'Gold is the ultimate asset bubble'

Jan 30, 2010

In this issue:
» Is gold in bubble territory?
» US economy expands the most in six years
» Chanos continues to see property bubble in China
» Indian government could set petrol prices free
» ...and more!!

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George Soros is one of the most successful modern day speculators. He has amassed most of his wealth by identifying bubbles and participating in them until they become ripe for bursting. Thus, it can be concluded quite safely that he indeed knows a thing or two more about bubbles than the average Joe out there. Hence, we were all ears when Soros recently proclaimed that gold is the ultimate asset bubble. Gold has certainly appreciated in the region of 40% in 2009. And interest rates were also quite low in 2009. These two conditions have to be met for an asset class to be declared a bubble. And indeed they were met in the case of gold.

However, it should be noted that on a long term basis, gold has still not reached the inflation adjusted high of 1980. By some estimates, it will have to double from here to reach those levels. Moreover, the inflation adjusted high mostly takes into account a trend line inflation. Not the type that is staring us in the face in view of the enormous money printing that is being done. Now, there is no doubt Soros has said that Gold is the ultimate bubble. But even he has not mentioned whether the bubble is about to burst or will continue to make new highs. Thus, there may not be a big gold price correction at all.

We are of the view that there will be pullbacks along the way. Some big and some small. But as long as central banks, most notably the US Fed continue to print money, Gold will be an important asset class to have in one's portfolio. Like we always mention, please do not go overboard with it.

 Chart of the day
Fourth quarter numbers for the US GDP are out. The US economy has recorded its fastest growth in six years as economy expanded 5.7% during the last quarter of 2009. However, thanks to the decline in the first two quarters, the US economy still ended the year about 2.4% lower, the biggest drop in 63 years and the first full year decline since 1991, reports CNN finance. Furthermore, it has been said that a significant growth in the fourth quarter has been due to inventory correction and government stimulus and the same may not be available during forthcoming quarters, thus putting a big question mark over the sustainability of the growth.

Source: US Department of Commerce

Jim Chanos, the man who gained notoriety by calling Chinese economy Dubai times 1,000, is at it again. He has argued in a recent speech that a bubble is building in China's financial system that could derail the global economic recovery. "China is the engine of growth that will hopefully pull us out of the morass that we find ourselves in. But the closer you look at that engine, the more you begin to see that it may throw a piston rod soon," Chanos is believed to have said. While he cautions that he doesn't expect a crash in China anytime soon, he is seeing classic pockets of overheating and overindulgence and has no doubt that there is a credit driven property bubble going on in China right now.

If what Chanos is arguing turns out to be right and if the bursting of property bubble does indeed affect other parts of the Chinese economy then the global economy would indeed be in big trouble what with the US also looking increasingly wobbly. However, if the Chinese authorities do manage to cool down their economy without any big trouble, then the dragon nation could certainly emerge as one of the most attractive investment destinations.

Tata Motors, a good proxy for the country's auto industry posted its third quarter numbers yesterday. While the company did post a profit of Rs 4 bn as against a loss of Rs 2.6 bn during the same quarter last year, high input prices took some of the sheen away from the performance. It is perhaps an indication that Indian auto companies may not have it easy on the raw materials front in the coming calendar year and margins might take an across the board hit. With the government also planning to withdraw stimulus measures and with the interest rate hikes barely a few months away, the industry players better start gearing themselves for a tough 2010 ahead. While we are not saying that the growth in demand would go into the negative, there is certainly a strong likelihood of it not matching up to 2009 levels. As for Tata Motors, the company is planning to launch three new cars in 2010 and would also continue with its balance sheet restructuring exercise.

Call it as coming straight from the horse's mouth. The RBI Governor Dr. Subbarao believes that the government's huge deficit is not sustainable. In fact, he has warned that this deficit poses the biggest challenge to the Indian economy in the medium term.

He has said that the RBI has already begun the process of exiting from the low interest rate stance. Now it is important that the government begins the process of reversing its stimulus measures.

Well, statements like these are rare given that the RBI has never challenged the government's measures in the past. At least, never directly! But given the dilemma it itself faces (between taking care of inflation or growth), its warning is really critical. Only if the finance ministry is listening!

If an industry provided essential services and had a few dominant players, one would usually expect the players to enjoy excellent economics. Not so for the Indian oil & gas industry. The government has traditionally shielded consumers from high fuel prices. Even when high crude prices make the life of refining and marketing companies difficult. Finally, the government seems to be taking steps to remedy the situation.

As per a leading business daily, the government is likely to free petrol prices next month and partially increase diesel prices. However, cooking fuels will continue to be subsidized. In our view, this is a welcome move given the limitations of the government. As the bulk of commercial transport in India runs of diesel, it cannot tinker with its prices without stoking inflation further. Hiking cooking fuel prices would be ill advised at the time of rampant food price inflation.

Key markets across the world ended the week on a grim note. Asian stocks were amongst the worst hit this week. India ended the week on a weak note as well. India's benchmark index, the BSE-Sensex ended lower by about 3%, making it amongst the top losers. These losses were because of various reasons. The primary one was of investors being on a selling spree in anticipation of an unfavorable review of the monetary policy, which was announced on Friday (29 January 2010) this week. In addition, global developments also played their part as the week progressed. This led to further losses.

Note: Country names represent their respective stock market indices;
Data Source: Yahoo Finance, Kitco, CNNfn

 Weekend investing mantra
"Book value is an accounting concept, recording the accumulated financial input from both contributed capital and retained earnings. Intrinsic business value is an economic concept, estimating future cash output discounted to present value. Book value tells you what has been put in; intrinsic business value estimates what can be taken out." - Warren Buffett

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3 Responses to "'Gold is the ultimate asset bubble'"


Feb 27, 2010

very informative.



Jan 31, 2010

I endorse your remarks on the Gold price. Given quantitative easing in the West, worries about the dollar, and the time it takes to increase the supply of gold, it is most unlikely that the price is liable to come down for the next year or maybe two. In any case the inflation adjusted price of gold should be $2000 at its highest point, wheras the price now is about $1100.I have put my money where my mouth is by buying a significant amount through a Gold fund recently.
I do not know a great deal about Jim Chanos, what I know however, is that Anthony Bolton the doyen of Fund Managers in the U.K. has come out of retirement to start a new Fund for Fidelity in China, shortly. I would back him anyday over your Jim Chanos, especially as I can see the vast potential that exists in China and the way in which they have managed their affairs so far- on the economic front- that is.
Otherwise I regard China as an odious country in every respect and would hate to have any relationship with it except an economic one. Sorry Mr.Confuscios!!


shekhar nanavare

Jan 30, 2010

in buying gold is like a suside.It will come down
upto 8000/-or below it definately whithin 1-2 years.
if gold crosses 18000/-level then should sell it.

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