Gold is looking better than ever

Apr 30, 2010

In this issue:
» Investors demand huge premium for Greek bonds
» 70% of large cap funds underperform indices
» Buffett all set to host Berkshire annual shareholder meeting
» India will take a lot of years to bring deficit under control
» ...and more!

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The last few days have seen volatility return in the global markets with full gusto. And why wouldn't it? After all, the markets received two big jolts. First, Goldman Sachs came under the scanner and then, clouds of debt default intensified over Greece. Of course, it is quite possible that these issues will be resolved and the world will go back to business as usual. These are minor setbacks alright. But they are certainly pointing towards a bigger menace, the like of which we must have never seen in history.

Look at it whichever way you want. But the fact remains that so much sovereign debt is likely to be issued over the next few years that there aren't going to be enough savings in the world to service them. Hence, the Governments would be left with no option but to print currencies. Of course, the Governments have been doing the same all this while. But the magnitude of the forthcoming money printing exercise is going to be so huge that there is a strong chance that there will be hyperinflation some time down the line.

Thus, as the value of money goes down because of its excessive printing, the value of something that is in limited supply and is valued all over the world will certainly go up. And what better commodity to fit this description than gold. The yellow metal has had an excellent run so far this decade but given what lies in store, it is perhaps looking better than ever.

However, as we have said before, make gold only a small part of your portfolio. Agreed that there are strong chances of hyperinflation. But what if hyperinflation does not occur at all. In that case, you may need better options than Gold to boost your purchasing power.

 Chart of the day
Ever since S&P downgraded Greece, its bonds have taken a beating. So much so that yield on 10-year Greek government bonds has spiked so much that in order to hold it, investors now demand a risk premium of nearly 7 full percentage points over the relatively safe German bonds. While Portugal and Ireland, other of the so called PIIGS group of nations have also seen their risk premiums go up, the damage has not been as severe on the remainder of the PIIGS viz. Italy and Spain. Investors seem to be waiting for their downgrades by the ratings agencies as well before they decide to sell their bonds enmasse.

Source: Economist
*Figures have been rounded off to nearest digits

It is that time of the year gain. When Warren Buffett holds the annual shareholder meeting for his company Berkshire Hathaway. People travel half way across the world to get a glimpse of the man. And soak in Buffett's trademark wit and wisdom. More than 110,000 people are expected to arrive this weekend in Warren Buffett's hometown. That's quite a jump from the audience of 12 in the first meeting in 1981. Such attendance is usually reserved for world leaders, entertainers and sports stars. It is practically unheard of in the field of business. In fact, most shareholder meetings are dull, thinly attended affairs. It is expected that there will be questions on Goldman Sachs and the regulation of derivatives. There will also be the usual investment related questions. We sure will be tuned in.

Apart from the US dollar, no other currency has received as widespread a criticism as the Chinese Yuan. Most people blame China's policy of keeping the Yuan pegged to the US dollar as detrimental to recovery in other Asian economies. This is set to change this week, or so it seems. As per some economists, the long-anticipated de-pegging of the Yuan from the US dollar could happen over this weekend.China has long been under pressure from the US, but also of late from its peers like Brazil and India, to allow its currency to appreciate. This is seen as a way towards rebalancing the global economy from a China centric export model.

Business magazines these days devote reams of print on companies creating loads of market value. There are also those creating the biggest brands and the maximum turnover. It is really interesting to know that some names that never featured in the past are making to the list these days. Also, plenty of companies from emerging economies are making their presence felt. But what surprises us is the extent to which such rankings gather readerships and following. Particularly because, companies like Lehman Brothers, Merill Lynch and Goldman Sachs enjoy a pedigree of the same. But as of today, these can hardly boast of any reputation or value.

The listing of ICICI Bank as the 45th most valuable brand in the world by BrandZ did not really surprise us. The same was apparently based on the bank's pioneering effort in retail banking. We would certainly not like to contest that. But we would like to add a word of caution that such may not be all that synonymous with shareholder value. Hence, serious investors would do well to take such rankings with only as much interest as they deserve.

India's state and central fiscal deficit at a combined 9.7% of GDP was always a matter of concern. To such an extent that in the recent budget, the Finance Minister laid a roadmap to bring this down over the years. But Takahira Ogawa, S&P's director for sovereign and international public finance ratings, thinks differently. He is of the view that it will take several years for India to get its combined fiscal deficits to desirable levels. Ogawa believes that soaring prices are a worry for India. He also opines that the RBI's inflation projection of 5.5% for FY11 would be difficult to achieve. Infact, inflation and a higher deficit are major concerns for India. They could thwart India's growth which has been pegged at 8.5% this fiscal.

This means that the expansionary monetary policy that the RBI had been following last fiscal may not hold much ground now. Stimulus packages were critical then to bolster the Indian economy. But they also lent a hand in worsening the deficit situation. And abundant liquidity would only spur inflation further. What is more, India's fortunes will also depend on how monsoons pan out this year. Indeed, it will certainly be a challenging task for the Indian government to keep both inflation and the deficit in check in the coming years.

Why do you invest in an equity mutual fund? The answer might be quite obvious at first, but certainly deserves deeper thought. One may invest to take advantage of the higher returns that equities are supposed to give over the long run. But if that is the only motive, than why not invest in an index fund? An index funds, for the uninitiated, mimics the returns of an index like the Nifty or the Sensex. Thus there is no individual stock picking involved. Only a formula based mechanical criteria which decides the inclusion of stocks in an index. Plus they come with the huge benefit of lower costs when compared to actively managed funds.

But wait a minute! Wouldn't you want to take advantage of a smart and savvy fund manager who would pick stocks in such a way so as to get you higher returns than a mere passively managed index fund? If that's why you invest in mutual funds, think again. According to the newly launched S&P Crisil Indices versus Active Fund (SPIVA) scorecard for the Indian mutual fund industry, 70% of large cap funds in India underperformed the S&P CNX Nifty Index. Further, 40% of the funds in the diversified equity category underperformed the S&P CNX 500 Index over a 5-year period ended Dec 2009. Indeed, in the world of investing, a greater intellect does not necessarily mean a better investing performance.

Meanwhile, the Indian markets had another strong outing today with the BSE-Sensex up by around 70 points at the time of writing. Heavyweights like Infosys and Tata Motors were seen driving most of the gains on the index. Strength was also witnessed amongst Asian indices today whereas Europe has also opened largely on a positive note.

By the way, the SEBI vs. IRDA war has just gotten a little murkier. SEBI has decided to move Supreme Court on ULIPs. Please let us know what do you make of this.

 Today's investing mantra
"When you combine ignorance and leverage, you get some pretty interesting results." - Warren Buffett

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24 Responses to "Gold is looking better than ever"

jimi chikhliwala

Jul 20, 2010

The more we hear the insurance regulator the more we feel he is the insurance industry safe keeper not a regulator for the ULIP taker.

Unfounded charges are lavied that also to elder people without giving insurance to them. They charge big commisions to keep your money safe with miserable returns why would you pay them to keep your money safe you have banks who will pay you to keep your money safe.

If you have never bought a ULIP do not make the mistake of buying one ever.


Pradeep Das

May 3, 2010

As a capital market based product, ULIP should be regulated by SEBI


N.M.R Shreedhar

May 2, 2010

reg the SEBI vs IRDA tussle, maybe better to have a separate independent monitoring body to audit the ULIP schemes provided by Life Insurers as the amount of money at stake is huge--I think the figure is close to Rs 17lakh crores. This way both SEBi and IRDA will be free to continue with their respective jobs. Whatever the outcome of this ongoing battle, the customers would benefit as henceforth we can expect a downsizing of the agent commissions and more transparency/disclosures. regds



May 2, 2010

IN my View,in the Interest of Investers ULIP Investments should follow Both IRDA & SEBI guidelines.




May 1, 2010

If ULIPs have become major investors in the market, certainly atleast the investment arm of Insurance companies and the way ULIPs are sold should come under the ambit of SEBI which is the sole regulator of capital market. Each Insurance company is no less than an asset management company and why they cannot submit themselves to SEBI - not necessarily completely but to the extent of the selling process of ULIPs and the investment processes.


sk agrawal

May 1, 2010

Free guide for profitable approach to stock picking



May 1, 2010

The IRDA vs SEBI controversy has to be seen against the backdrop of the Mutual Funds performance over the years. Over the years, their NET RETURN to the investor has been very poor. In the circumstances, SEBI intervening to protect the interests of ULIP investors is timely. IRDA has been a regulator, but not very investor friendly. Insurance funds have especially been fleecing Investors in different names. Their return to investors is very, very dismal. Their only excuse is - it is insurance, therefore do not expect much return. This does not wash. They must reduce their charges and improve their efficiency. Investors must get better returns than at present. Private insurers are still worse.I wish SEBI has a role to play when ULIP funds are invested in the Market.IRDA must have a role to play when Insurers fix premium amounts and final benefits.But, IRDA must ensure thatv the charges are reasonable.



May 1, 2010





Jagadeshwer Rao

May 1, 2010

It is by now very well known that in India, ULIPs are grossly missold to the gullible investors. MF industry has been worst sufferer of all this for the last 2 years. I strongly feel there must be a level playing field between MF schemes and ULIPs. Whatever may be the outcome of this murky imbroglio, at the end of day, Investors would be benefited because of increased transparency and improved disclosure norms that would follow this episode.



May 1, 2010

Since a very large part of investment goes for shares, the control should be with the SEBI. Due to very incentive payment by ULIP's there is extreme pressure from brokering community which is unseemly.

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