»5 Minute Wrap Up by Equitymaster

On This Day - 21 OCTOBER 2010
Is the world's greatest investor wrong about gold?

In this issue:
» 'We can't be bullied', message from China
» Ongoing trade wars could spell doom
» Government's disinvestment target runs into a happy situation
» It's indeed a 'Happy Diwali' for retailers
» ...and more!!

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It is a known fact that Warren Buffett isn't exactly a gold bug. Infact, it will not be out of place to call him a perpetual gold bear. Buffett talked about gold one more time in a recent Fortune interview. And was yet again at his acerbic best. He opined that one could take all the gold that has been ever mined and it would fill a cube 67 feet in each direction. And for what it is worth at current prices, one could buy all the farmland in the US, 10 companies of the size of Exxon Mobil and still have US$ 1 trillion of walking around money. Hence, according to Buffett, it is these assets that are going to produce more value than the big 67 feet cube of the yellow metal. This is the primary reason he is a big gold bear.

As far as we could gather, Buffett believes that gold has no intrinsic value. It is indeed a rare occurrence that we disagree with Mr Buffett. But we believe he may be wrong here. Buffett talks about intrinsic value. But we don't think a can of coke comes equipped with a lot of intrinsic value either! It is loaded with sugar and has no nutritional value. Infact, its overconsumption seems to do more harm than good. But people still have it in large numbers. This is because it appeals to the taste buds and gives some sort of mental satisfaction. Save for that, we don't think it does any good. And still, Buffett has invested heavily in Coke. Infact, he calls it one of his best ever investments.

In a similar vein, owning gold or gold jewellery gives mental satisfaction to people. People love wearing and flaunting it. Also, people own gold because they believe it is some sort of insurance. An insurance from the rapid devaluation of fiat currencies. Thus, if coke has intrinsic value, so does gold. Besides, there is only a very limited supply of gold in the world.

What do you think? Do you think Buffett is right about gold or gold certainly has some intrinsic value? Let us know your views. You can also comment on our Facebook page.

 Chart of the day
It is virtually a race to the bottom. Countries have started taking steps to debase their currencies so that exports could be boosted. Thus, the question that arises is, if everyone is debasing their currencies, what is it that they are debasing against? We believe the chart of the day shown below could perhaps help throw some light on the issue. It is indeed the yellow metal gold that is the sole gainer in the currency wars. As shown in the chart, all of the world's major currencies have seen their value go down against gold in the first nine months of 2010. In other words, gold has gained against all the currencies. Only the magnitude is different. Even the Indian rupee has lost some ground against the yellow metal. Depending on how you look at it, this may just be the start of currency wars and also of the surge in gold prices.

Source: GoldSilver.com

Continuing with macroeconomic problems, the economic slowdown in the West has brought with itself a whole host of issues. And one of them is concerning trade wars - economies imposing capital controls to boost domestic economies at the expense of global trade. Leading commodities investor Jim Rogers is of the view that such capital controls are very dangerous for the global economy. As he told an international business channel recently, "The world is on a very dangerous precipice, and if we do continue with trade wars, that's going to be the end of the world economy." Rogers goes on to warn, "If we don't solve this problem, it's finished, it's all over." Scary prediction indeed!

This year, it appears that the Indian consumers just have too much money. With Diwali just around the corner, people are spending big bucks. Be it high end televisions or high fashion apparel, money seems to be pouring in for the retailers selling them. So much so that it is sending manufacturers into a tizzy as they are adopting emergency measures to just keep up with the demand. The retailers are seeing almost 15-20% jump in the total bill values as compared to that seen last year.

The reasons behind this increased frenzy range from wage hikes and higher bonus payouts by the companies to availability of cheap finance. Whatever the reason, the festive season is yet again turning out to be a big boom time for the retailers.

Economists the world over seem to have a unanimous opinion over atleast one particular issue. And it is that China's artificially undervalued currency is exacerbating the consumption imbalances in the world economy. But chances that the rest of the world can get the dragon nation to change its stand on its currency look very slim indeed. A testament to China's increasing confidence on the global stage. Infact, it has now begun showing its clout in other ways too. As per a Bloomberg report, China is quietly halting shipments of crucial minerals to the US and Europe. This, after doing the same to Japan. China controls about 97% of the production of rare-earth materials in the world. Materials which are a crucial raw material to making various important products. These include things like hybrid cars, laptops, wind turbines and weapons. Thus the country is now finding its monopoly in these materials as another way to leverage its increasing global influence.

Even before the issue closes today, the Coal India IPO has received a tremendous response. Even as we write this, the issue has been subscribed 12 times over. And chances are that by the time you see this write up, the number would have gone up even more. A great confidence booster indeed for the government who is keen on reducing stakes in few more PSUs. Mint reports that up for grabs over the next few months could be Manganese Ore India Ltd, Hindustan Copper, SAIL and three energy firms, IOC, Power Grid and ONGC.

We don't know whether it is a coincidence or a well thought out strategy. But the fact remains that most of the companies that the Government has lined up for IPOs and FPOs are commodity companies. An asset class that is amongst the few that global investors are bullish on. Thus, if the Government gets the pricing right like it did in the case of Coal India, there are chances that it could go laughing all the way to the bank by the end of the fiscal.

Investors in the US will have to wait longer before they earn returns commensurate with risks. As per the world's largest bond fund PIMCO, the US economy is unlikely to grow beyond 1.75% in 2011. This is despite the Fed's attempts to pump prime growth by offering liquidity at rock bottom rates. What this means is that emerging markets are bound to see foreign capital inflows for a longer period. The export driven growth from developed markets may remain muted. Nevertheless, domestic consumption and government investment is likely to leave a very attractive spread between the return rates in the two geographies. For Indian investors the scenario warrants caution. With too much money chasing too few assets, euphoria and overpricing are here to stay. All the more reason for investors to look for some margin of safety.

Meanwhile, after languishing in the red in the past few sessions, the benchmark indices have gone from strength to strength today with the BSE-Sensex trading higher by around 340 points at the time of writing. Heavyweights like Reliance and ITC were seen lending most of the strength to the indices. While majority of Asian markets closed strong today, Europe is also trading in the positive currently.

 Today's investing mantra
"Learn every day, but especially from the experiences of others. It's cheaper!" - John Bogle

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