»5 Minute Wrap Up by Equitymaster

On This Day - 15 JUNE 2010
Why are these investing legends holding on to gold?

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!

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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

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