Should the government have the same gold policy as yours?
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» Is the commodity 'bubble' bursting?
» Investors read too much into quarterly numbers
» Indian banks losing business as per RBI
» Osama's death renews faith on dollar dominance?
» ...and more!
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But in reality, not all countries follow this policy of investing in gold. If one goes back in history, United Kingdom in fact sold its gold reserves in 1999. This had led to a huge decline in gold prices at that time following which central banks agreed to restrict their sales. Though one might think that UK was wrong in selling its gold, it however remains to be an asset that is not of much use for the government. There are several reasons for this.
Government reserves and funds are maintained for precautionary purposes. For example these funds are built to intervene in currency markets at times of currency adversities. The government can use its reserves in the global markets to support falling prices of its currency. If the government chooses to use gold for this, it would not be advisable as selling gold would just lead to a decline in the asset's global prices and not help the country in stabilizing its currency. Another reason that could be cited for holding gold would be to link the national currency prices with the gold prices. This would again not make sense especially for the richer and more developed countries.
However, countries like India and China have been expanding their gold reserves. They say that they are doing it more as precautionary reserve and not for the purpose of trading in gold to earn returns. Thus it would really make sense to hold gold only to the extent it acts as an insurance against currency devaluation and not as an investment.
For the retail investors too, gold can be an important investment as well as a hedge against inflation. But the extent of investment in the yellow metal in one's portfolio should not be disproportionate to fixed return investments and stocks.
Do you think the Government should keep building its gold reserves? Share your comments with us or post your views on our facebook page.
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Looking at the reasons for the recent correction in commodity prices one could easily make out they are temporary in nature. For instance, if US reports positive macroeconomic data for next week oil prices could rise in anticipation of increased demand. Again we know that commodities typically exhibit low correlation with equities. Thus, in the current environment commodity as an alternative asset class is more preferable than equities. This means that the demand is here to stay and further rise in prices cannot be ruled out. Hence, we believe that the recent correction is more of a breather rather than a genuine pullback. May be, the peak of this commodity price bubble is far higher than our imagination.
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The most recent March quarter has been no different. Already, 140 of the BSE 500 companies have announced their results and the verdict over which stocks need to be discarded and which ones to be lapped up also seems to have been passed. At the end of this huge exercise though, there is a question that begs itself. Does all of this really make sense? Certainly not we believe. Investing should be viewed from a long term perspective. One should not change one's mind and jump ships just because the most recent quarter has been bad. If the company's fundamentals are good, it will certainly reward its shareholders in the long term. After all, doesn't Benjamin Graham, the father of value investing say that investment is most intelligent when it is most business like? And business owners certainly do not fold up and change their business models on the basis of just one bad quarter. Shareholders like you shouldn't do it either.
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A certain gentleman called Steve Cortes has drawn an interesting parallel between military and currency might. He says that since the US army is the strongest and most unrivaled, the dollar would also continue to remain the world's reserve currency. He points that historically, the country with the strongest currency has always been the reserve currency. Well, that's logical and true. It goes without doubt that politics and economics are intricately woven in to each other.
But let us not ignore the fact that the US economy is going through a major economic turmoil. And mind you, it's not a cyclical downturn but the beginning of the end of a century long hegemony. US' deficits are widening to insane levels. The damage cannot be repaired without significantly lowering the American standard of living. And as its economic clout subsides, its political dominance may also mellow down.
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04:55 | Today's investing mantra |
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6 Responses to "Should the government have the same gold policy as yours?"
ketan
May 7, 2011No, the present prices of Gold are too high.However,on declines the govt, should increase its reserves of Gold and Silver
Ravindra S Bawaskar
May 7, 2011Dear Sir,
My personal view is RBI should increase their reserves in gold with so many money scams already leading to increasing worries of RBI, being simple NRI everybody looks to-wards INDIA as a safe place to retire with assured returns which banking sector should take care.specially remembering the good old days when INDIA was a gold country & where that glory went to?.
DC Sekhar
May 6, 2011Yes, the Government of India should consider an increase in gold reserves to 8-10% of the total reserves. It should be done without impacting the international prices of gold w/o much hype. There is a need to emphasise that it is not for investment purpose so that the speculation is minimised. It is important to strike deal at a right time. The range of gold reserves can vary from 5-10% in long run depending on the scenario of global economy and for preserving the value of reserves. The cycle can stretch upto 20 years.
Madhavankutty
May 6, 2011Once in India Gold Coin was using as currency and that currency was costing 16 Rupees only at that time the same coin I was purchase from a gold smith in Mumbai at the rate of 1500 rupees in 1980 I think so. At present its cost I con't imagin.
amarish
May 6, 2011india has not that gold which china has.thanks to all gold etf who has marketed of gold schem.only reliance mf has started to market gold by only rs. 100.00 monthly sip
amarish
George
May 9, 2011I would say "YES" because in the coming years or say about coming centuries, due to the wrong economic planning and activities the so called paper currency would become worthless, although whatever economic solutions are being implemented to maintain the value of paper currency. In such eventuality, that would spread all over the world in the near future, the Gold is the only best suitable item through which wealth can be measured!