Gold could soar another 4,300%

Jul 22, 2010

In this issue:
» A crash in Chinese stocks is imminent
» Three Indian infra projects among world's best
» Banks face US$ 5 trillion credit shortfall
» The slowdown looks downright frightening, says Grantham
» ...and more!!

Bubbles happen across a wide variety of asset classes. But they do share quite a lot of common features. One of those is indeed psychological. Investors become so blinded by the huge run up in price that they start having complete disregard for traditional valuation measures. And consequently, even extremely absurd prices seem justifiable.

Take the case of Gold? There is no doubt in anyone's mind that the yellow metal has been on a tear the past few years. And people wanting to jump in on the Gold bandwagon will come up with umpteen theories to justify excellent returns that lie ahead. Such theories have indeed come dime a dozen. But the one that we would like to highlight really takes the cake. A financial portal has put the fair value of gold at, hold your breath, US$ 52, 381 an ounce! This is a whopping 43 times more than the current price. For an Indian buyer, this is equivalent to nearly Rs 8,00,000 per 10 Gms of gold.

The reasoning behind this is pretty simple. If the world were to move back to the gold standard, all the US dollars will have to be converted into gold. The US currently has 13.8 trillion dollars in circulation whereas it admits to having only 261.5 m ounces of gold. Thus, there is US$ 52,381 dollars worth of currency behind every ounce of gold for the US and this thus would be the fair price of Gold.

The argument made in the above example is very simple. And the real world is indeed very complex. But there is no denying the fact that even if one tenth of the target were to be achieved, we are still far away from the peak price of gold. Furthermore, with the amount of money printing happening, the peak price will keep getting higher and higher. Hence, gold may not go up 43 times from here, but it can still give very attractive returns.

Note: You can now learn more about derivatives on Equitymaster! That's right! We now offer you both views and tutorials on derivatives. This is yet another effort to empower you with credible information and views, dear reader. We hope you will make the most of it!

 Chart of the day
It seems to be the season of big bang IPOs in two of the fastest growing economies of the world, India and China. The dragon nation recently brought to the market a multibillion dollar IPO in the form of Agricultural Bank of China. In fact, its size dwarfed not only the IPOs in China so far, it went on to become the biggest ever IPO in the world. India too is planning to come out with its biggest IPO ever as it looks to list the world's largest coal producer, Coal India Ltd. However, as today's chart of the day shows, the size of the Coal India IPO, thanks to just 10% dilution, does not even come close to the biggest IPOs in the world. Just as in other spheres, India will have to wait a bit even here before it can close the gap with China.

Source: The Economist

We've often carried in The 5 Minute Wrapup stories quite critical of India's infrastructure and its pitiful state. We certainly do not derive any pleasure from doing so. Our intention is just to draw attention to one of India's most pressing problems at the moment. Thus it came as great source of excitement for us to have stumbled upon a rather pleasant development in this regard. Three Indian projects have featured in a global infrastructure project report of renowned consultancy firm KPMG.

The report showcases 100 examples of great projects across the world. The three Indian projects are the KG-D6 integrated gas project, the Mundra power project and Indira Gandhi International Airport, Delhi. It commends these projects for their scale, complexity, innovation and impact on society.

This instance clearly shows that world class infrastructure, which can be a boon to the country's economy and its people are certainly not out of reach. What is desperately needed is just to analyze and understand the factors that make such good projects so successful. And then replicate those factors in future projects. Only this will ensure that more and more such instances become the norm rather than the exception.

Has the stock market reached its top for the time being? It's a difficult question to answer. Even when individual stocks look fairly or over valued, it is difficult to predict when they will correct. That day may be tomorrow or two years down the line. But one person who is sure that a crash is imminent is Jim Walker, dubbed Asia's 'Dr. Gloom'. Albeit in the Chinese context.

Walker is of the opinion that "There are an awful lot of companies that don't make any money in China, and they need to go." He adds that major manufacturing cities in China are suffering labor shortages, thanks to the real estate bubble. He also worries about China's fudged economic data, huge current account surplus, currency manipulation, accommodative monetary policy and soaring inflation. It remains to be seen whether the direction of his call and especially the timing turns out to be correct.

As much as the RBI would want Indian banks to be different from their global counterparts, there are restrictions nevertheless. In an attempt to fortify the banks with sufficient capital, the RBI had proposed higher capital adequacy. However, several players in the sector, mostly PSUs, are yet to comply with the Basel II requirement. Their CAR is still running short of 12%.

Although the government made an allocation of Rs 150 bn for capital infusion in the budget, the same may not suffice. Particularly if the funds are to be used to accelerate growth. Thus, in all possibility the higher capital norms for Indian banks are likely to be rolled out in phases.

The crisis for the global banking system isn't seen ending soon. As per a leading international financial portal, global banks face US$ 5 trillion worth of liabilities to be repaid over the next 2 years! This is the money banks borrowed from bondholders and other creditors to get over 2008's credit crisis. So, while no one seems to be talking about it, the bill is due now! Out of this US$ 5 trillion, European banks owe the most (52%) followed by US banks (26%). And not just in terms of magnitude, the situation is more serious in Europe. This is because the sovereign debt crisis has hit that region even harder than the US!

Anyways, these banks have the option to roll over their loans and bonds. But the situation looks pretty grim as of now.

When the governments in US and Europe announced huge stimulus packages to keep their respective economies from plunging into depression, certain concerns began emanating. These were that massive doses of liquidity and printing of money would cause inflation to rear its ugly head. Noted investor Jeremy Grantham was also of the same view. But that scenario has not played out. And it has become increasingly apparent that deflation has gained the upper edge over its adversary i.e. inflation. The massive doses of stimulus have raised the possibility of a sharp increase in money supply. But what the developed world is facing now is weak loan supply, downward pressure on prices from weak wages and weak demand and slowdown in the velocity of money.

What is worrying Grantham is that while the initial recovery as a result of the stimulus measures has been strong, the growth rates have already begun to slowdown again. Moreover, he is concerned that austerity measures at times such as these will only intensify recessionary trends. Especially, given the debt woes that Europe is facing and the severe austerity measures as a response, Grantham opines that this slowdown looks downright frightening.

Meanwhile, Indian indices had a weak outing today and the BSE-Sensex was trading lower by around 50 points at the time of writing. Heavyweights like ICICI Bank and Reliance were seen adding the maximum to the selling pressure. While other indices in Asia also ended on a negative note, Europe is trading mostly in the positive currently.

 Today's investing mantra
"Those who have knowledge don't predict. Those who predict don't have knowledge." - Lao Tzu, sixth-century B.C. Chinese poet

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 "Gold could soar another 4,300%". Click here!

7 Responses to "Gold could soar another 4,300%"


Jul 27, 2010

This issue is utterly confusing and does not make any sense. Going by my past experience, I think your articles are too lengthy and at times boring. Who has time to read the long stories, although I appreciate your art of story telling. Please excuse me.In a nutshell what we expect is a brief report.



Jul 25, 2010

Whether the gold would go up so much? we dont know, but one thing I would to say here, you have been telling the importance of gold for last 3 years and we have purchased (as ETF) at lower rates based on your advice. Sold some for profit and holding some qty. So your advice has been good to us. I am sure many of the other readers would agree with me.



Jul 23, 2010

If gold is up than Sensex could be down. What u think about sensex? I think what we have to do? Invest in gold right now or in sensex? It's confusion. If u can tell me plz send me yr answer on my mail id.



Jul 22, 2010

Mr.Ajit Dayal & Mr.Bill Bonner keep giving contrarian views about mkts & confuse people. If the world is in a great correction how can India be isolated. India doesn't give unemployment numbers, it constantly revises inflation data upwards two months after the original figures are given to beat consensus estimate. How can one trust any GDP figures? Where is it helping the average man at the ground level, it is only helping the rich to get richer. Let's be clear that the bull cartel has the upper hand & is perfectly triggering stop loss lvls of bears to drive up mkts. Also tell us if globally there is deflation how can Gold, which is considered a hedge against inflation, go up.



Jul 22, 2010

This Gold issue is becoming totally confusing--while You go all out promoting Gold as a Safe Haven and Lasting Currency; Value Research , on the other hand claims that Gold as such will hold very little value in future-- makes me wonder whether it is sheer coincidence or a well-executed strategy.By the way this is true for international financial advisories too. Is there so much uncertainty about Gold? regds


Sidheshwar barule

Jul 22, 2010

Gold could soar another 4,300% what is means by



Jul 22, 2010

stopp sending me immidiatly.

Equitymaster requests your view! Post a comment on "Gold could soar another 4,300%". Click here!