Is this the time to sell Gold?

Mar 30, 2010

In this issue:
» To hold on or to sell Gold?
» Indian banking sector in safe hands
» Real estate prices may be in for some correction
» LIC to pump in a mammoth Rs 750 bn in FY11
» ...and more!!

Knowing when to sell is one of the most difficult decisions in investing. The difficulty gets compounded in the case of assets like gold. This is because unlike stocks, it is difficult to arrive at an approximate intrinsic value per ounce of gold. More often than not, relative valuations are relied upon. And even this may turn out to be long shots. Thus, the tendency to book profits after only a minor gain is at its maximum. And when the asset under consideration has been billed as the asset of the decade, the temptation to sell is at its peak. However, if you are invested in gold for quite some time now and are sitting with huge profits and wondering whether to head for the exit, it would pay to listen to a famous analyst who answers to the name of Dylan Grice.

Dylan is of the view that the reason he owns gold is because he is worried about the long-term solvency of the developed market Governments. Thus, eventually there is going to be a crisis of such a magnitude that politicians will be forced to accept that inflating one's way out of a recession is indeed not the right thing to do. And this is when the time will be right to sell gold. For the time being though, no such thought is even remotely entering the minds of economists and politicians. Thus, gold may continue to appreciate as western governments continue with their senseless policies.

Even Ajit Dayal, our founder, shared a similar view at the recently held Equitymaster Investment Summit. Ajit was of the view that the yellow metal is a perfect insurance against Government inanities and hence, a must in every portfolio. In case you missed the summit, here is your chance to make amends.

 Chart of the day
If today's chart of the day is any indication, India's banking sector does look to be in extremely safe hands. We say so because inspite of the varied economic conditions that the Indian economy was subjected to, the ROE of the sector has remained well within acceptable limits. What more, the small contraction that happened in FY08 was a consequence of the equity base of the banks growing at a higher rate than other assets. This is a matter of great comfort as it strengthens the shock absorbing capacity of the banks and does indeed augur well for the future of the sector.

Source: RBI

Real estate players may have to brace themselves for yet another correction in home prices. It is no surprise that the global financial crisis had an adverse impact on home prices in India as demand waned and financing problems ballooned. However, many of them were able to weather the storm due to financial restructuring and a revival in home buying on the back of greater consumer confidence and lower interest rates.

But with prices once again rising, as more homes come into the market at higher price levels, a correction seems imminent. What is more, high end houses in Mumbai and the National Capital Region (NCR) are the most vulnerable to these shocks. Not surprisingly, Mumbai earned the dubious distinction of witnessing the highest price rise in recent times. And with many projects being announced over the next 6 months in the city, there could be an oversupply of homes and thereby a dip in prices. This will then turn out to be good news for those who are still looking to buy their first home and are still looking for a right price. Not just that, real estate players will need to realize that in order to maintain a sustained demand for houses, it is necessary that prices do not reach unjustifiable levels.

A lot of economists round the world are gung ho about the outperformance of the Asian economies against their Western peers in combating the downturn. But there are others who associate this with a very big 'if and only if'. And they believe that the economic double-dip recession in the West and the bursting of Chinese bubble are not the only short term risks, there are other menaces to be considered as well. Yes, government policies will play the most critical role in the rise or fall of the emerging Asian economies.

"Good policies do not guarantee good economic performance, but bad policies almost always result in poor economic performance." This is what Mr. John Llewellyn, former senior official, OECD opines in his recent Asian economic study for Nomura. Mr. John believes that leading Asian countries like China, India and Indonesia have a significant scope to grow on supply side by improving urbanization, education and services sector. However what is most critical is the growth in domestic demand. He believes that policy makers in developing Asian economies need to strengthen the social security net. This will ease the precautious consumers from worrying about saving excessively for the rainy days and instead consume a tad more today. Also, there is a need to dismantle trade barriers so as to increase trade income and also improve productivity through increased competition. Good observations indeed. As for how much the respective governments succeed at it, only time can tell.

When it comes to domestic institutional investors investing in the stock markets, LIC clearly rules the roost. As per reports, this large investor is slated to get even larger. LIC is planning to pump in a staggering Rs 750 bn in the stock markets in FY11, 25% higher than what it invested in FY10. Further, with LIC's investments getting bigger every year, some expect that for the first time ever the ratio will change wherein investments in the equity markets from domestic institutions will be higher than the investments by FIIs.

Traditionally FIIs have dominated equity investments in India, dwarfing their domestic counterpart. But with the equation changing, investors can perhaps expect more stability and less volatility in the stock markets. This is because FII are a finicky lot, and are known to be quick to pull out money at the slightest sign of trouble, thus having disastrous consequences for the markets. With higher support back home, their influence on the markets may not sustain at the level it used to be at earlier.

The Too Big To Fail entities may no longer get away with their wrongs at the cost of taxpayer funds. They will themselves have to chip in with taxes for keeping themselves afloat. Named as 'bank-tax' the new fiscal levy is the G-20 nations' proposed solution to big bailouts during credit crunch. The proposal has however not gone well with the big banks. They fear that the additional tax outflow would be discriminatory. Also, it would limit their capacity to lend. However, financial regulators in the US and Europe do not seem to be seeing eye to eye with the entities they are overseeing. With bank-tax finally getting closer to reality, we can only hope that risks are not once again overlooked in the allure for profits.

Meanwhile, after remaining in the positive for most part of the day, the BSE-Sensex turned negative during the final hours and is trading lower by around 50 points currently. Heavyweights from the IT sector are exerting the maximum selling pressure. Most of the other Asian indices have however ended the day in the green whereas Europe has also opened mostly in the positive.

 Today's investing mantra
"We enjoy the process far more than the proceeds." - Warren Buffett

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5 Responses to "Is this the time to sell Gold?"


Apr 9, 2010

Dylan's view on gold settled my long pending doubt. His view is going to rule.


Archie Sequeira

Mar 31, 2010

I subscribed to your bulletin just last week and have recd. three bulletins all of which I have read end to end. I find them lucid, well written, analytical and balanced. The clarity of language is exceptionally good. Rarely have I come across a bulletin of such high quality. Keep up the good work.



Mar 31, 2010

One can find sumptuous food for thought in your well-considered views on investment in Gold and real estate. Existing and prospective investors have a wealth of highly useful information in the lucid wrapups.


C. Sen

Mar 30, 2010

This is a very good helpful community which enlighten all the new investor in a right sence in the investment market arena.I wish a grand success of the mission.

C. Sen


praful chhasatia

Mar 30, 2010

Can LIC become next UTI, the way in which it is buying some scripts

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