|»5 Minute Wrap Up by Equitymaster|
On This Day - 4 DECEMBER 2010
Can this commodity maintain its 'golden' run?
In this issue:
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So gold's performance looks good overall. But wait before your draw any conclusions.
There's another commodity that's not been in news as much as gold. But it has given almost 2.5 times the returns on the yellow metal this year. We are talking about silver, earlier the poor man's gold and now seemingly better than gold itself.
As the chart shows, silver did not have a phenomenal run over the entire past two years. The real surge came in only after August 2010. Since then, it has risen almost 55%.
So where does silver go from here on? Can it repeat its past performance?
Given the way the global economic scenario is panning out, we believe that silver still has the pace to run up from these levels. As more people wake up to the fact that governments around the world have ruined their finances, and they plan to still destroy the value of their paper currencies, hard metals like silver will rise. Investors would want to own it as 'real money' to protect themselves against future financial and economic crises that their governments are pushing them to.
Well, all this doesn't mean that silver cannot fall in price in the short to medium term. Its past volatility suggests so. But if you are looking at the long term, we see the outlook for the metal as pretty good.
Nothing can be closer to the truth than this. You as an investor have a lot of troubles to chew on these days. Right from scams in your own backyard and rising inflation, to property bubbles in China, war tensions in Korea, bankruptcies in Europe, and the never-ending problems in the US. So something might go horribly wrong anywhere, anytime. And that is the biggest fear investors have these days.
So, amidst all this, what does Bill suggest? "Easy. Buy gold on dips. Sell stocks on rallies. Don't worry. Be happy."
So, are you buying gold and/or silver these days? Share with us.
We know Roubini as one of the leading global voices who predicted the 2008 bust and the subsequent crisis. He has sounded several ominous warnings since then. And most have been closer to reality. So, we believe he is right in his lament of people calling him a doomsayer and not a realist.
Anyways, Roubini continues to believe that things are going to be very mediocre throughout the world, and especially in Europe and Japan. As far as India is concerned, he believes that the country is quite likely to outpace China in the coming years. And the key treason for his argument is that India, unlike China is more dependent on domestic consumption, which is a more sustainable practice of long term economic growth than the export led Chinese model.
What Roubini is saying is a widely known fact. But it becoming a reality is something we are worried about given the way concerns regarding our policies and inflation are shaping up.
Data source: Kitco, Cnnfn
This surely must leave the policymakers in a tizzy. One of the key reasons that the Indian economy is overheating is because of ever rising short term capital inflows.
We believe that capital inflows seem to be more a result of loose monetary policy in the developed world than an indicator of India's strong fundamentals. And hence, they should not be allowed to unsettle the Indian economy by overheating it and creating asset bubbles. We also believe that when the time will come, the RBI will certainly be up for the challenge, Mr. Kahn's words of encouragement notwithstanding.
This 'new normal' was once again put to some very good use in a recent Gross interview with Bloomberg. Gross opined that the Federal Reserve is unlikely to raise interest rates for several years with employment growing less than forecast. Thus, there is a very strong possibility of negative real interest rates in the US till the time the Fed maintains its stance.
This phenomena combined with very low economic growth in the US could lead to very low rates of return on financial assets going forward as per Gross. "The new normal is a 3% plus or minus nominal GDP. It speaks to 2% growth and 1% inflation. We are running at a half size paper airplane type of economy as opposed to one with stable wings and full thrusting jet engines," Gross is believed to have said. We couldn't have agreed more.
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