»5 Minute Wrap Up by Equitymaster

On This Day - 4 DECEMBER 2010
Can this commodity maintain its 'golden' run?

In this issue:
» Why people are buying gold?
» Is doom the reality? Ask Mr. Roubini
» IMF warns India against overheating
» Russia, India outperform in a good week
» ...and more!!

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 Chart of the day
Gold prices have been on a very steady wicket over the past few months. In fact, since the start of this year, the yellow metal has risen by almost 28%. Stocks worldwide have not given such returns this year.

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%.

Data source: Kitco

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.

Moving on from silver and to gold, we recently read a good piece on the yellow metal written by Bill Bonner of Agora Inc. Bill pointed out one key reason people are buying gold these days. And it is 'because they are fearful that something is going to go wrong'.

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.

It is human nature to give names to people we are familiar with, depending on their habits. So when someone is perpetually gloomy on the global economic outlook, the world decided to christen him with the label of 'Dr. Doom'. But Nouriel Roubini has emphasized that he is not 'Dr. Doom' but 'Dr. Realistic'.

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.

After last week's poor show, this week brought in some respite for investors globally. As seen from the chart below, most stock markets closed with good weekly gains. The list was led by the Russian and Indian markets, which gained 4.7% and 4.3% respectively. China was the worst performer during the week, down 1%. Fears of a property bubble and rising interest rates were the key bugbears that impacted China's performance this week. Other asset classes like crude oil and gold also closed strong.

Note: Country names represent their respective benchmark stock indices;
Data source: Kitco, Cnnfn

India's policymakers have come in for some praise yet again. And this time from none other than Mr. Dominique Strauss-Kahn, the current Managing Director of the IMF. "India's policy is indeed the right one," he opined on his most recent visit to India. He is happy that India has not undertaken massive intervention nor is it trying to stem rising short term capital inflows. At the same time though, he has warned India against an economy that could overheat quite quickly.

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.

Most booms and busts bring along with them new words and terminologies that most aptly describe the phenomena that just happened or the one that lies ahead. The one such term that is perhaps most in use in today's times is the idea of the 'new normal'. And it has been championed by none other than the world's foremost bond investor, Bill Gross. The 'new normal' is nothing but a period where investors receive returns lower than what they have been used to in the past.

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.

 Weekend investing mantra
"All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don't work out." - Peter Lynch

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