and the board is independent). Today, SMEs are very much a focus for expansion. “We have big corporates in this country but I don’t believe they are going to expand and carry the country’s growth forward,” says Bat-Ochir. “We need a broad base of promising SMEs to allow double-digit growth to take place in our economy.” Xac Bank, like most, gets around 90% of its income from interest, and accepts that growth in other business lines will have to take place to diversify earnings.

Another example of an unusual strategy is Chinggis Khaan Bank. Chairman Sergey Gromov – a pioneer investor in Mongolia whose holdings also including the leading brewery APU and the insurer Mongol Daatgal, discussed below – says the bank focuses on areas like agriculture and building materials, but not mining. “Agriculture has huge potential,” he says, pointing to the sheer scale of land and the as yet limited use of fertilizer or other techniques.

International players such as ING and Standard Chartered have started to appear in Mongolia, though chiefly with representative offices rather than significant on-the-ground commitment so far. PricewaterhouseCoopers, KPMG and Ernst & Young are also represented.

Eurasia Capital is the nation’s leading investment bank today, and it is likely that this will be a growing part of the market in future. “There will be more of a focus on long term investment funds and institutional investors in future,” says Bayarsaikhan D, Chairman of the Financial Regulatory Commission of Mongolia. As the finance ministry interview explains, two quasi-sovereign wealth funds – the Stabilization Fund and Human Development Fund – are being developed, while a development bank focused on long-term infrastructure has been formed and will soon start lending. The development of new investment, capital markets and securities laws, in varying states of readiness, will help growth.

Another area ready for dramatic growth is the insurance industry. Mongol Daatgal, the country’s first insurer, dates from 1924, but the industry is still in its infancy; only one company provides life insurance, while a handful of others provide property and commercial cover. “It is a very virgin market,” says Batzul Tumur-Ochir, Mongol Daatgal’s CEO. “It only holds 7.4% of GDP, and total premium income in 2010 was just US$30 million for the whole industry. People have not understood insurance, or have seen it as a cost in the past; but now the economy is growing because of the mining industry, people have more money from wages and may spend some on insurance.”

On top of general economic growth, legislation will drive the industry too. Mongolia today does not have mandatory insurance for drivers, but this year a new law is likely to change that. “That will automatically give a 30 or 40% increase to the market,” Batzul says. Professional liability insurance will also become mandatory in the near future, while the growth of the mortgage market is also going to feed through to insurance – through corporates and banks, and through individuals. Batzul plans to enter life insurance too within three years, as he also sees momentum for growth there.

China’s shift to a domestic consumption economy will have drastic impacts on the country’s need for soft commodities and could exacerbate global problems of food prices and water scarcity, bankers have warned.

China has a stated objective to move away from an export-led model to one fuelled by consumption at home, which suggests a move away from needing metals to instead needing foodstuffs such as meat and grain. Changes in diet that have accompanied the growth of the Chinese middle class, particularly towards meat and dairy, will also have major knock-on effects. “Unfortunately, meat eats 12 times as much grain as grain does,” noted Donald Hanna, managing director of global liquid markets research at Fortress Investment Group.

“The issue for China is really a question of scale: it really is huge,” Mr Hanna said. “And the other complication we have in markets for food is that when supplies get tight, markets don’t work very well. In fact, as consumers get concerned there might be scarcity, demand doesn’t fall with price increases: demand rises.

“And what do the producers do? They don’t supply more, they supply less. You get this dynamic we last saw in 2008, in which you get these periods in which the markets go completely haywire.” Chinese consumption growth could bring around these circumstances again, he suggested.  “Until we can manage this process of growth and gain some level of efficiency,” such as through technology, “you’re going to have the potential for much more volatile food prices. That’s going to take hedge funds to some interesting places, but it’s not going to be very helpful in dealing with issues like poverty.”

Hiroshi Watanabe, President and CEO of the Japan Bank for International Cooperation, said China’s consumption and industrialization was increasing the pressure on water needed for agriculture, not just in China but regionally. “For agriculture, we need pure water, and unfortunately China doesn’t have very much of it,” he said. “And now the inland provinces of China are going to use more water for industrial use. That industrial use can be replaced by some recycled water, so that the clear water can be kept for agriculture in Laos, Cambodia, Thailand and Vietnam.” That would suggest a level of integration on regional water use that does not exist today, but Mr Watanabe said it was essential. “We need more international coordination, not only one private company or country,” he said. “We need a joint effort, and if not we are going to have a very sad situation.”

Anita George, Director of infrastructure and natural resources at IFC, said water challenges were illustrated by instances such as Saudi Arabia investing into large tracts of land in Africa “to tap into this key resource of water. In a country like India 85% of the water is already being used in agriculture: it’s very inefficient.” But she appeared to suggest the situation could be salvaged, or at least improved. “In fact, the gap between water supply and demand – which is already significant and promising to be one of the biggest crises the world has to handle, can be filled by demand-side management on the agricultural side.”

Chinese consumption is already causing major changes in regional exports. “The rising middle class and the change of consumption patterns in places like China are knocking into other countries in the region and globally,” said Paul Gruenwald, chief economist for Asia Pacific at ANZ. “Because of China’s rising demand for commodities, both soft and hard, Asean countries exports have actually done a U-turn in terms of their composition,” he said: from a declining proportion of commodities in exports through the last decade, the proportion has increased again the last five years “largely because of the effect of China.”

Singapore Mercantile Exchange, billed as the first pan-Asian multi-product commodity and currency derivatives exchange, rang its opening bell on August 31. The next question: will people use it?

CEO Thomas McMahon describes the rationale as so obvious “it was like a light switch flicking on.” Asia is the new home of world commodities demand and Singapore the natural hub to trade it: its Jurong Island is one of the densest oil refining areas in the world, and its port one of the busiest. SMX has kicked off with four futures contracts: gold, with physical delivery to vaults near Changi airport; crude oil, in both West Texas Intermediate and euro-denominated Brent form; and a single currency pair, euro against the US dollar.

While SMX can claim a first as a pan-Asian hub, Asia is no stranger to commodities exchanges themselves. The real action is in China, where the three domestic commodity exchanges are remarkably powerful for bourses in a country with no foreign involvement and major currency controls. The Zhengzhou Commodity Exchange’s sugar contract was the top agricultural future or option anywhere in the world in 2008 and is likely to be so again in 2010, with RMB13.78 trillion of trades in the first four months of the year alone; the Dalian Commodity Exchange’s soybean meal and soybean oil contracts both comfortably outpace their equivalents in Chicago; and the Shanghai Futures Exchange did the unthinkable last year by overtaking the London Metals Exchange in copper volumes, as well as being the world leader in natural rubber futures.

Elsewhere, domestic contracts have been appearing across Asia. Chicago Mercantile Exchange and Bursa Malaysia launched a dollar-denominated palm oil futures contract in May. India’s Multi Commodity Exchange has proven a success. And Singapore itself already has commodity futures, through the Singapore Commodity Exchange (Sicom), a subsidiary of Singapore Exchange; this offers coffee, fuel oil and gold futures (though the gold contract does not offer physical delivery as SMX will) and last month announced plans to introduce base metal contracts on copper, aluminium, zinc and nickel in a deal with the London Metal Exchange.

The premise of the exchange is that most of these exchanges are either not open markets, and that local businesses ought to be able to hedge their commodities and foreign currency transactions in Asia without having to trek to London, New York and Chicago. McMahon points out that many commodities are produced, shipped, stored and used within Asia, yet the markets for pricing them are elsewhere.

The example of Olam, the Singapore-based agricultural commodity supply chain group, is being mentioned a lot: an acknowledged leader in commodities from cashews to coffee to cotton, why should it be unable to hedge in its own time zone?

But SMX sees the challenge ahead. “Launching a contract doesn’t guarantee its success,” says Jignesh Shah, vice chairman of SMX and group chief executive of Financial Technologies, the Indian company that has built the exchange (an interesting subplot is that Singapore’s new exchange was developed and is owned by an Indian company). Hauling liquidity from established exchanges and persuading people to transact locally will define whether the new exchange thrives or fails.

Another issue is competition with the SGX: so far the contracts don’t overlap and the two insist they are complementary to one another, but how long can that remain the case? It’s also worth noting the new arrival in Raffles Place last month: the first overseas office of the London Metals Exchange.

Logically, though, it ought to work, and SMX has more products in the works, starting with two more currency pairs (US$/Australian dollar and US$/yen). Shah says it is considering contracts for coffee, pepper and palm oil, and says options will naturally follow. “Futures without options,” he says, “are like a dance without music.”

If you build it, will they come? The central issue facing the new Singapore Mercantile Exchange is not whether there’s a logical basis for its existence, which there clearly is. It’s whether that’s enough of a reason for people to gravitate to it.

The new exchange is billed as the first pan-Asian multi-product and currency derivatives exchange. Its premise, in a nutshell, is this: Asia is at the heart of commodities, whether it’s in terms of mining or growing them, storing them, processing them or consuming them. The only area where it isn’t at the heart of commodities is in trading.  That either takes place on closed local exchanges, or many thousands of miles away in Chicago, London or New York.

On the face of it the existing arrangement makes no sense. Why, the new exchange’s backers argue, should a company like Olam or Wilmar or Noble – all Singapore-based commodity leaders – have to go at least eight time zones away in order to hedge their exposures? Singapore, of all places, makes this situation appear incongruous: one only has to look at the port to be reminded of the volumes of goods that move around the region, while its Jurong refineries are among the most dense concentrations of oil processors in the world.

But it’s not as if Asia is any stranger to commodity futures trading. China has, little-noticed, developed a position of global dominance in one contract after another in the last few years. Ask most people where the most widely traded sugar futures contract is, or soybean oil, or natural rubber, and they would likely guess Chicago. Wrong: the correct answers are the Zhengzhou Commodity Exchange, Dalian Commodity Exchange and Shanghai Futures Exchange, respectively. Zhengzhou’s sugar contract was the top agricultural future or option anywhere in the world in 2008 and probably will be in 2010 as well.

How about copper? Has to be London, right? No – Shanghai again. And to get a sense of the pace at which these things are developing, take a look at Dalian’s plastic futures: it traded its first ever such contract in 2007 (LLDPE, a linear low-density polyethylene) and is already the world’s leading plastic futures market.

India’s Multi Commodity Exchange illustrates the same point: only launched in 2003, it is, it says, the sixth largest commodity futures exchange in the world, and the world leader in silver contracts, for example.

But what binds India and China is that in neither case are these markets truly open, particularly China, where currency controls remain rigorous. It is extraordinary that China’s exchanges have reached such vast volumes entirely on domestic business, but that goes some way to demonstrating just how much activity an open Asian market might enjoy.

So, Singapore Mercantile Exchange boasts a decent array of promising prospects: open; with the strength of infrastructure and regulation that Singapore provides so well; in the right time zone for where the action is; and with a few sensibly chosen contracts to test the waters (West Texas Intermediate and Brent crude, gold with physical delivery to vaults near Changi airport, and the dollar/euro currency pair). The question that will make or break it is whether convenience and logic are enough to make people change their ways, and to bring liquidity with them. Asiamoney’s view is that it will happen eventually but that any expectations of an overnight transition are well wide of the mark – in fact, it could take years to get to the sort of critical mass that will really mark the exchange as a success.

There is, incidentally, another interesting aside to this story, and that’s the backers of the new exchange. Singapore has prided itself for decades on its openness and its ability to build a world class financial centre, and in numerous areas – forex, oil trading, private banking, hedge funds – it has succeeded in doing so. But the infrastructure itself is generally considered homegrown: Singaporeans know how to make the right framework and they have the technical ability to streamline it.

Interesting, then, that this new exchange is not only developed but owned by an Indian company, Financial Technologies (India). These guys have quite a track record: they also made India’s Multi Commodity Exchange and have built other bourses in Bahrain, Dubai and Mauritius, among other places. It’s a sign of the times that India should have managed to export leadership in stock exchange development before the country itself has even removed its capital controls.

“Basmati,” says Rajat Beg, “is the champagne of rice.”

As an executive of India’s REI Agro, one of the world’s major basmati producers, you might say he’s biased. But he has a point. Basmati – the word means “the fragrant one” in Sanskrit – isn’t just a source of sustenance: its rarity, and the sheer difficulty of producing it, has made it a status symbol in its own right. In class-conscious India and elsewhere, if you serve basmati rice, you’re making a statement.

Basmati’s prestige stems from the painstaking process involved in growing it. Everything from the temperature to the soil, the humidity, the timing and the storage of the rice is vital. It grows in only two countries in the world, Pakistan and India; and within India, which accounts for three quarters of the global harvest, it only grows in four provinces and constitutes barely 2% of the Indian national rice crop.

So what do you need to grow basmati? It’s a highly specific checklist. Basmati needs the rich alluvial soil that comes down in the snow-melt from the Himalayas, which is why it only grows in the foothill states of Punjab, Haryana, Uttranchal and a chunk of Uttar Pradesh. Those snow-fed waters are important too, and there needs to be a median temperature of 28 to 33 degrees Celsius and a minimum humidity of 60%. Even the hours of daylight and the gentle winds there are crucial. It’s a very picky breed of rice.

On top of that, the timing of sowing is important. Top growers sow in the nursery in the first week of June, then grow in the kharif season – through July and August, during India and Pakistan’s south-west monsoon season – and harvest from September to December. Everything about this timing matters: it smells better when it ripens in cool weather.

Next, basmati must be matured for 18 to 24 months before it is sold. It is dried, processed and carefully stored. If you buy a packet of top-grade basmati from a store today, it was probably harvested at the end of 2007 at the latest. “Basmati is like wine,” Beg says. “The fragrance and cooking qualities are enhanced with ageing.” Understanding why gets you into some complex science: as moisture reduces in the rice during storage, a cocktail of about 100 chemical compounds is formed, and that’s what makes the rice sweet with a unique nutty aroma.

This convoluted process makes it much more expensive. Whereas mainstream rice goes for around 20 rupees per kilo in India, premium basmati can be five times more than that. So why buy it? Partly, it tastes good: it’s aromatic, it doesn’t stick, and since it loses moisture when stored, it cooks better than normal rice. But it’s more than that. The rarity creates exclusivity, and with it, prestige. “Any family function or get-together in India is incomplete without the basmati recipe,” Beg says. As one producer slogan in India goes: “Basmati is no product. It is a status symbol. It doesn’t just feed; it elevates.”

And, while this social side certainly matters in India, it is still more potent elsewhere. About 60% of the Indian basmati crop – representing almost half the global total – is exported, and of that, almost half goes to Saudi Arabia, and plenty more to the other big Gulf states: United Arab Emirates, Kuwait and Yemen. This is where the prestige of basmati is most powerful: the sense that what you eat, and what you serve, says something about you and your wealth.

It’s a prestige Indians have been prepared to go to court for: when a Texan company won a US patent on basmati rice lines and grains in 1997, the furore went all the way to the top and caused a diplomatic standoff between the Indian and US governments. India didn’t follow through on a threat to take it to the World Trade Organization – the US company withdrew most of its patent claims instead – but to this day the WTO only allows certain varieties of rice grown in India and Pakistan to be labelled as basmati.

Indian scientists have developed molecular market systems – rice detectives, you might say – in order to authenticate traditional or evolved basmati from other forms of rice, so important is it to be sure that only the best crop is sold under the name. Exporters get a “purity certificate”. It’s quite something when your rice has to be fingerprinted: welcome to the exclusivity of basmati.

Gold is at a record high and it’s easier than ever to get exposure. But should you?

1. Are you worried about traditional safe assets like bonds crashing? Yes/No

 One of the main reasons people invest in gold is as insulation against problems in other asset classes. In particular, since the problems set in with sovereign bonds in Europe, investors have started to think twice about what they used to consider safe haven assets. In an environment like that, gold shines: it’s at an all-time high in US dollar terms. That said, it’s very wrong to think that just because Greece might default on its bonds, you shouldn’t trust sovereign bonds anywhere else: some, including the US and Australia, remain pretty much bulletproof.

 2. Are you worried about inflation?

 Another reason people buy gold is as a hedge against inflation. Over the very long term it tends to move in the same way as inflation, so if you hold it, you won’t be left behind by the economy. That said, in recent years its performance has dramatically outstripped inflation, causing some to think it’s due a decline.

 3. Do you need diversification?

 Gold, like all commodities, tends to behave in a different way to stock and bond markets, and some advisors think that’s a good reason to include it in a diversified portfolio.

 4. Do you believe in gold’s outlook?

 Apart from the macro factors about the state of Europe and so on, there are simpler themes that impact the gold price. One is that there’s a finite amount of it in the ground – also that, once out, it is there forever in one form or another. It is affected by things like India’s growing wealth, given its popularity as jewellery there; by the difficulty of gold mining at increasing depths; and by central banks around the world wanting to hold it in national reserves. Most think the outlook, for the medium term at least, is good.

 5. Do you think the Australian dollar is due to weaken against the US dollar?

 In truth, few people do think this, but if it happened it would be good for Australians holding gold. Gold has performed sensationally in US dollar terms, but much of that gain has been wiped out for Aussies by the strong performance of their own currency.

 6. Are you comfortable buying something that’s already at a record high?

 An important question: some feel the great rise in gold has already happened and that we might even be heading for a bubble; others think that there is plenty of headroom. Gold trades at more than US$1,200 an ounce today; the most bullish believe it could hit US$2,000.

 7. Are you comfortable holding exchange-traded funds?

 There are several ways of owning gold: one is to buy an exchange-traded fund (ETF), like buying any share, which trades on the ASX and reflects the value of gold. Some ETFs around the world are backed by genuine allocated gold; others are just derivatives reflecting the price.

 8. Or do you prefer the security of owning something you can physically hold?

 If you’re so inclined you can get good old Goldfinger-style bullion or gold coins from the Perth Mint, who can also hold it for you or give you certificates reflecting ownership.

 9. How about gold miners?

 Some choose to play the gold price by buying the stocks of miners. There’s an awful lot more variables at work when you do this – you’re relying on their success to find gold and mine it, and a host of other issues common to any company – but they sometimes do better than the gold price itself. Some managed funds focus on gold miners and other ways of playing the gold price.

 10. Do you understand the dangers with gold?

 Gold can be volatile, unpredictable, and it will never pay you a dividend or earnings like a company does.

 The verdict

Mostly yes: There’s a place in your portfolio for gold, as a diversifier, a hedge against difficult times, and a plain old good investment

Mostly no: It’s not for you. Perhaps you doubt the outlook of something at a record high or think the Aussie dollar is going to wipe out any gains you might make.