If you do not own gold, now is the time... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

If you do not own gold, now is the time... 

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In this issue:
» Interest rates in BRICs stay high
» Cut in gold import duty on the cards
» Road projects set to get cleared
» Will equity fund raising in India ramp up?
» ...and more!

If you thought that the economies of the rich world are on the mend, think again. After years of massive money printing, last year, the US announced a halt to its quantitative easing program. The perception was that the economy is recovering and there is no need to support it anymore. However, economic data released from the country so far has been volatile at best with no real signs of a recovery.

Not just the US but Japan too went in for a radical quantitative easing program last year. Dubbed Abenomics, the Japanese PM's aim was to unleash a wave of liquidity so as to stoke inflation.

And now the European Central Bank appears to have gone one step ahead. Indeed, the ECB President Mario Draghi has now cut the deposit rate from 0% to negative 0.1%. This deposit rate is essentially the rate central banks pay other banks to deposit funds. In other words, the ECB has officially ushered in a negative interest rate scenario.

What does this mean? Basically, savers get a raw deal. A negative interest rate scenario means that you are effectively paying the bank for depositing your money when in a normal situation it is the other way round. So there will be no inducement to save. But this works very well for borrowers. Now they can easily get funds at practically no cost. More funds and more money in the system means that there will again be more liquidity chasing various asset classes. Asset prices then will reach unsustainable levels thereby setting the stage for the formation of asset bubbles. And at some point in the future, these asset bubbles will burst. And the world will wake to another financial crisis, probably worse than the 2008 global crisis.

What is so ominous about this situation unraveling is that it is pretty much similar to what caused the 2008 crisis in the first place. And yet central bankers around the world do not seem to have learnt a lesson.

That is why we stick to our view that gold is an asset class that one should not ignore. This is despite the fact that many economists and so called experts have been forecasting a fall in the prices of the metal. As these loose monetary policies continue, gold will be the one tangible asset that will act as a hedge as against paper currencies which are bound to lose value. What more, even if the US Fed has trimmed its bond buying program, we will not be surprised if it resorts to it once again sometime in the near future, if the health of the US economy remains subdued. Hence, we reiterate our stance that investors should have some part of their overall investment portfolio allocated towards gold.

Does the case for gold remain strong given the negative interest rate scenario brought in by the European Central Bank? Have you allocated part of your portfolio towards gold? Let us know in the Equitymaster Club or share your comments below.

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01:36  Chart of the day
While the interest rates in the West remain low, those in the BRIC nations have been quite firm. hile the rich world has been grappling with deflation, for these emerging economies especially India, inflation remains a key concern. In India at least, high inflation has been a problem for quite some time now. And the RBI is in no mood to ease rates unless this comes down within acceptable levels. If the Modi government gets its development agenda rolling and many of the supply side bottlenecks are done away with, then there are very good chances of inflation cooling off. And this will be a good enough signal for the RBI to also start reducing interest rates.

Interest rates in the emerging world stay high

Imposing import duty on gold has been just one of the attempts of UPA government to arrest current account deficit (CAD). The policy may not have had a meaningful impact on the deficit. However, what it certainly did was bring down the gold import volume dramatically (down 80% YoY). Meanwhile, the quantity of gold smuggled into the country has also growth disproportionately. And that has in many ways defeated the purpose of the import duty. So in what may come as a huge relief to gold investors, the NDA government is contemplating to cut the import duty. Given that the sentiment towards buying gold is already muted, the government probably does not fear stoking CAD concerns. More importantly, the constant foreign inflows after the change of government have also eased deficit concerns to an extent. Further fall in gold prices, in the event of a duty cut, should be seen as an opportunity to buy more gold we believe. While investors may not want to speculate on near term trend in gold prices, holding 5 to 10% of one's assets in gold continues to remain important. And the duty cut will certainly tilt the risk-reward balance for gold firmly in favour of the latter.

It looks like the government is ready to set the ball rolling when it comes to infrastructure projects. In stark contrast to the west's obsession with loose monetary policy, the new government in India seems to have understood the role of infrastructure to boost growth. In what will be music to the years of road developers, the surface transport ministry is looking to clear pending road projects amounting to Rs 180 bn in the next six months. The ministry has drawn up a list of 11 top priority road projects. This includes the controversial Delhi-Meerut Expressway which has been held up since 2007.

The new government is certainly keen to put its best foot forward in its first few months. Road projects which have completed most of the appraisal process will now be put on the fast track. In the next six months, the ministry will clear projects with a total length of 1,300 kms. The target for FY15 has been set at an ambitious 8,500 kms. It must be kept in mind that in FY13 and FY14 the ministry awarded just 1,322 kms and 3,169 kms of projects respectively. Road infrastructure plays a critical role in the overall growth of the economy. We certainly hope that the new government will be able to deliver on its targets.

The investment climate in India is in doldrums. But the irony is that a host of investment proposals are simply awaiting approval from the government. As per sources, 285 projects valued at over Rs 16 trillion are put on hold. If India has to regain its momentum then the first thing is the fast approval of the pending projects. And the Narendra Modi led NDA government has taken the first step of merging ministries to cut down on delays. In yet another positive development, the government has moved towards an online system for environment clearances. Around 44% of the projects had been stalled due to environmental reasons. Therefore this move will not only set the ball rolling but will also bring in transparency in the whole process.

For a capital starved country like India, there's a huge source of funding sitting right here in our midst. At least this is what The Economist seems to believe. The magazine is referring to our very own stock markets. At last count, it was worth a staggering US$ 1.5 trillion. And yet hardly any of it is used for fund raising. To put things in perspective, only about US$ 18 bn dollars worth of fund raising has happened through our equity markets per year since 2008. This is a measly 1% of the total market value of all listed firms currently. Can this be taken up to US$ 100 bn over the next few years? Certainly. The number does look high from a historical standpoint but its well within reach given that it will amount to not more than 7% of the current total market cap. This is not going to be easy to tap though. First and foremost, Indian banks and its firms will certainly have to rid themselves of the bad debts that they have accumulated during the slowdown. And the RBI seems to be making the banks' job easier by forcing them to recognise rotten loans faster. And if firms too hasten up this process at their end, we will truly be on the cusp of a big bang restructuring. It would set the Indian economy up for the next phase of growth. Whoever said fundamentals drive stock markets. For all you know, the stock markets can also become an agent of change for fundamentals, isn't it?

The Indian stock markets, continued to gain ground on the back of strong buying activity across index heavyweights. At the time of writing, the benchmark BSE-Sensex was up by 302 points (up 1 %). Barring IT, all sectoral indices were trading in the green. Oil & gas and banking stocks were the biggest gainers on the bourses today. Asian stock markets were trading mixed. While Japan found favour, China and Hong King were the major losers. European markets have also opened the day on a mixed note.

04:56  Today's investing mantra
"I like businesses that I can understand. Let's start with that. That narrows it down by 90%. There are all types of things I don't understand, but fortunately, there is enough I do understand." - Warren Buffett
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3 Responses to "If you do not own gold, now is the time..."

Thirupathi Rao

Jun 8, 2014

It may be true in one point of view. But I understand that gold relentlessly went up to 300% plus before retreating to 200% now.Asian stocks are moving up besides improvement in EURO economies.It may take some more time for stabilization of Gold rates.Till such time investors may wait for investment in Gold.


Ravi S Kolathur

Jun 7, 2014

As the gold price is steadily falling, I am investing in Gold ETF everytime its price touches a lower 100 per gm level, i.e. I invested some when the price was 2700, then some at 2600, and I am waiting for it to touch 2500.


Pankaj Gera

Jun 7, 2014

While Gold price in Dolor terms may see firmness on long term, in India Gold prices is bound to see downward rend in short term majorly due to cut in import duty due to improvement in CAD and rupee strengthening. The overall exposure to gold should be limited to 10% of portfolio. Gold as a commodity follows 8 year cycle and has already seen extended cycle.Systematic investment in Gold can reduce downward risk.
Pankaj Gera, CFA, CFP
Mb 9891250443

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