Should the government have the same gold policy as yours?

May 6, 2011

In this issue:
» Is the commodity 'bubble' bursting?
» Investors read too much into quarterly numbers
» Indian banks losing business as per RBI
» Osama's death renews faith on dollar dominance?
» ...and more!

----------------------------- Get FREE: The Guide to Gold -----------------------------Will the gold prices keep rising in the future too?

Is it better to invest in gold or stocks? ...

'Gold Bug' Bill Bonner, answers these questions for you in the exclusive publication - The Guide to Gold

Quick! Sign up for our FREE newsletter, The Daily Reckoning and get this Guide FREE!


Gold has caught the fancy of every investor. The yellow metal's 'safe haven' status has attracted every investor towards it. Investors are also attracted to the dazzling yields that the metal has delivered in recent times. By this account it would make sense for the governments to invest in gold as well. After all, gold would be a good way for them to deploy their reserves to earn higher yields.

But in reality, not all countries follow this policy of investing in gold. If one goes back in history, United Kingdom in fact sold its gold reserves in 1999. This had led to a huge decline in gold prices at that time following which central banks agreed to restrict their sales. Though one might think that UK was wrong in selling its gold, it however remains to be an asset that is not of much use for the government. There are several reasons for this.

Government reserves and funds are maintained for precautionary purposes. For example these funds are built to intervene in currency markets at times of currency adversities. The government can use its reserves in the global markets to support falling prices of its currency. If the government chooses to use gold for this, it would not be advisable as selling gold would just lead to a decline in the asset's global prices and not help the country in stabilizing its currency. Another reason that could be cited for holding gold would be to link the national currency prices with the gold prices. This would again not make sense especially for the richer and more developed countries.

However, countries like India and China have been expanding their gold reserves. They say that they are doing it more as precautionary reserve and not for the purpose of trading in gold to earn returns. Thus it would really make sense to hold gold only to the extent it acts as an insurance against currency devaluation and not as an investment.

For the retail investors too, gold can be an important investment as well as a hedge against inflation. But the extent of investment in the yellow metal in one's portfolio should not be disproportionate to fixed return investments and stocks.

Do you think the Government should keep building its gold reserves? Share your comments with us or post your views on our facebook page.

 Chart of the day
Continuing our discussion on holding gold, today's chart of the day depicts the sharp increase in India's gold reserves. For several years, (1998 to 2008), the country had held approximated 358 tonnes of gold. However, in 2009, it decided to hike its gold reserves. Its holdings were bolstered by the 200 tonnes of gold that the country purchased from IMF (International Monetary Fund) for a value of US$ 6.9 bn. The country now holds 658 tonnes (in 2010) of gold.

Data source: World Gold Council

Commodity as an asset class has had a dream run for more than a year or so. Be it any commodity for that matter. However, the recent week saw a huge correction in commodity prices. Silver prices declined due to increase in margin requirements by the exchanges to curb speculation. Even oil prices fell by more than US$ 10 in a single day amidst weak macro-economic data and increasing jobless claims in US. Further, appreciation in US dollar pushed the prices of dollar denominated commodities lower. Basically the entire commodity basket got clobbered for multiple reasons. But is this a signal towards culmination of a long standing commodity asset price boom? Well, we believe otherwise.

Looking at the reasons for the recent correction in commodity prices one could easily make out they are temporary in nature. For instance, if US reports positive macroeconomic data for next week oil prices could rise in anticipation of increased demand. Again we know that commodities typically exhibit low correlation with equities. Thus, in the current environment commodity as an alternative asset class is more preferable than equities. This means that the demand is here to stay and further rise in prices cannot be ruled out. Hence, we believe that the recent correction is more of a breather rather than a genuine pullback. May be, the peak of this commodity price bubble is far higher than our imagination.

Stories that most investors tend to be irrational keep doing the rounds. And if one has spent a long enough time in the financial markets, one would certainly come up with a good amount of evidence on the same. However, in terms of sheer size and scale of irrationality, nothing beats the carnival like atmosphere of the quarterly results. No sooner do results come out that number crunching amongst analysts begins in all seriousness and stock upgrades and downgrades follow.

The most recent March quarter has been no different. Already, 140 of the BSE 500 companies have announced their results and the verdict over which stocks need to be discarded and which ones to be lapped up also seems to have been passed. At the end of this huge exercise though, there is a question that begs itself. Does all of this really make sense? Certainly not we believe. Investing should be viewed from a long term perspective. One should not change one's mind and jump ships just because the most recent quarter has been bad. If the company's fundamentals are good, it will certainly reward its shareholders in the long term. After all, doesn't Benjamin Graham, the father of value investing say that investment is most intelligent when it is most business like? And business owners certainly do not fold up and change their business models on the basis of just one bad quarter. Shareholders like you shouldn't do it either.

The past few days have been quite disturbing for investors in the banking and financial sector. Now, it is not that the March quarter and financial year 2011 (FY11) results declared so far have brought in too many negative surprises. But ever since the RBI (Reserve Bank of India) declared its aggressive monetary policy stance, the upsides to the sector's near term profitability have been capped. To top that the latest guidelines from the central bank are also expected to have some meaningful impact on the fundamentals of the sector. The rise in savings account rates and change in provisioning norms may have just temporary impacts. But factors like striking off NBFCs from priority sector loan classification will certainly create a more level playing field for banks. The benefits of the same will, however, filter in only in the long term. Meanwhile, the growth target in advances and deposits for financial year 2011-12 has been set at 19% and 17% YoY respectively. However, if one looks data for the first few days of the fiscal, the numbers are in the negative. We believe that the markets are reading too much into the short term prospects. While growth numbers for the first quarter typically tend to be muted, they pick up in the latter half. Hence investors would be better off focusing on longer term trends.

The Osama Bin Laden operation was a very bold step by the US. Which country in the world can just barge into another country for a secret operation without even keeping the latter in the loop? Only the US can do that. It is the only country that can randomly go to war with any country at will. That talks a lot about its political and military might. It is without doubt the reigning global superpower so far.

A certain gentleman called Steve Cortes has drawn an interesting parallel between military and currency might. He says that since the US army is the strongest and most unrivaled, the dollar would also continue to remain the world's reserve currency. He points that historically, the country with the strongest currency has always been the reserve currency. Well, that's logical and true. It goes without doubt that politics and economics are intricately woven in to each other.

But let us not ignore the fact that the US economy is going through a major economic turmoil. And mind you, it's not a cyclical downturn but the beginning of the end of a century long hegemony. US' deficits are widening to insane levels. The damage cannot be repaired without significantly lowering the American standard of living. And as its economic clout subsides, its political dominance may also mellow down.

The Indian stock markets continued to trade above the dotted line. BSE Sensex was trading up by 204 points (1.1%) led by gains in stocks like ICICI Bank and Tata Motors. However, Asian stock markets closed the day in the red

 Today's investing mantra
"Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks." - Warren Buffett

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 "Should the government have the same gold policy as yours?". Click here!

6 Responses to "Should the government have the same gold policy as yours?"


May 9, 2011

I would say "YES" because in the coming years or say about coming centuries, due to the wrong economic planning and activities the so called paper currency would become worthless, although whatever economic solutions are being implemented to maintain the value of paper currency. In such eventuality, that would spread all over the world in the near future, the Gold is the only best suitable item through which wealth can be measured!



May 7, 2011

No, the present prices of Gold are too high.However,on declines the govt, should increase its reserves of Gold and Silver


Ravindra S Bawaskar

May 7, 2011

Dear Sir,
My personal view is RBI should increase their reserves in gold with so many money scams already leading to increasing worries of RBI, being simple NRI everybody looks to-wards INDIA as a safe place to retire with assured returns which banking sector should take care.specially remembering the good old days when INDIA was a gold country & where that glory went to?.


DC Sekhar

May 6, 2011

Yes, the Government of India should consider an increase in gold reserves to 8-10% of the total reserves. It should be done without impacting the international prices of gold w/o much hype. There is a need to emphasise that it is not for investment purpose so that the speculation is minimised. It is important to strike deal at a right time. The range of gold reserves can vary from 5-10% in long run depending on the scenario of global economy and for preserving the value of reserves. The cycle can stretch upto 20 years.



May 6, 2011

Once in India Gold Coin was using as currency and that currency was costing 16 Rupees only at that time the same coin I was purchase from a gold smith in Mumbai at the rate of 1500 rupees in 1980 I think so. At present its cost I con't imagin.



May 6, 2011

india has not that gold which china has.thanks to all gold etf who has marketed of gold schem.only reliance mf has started to market gold by only rs. 100.00 monthly sip


Equitymaster requests your view! Post a comment on "Should the government have the same gold policy as yours?". Click here!