Gold touches US$ 1,000. Time to buy? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Gold touches US$ 1,000. Time to buy? 

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In this issue:
» India's expenditure on healthcare remains poor
» World trade will decline in 2009
» FM maintains GDP growth at 6% plus in FY10
» Stiglitz's gloomy view on the US economy
» ...and more!!

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Interest in gold continued to rise as for the first time in six months, gold futures breached the US$ 1,000 per ounce mark yesterday. This takes the year's gain to nearly 14% and sets up the yellow metal nicely to close in the positive for the ninth year in succession. It should be noted that the turmoil in the global financial system has led to the central banks around the world flooding the market place with trillions of printed money, giving rise to concerns of hyperinflation. While inflation not raised its head just yet, it is only a matter of time and hence, we believe that gold may be one of the best bets around to nullify the effects of the same on your portfolio.

And although gold prices have moved up sharply in the past few years, many experts are of the opinion that it may go significantly higher even from the current levels and hence, it may not be too late for one to enter. Infact, here is the Director and President of Quantum Asset Management Company as well as the founder of Equitymaster, Mr. Ajit Dayal's view on gold, "Keep buying, it is a great hedge just in case the world stays in trouble - or inflation gathers steam."

00:44  Chart of the day
They may be the two fastest growing economies in the world with the biggest population but India and China do not seem to have done much to improve the quality of life of its people. As today's chart of the day shows, India's healthcare expenditure as a percentage of GDP leaves a lot to be desired. What is also appalling in India's case is that between 2000 and 2006, the spending on healthcare has actually reduced whereas the same has increased for the other countries. The government has time and again laid stress on the importance of education and healthcare but obviously needs to pull up its socks in terms of making any meaningful difference. We talk about how India has the advantage over the developed world due to its younger population, but will that matter if the quality of life remains poor?

Data Source: The World Health Organisation

China did something interesting recently. No, we are not talking about the country becoming the first to subscribe to IMF bonds worth US$ 50 bn. Given the financial clout it has, it was certainly expected to do so. But we are talking something bigger than that. The Chinese central bank has decided to fork out majority of the money to buy the IMF bonds using its local currency Yuan, sending shockwaves around the world.

Normally, one would have expected the dragon nation to pay in dollars on account of its recent displeasure with the same. But by using Yuan, it has now pushed a strategy, which it had been operating in a clandestine manner so far, out in the open. We are referring to the strategy of slowly and steadily making Yuan a freely convertible, global currency. And its purchase of IMF bonds in Yuan perhaps marks the first important step in that direction. It wants the Yuan to jostle for space in the reserves of central banks around the world and wants to increasingly trade with its trading partners in Yuan and not the US dollar. The 'Greenback' better be worried because here comes the 'Redback'.

Aggressive growth or regulated growth - is the question? And the man who presided over the creation of the biggest asset bubble in the US in recent times seems to be still favouring the former. Ex-US Federal Reserve chief Mr. Alan Greenspan is of the opinion that while poor capital adequacy led US banks to collapse in the global crisis, overregulation, as in India and China, has led to impeded growth for their banking companies. Probably, Mr. Greenspan continues to believe that poor regulation (as was the case during his tenure) can nurture larger number of entities globally that become 'Too Big to Fail' and thereby tide over economic crisis through government bailouts.

Recently, the director general of the WTO, Pascal Lamy, had remarked that import penalties and other border restrictions are closing off markets for global trade. Now the outlook seems even worse with UN body United Nations Conference on Trade and Development (UNCTAD) estimating a 11 % decline in world trade in 2009. That's lower than its earlier estimate of 9%.

This does not augur well for Indian exports. As per a leading business daily, it remained in the negative zone for the tenth consecutive month, since October 2008. Overall, however, we believe India will be relatively safer compared to some of its Asian counterparts as we are driven by domestic consumption more than exports.

Despite some signs of optimism emanating from the US in terms of an economic recovery, Nobel laureate economist Joseph Stiglitz has a gloomy view on the US economy as he does not see resurgence in the strong consumer spending that has been a key driver of growth. Stiglitz has said, "The prospects of a robust recovery are very, very weak." And where there has been a debate about whether the recovery will be U, V or W shaped, Stiglitz is more inclined towards the latter as he believes that the US economy faces the possibility of low economic growth over a long-term period or the possibility of a 'double-dip' recession whereby a recovery is not sustained. The silver lining in an otherwise dark cloud appears to be his stance that the second dip will not be as bad as the first dip.

While there have been some upbeat news on the housing and services front, the rising unemployment rate continues to undermine the strength of a US recovery. Unemployment soared to a 26 year high of 9.7% this August despite lower number of jobs being axed. Meanwhile the G-20 countries have decided to postpone their 'exit strategy' unless and until sustainable signs of a recovery start becoming visible. We hardly think this is surprising as the depth of the financial crisis meant that the recovery was always going to be gradual.

Despite the deficient monsoon and drought, Finance Minister Pranab Mukherjee maintains his stance that India's GDP growth for FY10 will be over 6%. India's GDP grew by a decent 6.1% in the first quarter of the fiscal and while the government does not expect this growth to be replicated in the second and the third quarter due to agriculture being hampered, the fourth quarter will make up for the same. Incidentally, the RBI has also projected the economy to grow by 6 per cent this fiscal with 'upward bias'. However, the CMIE and the UNCTAD believe otherwise. While CMIE expects growth to taper down to 5.8% for the fiscal, UNCTAD believes that India's GDP will grow at a much lower 5%. Whose estimates will finally prevail? Only time will tell.

The indices opened the day's proceedings on a firm note and while some amount of volatility was witnessed in the morning session, sustained buying activity across heavyweights enabled the BSE-Sensex to scale higher at the time of writing (up 185 points). On the global front, while key Asian indices closed firm, European indices are also trading in the green currently.

04:56  Today's investing mantra
"Time is the friend of the wonderful company, the enemy of the mediocre." - Warren Buffett
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6 Responses to "Gold touches US$ 1,000. Time to buy?"


Nov 8, 2010

what next in gold



Oct 3, 2009

I started a fresh in learning markets and investment.

But regarding gold ------- Opps i need to bye gold but when to buy is a big question.

Best Regards


madhuri kumar

Sep 10, 2009

With regard to regulated growth : How can one say, 'too big' can not fall? When there is no inherent strength, big or small, is bound to fall



Sep 8, 2009

sir i am padmakar patil i am totaly unknown of the share market but i stated study of the marekt last one and half our. i read many aritcal of u news letter and i satisfied for concerning knowlege. today i read Gold toudcehs artical. and i known to when will reaceh to the gold prices. but i dont conforma about purchase gold. i do not daired. ok good morning.



Sep 8, 2009

As always,I am avidly reading ur wrap ups.However,I am not able to view other people's comments-whether they agree,disagree with mine.The page just doesn't open up.Please look into it.


Hemalatha Ravi

Sep 8, 2009

Aggressive Growth or Regulated Growth?

While I agree with Greenspan being the architect of the U.S. financial debacle by allowing a completely free hand to banks and financial institutions, he does have a point abour over regulation. If you look at the U.S's own example they did achieve a lot as a consumer economy before the melt down. China has been fuelling the U.S. growth by being its low cost supplier, to the detriment of its low paid workers, while the U.S. has happily ensured minimum wages and lifestyle for all its people as well as the most expensive health care in the World.

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