Will this commodity buck the trend?

Apr 13, 2011

In this issue:
» US government cracks down on HSBC India
» India's ranking amongst most powerful nations
» The BRICs get together to outdo the US dollar
» Will Obama's deficit cut plans remain on paper?
» ...and more!

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 Chart of the day
Indians feature amongst the best savers in the world. There is no contradiction to that. However, the most popular investment avenues have been few. For the last 4 decades, bank fixed deposits have cornered more than 40% of household savings in India. They continue to enjoy considerable appeal amongst the vast financially illiterate population in India. While investments in complex products are a far cry, even stocks are evaded due to the perceived volatility and risk in the markets. But one investment that has been the most preferred for centuries has recently been in the limelight.

Buying gold jewelry has been a tradition passed on to Indians for generations. Besides being a store of wealth the precious metal has also been considered an auspicious purchase. But rarely has the metal manifested itself in as many investment forms as it has recently. From buying gold coins to exchange traded funds (ETFs) to fund of funds (FOFs), alternative investment avenues for gold have assumed more prominence only recently. As per the WGC and the CSO, gold's share of household savings in India has gone up from 6% to nearly 10% in the past 5 years.

The question that beckons here is whether the interest in gold is purely due to inflationary concerns. Or rather, will higher real interest rates shift the focus back from gold to fixed deposits? We think the answer is - no! True that gold buying has been advocated more recently to combat impact of inflation on portfolio returns. Economic theory would suggest that lower inflation and higher real interest rates would dampen appetite for gold buying. However, this is a commodity that seems to be ready to buck the trend. Unlike other inflation hedges, gold investments have only gone up despite rise in real interest rates. What is more, with inflation in developed markets looming large the higher interest rates in emerging markets may have no negative impact on gold investments whatsoever.

What proportion of your annual savings is in gold? Let us know your views or post them on our facebook page.

Data source: World Gold Council, CSO

Remember that famous case from 2009 where Swiss bank UBS was forced to shell out US$ 780 m as a part of settlement. The case was of course a part of the US Government crackdown on wealthy individuals who evade taxes. Well, the crackdown has now assumed much larger proportions. It has in fact reached Indian shores. A leading daily reports how the US department of justice announced last week that HSBC India may have helped potentially thousands of Americans evade federal income taxes. Just like UBS, HSBC India, we believe, will have no other option but to comply and give out details of client accounts. The US is not averse to using its financial muscle either. This is because non-compliance by the bank could lead to a 30% withholding tax on the bank's investments in US assets. Clearly, the squeeze back home on budget deficit is forcing the world's largest economy to come up with such novel means to raise revenues from taxes. What the move has done though is that it has put a lot of banks on the edge. Clearly, global finance as we know it may cease to exist few years from now.

How often did you rue about some of your school subjects being of no use in your career pursuits? Well, if you have done that often, you are not alone. The World Bank recently urged countries to focus on more on education preparing the younger generation for the jobs versus focusing on the time spent in school. There are around 210 m people globally who do not have jobs. Employers are also reporting that there are too few workers with the right skills which they can hire.

Better, more rounded, and practical learning is extremely beneficial for students. Development of knowledge and skills will help reduce poverty, and increase economic growth, by having a more qualified work force. This becomes even more relevant when it comes to emerging countries. India for example has a large population of young, albeit uneducated people. And 'education' versus 'literacy' should be a huge priority. World Bank President Robert Zoellick says - "For developing countries to fully reap the benefits of education both by learning from ideas and through innovation, they need to unleash the potential of the human mind. And there is no better tool for doing so than education." Well, we couldn't have put it better ourselves.

Here's another feather to attach in the cap of the Indians. India is the fifth most powerful nation as per a study conducted by our very own National Security Research Agency. The study was of 50 nations and was based on their defense capability, economic strength, effective population, technological capability and energy security. India came in fifth after US, China, Japan and Russia. Interestingly India ranked very high on effective population, economic growth and defense capability. But ranked low on the more critical technological capability as well as energy security. So we may rejoice on having world class defense equipment and show superior economic growth. But we wonder as to how long this would continue unless we continue to innovate new ways of sustaining the growth. Or if our industries and the people remain power starved. These must be improved if India wishes to move up the ranks of the "most powerful nations". Nonetheless such titles would definitely add to the "feel good factor" for the people.

US President Barack Obama has pledged of halving the US fiscal deficit by the end of his four year term. But this seems like a tall order. Already the country is set to have the largest budget deficit of major developed economies this year. And if Barack Obama is determined to stick to his pledge he will have to start doing something now to reduce this debt. Otherwise, he will have to deal with tough adjustments in the next two years which will involve cutting deficit by 5% of GDP. Indeed, that would make it the largest adjustment in at least half a century and highlights the precarious state of the US' finances.

The US deficit is likely to reach 10.8% of its GDP this year. This is ahead of Japan and the UK. The problem is that US' monetary policies have been rather loose since Bernanke and the US government was hoping that more liquidity would spur consumption and growth. Their plans have not really taken off but have instead added more pressure on an already increasing deficit. Hence, it will be interesting to see what proposals Barack Obama comes up with when he makes some announcements in this regard this week.

We have spoken enough on the US Fed's reckless money printing exercises and how that is going to have a disastrous impact on the US dollar. Now, the BRICS nations- Brazil, Russia, India, China and South Africa- are coming together for the first time to do something path-breaking. This step could very well mark the beginning of the end of the US dollar dominance in the world economy. The five-nation group of fast growing economies will sign agreements under which they will be able to give credit and grants to each other in their own currency instead of dollars. Read that again-"instead of dollars!" And mind you, these five economies combined are projected to contribute about 48% to the global economy in the next decade. So it is quite evident that the center of economic power is shifting away from the US and the other developed economies.

The benchmark indices in Indian stock market managed to cross the dotted line in the early hours and gathered momentum later on. The BSE Sensex was trading 309 points (1.6%) higher at the time of writing this. Other Asian markets also closed higher. The European markets have also opened flat to positive.

 Today's investing mantra
"You ought to be able to explain why you're taking the job you're taking, why you're making the investment you're making, or whatever it may be. And if it can't stand applying pencil to paper, you'd better think it through some more. And if you can't write an intelligent answer to those questions, don't do it." - Warren Buffett

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4 Responses to "Will this commodity buck the trend?"


Apr 18, 2011

nice,but please give about silver also



Apr 14, 2011



Meena Gagare

Apr 13, 2011

Dear Sir,
plz. give 5minute wrapup about commodity market.

Meena Gagare



Apr 13, 2011

I understand that gold is a very good investment option, but i really think you are over doing it ! Everyday i open your newsletter and you start about how gold is a great investment option. I think you have by now hammered it into the heads of your readers. WE UNDERSTAND !

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