Absolute non-believers in Gold turn believers!

May 8, 2010

In this issue:
» Increasingly, value investors are buying into the gold story
» It is time trading programs are abandoned
» Government to get Rs 840 bn bonanza from the SC verdict on gas feud
» EU leaders to set up a fund to tackle the crisis
» ...and more!

---------Only for Equitymaster subscribers! 100% FREE subscription to The Daily Reckoning ----------
Now you can read what knowledgeable investors across the globe read every single day - for global market analysis and investment ideas. Yes, we are delighted to bring you The Daily Reckoning, a daily financial e-column by Bill Bonner, Publisher and Editor, and three-time New York Times best-selling author. As one reader put it, Bill "makes more sense in one e-mail than a month of CNBC". The Daily Reckoning is published every day in 3 languages from offices in 6 countries - US, UK, Australia, France, Germany, South Africa. Now, it's India's turn...And your turn to get it for FREE! Click here

Gold is real money, it is real wealth, feel a lot of financial experts. However, there is a group of investors out there who are not particularly known for their love for gold. This group answers to the name of value investors. Infact, Warren Buffett, the most renowned member of the group even went to the extent of saying that gold has no utility. It is dug out of the ground in Africa, or someplace and then we melt it down, dig another hole, bury it again and pay people to stay around guarding it. This comment was made quite some time back. And there are no indications that Mr. Buffett has had a change of heart with respect to gold.

However, the gold mania seems to be catching up with some of the other renowned members of the value investing clan. Atleast this is the impression that we got after listening to the news flow coming out from the Value Investing Congress, which is underway in New York currently. In sharp contrast to the earlier trend, quite a few presentations in the congress were centered on gold.

Infact, Lloyd Khaner, a prominent value investor even titled his presentation as why some of the best value investors own gold. Khaner added that while gold supply is decreasing, there are new buyers like central banks coming up in the market. Furthermore, he also observed that gold had value even if it did not appreciate. As per him, it is the last currency standing as you cannot print more.

We cannot help but agree with Mr. Khaner. Gold seems to be the perfect hedge against currency devaluation, the threat of which is perhaps the highest than it has ever been. Thus, if you haven't invested in gold yet, it is time you made it a small part of your portfolio.

 Chart of the day
The fiercely contested Reliance saga may have come to an end but not before causing some curious churn in the market cap of group companies. As today's chart of the day shows, the SC verdict seems to have made the elder brother's company shareholders rich by as much as Rs 75 bn. Incidentally, the wealth that the younger sibling's shareholders lost in the companies that had a stake in the gas feud was pretty similar. In all, the SC verdict made them poorer by Rs 77 bn. Clearly, one man's gain has turned out to be another man's loss.

Source: CMIE Prowess

The Supreme Court verdict in the RIL-RNRL case will fuel investments in the power sector. This is what some players in the power sector believe. "If the gas is available for various other developers then I am sure it will encourage people to set up more gas-based power plants," says one executive from a leading power producer.

Earlier, the Supreme Court ruled that government was the authority to determine pricing and utilisation of natural gas. This is given that, as per the court, this gas is a national asset. The court rejected the younger Ambani's (RNRL) plea for cheaper gas to its power projects from Reliance Industries. This original deal was on the basis of a family pact. Truly, the biggest family duel in the history of corporate India shows no signs of ending anytime soon!

The Greek crisis has shaken the core of the European Union (EU). Now,the EU leaders are looking to set up an emergency fund to halt the spread of the contagion to other countries within the region. The idea is to defend the Euro that looks shaken by the crisis. Europe's failure to contain Greece's fiscal crisis triggered a 4.3% drop in the Euro this week! The size of this emergency fund is not yet known. But given the scale of the crisis, it is expected to be another huge sum of money.

Die robot, die! The screams are getting louder. It is time to end the rule of the computers who have taken over. No, we are not talking about the climax of a sci-fi movie. It is happening in real life. On Thursday, the Dow crashed almost 1,000 points during the day before recovering. The largest points drop ever. The reason - computerized trading went berserk. It has happened in the past. In 1987, when computers had trigged a similar sell-off in the US.

Capital markets seem to have forgotten their basic purpose of existence. Their role is to raise capital for businesses and subsequently create a market for shares to change hands. But that's just a side show now. The finance and computer wizards have taken over. Complex trades, backed by financial engineering and computer engineering, is where the action is. The result - the financial meltdown and now the largest intraday crash in years.

It is high time markets rediscovered their original purpose - help entrepreneurs and genuine investors. Regulators must start working on restoring that purpose. In our view, some sort of a lock-in period must be introduced. Ultimately it's the short term crowd who bring much grief on genuine investors. It is time for the trade-per-nanosecond robots to die.

There is a gentleman named Robert Wiedemer. There are chances that you may have not heard his name. Frankly speaking, neither have we. But if one's first book has accurately predicted the recession that began in 2007 and the second book has been named as one of the best investment books of 2009 by a prominent magazine, one's views are definitely worth listening to. And this is exactly the claim to fame of Mr. Wiedemer.

Mr. Wiedemar spoke to a leading business channel recently and opined that the debt crisis that is disturbing Europe right now will ultimately affect the United States. "It is inevitable. That doesn't mean it is inevitable tomorrow or next month, but certainly over the next two years if not sooner," he is believed to have said. He also took potshots at the US Fed's expansionary policy and observed that the US will not be able to escape the scourge of inflation as there has been a huge three-fold increase in the monetary base of the United States. So there we have. Another financial expert who is extremely bearish on the prospects of the US economy.

So, who won in the Ambani vs. Ambani fight? Well, we are not going to take sides - it is the government that won. You see, it's been a fairly established principle that oil and gas belongs to the sovereign state. That is why energy companies around the world are operators or contractors on oil and gas fields. Not owners. In return for mineral rights, governments get royalties. The Supreme Court's decision upholds this principle. The government has the right to determine the price of the gas, which it has done at US$ 4.2 per British thermal unit. As a result, the Indian government will get revenues to the tune of Rs 840 bn from the entire life of KG basin gas. Had the judgment gone the other way, it would have meant a lower price of gas and affected the government's revenues. As for consumers of gas like power and fertiliser plants - they would be happy that they will get the gas, even if at a higher price.

The past week was a negative for the world markets as all key global indices closed in the red. Europe was the worst hit because of mounting concerns that Greek debt crisis would spread to Portugal and Spain. France was the biggest loser of the week globally while UK and Germany fell by 7.7% and 6.9% respectively. US markets closed with a fall of 5.7%.

In Asia, India closed the week with a decline of 4.5% while China fell by 1.2%. Singapore and Hong Kong markets fell by 5.2% and 5.6% respectively. The biggest loser in Asia was Japan with a fall of 6.3%. Brazil ended the week down 6.9%. Gold was the only asset class that stood tall amidst the ruins, edging higher by 2.4% during the week.

Source: Yahoo finance, Kitco, cnnfn

 Weekend investing mantra
"Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes." - 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 "Absolute non-believers in Gold turn believers!". Click here!

6 Responses to "Absolute non-believers in Gold turn believers!"


May 9, 2010

If Valueinvestors are looking at GOLD -- then this is a warning signal that the worst is still ahead of us. I think GOLD is an emotional asset and it price is pure perception. The fact that Gold jewellery sales are down by 50% is an indicator that gold is getting out of the reach of the common man...not a healthy indiactor for long term investment in gold.Please post more info about this conference...good job.



May 8, 2010

Effective and informative article


Aniruddha Sengupta

May 8, 2010

I read your 5 min wrapup regularly and usually agree with most of what you have to say, though one particularly sore area is your views on Gold. We'll leave that for another day. Let me take this opportunity to congratulate you on your synopsis of the RIL-RNRL battle, about which the media at large, has gone wrong completely, but you managed to summarize succintly in less than 50 words. Kudos!



May 8, 2010

Your comments are not very atteractive.It is just like news reading.No suggetion which stock to accumulate and which to sell.


Anupam Garg

May 8, 2010

DIE ROBOTS DIE PLEASE! spot on article...its high time we place a limit to artificial intelligence, lest we want the terminator to take over



May 8, 2010

an excellent read

Equitymaster requests your view! Post a comment on "Absolute non-believers in Gold turn believers!". Click here!