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Will Alibaba Hedge a Portfolio Against Economic Chaos?

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Precious metals liquidated to make room for the much-hyped Alibaba IPO – this could be costly.

Christopher-LemieuxSMBullion.Directory precious metals analysis 22 September, 2014
By Christopher Lemieux

Senior FX and Commodities Analyst at FX Analytics

Jack Ma is a happy man. Alibaba (BABA) was hyped, so much so that money managers liquidated precious metal holdings in order to make room on the books, and silver took the brunt of the brute force beat-down. 

However, this could be a costly mistake. Although up well above the $68 per share offering, traders pushed shares almost four percent lower today on notably lower volume.

The idea is that Alibaba is “safe,” but can it hedge against inflation or poor economic data? Could it protect a portfolio from an economic calamity?

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The answer is no. Here is why:

The eCommerce giant is a highly-leveraged growth play. Alibaba’s primary market is China, as it makes up roughly 80 percent of all eCommerce in China; and Jack Ma is likely to continue to focus efforts domestically.

But there is one problem: China is slowing down, and there are already talks about downgraded 2015’s GDP growth forecast. To top off matters, the People’s Bank of China (PBOC) has said there will not likely be an all out stimulus plan, which caused the Hang Seng to fall two percent overnight and lost any upside gained from “QE-lite.” Even if Ma looks to expand internationally, the global consumer is in tough shape.

It looks like the Chinese government recognizes that the economic boom is over and the country is settling down to a lower level of growth,” said Andrea Williams, head of European equities at Royal London Asset Management. A slowdown in China could pose problems for Ma and Alibaba shareholders who think the stock is the next best thing from sliced bread. Global growth expectations are getting slashed, too.

This is not to say Alibaba will not succeed or be a promising growth stock, but it will not provide the portfolio hedge against a slower growth backdrop, nor does it help when money managers throw away diversification just to add more risk.

As Wall Street funds stock up on Alibaba, BullionbyPost’s founder Rob Holiday-Stein said sales of 12.5 kilogram gold bars are up 243 percent year-over-year. The ultra-wealthy may not be fooled by today’s equity bubbles and are moving wealth into hard assets. These are some serious gold bars, worth roughly $490,000 each!

The divergence between gold demand and price continues. During gold’s decline in 2013, the US Mint had record sales in both gold and silver coins. Australia’s Perth Mint had to begin a third shift for round-the-clock production just to meet demand. Retail investors continue to purchase precious metals and see the declines as simply a price discount.

According to London’s ATS Bullion, sales for one kilogram gold bars doubled in the three months ending in August. These large gold bars symbolize wealth protection and asset diversification.

Not everyone believes in buying stock within a equity bubble.

One a side note, last Thursday, I was talking to a friend who happens to be an adviser at a large US bank. He had a client (who remained anonymous) wanting to dump her entire $100,000 401(k) in Alibaba stock.

I think the market top is quickly approaching.

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