Investing in Gold? Don't lose heart... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Investing in Gold? Don't lose heart... 

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In this issue:
» Bernanke receives top approval ratings
» A new player eyes the already congested telecom market
» While blue chips are welcome, SMEs are finding it tough
» Thank God for China, says US Inc.
» ...and more!!

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US Fed Chairman Ben Bernanke had his semiannual meeting with the US Congress yesterday. The meeting assumed great significance as it was expected to enable one to read into the mind of the most powerful monetary authority in the world. Bernanke made it quite clear that the recovery is still fragile and hence, there is no way that interest rates can be raised. Atleast not until unemployment situation shows signs of improving.

While these comments may have brought smiles on the faces of equity investors as inflation is not an immediate threat and economy would be given a chance to recover, such are the laws of investing, that it may have ruffled some feathers elsewhere in some other asset classes. None more so we believe than gold investors. Yes, the fate of the yellow metal is still married to that of US dollar and inflation and good news for the latter two more often than not means bad news for gold. Little wonder, gold prices have been behaving rather sluggishly in recent times. And with the recent Bernanke statement, it is expected to remain in hibernation for some more time to come.

But does it mean that gold has lost its allure as an important asset class. We don't think so. The problems that the world economy is confronting are not going to go away in a jiffy. In fact, things could even turn worse for some countries. And then of course all the liquidity that has been pumped into the system globally is sooner or later going to show up in the inflation numbers. So, from a long-term perspective, gold is still one of the preferred asset classes. It's sensible to have about 5% of your assets in gold.

00:53  Chart of the day
Today's chart(s) of the day show how China and to a small extent India, has taken a lead over other BRIC members (Brazil and Russia) as also the US when it comes to growing their economies over the past 40 years. The right hand chart depicts that, if one were to - by what -ldman Sachs had projected in its 2006 report, we still have a long way to go...or a high mountain to climb!

Data Source: IMF, Goldman Sachs

Coming back to Bernanke, he may have received flak from some full-blooded capitalists but if a survey by Bloomberg is to be believed, he has received top marks for combating the worst financial crisis since the Great Depression. As many as 75% of those who were polled had said they were impressed with Bernanke. Indeed, ever since the crisis broke out, Bernanke has moved with lightening speed, reducing interest rates to near zero levels and in no time, doubling the Fed's balance sheet by injecting trillions of dollars into the economy, a move that many believe has helped avoid a repeat of the Great Depression and has helped stoke chances of recovery sooner than expected.

However, not everyone has appreciated the move. By flooding the system with unprecedented liquidity, Bernanke has raised the threat of runaway inflation manifold and his biggest challenge would be to rein in the same without causing adverse effects on the economy. If he indeed manages to do the same, he might get top marks in our books as well.

It's a sector that the dividend purists would love to hate. Even after growing at such a break neck speed, it was only recently that the largest player in the sector announced its first ever dividend and even that resulted in a very small yield. Blame it on the continuous capex needs and cut throat competition that's keeping pricing power to the bare minimum. Indeed, we are referring to the telecom industry. And if these hindrances weren't enough, competition is getting tougher by the day.

As per a leading daily, the Indian arm of Norwegian telecom group Telenor has begun preparations to raise up to Rs 100 bn to fund the rollout of its operations in India's rapidly growing but a congested mobile market. So, don't be surprises if the market leader is forced to do a re-think of its dividend plans.

As per a leading daily, China seems to be proving one of the few bright spots during the US earnings season as the dragon nation's huge stimulus package is supporting demand for a variety of products, ranging from computers to construction equipment.

Although the earnings season is far from over, the list of companies that have already mentioned China as a positive has already reached notable proportions. In fact, the number of China admirers is only likely to grow in the second half of the result season as investment in the country picks up and the multiplier effect of the stimulus further kicks in. Little wonder, people are expecting the country to recover the fastest from the global financial crisis.

India isn't in a very bad position either. Although Planning Commission Deputy Chairman Montek Ahluwalia has stated that there could be no further fiscal stimulus packages for India, successful implementation of the ones that have already been approved is likely to see us through a decent enough economic growth. Furthermore, if the monsoon holds up well, we might end up with a GDP growth in the region of 6%-7%, which given the circumstances elsewhere, we would happily accept.

There may be talks flying around about India needing investments in infrastructure but what about investments in education? In an interview with the DNA, Robert Lytle, partner with international investment consultant The Parthenon Group believes that around 70 to 80 global players are willing to set up operations in India with investments in education running into hundreds of millions of dollars. What also holds tremendous opportunity is the sheer scale of private investment needed in the sector and the government emphasizing on reforms in the education sector.

However, all is not hunky dory and serious bottlenecks have the potential of hampering the development of education. One is that though foreign investment is allowed no company or for-profit organisation can invest into education. The second and the more serious one is the chronic red tapism in the sector, a phenomenon that all of us have experienced during the course of our education. It is said that India holds the advantage of having a much younger population as compared to the developed world, which can contribute to the former's growth. However, what matters is quality and not quantity. And if the education sector in India is not given its rightful due in the form of much needed investments, India's ballooning labour force will not hold much value. Indeed, some serious food for thought here.

Be it acquisitions or funding - Indian companies do not hesitate in looking at the foreign option these days. As per a leading business daily, a handful of blue chips have successfully managed to raise equity capital by way of GDR issues to fund their various needs. Clearly, Indian giants are now welcome globally. However, things are not quite as rosy for the smaller Indian businesses. The Deputy Governor of RBI herself says that for the SME sector, "...unavailability of sufficient equity, long-term capital are the typical problems." The good thing is that the apex bank is expected to lend a helping hand to the sector by relaxing norms for banks in the annual monetary policy later this month.

We agree that small and medium enterprise (SME) segment should indeed be supported. Not only do they provide livelihood to millions of Indians, but also from a purely capitalistic point of view - the winners of tomorrow must be SMEs somewhere right now.

After opening strongly in the positive, the Indian benchmark BSE-Sensex had slid into the negative territory and was still trading in the red at the time of writing. As far as other Asian benchmarks are concerned, while some of them closed in the red, others managed to eke out small gains. European markets are trading in the red currently.

04:48  Today's investing mantra
"If your actions are sensible, you are certain to get good results; in most such cases, leverage just moves things along faster. Charlie and I have never been in a big hurry: We enjoy the process far more than the proceeds - though we have learned to live with those also." - Warren Buffett
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5 Responses to "Investing in Gold? Don't lose heart..."

mj singh

Jul 23, 2009

gold fluctuation is much less but it has gone up &up ammounting to long term investment


Dr.MP Agarwal

Jul 23, 2009

Not of any use for me,but very good & usefull message for the concern ones.



Jul 22, 2009

Bernanke is perhaps taking a chance on the faster recovery potential of China and India. By keeping int rates low more liquidity is likely to flow into these countries stoking chances of inflation more in India and China.This could put a spanner in Indian Govt's plans of public infrastructure by forcing it to be more defensive on monetary policy.


dr praveen

Jul 22, 2009

today`s mantra is makes great sense.



Jul 22, 2009

Five minute wrap up is really a wonderful wrap up of the
market.It is brief but meaningful

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