Berkshire Hathaway bear turns bullish on gold - The 5 Minute WrapUp by Equitymaster
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Berkshire Hathaway bear turns bullish on gold 

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In this issue:
» Why are emerging market currencies falling?
» Mr Murthy comes back as Chairman for Re 1 salary
» RBI tightens regulations for new bank licenses
» Emerging markets vulnerable to foreign capital flows
» ...and more!


00:00
 
A very famous quote by value investing genius Warren Buffett goes thus: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

This may appear simple in theory. But when it comes to application, not many would be able to stand the test. To be a contrarian, to stand apart from the crowd requires great conviction and discipline.

A gentleman who answers to the name of Doug Kass has done exactly this. You will recall that last month Mr Kass had participated in Berkshire Hathaway's annual general meeting as the official Berkshire 'bear'. Now, Mr Kass has taken a contrarian call on gold.

While investors and speculators across the globe are dumping the yellow metal, Mr Kass has turned extremely bullish on gold. Here is what he has to say: "There is probably no better time to consider diversifying one's portfolio into a depressed asset class (e.g., gold) than when the crowd is optimistic about a vigorous and self-sustaining global economic recovery and when the world's stock markets are at record high prices."

Let us explain his rationale. The overall sentiment has turned against the precious metal. Many have called it the end of the gold bubble. As a result, the number of gold bears has gone up dramatically. Too many short sellers crowding in may create a short squeeze and result in demand for gold.

Moreover, all hopes are now pinned on a sustained global economic recovery. In fact, the US dollar has strengthened in recent times backed by hopes that the economy is set to recover and the US Fed would gradually wind up its QE program.

Mr Kass believes these expectations are too optimistic. On the contrary, he expects all major currencies including the US dollar to weaken over time. The stimulus program may go on much longer than what people think. At the same time, he is of the view that inflation would eventually show its ugly head. And this would push gold prices higher.

We very much agree with the views of Mr Kass. The only point where we differ is how we look at gold as an asset. It is worth noting that Mr Kass has been bearish on gold earlier. He has now turned bullish purely because of the contrarian appeal and his overall bearish view on stocks. We, on the other hand, look at gold an as insurance, as a keeper of value. We believe that a small percentage of your investment portfolio, say at least 5%, should be parked in the yellow metal. This, in our view, will help you guard against destruction of purchasing power caused by unforeseeable crisis or reckless government policies.

Do you think this is a good time to buy gold? Please share your comments or post them on our Facebook page / Google+ page

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01:30  Chart of the day
 
The Indian rupee has been sliding against the US dollar again in recent times. With the rupee heading close to its all-time low, Indian policymakers are again worried. But is the rupee the only currency that has been tumbling? The answer is no. In fact, several emerging market currencies have been falling. The chart of the day shows the returns that worst performing emerging market currencies have delivered in the last one month.

Many have already started calling an end to the bull rally in emerging market currencies. The decline in emerging market currencies is largely attributable to the expected economic recovery in the US and the chance of a consequent pull back of the QE program.

Data source: DNA Money


02:00
 
Infosys Ltd recently announced a comeback of its founder Mr Narayana Murthy. In a letter to the people of his company, Mr Murthy has stated that he would be working for a token salary of Re 1. The practice of working for a token salary is not really new. At times of crises, company CEOs have opted to work for token salaries. But let's not mistake this as working for free. The CEOs do get compensated in the form of stock price appreciation and dividends on their personal holdings in the company. Nevertheless, the impact of such a practice is that it does not add additional stress on the company's financials. This is a boon especially when times are tough. This makes one wonder if other companies in India would follow Mr Murthy's example. As per an article in the Times of India, this is highly likely.

Most companies in India have seen their earnings come under pressure in recent times. This is largely due to the depressive macroeconomic situation. As a result, the CEOs may opt to work for a token salary. This would work well for companies especially for those where the compensation to the top brass is a significant portion of the profits. It also helps that the returns for such CEOs are tied to their stock holdings. As a result, they are more motivated to ensure that the company delivers better performance. However, history tells us that CEOs opting for such pay structures is usually a temporary thing. It is a short term approach adopted during a crisis situation. Therefore the question we must be asking ourselves is there a crisis situation out there? If this is true then investors would do well if they adopt a cautious approach when it comes to their stock investments. The importance of doing your own homework becomes even more pronounced during such times.

02:45
 
When RBI announced granting new banking licenses, there was considerable interest shown by big corporate houses. Many of them already had non-banking finance arms. Thus, they wanted to expand operations by foraying into banking. But it was not always going to be easy.

The banking and the financial industry worldwide has received considerable backlash and criticism. This is for the role it played in manifesting the global financial crisis. One of the reasons why the Indian banking industry was relatively unscathed was because of the strong regulations imposed by the RBI.

Hence, there have been concerns whether awarding banking licenses to corporations was a good idea. One take on this was that the RBI will have to tighten its regulatory requirements while doling out new licenses. And it seems to have done just that. The central bank has introduced a provision that the promoting company aspiring for one must have at least 51% public shareholding. This is over and above its guideline that the non-operative financial holding company (NOFHC) floated for the purpose should itself have 51% of its voting equity shares held by companies in the promoter group. The idea is to make sure that licenses are not awarded to all and sundry. But only to those who are very serious in carrying out banking operations. We believe this to be a step in the right direction. And will not deter those corporations which really want to establish a strong presence in the banking arena.

03:30
 
There are two things that drive equity markets. One is earnings and the second is liquidity. We know that during recession earnings fall. At this point it is liquidity created from money printing that drives the markets. But once that liquidity dries up, prices revert to their fundamental value supported by earnings. Something similar has been happening in the emerging market countries like Indonesia, Thailand and Philippines. Until recently, these markets were soaring. This was due to the liquidity injection exercise undertaken by US Federal Reserve. However, Ben Bernanke has now given indications that this stimulation exercise may come to an end soon. As such, these emerging market stocks have taken a beating.

It is not that these markets were supported just by the external liquidity. The fundamentals of these markets were strong enough to attract foreign capital. But in emerging markets, not enough savings are channelized into equities. Thus, they are more dependent upon external cash flows. And this external cash flow depends upon the monetary policy exercise of ECB or Federal Reserve. Unless enough domestic savings are channelized into markets, emerging equities will continue to remain dependent upon foreign capital. And thus remain volatile to that extent.

04:10
 
In the meanwhile, the Indian share markets were trading flat. At the time of writing, the BSE Sensex was marginally up by 9 points (0.04%). The sectoral indices were trading mixed with stocks in the oil and gas and realty space leading the gains. However, stocks in the software and FMCG space were witnessing maximum selling pressure. Asian stock markets and European markets were trading in the red.

04:35  Today's investing mantra
"Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."- Warren Buffett

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    3 Responses to "Berkshire Hathaway bear turns bullish on gold"

    Mohanreddymutyala

    Jun 6, 2013

    The emergency market failed because of tv gold hike unnoticed .
    Tv
    Mohanreddymutyala

    Like 

    Cool_mohanreddymutyala@rediffmail.com

    Jun 6, 2013

    Because of gold prose hike.
    Tv
    Mohanreddymutyala

    Like 

    SKundu

    Jun 5, 2013

    I agree with your point about treating GOLD as an insurance. However a lot of people treat that as an investment rather than insurance. Nothing wrong in that. The difference is that when you buy insurance you ideally do not want the returns, its a hedge... should things go wrong. With the recent fall in GOLD prices a few people [I know] have become scared saying that if GOLD has to go down, why buy that. Which basically brings us to the point... do you treat GOLD as insurance on investment.

    Like 
      
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