This Indian banker doesn't want you to buy gold - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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This Indian banker doesn't want you to buy gold 

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In this issue:
» Did the famous author of 'Tipping Point' cause the financial crisis?
» Jim Rogers does not see a hard landing in China
» The Prime Minister continues to remain silent on important issues
» The real estate market that is beating Mumbai hands down
» ...and more!


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00:00
 
We like it when CEOs and corporate heads come out and help policymakers with their policymaking. After all, their intellect and vast experience helps them bring fresh perspectives on the table and give policymakers something extra to work with. Thus, we read with great interest an article penned by Mr Aditya Puri, the MD of one of India's most respected banks, HDFC Bank. It touched upon ways and means to bring under control the problem of our huge current account deficit.

Now, Mr Puri is one of the most astute bankers in the country. And he did have a couple of suggestions that were quite good. However, what did not go down well with us were his views on gold. Mr Puri chose to paint the yellow metal as the villain-in-chief of India's current account deficit problem. In fact, he went to the extent of saying that a complete ban, albeit a temporary one, on gold imports is certainly called for. Besides, he was also of the view that by investing in gold, households seem to be moving away from financial assets and hence, making that much less money available for investments into the economy.

We believe that Mr Puri's views are akin to putting the proverbial cart before the horse. It isn't that India's current account deficit is higher because of gold. But the point is that gold is being preferred because of the governance deficit in the country. At a time when most other assets are offering negative real rates of interest, people are likely to queue up to buy the yellow metal. Once policymakers address this problem, demand for gold and thus the current account deficit might also come down.

Mr Puri's second argument also seemed a little out of place as per us. Just as other financial assets are a form of wealth, so is gold. The question of it being a hindrance in the investment of other productive assets does not arise as per us. It isn't that gold is drastically affecting the savings rate in the country. It's just that its preference as a saving asset has gone up in recent times and this should not affect the investment climate in the country in any big way. Thus, Mr Puri's suggestion of banning gold imports does not seem to be on a firm footing. On the contrary, it will end up depriving people of an important hedge against inflation and macroeconomic uncertainty.

What do you think? Do you agree with Mr Puri that gold imports should be banned? Share your views or you can also comment on Facebook page / Google+ page.

01:17  Chart of the day
 
Everyone has harped enough about the demographic advantage that India possesses. However, The Economist has chosen to highlight one another important point about India. And this forms the basis of today's chart of the day. As per the popular magazine, although India boasts of one of the youngest populations in the world, it is also home to the oldest policymakers i.e. cabinet ministers. As highlighted, with an average age of 65, India's cabinet ministers are older than those in any of the BRIC nations as also USA. As the magazine points out, this can be a good thing as long as the going is good. However, as the Arab world showed, a big age gap can also be a source of instability. We pray this does not turn out to be true for India.

Source: The Economist


01:52
 
While experts around the world are crying hoarse about a hard landing in China, Jim Rogers is unfazed. He believes that concerns on a slowdown in China are overdone. And every fall in the Chinese stock markets is reason enough to get interested in investing there. So why is Rogers bullish on China? He believes that the Chinese government has made it quite clear for some time now that it wants to bring inflation down and prick the property bubble. Indeed, if China has to grow at a healthy pace in the years ahead, some hiccups along the way are bound to occur, but these would enable the dragon country to emerge stronger. In this, China's scenario is akin to that of the US. Rogers states that in the nineteenth century, the US had 15 depressions. But out of that came a successful country in the twentieth century. Thus, Rogers believes that China would also more or less mirror the same trend. And the fact that it has ample forex reserves also gives it an edge. Quite compelling arguments indeed. It will be interesting to see who turns out right, the China bears or Jim Rogers.

02:27
 
History offers plenty of examples of common perceptions being flawed. That big entities are not destined to fail was one of the biggest misconceptions in the history of mankind. Ironically, the man who was once chairman of an iconic big bank recently reiterated this view. Citigroup's ex-chairman Sanford Weill now believes that big banks need to be broken up. Well, it almost sounds like Greenspan talking about the ills of loose monetary policy. However, the fact remains that some degree of sanity is returning to the big entities. In hindsight of the problems that big banks created, breaking them up is certainly the way to go. No doubt these entities have hardly created any value for shareholders all these years despite their size. Hence, big banks are now destined to go back to their 1980's avatar. What remains to be seen is whether these big entities remain answerable to tax payers for their multibillion dollar bailouts.

However, it cannot just be about separating i-banking from deposit taking. It needs to be about avoiding conflicts of interest. Not just in banking but in any industry. Including brokerages and rating agencies.

03:00
 
Property prices have risen by more than 50-70% in Mumbai and Delhi in the past one year. Seeing this steep appreciation, Indians, especially NRIs are increasingly looking at investing in the Middle East property market. Data shows that Indians topped the list of first-time property buyers in Dubai. They bought properties worth Rs 2.9 bn in the city last year. Plus, 100 of the 900 apartments in Dubai's iconic Burj Khalifa skyscraper are owned by Indians.

So why Dubai? Investment in property is for capital gains. Mumbai or Delhi can no longer offer the same as the base price is already too high, and thus the return on investment will be lower. Plus, the biggest advantage of investing in Dubai property is that there is no tax on the rental income. Nor is there any capital gains tax levied on the sale of property. However, from an investment point of view, India may just be a better choice. Dubai is still reeling from the 2008 financial crisis. On the other hand, India's real estate sector remains relatively sheltered from macro factors. Plus, the Indian market is more realistic as it caters to real demand and is not as heavily dependent on global factors or the investment climate.

03:37
 
After the erstwhile Finance Minister vacated his position, the PM has graciously stepped in to take control of the finance ministry. But for those who thought that he would help turn the fortunes of India's slowing economy, they are wrong. Despite the importance of the decision on diesel price hike, the PM continues to maintain his silence on the subject. The reason being that such a hike would lead inflation to spiral out of control. And if this is done in the absence of reforms, it would hurt the economy more. Not to mention the loss of confidence in the sensitive voter community.

If this were to happen before the important Vice President elections, the PM's political party may lose the same. Therefore, he has decided to hold his peace till the elections are over. Unfortunately, the country would continue to suffer during this time. We need reforms and we need them soon. But what we need more is a PM or a Finance Minister who puts the needs of the economy before political interests.

04:08
 
Malcolm Gladwell, the author of popular books like Blink, The Tipping Point, Outliers, etc. finds himself at the receiving end of a rather shocking accusation. That of being responsible for causing the financial crisis. What on earth could make someone think that Mr Gladwell would have caused the financial crisis? You will recall that the financial crisis struck with the collapse of the giant investment bank Lehman Brothers. Interestingly, Mr Gladwell had been to Lehman in 2005 when his book 'Blink' had just been published. There, he had given a talk on decision making to the senior executives of bank. For starters, 'Blink' is about the power of gut decision. As the story goes, Lehman's President Joe Gregory was highly impressed with the ideas presented. So much so that he passed copies of the book on the trading floor.

Does this imply Mr Gladwell's ideas were responsible for the crisis? We certainly don't think so. It appears that Lehman's employees misinterpreted his ideas about snap judgments. The book clearly elaborates cases wherein gut decisions could go wrong if not defended against bias and corruption. Moreover, the crisis cannot be attributed to any single person or cause. It was an eventuality whose genesis goes back in time much prior to Mr Gladwell's talk at Lehman.

04:45
 
Meanwhile, indices in the equity market in India have been trading lackluster today. The benchmark Sensex was trading marginally lower at the time of writing. Heavyweights like Reliance Industries Limited (RIL) and Infosys were seen exerting the maximum pressure. While Asian markets closed mixed today, Europe has opened on a positve note.

04:55  Today's investing mantra
"One of the reasons why looking at return on capital is important is that it keeps you out of the value traps." -Joel Greenblatt
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30 Responses to "This Indian banker doesn't want you to buy gold"

jignesh thakkar

Jul 29, 2012

This is to bring your attention to the fact that in this article you have made a mistake by interchanging names of SBI & SEBI...have a look at it...i have been the reader of this article for long & would not like to see such serious blunders in the same...such mistakes are harmful to the image of the EQUITYMASTER & 5min wrap up...thank you

Like 

KP

Jul 27, 2012

It really is a pity that most people on this board don’t understand the nature of money and have forgotten the lessons of their forefathers.

First let’s start with the basic definition of inflation -

Inflation is an increase in the money supply and NOT an increase in price levels. The rise in price levels is a CONSEQUENCE of an increase in the money supply caused by debasement of the currency.

The way the money supply increases is through the process of fractional reserve banking. RBI interest rates need to reflect the amount of real savings in a country. Unfortunately, they set this number almost arbitrarily or based on political pressure. By keeping rates too low for over a decade, RBI has allowed the banking system to increase the money supply almost four fold since 1999. It’s a pity that most people don’t understand that by making loans, the banking system, though the process of fractional reserve banking, inflate the money supply. The resulting price rise is arbitrary and unpredictable but inevitable.

Who wins with inflation is anyone with debt (usually the government). And who loses with inflation is anyone with savings. The loss of purchasing power is brought about due to debasement of the money supply because all prices are in Rupees. Inflation is a hidden TAX on savers and the only way to escape this is to hold a hard asset that cannot be debased easily. This is where gold, silver, and property comes into play. People need to think of gold not has an asset but as money, money that cannot be debased by the government. Hard assets are the only way to protect your purchasing power.

Lastly, also want to point out that the reason that gold/silver do not pay anything is because there is no counter-party risk associated with them. Anything that pays you interest by definition has a probability of default. That’s the reason people expect to be compensated for taking on that risk.

People like Aditya Puri are simply talking their own book. There is a lot of propaganda, especially in the West, to make it seem like gold doesn’t or shouldn’t play any role in the monetary system. However, gold is the currency of choice of the free-markets and has been for over 5000+ years. The average lifetime of paper money is about 28 years. The current system is in its 41st year (2012-1971). Ignore gold at your own peril.

Like (3)

Ghanashyam Bhinge

Jul 27, 2012

I agree with you. Government should first bring much awaited reforms and good governance. Then people will start believing into corporates and stock markets. Till such time gold is the only option available to common investors to park some of their investible funds.

Like (3)

Panchu

Jul 27, 2012

Gold is not a productive asset, as the two best form of gold investment (Gold ETF & bars) don't generate any employment or contribute to the economy. Gold in safe storage is akin to gold treasures, hardly useful to modern society. Mr Puri suggestion of "temporary" import ban on should be considered if it will help in reducing the deficit.

Like (3)

Shyam Kumar

Jul 27, 2012

Policy makers should understand that people have moved more towards GOLD only because there was no much returns on Fixed Deposits. If FD's give a better return people are sure move away from Gold. TDS is another factor which drive people away from FD's. Higher interest and removal of TDS will surely bring down the requirement of gold.

Like (3)

nagarajan

Jul 27, 2012

we fully agree that both gold and realestate investment at this valuation is foolish and unproductive & prudent investors should aviod

Like (3)

sedric fernandez

Jul 27, 2012

Fully agree with Aditya Puri. Even yesterday, one of the RBI Dy.Directors has said that we need to move away from Gold, since gold cannot be used to produce anything.

i have always wondered why Gold has been given so much importance in our country. This craze for hoarding 'more gold than your neighbour has' is definitely a hindrance to our progress as 'forward thinking' individuals and our country as a whole.

but looks like this socio-economic change though necessary will take a long time

Like (3)

C.M.PANICKER

Jul 27, 2012

Mr Puri has foregotten that gold ornaments making and trading is a big business providing income to the excheqer and jobs to millions of people in the country.Govt should encourage export of value added gold to compensate for the outflow of foreign exchange.The love for gold is of sentimental value for the large rural population of India, whose sentiments will be hurt if import of the yellow metal is stopped and it is made costlier in the process.

Like (1)

manoharkantak

Jul 27, 2012

We have to analyse Mr. Puri's statement properly. If Gold is banned, what will happen ? Many dowry problems will be reduced. Gold smuggling will prosper, more black money will be generated. People will resort to real estate, again the prices may soar, and black money generation will increase. Gold ETF's also will be closed. How much it will work in bringing down the budget deficit is still an experiment one can try. Instead discourage the people to buy Gold by strengthening the Economy. Respected business houses should be allowed to appeal to the people to lend money at 5% or 6% interest to save the economy. There are many learned and patriotic people still in our country who know the global economic problems and will help the nation to come out of such crisis. But not Air India and Vijay Mallya.Today Gold appears to be a necessity in one's portfolio. Personally I was against gold because it is a dead asset, but now I also feel it is safe and with Gold ETF's it is tradable also. Even if values fluctuate, from Rs.3000 it will not come down to Rs.30 like some shares.Even if Mr. Puri is right it will not be practicable in our country where Kalmadi and Raja are still our leaders.

Like (1)

mcb

Jul 26, 2012

The ban on gold will encourage smuggling of gold because as long as present situation continues, buyers will always be there. In any case, the money that is used to buy gold ultimately comes into circulation and gets multiplied through banking and other investment channels, the real problem is idle money and black money which are not the part of active circulation which is must for economic growth.

Like (1)
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