Gold no longer the primary crisis currency?

Mar 23, 2011

In this issue:
» Will Buffett invest in India?
» The brakes have hit Indian automakers
» US healthcare bn-dollar biz for India IT
» Indian banking on path of reforms
» ...and more!

-------------------------------------------- Free Guide -------------------------------------------- The Definitive Guide To Financial Planning

Claim Your FREE Copy Now! Click here!.


Currency devaluation is part of our cultural folklore. You may have spent a lot of your childhood hearing from your elders about how much money could buy in "those old days". And how over time everything became expensive, politicians got more corrupt and so on. It is very intuitive for people to invest in precious metals. They may not know about monetary policies, fiscal deficits and such sophisticated jargons. But gold has been a safety haven since time immemorial. It still continues to be. Now, silver is increasingly becoming a global monetary metal. And there are fair chances that silver prices will outpace those of gold in the coming times.

Inflation in India and China has been on the rise. And not so surprisingly, silver's role as a monetary metal is gathering the most momentum in emerging economies. Let us show you some really mindboggling numbers from China. Industrial and Commercial Bank of China (ICBC), the world's largest bank by market value, sold 418,000 ounces of physical silver to Chinese citizens in January 2011 alone. Now compare that with 1.06 m ounces for the whole of 2010. China was a net importer of over 100 m ounces of silver last year. It is important to note that a few years ago the dragon economy was exporting an equal amount annually.

On the other hand, can the mining community match up to the burgeoning appetite for silver? Not really! Silver is primarily extracted as a by-product of gold mining - an industry that's already operating at peak capacity. So an explosive demand coupled with inelastic supply translates into guess what, higher prices!

Both gold and silver have rallied significantly. Of late, silver has stolen much of gold's sheen. Its spot price rose by 83% last year, whereas gold posted a relatively modest gain of 30%. If this is any indication, then silver's dominant outperformance of gold is set to continue. Silver's lower unit price makes it the poor man's gold. Think about it, 90% of the world's population is poor.

Do you think silver prices will continue to outpace gold prices in the future? Share your comments with us or post your views on our facebook page.

 Chart of the day
Mumbai posted the highest domestic per capita income of Rs 125,000 in 2009-10. Delhi lagged slightly behind at Rs 117,000. For the same period, Maharashtra's per capita income averaged Rs 74,027. But the number would be much lower if you would take away the contribution of Maharashtra's golden triangle- Mumbai, Thane and Pune. On the other hand, India's per capita income stood at Rs 46,492 during 2009-10, a growth of 14.5% over the previous year. One must note that per capita income figures completely veil the wide income disparities. While India marches ahead with its growth story, a certain Bharat still remains far behind.

Data source: Economic Times

There is very little ambiguity about the way the Oracle of Omaha, Warren Buffett, invests. He has gone at great lengths over the years to make his investment style crystal clear. However, one thing has always puzzled us. Why is it that the world's most successful investor has given India the cold shoulder? This is especially in light of the fact that India is home to some world beating companies. Besides, quite a few Indian companies pass the management integrity test that Mr Buffett lays so much emphasis on. Indeed, what better occasion to answer such a question than Buffett's interaction with the media on his maiden trip to India.

Buffett was more than willing to oblige. He made it clear that India, given its size, can no longer be ignored. "I don't consider India as an emerging market, I consider India as a very big market. We continue to look at large countries like India," the Octogenarian super investor is believed to have said. Well, only time will tell whether Mr Buffett has paid the mandatory lip service or is seriously considering investing some of his billions into Indian firms. Should he choose to do the latter, we are quite confident that he may not rue it few years down the line.

Auto makers are facing the heat. And no, it is not on account of the soaring temperatures in India currently. After posting record sales last year, car manufacturers are now facing a three pronged challenge. Increased input prices, shortage of components post the massive Japanese earthquake and the RBI's latest rate hike are all adding pressure. It is getting increasingly difficult for players to meet their ambitious sales targets. Rate hikes make vehicles more expensive. And shortages of key parts like tyres, castings, and steel make it difficult for cars to finish their path down the assembly line. Hopefully, these problems last only for the short to medium term, until supply side issues are resolved.

The plethora of opportunities in the US pharma market is set to bolster the fortunes of Indian pharma companies. Especially since the US government wants to bring more people under medical coverage. And at the same time, reduce overall healthcare expenditure. But if you thought that this opportunity is limited to the pharma sector alone, think again. The IT sector too can now benefit immensely from the US healthcare space. In fact, the latter offers a multi-billion dollar IT and back-office services opportunity. This is likely to be much bigger than the Y2K opportunity, which had transformed many Indian IT providers. Indeed, the healthcare space in the US had always lagged in terms of adopting off-shoring and technology. But this is all set to change. Why? Because various regulatory changes are stressing on inclusive healthcare and standardisation in patient records in the US, among other things. Indeed, the US government investment in the Healthcare Bill is estimated to be over US$ 1 trillion over 10 years. And Indian IT players who jump onto this bandwagon can benefit immensely from the same.

That the Indian financial sector can do a lot more with some much needed reforms and policies is a given. But the delay in the pace of the reforms has had a lot to do with the progress of the sector. It seems that some of the banking reforms are now finally ready to see the light of the day. The most important one being the removal of restriction on voting rights. With the new set of policies, the voting rights would be commensurate with investors' shareholding in private sector banks. There are 20 PSU banks and 22 private sector banks in the country. Higher voting rights in the private sector entities would attract more investor interest in them. Not that the RBI is trying to fast track opening up of the sector to foreign players with this. The regulator continues to remain cautious about the approach of the big banks in the West. However, within the Indian banking sector itself, there are players that would be more open to M&A deals with the new proposal. And consolidation is something that the sector desperately needs to address the issues of scalability. For investors in the sector, there could be plenty of long term upsides in the offing.

Finally, there is a Fed official who agrees that US does not need any further quantitative easing programs. We are referring to Richard Fisher, the President of Dallas Federal Reserve Bank. Mr Fisher feels that the US is currently on a path towards insolvency. And the policy makers' decisions are crucial as they would decide if US would continue to the path of insolvency or not. As per Fisher, the Fed should not come up with any further easing programs once QE-II comes to a close in June this year. If easing is continued, then the flood of money would only fuel the country's inflation. And that would lead to further problems for a country which is already facing sluggish growth. As per Fisher, the liquidity in the US financial system is already very high. Further infusion of easy and cheap capital would just lead to higher inflation without helping growth in any way. And this would send US on the path of bankruptcy instead. For the sake of US, we hope that the rest of the Fed and Mr. Bernanke would listen to Mr. Fisher and abide by his suggestions.

In the meanwhile, Indian stock market indices traded firmly in the positive territory. At the time of writing, the benchmark BSE Sensex was trading higher by around 157 points. Stocks from banking and healthcare space lead the pack of gainers. All sector indices except auto are trading above the dotted line. On the other hand, while European stock markets are trading weak, the Asian stock markets are trading mixed.

 Today's investing mantra
"Inflation is taxation without legislation." - Milton Friedman

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "Gold no longer the primary crisis currency?". Click here!

6 Responses to "Gold no longer the primary crisis currency?"

suvendu Das

Apr 20, 2011

Yes the rally will go another 30% from here,and why it will go because,silver is valued less with comper to gold.


Adi Daruwalla

Mar 28, 2011

If we have the highest per capita income in the Nation, then how do we compare internationally, with the BRIC nations, Argentina, African nations and US,GB and EU?
If infaltion is taxation without legislation, then the padding from the legislators arses must be removed and each of them given a flogging (200 times) and removed from the post as legislators and made street urchins.


Manoj Kumar

Mar 27, 2011

For sometime yes the silver prices will continue to outpace gold prices but these things keep changing. I think the prices are already nearing the peak. we should infact now focus on other metals like copper or aluminium which have industrial use and similarly become the poor man's gold and silver when these two metals gets out of reach of poor man.


shaheen ashraf

Mar 23, 2011

gold has perenial demand in the shape of domestic consumption unlike it is unlikely silvr price shall continue to rise .


ajay Joshi

Mar 23, 2011

its about the rally in silver... how does an indian investor benefit from it ? any stocks ? any MF's ? any ETf ?



Mar 23, 2011

...though the unit price is low from investment point of view one needs to buy a larger lot, like half kg. & there are no Silver ETFs I guess. Are there any?

Equitymaster requests your view! Post a comment on "Gold no longer the primary crisis currency?". Click here!