Bull market for gold has a lot further to run

Dec 21, 2009

In this issue:
» Where are small-caps headed in 2010?
» Worst performing sector in 2009
» Outlook for crude oil in 2010
» Raise interest rates, says Bimal Jalan
» ...and more!!

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While stock markets have had a brilliant run in 2009, there's another asset class that we believe has grabbed the headlines. Gold! And that's just with a 23% returns since January (in rupee terms). Compare this with the 75% gains that the stock market indicator - BSE-Sensex - has seen during this period.

One key reason for gold's bigger mind share than stocks during 2009 we believe is - the future.

With the printing presses of central banks (led by the US Fed) working overtime, many noted experts are now predicting a return to the Gold Standard! One amongst them is Porter Stansberry, chief of the leading US-based private publishing company, Stansberry & Associates Investment Research.

Porter has been a gold bull for quite a number of years now. And his current view is that gold is 'nowhere near the top'. This he believes is because central bankers, the key players in the gold price - have begun to buy gold only since the last six months. "So this bull market for gold has a lot, lot further to run," he put its straightforward!

Like he keeps all his savings in gold, Porter also advices people to hold their savings in the yellow metal. And to own as much as they can reasonably afford.

As for Equitymaster's view, we believe that while gold can still perform very well in 2010 and beyond, one should have not more than 10% of his/her investments in the yellow metal. Stocks in good Indian companies must form the biggest portion of this portfolio, especially if it has time on its side.

 Chart of the day
Today's chart of the day shows that the past decade (1999-2009) has been excellent for the Indian markets. In fact, these have outperformed the gains seen in the US and even Chinese markets. Opening of the economy post 1991, the rise of a knowledge economy and appreciation of India as a low cost yet quality base is what we believe has aided Indian markets during these years.

Note: 1995-1999 data for China is not available;
Data Source: CMIE Prowess, Yahoo Finance

Small-caps have outperformed mid and large caps in 2009. One big reason we think led to this outperformance was that small-caps started the year on a very low base of valuations. The BSE-Smallcap index was trading at a P/E (price to earnings) of just around 6.2 times in January 2009. Against this, the multiple stands at 17.6 times currently.

So where are small-cap stocks headed in 2010?

We do not expect small-caps to repeat their performance of 2009, in 2010. One of the foremost reasons is valuations. These stocks (on an average) are now trading at valuations that are very close to those of mid cap and large cap stocks. In fact, the gap between BSE-Smallcaps' P/E and Sensex's P/E currently stands at just around 18% as compared to 49% in January.

Data Source: CMIE Prowess

But this does not take away from the fact that there are numerous small companies out there, which are still available at attractive valuations as compared to their good long term prospects. One however has to be very cautious while searching for such valuable opportunities. After all, it's not every day that we hear about a new small company that's doing great things.

What would you call a 40% gain from stockmarkets in a year? Brilliant, isn't it? Not so for investors in FMCG stocks during 2009. The BSE-FMCG index, despite gaining almost 40% during the year, was the worst performer amongst the BSE sectoral indices. With investors coming back to take higher risks, the defensive nature of the FMCG sector cost its investors in 2009 (in terms of the opportunity costs).

So, will things change in 2010? Given the steep increase in raw material prices and rising competition that is threatening the margins of FMCG companies, we do not see much change in their fundamentals next year. Further, given that a host of FMCG companies derive a majority of their revenue growth from rural areas, poor incomes due to this year's drought will only act as an impediment for the sector's growth in 2010.

* Performance between 31-Dec-08 and 18-Dec-09; Data Source: CMIE Prowess

Investors then have also to content with high valuations of companies from the sector. The BSE-FMCG index for instance is currently trading at around 28 times earnings. This isn't cheap by any standards!

Just like the stock market, the crude oil market is currently in the wait and watch mode. It is watching the progress of the economic recovery in the developed world. The long term factors for higher crude oil though remain intact. There will be more people in the world in the future. Many of them will consume oil with greater intensity. No large discoveries have been made in the past several years. Over the near term, i.e., in 2010, crude prices will be determined by the pace of economic recovery, OPEC's decision on supplies, geopolitical disturbances, and also by the liquidity chasing crude oil derivatives.

Anyways, Indian markets had another weak day today. The BSE-Sensex was trading down by around 80 points (0.5%) at the time of writing. Midcaps and smallcaps however bucked the trend with the BSE-Midcap and BSE-Smallcap indices raking in gains of around 0.2% and 0.5% respectively.

Most other Asian markets also traded weak today. Stocks across Europe have however opened on a positive note. Gold is trading US$ 2 higher as compared to last week's close.

Bimal Jalan, the former Governor of the RBI, has now joined in on the debate over rising food prices. And he favours monetary policy tightening. "Reduction in availability of money may help in reducing the speculative pressure on retail prices," Jalan is believed to have said recently.

He rightly argues that a stark action is not needed as the inflation is confined mainly to food prices. He also points out that in addition to drought, the fact that India didn't make arrangements for import of rice is also hurting matters right now. This anomaly though may be about to get corrected. With political pressure mounting, imports will have to be resorted to. But even this could come with a steep cost. Importing food grains would mean putting further pressure on the government finances, which is already delicately poised currently.

Improving farm productivity and curbing inefficiencies in the distribution system seem to be the only viable long term solution. And these measures need to be undertaken on a war footing.

 Today's investing mantra
"Like most trends, at the beginning it's driven by fundamentals, at some point speculation takes over. What the wise man does in the beginning, the fool does in the end." - Warren Buffett, at the 2006 Berkshire Hathaway annual meeting

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10 Responses to "Bull market for gold has a lot further to run"

Rustom Dalal

Jan 14, 2010

One of your recent issues remarked on how small towns including district level towns are showing signs of prosperity. What majes you say that this years rural incomes will drop?



Jan 12, 2010

gold price may go 2500/grm in 2011 mid ?



Dec 26, 2009

"Bull market for gold has a lot further to run".
R U sure about this statement? Gold is losing it's shine as the $ gains strength.
However I like Ur articles which are interesting and contains lot of useful info.



Dec 22, 2009

$1085/oz today (dec 22, 20:57 IST), another 25 dollar drop. The speculators seem to be getting cold feet, now that this has broken what they were calling a "psychological barrier" of $1100.

US households are selling gold in "tupperware-like" parties - see article on Amazon finance today - unlocking dead and worthless value.

This is not a value play at all - but a very risky speculation - no one should even use the words "gold" and "investment" in the same breath!!

(In my last append - "Would anyone in their right mind give an unbalanced picture if they themselves had their skin in the game", I meant, "Would anyone in their right mind give an BALANCED picture if they themselves had their skin in the game").



Dec 21, 2009

On gold - central banks that are still planning to buy are from small countries - and their demand is going to be in the 2-20 tons range (like what Sri Lanka bought), and that too from the IMF, not from the open market. Thus they are unlikely to swing prices.

With the 10% drop, some speculators will be jittery, and another week of the sideways/downward movement may result in them booking profits - also because of end-of-year pressures.

Meanwhile, the dollar is climbing, and may have bottomed out, even if for a while. Most countries will be happy at that, since they hold dollar forex reserves, and a strong dollar helps their exports to the US and enhances their competitiveness vis-a-vis the US.

The so-called wedding season in India on which people were basing their hopes is also at an end.

Based on logic, the next few months should thus see the price of gold come down.

Based on fundamentals, there is no case at all for gold. It is not a value buy, it has no intrinsic returns or dividends, just a speculative price. No value investor should be ever dabbling in it. Other rare metals are different, for they have an industrial use.

Quoting someone or the other who has a large position in gold (as he admits), is like quoting some analyst who admits he has a substantial position in the stock he is recommending. Would anyone in their right mind give an unbalanced picture if they themselves had their skin in the game? Isn't this a conflict of interest for that recommender?

It is strange that every 2-3 days, this website takes one or the other random quote from the blogosphere and repeats it here in an attempt to predict a rosy picture for gold, quite contrary to their "value investment" line.

My reasoning is - whatever be the price of gold (or other "pure speculations" such as oil), I will stay away from it since it is impossible to work out its "future cash flow" (which by the way, is nil).



Dec 21, 2009




Dec 21, 2009

Dear Sir
There are contrasting forecasts for 2010 for dollar.Gold etc.
I have read forecast of 20% dollar appreciation during 2010 from present level.
This is from a single reliable source. Main convincing and supportive arguments:all present deficits and financial
are already priced in the dollar. All major countries currencies are not in better condition than the dollar
The above forecast is really a very bold forecast against the majority thinking and beliefs. My main dilemma is that
what happens to Gold and oil prices if dollar appreciates even by say ten percent? Will the gold rise with appreciation of dollar? What would happen to oil prices?
I value Equity Masters research based feed backs. Your detailed response would go a long way for me to understand better. Would Gold bull market forecast would be reversed?



Dec 21, 2009

very very nice but we need other information to invest in stock market like which time invest mony? and the company analyses or foundamental please give some idea for invest in stock market thanks for you.



Dec 21, 2009

future gold ia gilter


jitender singh

Dec 21, 2009

office boy job

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