Should you buy more gold than stocks?

Apr 25, 2012

In this issue:
» Europe risk makes junk bonds look good!
» What gives rise to sharp fall in purchasing power?
» Student loans next in bubble territory
» Diesel price deregulation finally on the cards
» ...and more!

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Indians do not need the excuse of Akshay Tritiya (considered auspicious for gold buying) to stock up the yellow metal. For generations, festivals, weddings and other auspicious occasions have warranted some gold purchase for us. The only novelty now being the availability of Gold ETFs and e-gold that one can buy through the demat account. The increased awareness about the inflation adjusted returns from gold has made it all the more alluring to retail and institutional investors of late. Top that with regular dose of opinions from commodity gurus like Jim Rogers, bankers and economists about the scope of outperformance of gold over other asset classes. The demand for gold from India has become so important that the same is now considered a key determinant of global gold prices.

Meanwhile, central banks in the US and Europe are not yet done with their money printing exercise. Hence, concerns over runaway inflation are far from being quashed. In such a scenario no asset class other than gold can offer the safe haven security for wealth conservation. There are even talks about some troubled countries moving back to the Gold standard due to the depreciation in their currency value. So is gold the best asset class to invest in?

As per statistics from a business daily, over the last 10 years, the annualized returns from gold has been 6 times that from US stocks (considering Dow Jones index). In fact the returns from gold outperformed stocks over a 50 year period as well. However, if one considers a 30 year period, the returns from stocks were much better than gold. Hence the returns purely depend upon the level of inflation, performance of the economy and corporate over a given time period. Companies in America may fail to keep up with the rise in the value of gold over the next decade. This is given the fact that currencies like the US dollar and the euro may lose value thanks to the excessive money printing.

However, for Indian investors the considerations could be very different altogether. For one, the central bank is extremely conservative about liquidity management. Plus despite relatively lower GDP growth, companies will continue to sustain good inflation adjusted profit growth. Hence the scope for returns from good stocks is much higher than in the US. No doubt the inflation adjusted returns from gold can add value to an Indian portfolio as well. But be in no doubt that there are several stocks that have the same virtue. Hence, take the stunning statistics about the outperformance of gold over stocks over a long period in the US with a pinch of salt. We believe Indian investors would be better off keeping their exposure to the yellow metal limited. In fact a larger proportion of good quality stocks than gold would do much more than keeping your portfolio inflation proof.

Should Indian investors purchase more gold than stocks? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
If the rise in consumption of consumer durables, automobiles and FMCG products in the hinterlands is to go by, the per capita income in Indian villages in rising much faster than in urban areas. This is especially considering the inflation adjusted income levels. As per data from the Reserve Bank of India (RBI), the rural wages have moved higher than the rural CPI (consumer price inflation) over the past few months. If this trend continues, it will not be surprising to see companies focus more on the rural markets.

Data source: RBI

The crisis and associated risk in the Euro zone is hitting new highs every day. But there is one set of people who is trying to profit from the situation. And that is the bankers trying to sell the junk bonds in US. Apparently, the risk in Europe has become so high that it makes even the junk bonds look good. Junk bonds are typically bonds offering high yields due to the high risks associated with them. They are generally referred to as highly speculative investment options. Not meant for the weak hearted investors. But currently the times have changed. With risks touching all time highs and domestic interest rates remaining in the near zero range, the US investors are getting desperate to park their funds somewhere. And the Wall Street bankers, quick in realizing this fact, have started to pitch junk bonds to investors. US investors would do well to read the facts and figures and analyse them against their own risk profiles before going ahead with investing in such bonds.

Imagine working hard all year round and saving a few lakh rupees in the process. Now, wouldn't you be livid after realizing that the money you so painstakingly saved can buy only half of what it could have bought a year earlier. Well, what happened here? It seems you've been a victim of the money printing by the Government. Sensing a slowdown, the Government decided to double the money supply and what this ended up doing is that it reduced in half, the value of all paper money, yours included.

What we just did was explain in simple terms the phenomenon that is underway in the western world currently and on a much larger scale. Little wonder, people are worrying themselves sick over the sharp fall in the purchasing power of money. And if this isn't scary enough, experts opine that the phenomenon has just started. Eventually, all the money is likely to vanish into thin air. is of the view that the collapse of the monetary system will give rise to alternative system of exchanging goods and gold and silver could also enter into the equation. But before this happens, it is going to be one hell of a turbulent ride we believe.

That airline companies are in trouble in India is a fact well known. But that does not seem to have deterred passenger traffic. In fact, as more and more people look to enter Indian shores, modernization of airports, especially in non metros, has become important. That is why the civil aviation ministry may revert to the public-private partnership (PPP) model. This is to modernize 35 non-metro airports and a few large ones in cities. One of the reasons for this is the Airports Authority of India (AAI) lacking sufficient funds to undertake modernization on its own.

Having said that, it may have to get ready to face stiff opposition from airport employees. For instance, the AAI had to invest substantially on its own in the modernization of Chennai and Kolkata airports. This is because employees opposed the PPP route. However, the Delhi and Mumbai airports have been modernized through PPP. Not everything is hunky dory with PPP either. The main problem that the PPP model faces is execution delays and cost overruns. But with the AAI strapped for cash, allowing private players to enter this space seems to be the only option.

Though several financial bubbles have burst in the aftermath of the financial crisis of 2007, newer bubbles continue to crop up here and there. The latest one doing the rounds is the student loan bubbles in some developed economies. In the US, outstanding student loans are estimated to be around US$ 1 trillion. That's bigger than even the outstanding auto loans and credit card debt. But as per an article in Zero Hedge, the student loan bubble in the UK is set to be even worse. This year, the UK government is set to roll out a plan wherein most of the burden of higher education fees would be shifted from the government to the students. This means that graduates are going to be saddled with humungous debt.

It is estimated that some students in England will leave school with about US$ 64,200 (approximately Rs 3.4 m) of debt. Compare that with average student debt of US$ 23,300 in the US. What does this mean? For one, graduates will defer buying homes. For the lower income groups, the impact will be even worse. These countries will witness another generation of debt slaves. Though there are a lot of surprising twists as far as repayments are concerned, the biggest problem is debt itself. With job creation in these economies being very lacklustre, such huge debt burdens are nothing but financial bombs of the future. When they burst and how much wealth destruction they cause is just a matter of time.

It was almost a month back that the Finance Minister vowed to contain subsidies to less than 2% for FY12. In times when crude prices are boiling and fuel subsidies seem to be on the rise, it seemed like a promise taken too far. However, from the recent turn of events, it looks like he is planning to take it seriously. The government has in principle agreed to deregulate diesel prices and make them more market linked. We just hope the decision is implemented in spirit and not just in letters. And we have valid grounds to doubt that. As we all know petrol despite being deregulated, continues to be sold below the international prices. The current pricing mechanism has been distorting markets, leading to dieselization of the economy. While LPG is serving commercial purposes, subsidized diesel drives SUVs used by elite class of society, thus making a mockery of whole rationale of fuel subsidies. As diesel consumption is around four times that of petrol, the need for this move can't be overemphasized. We just hope that the Government musters enough guts to implement it and target cooking gas next.

After opening close to the dotted line, the indices in Indian stock markets nosedived into the negative territory backed by selling pressure in IT, engineering and power stocks. At the time of writing, the BSE Sensex was trading 46 points below the dotted line. The indices in most other Asian markets closed lower in today's trade. Those in Europe have also opened flat to positive.

 Today's Investing mantra
"Even the intelligent investor is likely to need considerable willpower to keep from following the crowd." - Benjamin Graham

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4 Responses to "Should you buy more gold than stocks?"

arvind llakhani

Apr 25, 2012

appreciation of gold to my view is a result of depreciation of our currency. if we look at the international price increase in gold the appreciation is just 60% in last four years, where as gold in India has risen by 200%. I think we should opt for a productive investment options rather to be crazy for gold only.



Apr 25, 2012

I do not agree with your premise that our Central Bank is much wiser or that we are an island of sagacity in this sea of financial madness. RBI, too, succumbed to pressure and has done its own monetary easing recently, probably at the behest of the economically dumb political class. There was no liquidity crisis warranting such a generous dole by the RBI. Secondly, much as expert analysts & economic pundits may wish, we are not de-linked from the rest of the World. We are also in a major crisis and bubbles are forming in various asset classes. These will correct. There will be printing of money by RBI. It cannot be avoided. There is a currency war in the offing and we will be forced into it. We will flounder because we lack the resources. Buy gold like there is no tomorrow ... buy platinum, uranium, and all other rare earths. The only way to survive the future monetary war.


George Elava

Apr 25, 2012

People of constructive thinking would always keep their money moving by investing in stocks. Gold is totally an idle money. In the world, if no constructive work is taking place, if everybody satisfies with the things when he is born, then Gold is an everlasting asset, otherwise, not!

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Apr 25, 2012

"The government has in principle agreed to deregulate diesel prices and make them more market linked."

Not an issue by itself, as long as the govt also removes the usurious taxation on petroleum products where 50% of the retail price paid by consumers is gobbled up by taxes which are then wasted by the govt on its hare-brained schemes.

I say remove ALL subsidies but also abolish the income tax, sales tax, service tax, VAT, etc.

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