What Goldman's latest forecast could mean for gold? - The 5 Minute WrapUp by Equitymaster
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What Goldman's latest forecast could mean for gold? 

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In this issue:
» Has FM got the budget math right?
» IMF set to cut growth forecast if US spending is cut
» Compensation to states makes way for GST
» Slowdown in China's manufacturing growth
» ...and more!

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Commodity prices typically move in cycles. And it is difficult to pick the top or bottom of any cycle. This can be the case especially when something has been moving up structurally for the past 12 years. One gets slightly biased in his opinion when he sees such a prolonged rally. Extrapolating the past trend can make him believe that the only direction where price can head now is up. This is particularly true when the commodity in question is gold. That's because the precious metal in question has also been a store of value since time immemorial. Thus, being a safe haven and a hedge against inflation, the demand for gold is eternal is some sense. Further, with paper money being devalued at rates seldom seen before, attraction towards gold has only increased. Hence, it wasn't surprising to see the yellow metal rallying over the past decade.

But it seems that the rally does not have enough legs from here on. At least, this is what Goldman Sachs believes. But what makes it say so? Well, Goldman believes that the downside risks to the economy have reduced. Secondly, there is an uncertainty about the size and timing of QE3. Both these factors are expected to reduce the conviction of holding gold. And understandably so. If the downside risks to the economy have reduced, equities are likely to outperform. This would mean that liquidity will chase equities and gold will suffer.

Further, there was a nagging belief that QE3 would be huge and thus, there will be further deluge of cheap money which in turn would benefit gold. However, as per Goldman Sachs even this risk is reduced and this is therefore another reason to expect an underperformance by gold.

But does the argument of Goldman Sachs really deserves a merit?

Well, to be honest, the recent pay roll tax hike in US is likely to reduce the consumption and thus economic growth. Also, sequester cuts (automatic budget cuts) are on the cards with the government failing to curb spending on its own. China is slowing down and Europe is also in doldrums. Thus, the contagion risk to the US economy remains high. All in all, the belief that the downside risk to the economy has reduced is a wishful thinking. Further, it is not true that there is uncertainty to QE3. Bernanke's recent statements have only confirmed that he continues to favour unlimited money printing.

In a nutshell, risks to the US economy continue to prevail. And in an uncertain economic environment gold is the only asset class that prevails. Notwithstanding the near term volatility, prices of gold are likely to remain firm in such an uncertain environment. It therefore pays to remain invested in the yellow metal through a reasonable allocation in your overall portfolio.

Do you think that after more than a decade of sequential rise, gold prices will correct now? Please share your comments or post them on our Facebook page / Google+ page

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01:40  Chart of the day
The primary market witnessed a dry spell of activity over the last two years, as evident from today's chart. The total money garnered via Initial Public Offers (IPOs) in FY10 and FY11 stood at Rs 247 bn and Rs 356 bn respectively. However, the same declined over the next two years due to deteriorating market conditions. Nonetheless, it seems that a gradual revival is on the cards. And it is reflected in the performance registered till date. As it can be seen, total money raised via IPOs during 9MFY13 stood at Rs 60 bn. And this is marginally higher than Rs 59 bn raised in FY12. Now, with quite a few IPOs lined up for 4QFY13, we may well be ending the year on a decent note.

However, we feel that the IPO market may take a considerable time to witness the kind of momentum seen in FY10 and FY11. Right now, most companies are delaying their expansion plans. Also, the market conditions are not conducive to raise money. Investors have turned more cautious when it comes to investing in equities. Thus, unless the overall investment climate improves we may not see interest returning back to IPOs soon.

Data source: Business Standard, SEBI

The Union Budget 2013-14 was presented by the finance Minister (FM) just yesterday. And already there is a buzz that the Budget math is wrong yet again. The Budget's focus was to reduce the fiscal deficit. In fact, it aims to bring it down to 4.8% of GDP as compared to this year's figure of 5.2%. The latter was achieved through a drastic cut in the planned expenditure. If this had not happened, the fiscal deficit for the year would have been much higher. So what will change in 2013-2014 that will help the FM reduce the deficit?

For starters, he plans to cut down expenditure. And one main area that sucks up all the money is the subsidy. This year's budget has allocated Rs 650 bn towards petroleum subsidy. This is about 33% lower than the revised subsidy allocation made in last year's Budget. But the revised estimate of last year was a whopping 122.3% higher than what was actually budgeted last year. The reason for the lower subsidy expectation - the government has allowed for price hikes in diesel. As the time period and quantum of hikes remain unknown, it is doubtful that the subsidy would remain restricted to the budgeted amount. Add to this the subsidy burden related to the Food Security Bill and things start looking bad already. Even on the non planned expenditure side, the overshoots could be large. The FM was unable to curb the overshoots in this area last year, so doubts are raised on his ability this year.

The Budget estimates rely heavily on an improved economic environment as well as reduced leakages in the subsidy system. Unfortunately both of these are unpredictable. Unless the rain gods and the global economy come to the rescue of the FM, the budget estimates may go for a toss yet again. And if this happens, there could be little respite from inflation next fiscal as well.

There were several critical reform measures that the Budget remained silent upon. The FM was happy referring to them as works in progress! But one at least expected a timeline to be put in place for the implementation of two necessary legislations. These are the Direct Tax Code (DTC) and Goods and Services Tax (GST). Understandably the FM did not want to ruffle too many feathers in the pre-election Budget. He instead put the ball in the state governments' court to take the next step towards the reform. All he did was to provide a Central Sales Tax (CST) compensation of Rs 90 bn to the states.

The economic virtue of GST itself calls for accelerated implementation. More than 140 countries have introduced GST in some form. It has been a part of the tax landscape in Europe for the past 50 years. Moreover it is becoming the preferred form of indirect tax in the entire Asia Pacific region. As per government reports, replacement of indirect taxes by GST can potentially result in 1.4% increase in GDP growth . With such compelling logic, we are not sure why the Centre cannot expedite the legislation. Once again a 'safe' budget chose to ignore the economy's necessities!

Do you take economic growth projections by the IMF seriously? If you do then it would help to know that the global financier will slash the growth outlook for the US as well as for the whole world should there be an automatic spending cut in the former. In other words, if the US Government loses its right to keep spending more than what it earns, the US economic growth will be in danger of slowing down. And this slowdown in growth will also have repercussions on global growth as per the IMF. Consequently, it will have to take its growth projections lower.

We wonder what kind of economists are these who care only about the growth and not the quality of it. Clearly, the extra growth in the US that the IMF is talking about is due to more money spending by the Government and this was not sustainable in the first place. Thus, it should be happy that the deficit is being controlled which would pave the way for a healthier and sustainable growth in the long term. But alas, the IMF sorely misses the point. And sends out a misguided warning

China is the world's manufacturing powerhouse. So a slowdown there is bound to have an impact on not just the Chinese economy but also the global one. And that indeed seems to be happening. China's manufacturing sector grew more slowly in February. This was gauged from official purchasing managers' index which dipped to 50.1 from 50.4. This suggests that the country's recovery could be slackening. As long as the reading stays above 50 it means that the sector has been growing. It is just that the pace of growth has slowed.

Growth in China's economy had picked up pace post the third quarter as lending and government spending surged. However, along with this, concerns re-emerged over inflation and possible bubble in property prices. This led the Chinese government to tighten monetary conditions, the impact of which was felt by the manufacturing sector as well. Of course, one will have to watch the performance of the sector for a few more months before any noticeable trend can be established. But China, like the rest of the emerging economies including India, has been feeling the heat of inflation. And measures to curb the latter are taking a toll on economic growth.

In the meanwhile, the Indian share markets traded above the dotted line today. At the time of writing, BSE Sensex was up by 70 points (0.4%). Most of the sectoral indices traded firm except realty and FMCG stocks. Asian stock markets displayed mixed performance with Korea being the top gainer.

04:50  Today's investing mantra
"Owning stocks is like having children; don't get involved with more than you can handle" - Peter Lynch
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1 Responses to "What Goldman's latest forecast could mean for gold?"


Mar 1, 2013

I know it is difficult to answer my point here.

Whay can you say like Buy gold when it drops below this and see that its value is equivalent to 10-15% of your postfolio value.
I am not sure what is take away from the article. If you are a bit more explicit, it helps dumb people like us.

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