Why are these investing legends holding on to gold?

Jun 15, 2010

In this issue:
» Big Bull remains optimistic on the India story
» Some Indians getting richer...and many poorer
» Inflation rises - All eyes now on the RBI
» Chinese auto cos. eyeing India base
» ...and more!

------------------------------------------ Don't Miss ------------------------------------------
Our special report, Multibagger MidCaps, is available only till 11:59 PM sharp on the 18th of June i.e. only for a few more days.
We don't want you to miss out on the opportunity to make exciting returns from these high-potential Midcap stocks and hence this reminder.
We recommend you grab this report immediately. Read on for full details...

Gold has been on a tear over the past few months. And now investors seem to be in double minds - whether to buy more or sell part of existing holdings. This question crops up in case of any asset class that has seen a sharp rise in a short time. And gold isn't any different.

So, what can you do with your gold now? Sell, or hold?

If we were to take cues from a couple of investing legends of the current times, the second option carries more weight. We are talking about Jim Rogers and Marc Faber, who are holding onto their gold, tightly! These guys, unlike US Fed's Ben Bernanke, are not confused at gold's surge. And they both say they have no intention of selling their holdings, and are always on the lookout for dips so they can acquire more.

The biggest reason Faber and Rogers are holding onto their gold is that governments across the world are getting deeper into debt. What this means is that they continue to print more of their own currencies, which has the potential to lead to massive currency depreciation and inflation in the future. They rightfully understand that these governments have become addicted to these practices even more than in the past. And it's not sustainable by any stretch of the imagination!

So taking these factors into account, both Faber and Rogers are counting on gold to continue to move upward in price. This is notwithstanding any temporary correction that can take its price lower for a short while.

See, gold will enter a bubble phase only when its price goes up to unrealistic levels for no clear reason. And there are many reasons to believe now that this situation won't happen until far into the future!

So, are you a gold buyer now? Share with us.

Anyways, moving on from gold to stocks...'Big Bull', Rakesh Jhunjhunwala, remains as optimistic as ever on the India growth story. Speaking to a leading business channel recently, he opined that the Indian markets are likely to outperform from a 2-3 year perspective. The outperformance, according to him, would stem from the inability of the western countries to grow strongly on account of their huge deficits. Besides, the western countries are also grappling with an ageing population, factors that would stack the odds overwhelmingly in favour of India. However, he was quick to add that it is not going to be a smooth sailing for the markets. He believed that whatever happens in the global markets will also affect India. But on an absolute basis, India will still be able to outperform. As far as the most immediate concern is concerned, he believed that monsoon remains the key.

We couldn't have agreed more especially on the first point. India's relative insulation from the global economy would mean that the Indian growth story would continue to chug along nicely. However, Indian stocks could get affected due to global volatility as even though we may not be connected economically, we are indeed very closely intertwined with the global capital markets.

Forget the economic crisis, the count of millionaires has limped back to the pre-crisis levels. As per a study conducted by Boston Consulting Group, the number of millionaires in the world increased by 14% in 2009. This comes after a 14% decline in the count in 2008. The number of millionaire households around the world currently stands at 11.2 m. Further, global wealth has increased by 11.5% in 2009 as assets under management (AUM) increased to US$ 111.5 trillion. This was very close to 2007's record level of US$ 111.6 trillion.

Well, we do not have any specific data for India from the report. But one interesting fact thrown up is that India and China together are expected to make up 75% (around US$ 9 trillion) of the increase in AUM in the Asia Pacific region over the next five years!

 Chart of the day
Today's chart of the day is in contrast to the note above on India gaining more ground in the global millionaire rankings. The chart shows India's continued poor track record in providing the most basic necessity to citizens - food! As measured by the Global Hunger Index, India's index stood at 23.9 in 2009. While this was an improvement over the index of 31.7 in 1990, the record is worse as compared to peers like China, Brazil and South Africa. Even the hunger ravaged Sudan and inflation hit Zimbabwe score better than India! Do we say any more of the country's human development performance? It's really sad!

Source: Wikipedia

Food prices had barely shown some signs of cooling off. But before that could have an impact on overall price levels, inflation has reared its ugly head again. And this time the culprits are commodities like iron and steel. Higher growth in demand from infrastructure and construction sectors seems to have pushed up the prices.

At 10.2% in May the WPI (wholesale price index) is much higher than 9.6% recorded in April 2010. Liquidity has been tight lately due to high 3G license fee payments by telecom companies. Also, advance tax payments have contributed to the drying up of liquidity. With these the RBI seems to have little option but to tender price control measures. Bankers too have vouched for a rate hike to control the liquidity situation. It seems that that the upcoming monetary policy review will have many questions to answer.

The Indian auto sector has grabbed the attention of the world. Presently it is the second fastest growing market after China. With global auto companies seeing muted demand in their respective regions, they all seem to want a piece of the action. The latest buzz is of Chinese auto companies looking to set up base here in India. This includes auto ancillary companies as well. Apart from launching vehicles and products, they also plan to use India as an export hub. And the possible rationale - India's ability to produce quality products at low costs! This development is definitely an indirect acknowledgement of India's ability to produce quality products.

The volatility in the financial markets intensified about six weeks back. This was triggered by rating agency S&P's move to cut its rating on Greek debt to junk. Moody's has followed suit and has now cut its rating on Greek debt to junk. With this, it has declared Greece's credit quality as 'questionable'.

This comes even as Greece is trying to implement fiscal austerity measures and structural economic reforms that seek to reduce its debt burden. But rating agencies evidently do not seem to have too much faith in these attempts. If Greece were indeed to default, banks and other institutions could face huge losses. It will also have a domino effect, wherein the cost of borrowing for other Euro zone countries will go up. This could in effect trigger even more defaults by other countries like Spain and Portugal who also have shaky finances. While rating cuts such as these are not always accurate signs of things to come, they do serve to add to the level of anxiety in financial markets!

Indian markets traded with some volatility today. The BSE-Sensex was up around 40 points (0.2%) at the time of writing this. Gains are being led by stocks from the FMCG and power sectors. Yesterday's lead gainers, IT stocks, are however trading in the red. Among other key Asian markets, China and Japan closed with gains of around 0.3% and 0.1% respectively.

 Today's investing mantra
"If you want to have a better performance than the crowd, you must do things differently from the crowd." - Sir John Templeton

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 "Why are these investing legends holding on to gold?". Click here!

26 Responses to "Why are these investing legends holding on to gold?"

Capt Brian Fernandez

Jun 16, 2010

Yes I am heavily into gold but not in a direct way. I have invested in the DSP World Gold Fund which tracks only gold stocks. Will it be better to sell now at a high and shift to Gold ETFs? Do the gold ETFs actually hold the gold which they claim to have? Will they suddenly say one day that they did not buy the gold as the price was too high or something like that?


kaushal kishore jha

Jun 16, 2010

no purchase gold present market situation.



Jun 16, 2010

I agree to the fact, in the near future gold would be a right investment option. Considering Indian tradition gold always played as an asset worth remain invested both in material and paper form. I have started investing from January 2010 in Gold ETC.


Pradeep Kumar

Jun 16, 2010

Gold can be the blessing and death of countries. Sometime back, i read an interesting alternate theory which propounds that if Indians were to sell or pledge all the gold to a central fund
Pramod, being a fellow mallu i would recommend you please stop the SIP in physical gold with the jeweller, its one of the biggest frauds in terms of price that you will pay. I have bought gold ETF's and i find the price difference between physical gold and ETF's pretty huge. ALso, selling physical gold, even if it is in coins /bars is quite difficult as jewellers or bankers find excuses to avoid buying it. Sorry if you find the advise unsolicited.



Jun 16, 2010

Sir can we have THE HONEST TRUTH,
The Economic crisis never affects the millioniares. You would do well to check the % of people who were pushed down from middle to lower middle & lower middle to poor & even below the poverty line. Bill Bonner says USA is a fraud economy, I think India is no different. All govt. worldwide are in a manipulation mode so as to not cause a panic, for the financial blunders committed. So let all investors beware of any economic numbers given out by govt. By the way LIC(which suppoprts Indian mkts.) buy numbers are never put in public domain. Is there a RTI possible in this case in public interest? Would you care to throw some light on these matters.



Jun 15, 2010

accumulating gold is the only sensible option.sooner or later all these govts are going to be in deep trouble.every where there is wasteful expenditure and to meet it the govt doesnt tighten up the process of expenditure ,it prints more money!! all kinds of freebies and vitually no accountability of the officials are the norms to win elctions . long live democracy! dictatorship will be ten times worse.so grab as much gold as you can !!


rakesh taneja

Jun 15, 2010

every one wants to follow leaders of the trade i.e jim and mark but to my mind value investing goes with agricultural land as it is the only thing which will always have value and will give fruit of return. food items with rising population will always be a challenge this century.gold value may appreciate /depricaite with demand and time



Jun 15, 2010

It has been around for over 5000 years compared to 350 years for the longest existing paper currency Pound.Most Govts including USA and Germany have defaulted...USA in 1972 by going back on Gold standard.Given the developed world debt in 10 to 25 years most of these indebted nations..South Europe,Japan and then USA will default.And finally go on to confiscate and ban private Gold holdings in 10 to 25 years time.So,buy physical gold and not the paper ETFs.


Yogesh Desai

Jun 15, 2010

yaa i am buying gold and continue to do it on every deeps. as you suggested i have started buying silver as an investment.
i like thse commodities becuase they will surely appreciate in value in time as there are limited sources of them on earth and we cant produce them.. so i see the demand will continue to rise with not much rise in its supply causing higher and higher prices of them in future.



Jun 15, 2010

Re Greece's rating cuts, are you implying that the Rating agencies rate it higher than Junk just to avoid the chaos it creates despite its being default grade?
Then the others will complain that the Rating agencies are not doing their job properly (as when giving AAA grade to the junk CDOs that Goldman and Lehman sold?)

<<Prev    Next>>
Equitymaster requests your view! Post a comment on "Why are these investing legends holding on to gold?". Click here!