You must own this insurance policy

Oct 18, 2010

In this issue:
» What to do if gold prices crash?
» Domestic funds raise their faith in Indian equities
» Look before you apply to this IPO
» Rich investors lured by microfinance's shine, but then...
» ...and more!!

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Gold critics always oppose gold bulls saying that gold does not have an intrinsic value of its own. It pays no dividend and has no earning power. And the only way you can realise any money from it is by selling it. All these accusations are absolutely correct.

So you might wonder - why should I buy gold at all when it carries none of these benefits of dividends and capital appreciation like stocks? And how do you value gold, if not for these factors?

We believe these are very valid questions. But our question is - how do you value your insurance policy? Insurance in simple terms is a tool to hedge against the risk of an uncertain loss in the future. Like loss of house due to fire, or loss of life due to an accident.

Why not consider gold as an insurance policy as well? Isn't it an insurance against the loss of future purchasing power? Like a home insurance policy that protects us against any loss on our homes, gold protects our nest egg against inflation. Given that the world over, central banks are hell bent on debasing their currencies, they are just laying the ground for high inflation in the future. You can feel the pain of high inflation in India as well. And it is not going to reduce in the future given that while demand for everything (including food) is rising, supply is falling short.

So, like you buy an insurance policy, you ought to own gold to save you financial savings against future inflation.

What proportion of your total investment portfolio do you hold in gold or gold ETFs? Share with us, or post your comments on our Facebook page.

Famed global investment analyst Marc Faber recently opined that the dollar has been beaten down a little too much off late. Indeed, investors are very bearish on the dollar right now. But as a contrarian, Faber feels the dollar may change course in the short term. And that could also lead to a significant correction in gold and other commodities.

A large decline in gold though, declares Faber, should be looked as a buying opportunity rather than a reason to panic. In fact, one thing he says he will never do in his lifetime is to sell gold. This stems from his belief that the government of every developed economy, including the US, the UK and Western Europe, will eventually default on their sovereign debts. And the only refuge left in such a scenario would be gold.

 Chart of the day
Today's chart shows the rising confidence of the big Indian investors - mutual funds, financial institutions like insurance companies - in Indian companies. As the chart suggests, while the average stake of FIIs in BSE-200 companies has been have volatile over the past few years, the stake of Indian institutions has been on a consistent rise. It seems like the locals are fast realizing the worth of the long term Indian growth story while the foreigners remain on a shaky ground!

Note: The lines represent average stake of these investors in BSE-200 companies;
Data Source: CMIE Prowess

A lot of hype surrounds the Coal India IPO, which opened today for subscription. Investment bankers and brokers are falling over each other to offer reasons why they believe this IPO will be a game changer for the Indian markets. In short, huge expectations have been built around this IPO, which can turn out to be dangerous if the company were to fail to deliver on these expectations in the future.

We last saw such hype around an IPO way back in January 2008. But then the company offering its shares had nothing more to show to investors than a business plan. Coal India (CIL), on the other hand, is a well-established company and a near monopoly in its own right. But even that does not mean that you go all out and apply to the IPO as if there's no tomorrow.

Given the kind of euphoria that surrounds this IPO, there are big chances that the listing gains can be good (also as promised by its chairman recently!). But we believe that you must not apply to an IPO, like you must never buy a stock, just speculating on short term returns. It is important to study the company well before you apply to its shares. And CIL, despite its size, government backing and, long history, is no exception. As WSJ says with respect to this IPO - "Go with your headlamps on!"

The Keynesian Krugman is at it again. The Nobel Laureate is of the opinion that quantitative easing to the tune of couple of trillions of dollars may not just work. He believes that what is needed is money of the order of US$ 8-10 trillion dollars! An outrageously large sum we reckon. Already, there are talks doing the rounds that the last round of quantitative easing has the potential of fanning enormous inflation once the banking system starts lending out the money. And the sum under question is just a fraction of what Krugman seems to be proposing currently. Thus, one can imagine the kind of havoc that can be wrought if at all the US Fed was to give into Krugman's latest demand.

However, with the kind of pressure on the Fed, such a step looks very unlikely indeed. A second round of quantitative easing may well be coming. But its size is likely to be similar to the first one. In terms of its objective though, we feel the second one may also not achieve a great deal.

The assets are securitized. The papers are rated by rating agencies. And high networth individuals (HNIs) are lured into buying these investments by their wealth managers for supernormal returns. Does this sound very familiar? Then, let us tell you that you are wrong in assuming this to be story of subprime mortgage in the US. These securitized assets are being originated and sold in India. And they have nothing to do with real estate.

In a country with 40% of the population living close to or below the poverty line, lending to the poor is a big business. This populace has no access to banking channels and private money lenders have been acting as parasites on them. The success of SKS Microfinance revealed the tremendous potential for growth and profitability in this business. But greed to earn more than the 8-9% fixed deposit rates on their investible surplus has drawn HNIs to the securitized microfinance assets. The 80% recovery rate in such loans so far has given them the impression of high safety in such assets. And the returns are indeed enticing.

What is worrying is that these new variety of subprime loans have no collateral whatsoever. And with every ingredient of the earlier subprime mess, these assets have the potential to collapse harder. It seems that we learn very little from others' mistakes.

Indian markets had a weak day today. The BSE-Sensex was trading with losses of around 50 points (0.2%) at the time of writing this. Banking and FMCG stocks were leading the losers' pack. Most other key Asian markets also closed weak today, led by Hong Kong (down 1.2%) and Korea (down 1.4%).

 Today's investing mantra
"Acquire worldly wisdom and adjust your behavior accordingly. If your new behavior gives you a little temporary unpopularity with your peer group...then to hell with them." - Charlie Munger

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22 Responses to "You must own this insurance policy"


Dec 31, 2010

10% during bear market and 15% in bull market.


Asit Ranjan Satpathy

Oct 29, 2010

I want purchase. But I have no idea or experience how, which and where I buy the gold. Is it purchase gold Ornaments or 24 carrat gold coin. Please advice me in this way.



Oct 21, 2010

I am having 2%. Investment in the lines of Insurance policy , novel thinking , ofcourse , with so many strings of possibilities attached. Good thinking.


dr davinder batth

Oct 20, 2010 it late


GN Murthy

Oct 19, 2010

I would like to point to MrDash that even insurance is also not fully carefree option. You should carefully choose the Policy suitable for your need, be regular with your premiums, also read fine print in conditional clauses. Other wise at the time of signing up they promise sky and doll out only a pittance when you claim.
Where as Gold only needs safe keeping. When buying as long term investment you can over look the discounts on sale.


Sharat Kumar

Oct 18, 2010

What % of total assets do you recommend for investment in Gold?

Which route should one take for Gold investment?

As per your article, Gold prices are likely to fall. When, in your opinion should one make Gold purchase?


ramkishan sonthalia

Oct 18, 2010

25% of total investment should be in gold
Ram Kishan Sonthalia



Oct 18, 2010

Yes, I have already joined in Gold Jewellery Scheme in a leading Jewellery Shop. Monthly I am paying/remitting Rs.1500/-in that scheme, though I am a pensioner.-SURESH


Yogesh Desai

Oct 18, 2010

I have 15% of my portfolio in Gold ETF



Oct 18, 2010

when the rupee dollar exchange rate nears Rs.40/- per dollar range, when the FIIs take away their indian investments' capital appreciation along with exchange appreciation combinedly starts to yield on investments @ 20%

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