Are you a gold bug or a gold bear? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Are you a gold bug or a gold bear? 

A  A  A
In this issue:
» Reverse migration makes a strong case for labour reforms.
» Soros' dangerous predictions for China.
» CVs going through worst slowdown in 3-4 decades.
» Midcaps making a comeback?
» and more....


00:00
 
With gold prices correcting substantially in the last year, it has had two mixed reactions. One is to quit holding the yellow metal and park money in a relatively better performing asset class. Second is that of being a contrarian i.e. to see the decline as a buying opportunity.

It would not be wrong in saying that gold investments came in the limelight in recent years. Especially amongst retail investors! And with mechanisms such as ETFs (exchange traded funds) gaining popularity, the movement of funds towards the precious metal hyped up the asset class all the more. However, with the global scenario becoming seemingly stable and the chances of things worsening from here on seeming less, gold has lost its shine. And this is what the media along with major brokerage firms had and have been predicting as well.

As you would be aware, gold does not earn any cash flows. As such, it becomes difficult to measure in terms of intrinsic value. Its price movement largely depends on sentiments, which in turn relate to the future outlook. In times of uncertainty and high inflation, the preference to hold gold is higher due to its nature of being a hedging mechanism or an insurance agent - especially against paper currencies.

With all this negativity against the metal, there are some well known investors who have not shied away from expressing their bullishness for the yellow metal. Zerohedge.com has done well to compile a list of renowned investors and their long term views on the yellow metal. With the list including the likes of Jim Rogers, Marc Faber, Steve Forbes, and George Soros, amongst others - all long term investors - we thought it would be beneficial to hear what they have to say.

The key takeaway is that gold has been a long term performer and with the amount of paper money floating in the system, it is bound to debase currencies. As such, gold would act as a good insurance agent in the long run. Also, the fact that a lot of central banks - people who understand paper currencies the best - have been taking advantage of the lower prices is a sign in favour of gold.

Marc Faber also points out that gold consumption is likely to stand at levels of about 2,600 tonnes this year. This figure is higher than the production levels, which gives a strong indication of the chances of gold prices bottoming out. Gold consumption will be led by Asian giants China and India is the general view as well.

It may be noted that the gold imports in India have reduced substantially on the back of the initiatives taken by the RBI to curb the current account deficit. However, the government had also mentioned that this measure is not sustainable over the long run. This is another factor that would work in favour in the long term as India has historically been the largest consumer of gold.

According to gold expert, Doug Casey - "I've been buying gold for years and I continue to buy it because it is the way you save. I'm very happy to be able to buy gold at this price. All the so-called quantitative easing-money printing-by governments around the world has created a glut of freshly printed money. This glut has yet to work its way through the global economic system. As it does, it will create a bubble in gold and a super-bubble in gold stocks."

We could not agree anymore and are of the view that long term investors would do well to have the yellow metal as part of their portfolio. Albeit, to a certain extent. We suggest an exposure of at least 5% to 10% of one's portfolio.

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01:25  Chart of the day
 
With the result season about to kick off, predictions and estimates of companies' results have begun to flow in. And going by the consensus, the same are expected to be better than what they were in the past few quarters.

Today's chart of the day displays the financial performance of companies forming part of the BSE-500 index (not including data for banks, financial institutions and oil & gas companies) . While they seem to be doing well in terms of revenue growth, the same cannot be said about their bottomline figures. The expectation of better performance in the coming quarter is largely due to the improving broader economic conditions.

India's Largest Companies Not Doing So Well
*excluding data for banks, financial institutions and oil & gas companies

The total market capitalisation of the BSE-500 companies currently stands at Rs 66.06 trillion. The same figure stood at Rs 66.59 trillion a year ago. However, if one breaks it down further and removes the market cap of the companies forming part of the BSE-Sensex - which currently stands at Rs 34.7 trillion (Rs 32.35 trillion last year) - it indicates that the rest of the 470 companies have lost value of about 8.5% as compared to last year. In contrast, the BSE-Sensex's market cap has moved up by 7.4%.

Coming to valuations, the BSE-Sensex is currently trading at about 17.75 times, while the BSE-500 index is trading at 15.8 times. Both the ratios are calculated on the indices' respective trailing twelve month earnings. Given the higher valuations of the Sensex companies, it would be fair to assume the rest of the 470 companies to be trading cheaper than the average of the entire index. This would make the rest of the largecaps seemingly cheap. However, one should make sure they buy into companies that are performing well on the financial side given the earnings trend has not been favourable in the recent past.

02:05
 
What is GDP growth reduced in its most basic form? Well, it will boil down to a combination of two things, population growth and labour productivity growth. Let us keep the issue of productivity aside at the moment. Now, it is hard not to believe that India has the potential to grow at a tremendous pace on the basis of the growth of its labour population alone. This is of course provided that the Governments take the necessary steps to move our population out of farmlands and into labour intensive jobs like manufacturing. However, as highlighted by Business Standard, a report by CRISIL paints a very poor picture on this front. As a matter of fact, it has a strong feeling that there could be a huge reverse migration taking place. So, instead of people moving out of farmlands, as many as 12 m people could go back to agriculture by 2018-19. This compares with a decline of 37 m between FY05 and FY12. If this indeed turns out to be true, it is going to be nothing short of a colossal failure from the policymakers. It isn't still too late we believe. All that is needed to prevent the situation from going out of hand are some really strong steps. And this would include dramatic labour reforms, creating an environment conducive for doing business and faster decision making. Absent these, there's a real risk that we are staring at a huge demographic disaster.

02:50
 
The man is famous for his attack on the British Pound. He has also reportedly netted billions off the US subprime debt crisis. It now seems that he has set his eyes on China. As per an article on Project Syndicate, billionaire hedge fund manager George Soros has made dangerous predictions for China. According to him, the US Federal Reserve will not cause the biggest global economic crisis. Nor will Japan's gargantuan debt levels and asset bubble. The risks to the Euro zone do not even measure up to such catastrophic results. What does is the possibility of a major debt disaster in China! Soros reckons that China's giant banks and their shadow banking activities are wildly under estimated. These are the epicenters of massive asset bubbles. He also believes that China's pledge to move away from investment led growth is largely superficial. For if the policymakers were to do that, they would have to sacrifice GDP growth. For Soros to be proven wrong, the Chinese government will have to make its financial system more transparent from the black box that it is now. We do not see that happening in near future!

03:25
 
According to Mr Vinod Dasari, MD of Ashok Leyland, the current slowdown in the commercial vehicles sector is the worst that he has seen in the last 3-4 decades. He should know. Ashok Leyland is one of the leading players in the commercial vehicles (CV) space. The fortunes of the CV industry are closely linked to that of the economy. And hence it is hardly surprising that with the current slowdown in the economy, the CV segment has also been badly impacted. Indeed, among all the segments in the auto space, volumes of CVs have declined the most. This has also been reiterated by Mr Dasari in an article in Mint. He states,

"Usually, it is cyclical but this time not only it has lasted much longer and it has been deeper. We never had a 25% drop (in the current fiscal) on top of a 25% drop." Indeed, not only has Ashok Leyland suffered, but its peer Tata Motors has also been affected in the domestic market. When the cycle will turn is anybody's guess. But when the economy does begin to recover, there is no reason why players such as Tata Motors and Ashok Leyland should not see a consequent improvement in their performance as well.

04:10
 
In stock markets, fortunes swing like a pendulum. What falls one day goes up the next day. What falls more, goes up more too. Something similar seems to be happening with mid cap stocks in recent times. During the January-August period in 2013, the mid cap stocks took a huge beating, thereby underperforming the Sensex stocks by a big margin. However, since then, they have outperformed the broader markets.

Investors are bewildered about the sudden outperformance when nothing much has changed on the fundamental front. It is believed that expensive valuations in the large cap space is the primary reason for rally in mid cap stocks. As valuations are above comfort zone in the large cap zone, investors have seemingly turned towards mid caps. Also, it is mostly the FII money that has brought about this rally. And with valuations of large caps showing no signs of receding, more money is likely to chase mid caps. This may entice people to invest in mid caps. However, we believe that investors should not get carried away by this fad. While many reports making the case for midcaps - due to the wide valuation gap between the large and mid-sized companies have been making rounds, it must be mentioned that the earnings quality and performance of these two set of companies have been quite different as well. And as such, the same need to be gauged during one's stock selection approach.

04:50
 
In the meanwhile, Indian stock markets witnessed a volatile trading session. At the time of writing, the benchmark BSE-Sensex was marginally down by 16 points (0.1%). The sectoral indices were trading mixed with capital goods and banking stocks leading the gains, while oil and gas stocks were trading firm. Most of the Asian stock markets were trading lower led by Hong Kong and Japan.

04:55  Today's investing mantra
"There seems to be some perverse human characteristic that likes to make easy things difficult." - Warren Buffett
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4 Responses to "Are you a gold bug or a gold bear?"

PRABODH U POLADIA

Jan 9, 2014

gold prices have corrected .and it seems that bottoming is very near.
some predict that 1180$ is the bottom. if it breaks it is heading at 1000$. so be it.
the following points noted belo needs severe thinking.
1]with fiat currencies printing with no respite or holding back. how will that bring the price of gold remain low.its like too less of gold and lot of money chasing it.
2]we have already entered the mother of all depression. if we observe the great depression of 1920s and 30s.there was a certain pattern like in the begining of this period ...there was currency wars, trade wars, and ultimately world war. are we seeing the same patern now.?
3]the cost of producing gold is about 1200$ an ounce. mining gold has turned unprofitable. leading to fall of production, and the physical demand is increasing day by day. will this demand outperforming supply,not lead to rise in prices.
4]china and russia have banned gold exports, and china is building gold reserves by importing with its surplus balance of payments. China wants to bring its currency as use for international trade. thus the objective to build gold reserves.
5]for the past 50 years american govt has not performed audit for gold held as reserves in fort knox. that gold is gone. they have leased it ..and thus they have stock on books and not physical. they did this for gold price suppression. for advantage petro dollar.
6]US govt knows that gold is not recoverable.. that gold is now in forms of ornaments .
7]what about trillions of derivatives . ready to explode.[causing tsunami in the entire financial system world wide]
american govt needs 6 to 8 billion dollars per day debt to run the country..
8]no currency without the backing of gold has survived for more than 50 years. 5000 years of history proves it. you cannot cut trees,,convert into paper and print it out of thin air, last forever.
9]with the geopolitical factors remaining unstable. and war breaks out . what can be the options except investing in physical gold.
10] inflation deflation or stagflation. this present scenario is bringing down the standard of living. will gold be hedge against such situation'
silver is a smaller commodity. than gold, silver is also like gold to be defined as real money. silver is evaporating fast for its use in lot of sectors like electronics medicine. etc etc. silver stocks are dipilating. gold yet can be recycled. there is tremendous scope for silver to appreciate than gold.
source::silverbearcafecom /investmentraritiescom / 321goldcom /lemetropolecafecom

Like (1)

sharad sharda

Jan 9, 2014

In international market Gold prices are highly bottomed but the benefit of downfall in prices from $1600 to less than $1300 is not available to Indian public as Govt of India has arbitrarily hiked the prices in country by impounding heavy custom duty to curb its imports even at the cost of huge increase in gold smuggling. In my opinion, this is the high time to increase our investment in Gold, but certainly out of the country and to bring it in India after April 2014, when custom duty is likely to be decreased by the Indian Govt.

Like (1)

MADHUSUDAN RAO C H

Jan 9, 2014

In 2014 a fluctuation of only 5% to 10% can be seen in dollar terms. In India, depends on Rupee fluctuation after May 2014, the Gold Rate may come down by 5% to 10%.
From year 2015, SIP to be adopted for buying gold and silver. In the long run (after 10 Years), an individual can sell the first SIP for living instead of investing in VPF, Fixed Deposit / long term investment.

Like (1)

Nadir Godrej

Jan 9, 2014

I'm a gold bear. It is a useless asset. It can appreciate when suckers buy it. But essentially it is a Ponzi scheme. If you don't get out in time it can collapse as it did last year. Granted that people with good timing can make money but you can lose a lot as well. People who believe that QE can cause inflation any time soon are smoking some weird stuff. Equities are a better investment.

Like (1)
  
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