Has Warren Buffett found his challenger on gold?

May 31, 2012

In this issue:
» Are we at the end of commodities super cycle?
» FIIs seem to be piling onto power stocks
» Nassim Taleb prefers Europe over the US
» Mumbai commercial realty in for some tough times
» ...and more!

----------------------------------- It's Now or Never: Our Best Research at Rs 499 -----------------------------------

It's our Best Research that we are talking about here. Its usual price is Rs 2,450.

But today, you can sign up for its trial at just Rs 499.

Plus you will also get our last 5 Buy recommendations Absolutely Free.

Now there's a catch - This offer is valid only till 5 pm today. And since it's a trial offer, we can almost guarantee you that you will never see this offer ever again!

So Quick! Click here for complete details Now...


If you short the stock of a firm, how long would you be willing to wait for your thesis to come true? One day? One week? One month? In fact, one year would look like an eternity. Now what if we tell you that a hedge fund manager is believed to have waited for as long as six years for his prediction to come true? Shocking, isn't it? Not for nothing is David Einhorn known as one of the most pugnacious and successful hedge fund managers in the world. Indeed, his story behind the shorting of a firm called Allied Capital is a case study in dogged determination and painstaking research that every investor would do well to follow.

His shorting tendencies aside, David Einhorn can certainly be called a value investor at heart. But of a different kind than someone like Warren Buffett. For unlike the Oracle of Omaha, Einhorn does prefer to invest in gold. Infact, in his latest shareholder letter, Einhorn is believed to have taken a dig, and a nasty one at that, at Buffett's abhorrence to gold. Einhorn writes that over the last few years, he has come to doubt whether cash will serve as a good store of value. He further adds that if you wrapped up all the $100 bills in circulation, it would form a cube about 74 feet per side. If you stacked the money seven feet high, you could store it in a warehouse roughly the size of a football field. The value of all that cash would be about a trillion dollars. In a hundred years, that money will have produced nothing. In a thousand years, it is likely that the cash will either be worthless or worth very little.

Well, the above argument looks shockingly similar to one used by Buffett against gold, isn't it? So, who in your view is correct? Should an investor accumulate wads of cash for giving to his progeny or should he pile up gold? If it is only between cash and gold, there's hardly any competition we believe. Gold is likely to win hands down for its demonstrable track record of preserving value over the years.

To be fair to Buffett though, his argument wasn't against gold and cash but more about gold and other productive investments like equities and farmlands. Agreed that gold may not have the same upside as world class equities and farmlands. But one should be willing to give up some of this upside in order to earn the protective power of gold. For if economic activity goes for a toss for years on end, one does have the value preservation power of gold to fall back on. In view of this, it will do us no harm to have a small 10%-12% of our investments in gold at all times.

Do you agree with Buffett that one's investments should fully comprise of productive investments only? Share with us or post your comments on our Facebook page / Google+ page.

 Chart of the day
Today's chart of the day highlights why the Government is so eagerly eyeing cross border transactions. As per the chart, collections on cross border transactions have witnessed a healthy growth in the past few years, crossing Rs 274 bn in the most recent financial year. This is not all. As per reports, the Government seems to have already identified 11 offshore deals with capital gains liability with the finance ministry hoping to rake in no less than Rs 150 bn. Looks like international taxation is indeed the Government's new target to plug its gaping deficit hole.

Source: Financial Express

We all know that demand for commodities is cyclical. For about 200 hundred years, commodities have followed a broad pattern. They tend to rise for about a decade followed by two decades of decline. If this pattern is any indication, it is most likely that the commodity super-cycle has come to its end. The commodity super-cycle of the last decade was heralded by the massive investment-driven growth of China. The dragon nation's colossal appetite had blown commodity prices off the roof. But the world economy has gone through a sea of change over the last few years. The developed economies are gripped with problems of high sovereign debt and slowing economic growth. In recent months, China is also showing clear signs of cooling. Its commodity-intensive growth phase is nearing its end.

Does this mean that we're gearing towards two decades of commodity decline? This is impossible to predict. But the decline seems certain nonetheless. Commodity-rich economies such as Russia, Australia and Brazil may not be able to enjoy the kind of windfall gains they did at the height of the commodity boom. But lower commodity prices would certainly benefit an economy like India, which has been enduring high inflation for quite some time.

The Mumbai realty market has been struggling for quite some time now. As prices have shot up, demand has waned and so absorption (in other words occupancy) has also taken a beating. But that has not stopped developers from building more space. Office space is a classic case in point. Demand for commercial realty has taken a dip but reports suggest that there has been an increase in occupancy levels in the first quarter of 2012.

Does that signal a recovery? Not really and there are many reasons for the same. For starters, nearly all deals in 2012 so far have been in the pipeline for a long while with no new deals taking place. Further, 30 m sq feet of office space is likely to be added even though there is already a supply overhang. Office rentals have plunged and are now around one third of what they were 3 years ago. This has been on the back of an oversupply of 85 m sq feet and a fall in demand by 30%. Unsold inventory, huge debt and falling demand from corporates have also pushed developers into launching affordable offices and attractive schemes.

Despite this, occupancy has not really gathered pace as renewed concerns of a recession in India has resulted in corporates adopting a 'wait-and-watch' policy. What is more, although rental yields have been lower than fixed deposits, capital value of properties continues to remain high. This has largely been on account of black money. Thus, overall commercial property developers will most likely face some challenging times ahead.

It would not be wrong to say that the power sector story in India is one of torchbearers of the 'India growth story'. The advocates of this story would be bullish on the growth opportunities of the sector given the wide gap between supply and demand. However, while opportunities abound, stocks forming part of the sector have not really been the favourites amongst investors in recent times. The sector's highly regulated nature coupled with coal supply related issues have been causing problems for the companies for a while now. The BSE-Power Index has underperformed the BSE-Sensex significantly over the last year. The situation has been similar over the past six months as well.

However, it is believed that foreign investors have been using such opportunities (anticipation of action from the government on coal front) to buy into stocks forming part of the index. As per a leading business daily, 11 out of 13 listed companies related to the power sector witnessed a rise in their FII holdings during quarter ended March 2012 over the preceding quarter.

Which one do you choose between the devil and the deep sea? Well, investors must do with such precarious choices in difficult times. And here the only option is to settle for the better amongst the worst. Nassim Taleb, author of 'The Black Swan' believes that the choice of investing in Europe versus the US is as much a black hole moment. The probability of each of the economies going down under is high. However, given a choice, he would rather settle for investments in Europe than the US. The latter's inferior deficit situation and centralized government worries Taleb. He believes that despite some pockets of pain, Europe is a relatively safer place to be for investors. No doubt after the eurozone breakup some currencies will be left without much value. But it seems that the others will fare much better than the US dollar as higher interest rates could drag the US' growth and deficit situation into worse consequences. We do agree with Taleb's logic of preferring Europe over the US. However, we wonder why investors would have to make such a choice. Especially when there are far safer investment options in Asia!

Meanwhile, indices in the Indian equity market traded weak right from the beginning today with the Sensex perched around 160 points lower at the time of writing. Heavyweights like ICICI Bank and Reliance Industries Limited (RIL) were seen forming a significant portion of the decline. Most stock markets in Asia closed lower today with Europe trading mixed currently.

 Today's investing mantra
"Superior investors make more money in good times than they give back in bad times." - Howard Marks

Today's Premium Edition.

Today being a Saturday, there is no Premium edition being published.

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 "Has Warren Buffett found his challenger on gold?". Click here!

3 Responses to "Has Warren Buffett found his challenger on gold?"

Gangadharan Nair

Sep 29, 2012

Warren Buffett will be RIGHT where ever the Gold Standard is in force, where the investment on Gold will not fetch any return. Otherwise everybody will play with gold also. Country like India where the price of Gold has gone up by 500 times in 48 years making the GOLD as the best investment port folio.


Neeraj Goyal

Jun 11, 2012

never... productive assets are far far better than gold.
so called security that gold offers, will remain only till the time mankind believes in so.
the time mankind realizes uselessness of gold, it will lose all its value and then so called security or protectiveness will disappear all of a sudden!!!



May 31, 2012

What is the scam happening in NFCL?

They have demerged the oil refining business and hence shareholdres of NFCL have got shares in Nagarjuna Oil Refinery. So far so good.

Next, NFCL has been reversed merged into Kakinada Fertilisers and IKisan. Further the merged entity has been renamed NFCL. But at what cost. The face value of 10/- of the original NFCL has been reduced to a face value of Re 1/- in the new NFCL, with an extra 10% shares thrown in.

So if you has 1,000 shares og original NFCL last year, you will now get 1,000 shares of Nagarjuna Oil Refinery of face value Re 1/- (quoted yesterday at Rs 6.50) and 1,100 shares of new NFCL of face value Re 1/-. This new NFCL has not been qi=uotes as yet as SEBI has still not given approval.

It appears this scheme was done to increase the promoters stake (read "Owners of Nagarjuna Fertilisers and Chemicals to use circuitous route to raise holding" of Economic Times June 21, 2011) for just 30 crores as against the 175 crores they would have to shell out if done through the market.
Some CA firm called Grant Thornton has done the valuations upon which this scam revolves.

BSE took almost one year to pass this ridiculous merger scheme where minority shareholder value is being destroyed. How did it pass it? Now the ball is with SEBI. They have okayed Nagarjuna Oil Refinery for trading but not cleared new NFCL so far. How much money is exchanging hands? Why are questions not beinmg asked in Parliament or on TV programmes about this naked loot and cheating of the minority investor.

Sad that the Raju's are just another one of India's notorius robber barons whose use public shareholders money to further their own interests. As per the article Raju's have upped their stake from 38% to 51% and screwed minority investors in the process.

Equitymaster requests your view! Post a comment on "Has Warren Buffett found his challenger on gold?". Click here!