Will gold emerge the best asset class in 2014? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will gold emerge the best asset class in 2014? 

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In this issue:
» Has the govt. met its FY14 disinvestment target?
» Is the US Fed's forward guidance relevant?
» What ails India's manufacturing sector?
» Gas price hike will inflate India's subsidy bill
» ...and more!

Gold has had a stupendous run for around a decade leading upto 2012. The rally became all the more pronounced post the 2008 global financial crisis. As central banks around the world began their massive money printing exercise, the value of paper currencies began to decline and investors flocked to gold due to its safe haven status.

That changed in 2013. As the Fed talked about unwinding its quantitative easing program, it was assumed that the US was witnessing a recovery. Thus, stocks gained while gold did poorly and plunged by around 28%.

The first three months of 2014 have once again seen a reversal in trend as gold has gained 11% outperforming nearly every other major asset this year. The crisis in Ukraine, falling bond yields and decline in the dollar among others have been cited as reasons for gold prices moving up.

Does that mean that we will see another rally in gold going forward? There are many who do not think so. Expectations abound that interest rates will be higher in 2015 which will heighten the appeal of the dollar making gold lose its luster.

But that may not be the case. We are not sure in which direction gold prices will move in 2014. What we do believe is that while gold fell in 2013 only to gain in 2014 so far, there has hardly been a change in the ground reality. The Fed's QE program in the last 5 years has only inflated asset prices without doing much in terms of bolstering economic growth or improving job prospects. So the wide variation in gold prices has more to do with sentiment. Even though gradual taper of QE has begun, interest rates continue to remain near zero. What more, the moment the Fed taper begins to put pressure on asset prices, one should hardly be surprised if the QE taper is stalled.

All of this only points out to the massive distortion in asset prices and financial markets as a result of loose Fed policies. With so much uncertainty surrounding the same, the only tangible asset that will not lose its importance is gold. Another case for gold is China's growing demand for the same. China consumed a record 41% increase in gold last year as gold prices fell. As reported in an article in the Crux, Marc Faber believes that as the Chinese slowdown continues and geopolitical tensions around the region rise, so will China's demand for gold.

All of this only makes the case stronger for gold in the longer run. Thus, a correction in prices such as the one seen in 2013 becomes an opportunity to add the metal to one's overall investment portfolio. This could form around 5% of the same.

After a correction in 2013, do you think that gold will emerge as the best asset class in 2014? Let us know in the Equitymaster Club or share your comments below.

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01:36  Chart of the day
The current government is intent on bringing the fiscal deficit for FY14 down to the targeted level of 4.6% of GDP. In this regard, the curbs on gold imports and subsequent reduction in demand has considerably eased off the pressure. Although this is hardly a popular move and quite unsustainable in the longer run. The other development that is expected to help the government is the ramp up in stake sales. While Suuti's stake sale in Axis Bank generated considerable interest, the other major success was the CPSE ETF. As reported in Business Standard, This raked in the targeted Rs 30 bn with its New Fund Offer (NFO) getting oversubscribed by more than 30%. The NFO saw bids of more than Rs 40 bn and about 20,000 retail applications. All in all, these stake sales have helped the government achieve its revised disinvestment target of Rs 160 bn for the year. It will be interesting to see what FY15 holds in store especially with a new government in power.

Govt. stake sales ramp up in FY14
*Axis Bank stake held by Suuti

The newly minted US Fed Chairperson has definitely carried forward the legacy of her predecessor of giving forward guidance on interest rates. However, she seemed to have added her own little twist to it. For her, the current preconditions seemed too narrow. And therefore she is more in favour of somewhat broader set of measures. What begs the question though is whether forward guidance is as important as it is being made out to be? One of the Federal Reserve Presidents does not seem to think so. He has argued that we may be giving exaggerated importance to it.

Well, he could well be true there. US Fed seems to be of the view that keeping interest rates lower help give a boost to the economy and stimulate it. They of course do but only in the short term. Over time though, this does nothing but results in misdirected investments which cause even more pain down the line. Thus, the idea should be to leave the markets alone and not tinker too much with it we believe.

One of the biggest reasons for India's slowing growth is the laggard growth of its manufacturing sector. The contribution of the manufacturing sector has stagnated at about 16% of the Gross Domestic Product (GDP). This is significantly lower than many of its Asian peers. For instance, China's manufacturing sector has grown phenomenally from 2.9% of GDP in 1991 to about 34% of GDP now. China's share in world manufacturing is 13.7%, whereas India has a miniscule share of just 1.8%.

Why is India's manufacturing under duress? If India-born British economist Meghnad Desai is to be believed, the root problem that's plaguing India's manufacturing sector is rigid labour laws. As per him, there is pressing need to initiate labour reforms and make labour laws flexible. The other point that he raises is the need to improve productivity to remove poverty. But these factors point at one common problem. India has failed to harness the potential of what it claims to be its demographic dividend. It is high time Indian policymakers take steps to address these important issues.

Some time back, the decision to hike domestic gas prices was hailed as a path breaking reform for the oil and gas industry. However, it seems like the government was in a hurry for an image makeover and has made some announcements in the name of reform. The same if implemented will negatively impact the economy further. Gas price hike seems to be one such decision. As an article in Live mint suggests, it is not a decision that can be taken in isolation. Gas is a key input for the fertilizer companies. As such, an increase in gas price, if allowed to pass through, will lead to increase in the cost of fertilizer and finally the food prices. Given the food subsidy plans of the Government, we believe it will be detrimental for the fiscal health of the economy.

Currently, the urea manufacturers sell urea at prices set by the Government, lower than the cost of production for which they are subsidized. In case high fertilizer costs are not passed on to farmers, the Government will need to raise the subsidy for urea manufacturers. Basically, this means that fiscal deficit is sure to get worse, either due to food or fertilizer subsidy. While the plan was to hike gas prices starting April 2014, with elections approaching at the same time, we will not be surprised if it is put on the back burner.

Global markets recovered smartly during the week. The recovery has come after the US Federal Reserve reducing its monthly bond-buyback program by $10 bn to $55bn signaling an improving US economy. The US Federal Reserve also spelt out that interest rates would be raised six months after the end of the quantitative easing irrespective of whether the national unemployment rate of 6.5% is reached or not. This rate is currently at 6.7%. The US factory production increased by 0.8% in February. The US markets were up by 1.5% during the week. The European markets also rebounded with indices in Germany and France up by 3.2% and 2.8%, respectively. The UK market was up by 0.4% for the week.

Barring China markets that were up by 2.2% on a weak yuan, most of the Asian markets ended on a negative note for the week. The weakness has been on concerns of slowdown in foreign capital flows post further tapering in the monetary stimulus program by the US Federal Reserve. The Indian markets retreated after scaling a record high of 22,041 on 18th March 2014 in the run-up to the elections. As a result, Indian indices were down by 0.3% for the week. Even the Hong Kong and Japanese markets ended lower by 0.5% and 0.7%, respectively. Japanese indices have fallen despite the country reporting the smallest trade gap in nine months and Bank of Japan stating that the 2% inflation target remains on track.

Many of the sectoral indices ended in positive territory for the week ended 21st March with Metal (up 3.5%), FMCG (up 3.3%) and consumer durable (up 1.8%) being the biggest gainers. Oil & gas (down 1.7%), Capital goods (down 1.5%) and Realty (down 1.3%) were the losers for the week. On account of a special trading session on Saturday 22nd March, Indian stock markets closed up marginally higher at 21,777.

Performance during the week ended March 21st, 2014
Data source: Yahoo Finance

04:56  Weekend investing mantra
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4 Responses to "Will gold emerge the best asset class in 2014?"


Mar 24, 2014

5min wrapup is a very good concept. It has helped me a lot. Please continue the good work for many many years to come.


parimal shah

Mar 23, 2014

Has any study been done to gauge how much does it actually cost to deliver and supervise various subsidy schemes (such as PDS, fuels etc) and how much is the subsidy delivered. It is my guess that if the subsidies were done away with and prices left to market forces, the savings of the staff salary etc would be greater than the amount of subsidy disbursed. And the pricves of subsidized commodities too will be fairer to all.
One fallout in that case would be that the politicians and others would not be able to siphon off the money.



Mar 22, 2014



sn malhotra

Mar 22, 2014

While what Lord Desai has to say on the manuf sector may be true it can only be considered a secondary reason.
The primary reason has to be demand growth, quality products
by manufacturers.

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