This is why you should not own too much Gold - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

This is why you should not own too much Gold 

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In this issue:
» Indian pharma companies corner some more glory
» Corporate bond market volume more than triples
» The biggest problem facing Indian policymakers
» Inflation data has to be monthly: Planning Commission
» ...and more!

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00:00  Chart of the day
Expert after expert has been shouting from the rooftops about how gold might go from strength to strength from the current levels. And it could well be justified. However, if you look at the chart of the day laid out below, you would consider buying something else. Shares in Indian companies that is. Over a really long-term period, returns from Sensex have beaten returns from gold hands down. In fact, gold doesn't even come close.

Since Jan 1990 till Sep 2009, while gold is up nearly 5-fold and just about keeping pace with inflation, Sensex is up more than 25-fold, albeit with higher volatility. Agreed that best days for gold lie ahead as the metal had barely budged in the 1990s but so do India's. While gold has historically proven to be the best bet against inflation, the chart makes it clear that making it a large part of your portfolio may not be a very good idea. To give your portfolio that extra edge, stocks are a must have.

Source: Trend (Gold prices in Rs.)

Falling interest rates and the unpredictability of the stock markets in the last six months have given a much needed fillip to the corporate bond market. As per reports, the trading volume of corporate bonds is up over 3 times in the six months from April 2009 to September 2009. The trading volume during this period was about Rs 1,600 bn, compared to just about Rs 500 bn in the same period last year. The interest rate offered by these corporate bonds have been in the range of 8.25% to 8.75%. It is perhaps a pity then that corporate bonds are not as accessible to retail investors and as freely traded in India as in other parts of the world. But the authorities have stepped up their efforts towards the same and things might just get better in the near future.

While the weekly released inflation number (WPI) may be one of the most closely watched economic data these days, one cannot read too much into the same. This is because for one, the components of the wholesale price index are archaic and secondly they not show the impact of inflation at the consumers' level. The Deputy Chairman of the Planning Commission Mr. Montek Singh Ahluwalia has reportedly pitched for a monthly release of the WPI rather than a weekly release on the premise that the data collection system on a weekly basis is faulty. While his concern is genuine, what probably could be of more importance to the Planning Commission is not just the release of the 'correct' data but also better planning for better economic indicators.

Some Indian companies may have had issues relating to maintaining quality manufacturing standards but that has not tarnished the overall image of the Indian pharmaceutical industry. Otherwise what would explain the fact that Indian drug companies have bagged an overwhelmingly majority (around 95%) of drug approvals under the US President's Emergency Plan for AIDS relief (Pepfar). Companies in the forefront include Aurobindo, Cipla and Matrix who have secured around 15 approvals each. Pepfar is the largest commitment ever by any nation for an international health initiative dedicated to a single disease and is focused on 15 of the hardest-hit countries in Africa, Asia, and the Caribbean.

Since the population of many of these countries is largely poor, affordable healthcare assumes significant importance. This is where Indian pharma companies stand to benefit as they have the capability of producing generic medicines at a fraction of the cost of a patented drug. Having said that, for companies dabbling in this field, revenue growth will largely depend on volumes and margins may not be much to write about.

What exactly does a strong currency imply? Well, among other things it implies that your imports compete with your domestic production and ultimately, only the fittest domestic producers survive. In other words, it makes an economy competitive in the long run. And what does a weak currency imply? It means that not just the fittest domestic producers but all the producers prosper because it opens up export markets on account of the lower value of the currency and gives companies newer avenues for growth. Of course, there are a lot of other things that come into the picture when we talk of currencies, but the current explanation will suffice in trying to understand the biggest dilemma that the US policymakers are facing right now.

Should they do something to stem the dollar's slide or should they let it stay weak. Well, the answer would depend on the school of thought you come from. After several experts giving their opinions on the same, Nobel laureate Paul Krugman is the latest to throw his hat in the ring. In an Op-Ed piece for the NY Times, Krugman has argued that the US authorities should keep the dollar weak so that the economy has time to recover. While we wouldn't want to venture a guess on what the US authorities should do, we are certain that if one invests in companies that have strong competitive abilities, it does not matter one bit to the future returns whether the currency is strong or weak. Such companies will keep on growing consistently year after year. Want to know which Indian companies fit the bill? Click here.

While the US policymakers engage in a debate on what to do to the US dollar to ensure a speedy recovery, some like former Fed chief, Alan Greenspan seem to be already holding the view that a recovery and that too as early as the fourth quarter of the current year is a foregone conclusion. Talking to Moneynews, Greenspan, considered by many as one of the chief architects of the US financial crisis, has argued that the US economy could grow as much as 3% in the fourth quarter of 2009. Also, he does not see any need for more fiscal stimulus.

It should be noted that the 3% growth rate was the rate achieved by the US economy at the height of the boom when leverage was at its peak. Since the bursting of the bubble, there has been a massive deleveraging process underway and despite best efforts by the government to once again inflate a bubble, nothing has come out of it. The US consumer, which accounts for nearly 70% of the country, has chosen to cut back on its spending and unless it once again starts splurging freely, the US GDP growth has very little chance of growing consistently at the rate Messrs. Greenspan and Co. seem to be suggesting.

While the US authorities are pulling out all stops to inflate another bubble, their counterparts in India are beset with a problem of exactly the opposite kind. How to prevent one from being created that is. And that too, without harming the country's long term growth prospects. The fiscal and monetary stimuli that both the central government and the RBI had unleashed a few months back have been proven successful in their efforts. India has avoided a massive slowdown in its economy and now looks well poised to achieve a GDP growth well in excess of 6% for the current fiscal.

However, there are a couple of things that could throw the proverbial spanner in the wheel. The liquidity that the central bank had injected into the economy has now been supplemented by strong capital inflows and this has created a problem of plenty in the monetary system. While excess liquidity is always good as long as it does not lead to rising inflation, that is not currently the case with India. Inflation is on the rise steadily and many believe it could touch the 6%-7% mark by as early as March. Letting inflation run amok may not be the best strategy to have. Not only does it make life miserable for a large number of population, it also creates bigger asset bubbles, the bursting of which could lead to bigger problems in the future.

Hence, absorbing the excess liquidity and nipping the asset bubble in the bud should be the central bank's foremost priority. It has to be done at the right time and has to have the right mix. Overdoing it would mean hurting India's growth prospects and not taking enough measures would mean letting the problem persist. The authorities indeed have a few tough months ahead of them.

Meanwhile, after opening on a rather weak note, the Indian indices gathered steam as the day progressed and the BSE-Sensex was trading comfortably in the positive at the time of writing. Leading the rally were the stocks from the banking sector. While Asian stocks closed mixed today, most European indices were trading in the positive when last reports came in.

04:48  Today's investing mantra
"Attempting to outperform the market in the short-run is futile since near-term stock and bond price fluctuations are random and because an extraordinary amount of energy and talent is already being applied to that objective. The effort only distracts the money manager from finding and acting on sound long-term opportunities." - Seth Klarman
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10 Responses to "This is why you should not own too much Gold"

Dr P Mulay

Jan 3, 2010

I concur with James Mathew.

I also feel this is the time to buy gold. The financial system is going to collapse. Open your eyes.



Oct 18, 2009

offer your oomments on banking sector specially govt sector low PE banks like IOB , SYND. DENA. UCO AND CORPORATION BANK etc


Joshy Joseph

Oct 17, 2009

Since you are equiated both the Gold and Sensex with Rupees (here 100 Rupees)I don't think, it in any manner giving any misleading information as Prasanta Mazumder tells


Fateh Chand Kapoor

Oct 16, 2009

Ur comments about share market are very helpful to me. could u please intimate me if i can go for purchase of INFOYS WHICH SEEMS TO BE CHEAP AND SEEMS TO PROVIDE LOT OF PROFIT IN DAYS TO COME.



Oct 16, 2009

Eventhough there are contradictions about your comments I really appreciate the predictions . Indians are of heard mentality. Cannot help !
Forget about everything. Wish you very " HAPPY DIVALI" and prosperous "NEW YEAR"



Oct 16, 2009

Warren Buffet is the world's most successful investor and English is a Western language.

So, slanting towards both of these when writing such reports is actually a good thing, unless you want to see 5 min wrap up in Hindi, for instance.


Prasanta Mazumder

Oct 16, 2009

The chart is good but it is misleading. It would give much better picture if you could plot the sensex in terms of gold, i.e, how much of sensex you can buy by 10 gram of gold 20 years back and now. Then I am sure the picture would have been different.


P K Varma

Oct 16, 2009

The margin on the right side is not enough, resulting in the last word of every sentence getting chopped off.



Oct 16, 2009

Quite a good report with a variety of topics covered both of domestic issues life more liquidity and the likelyhood of inflation as well as the american position on the same issue. It also highligted the efects of currency devaluation and its efects both in India and in America. It was nice on the whole. Thanks


James Mathew

Oct 16, 2009

You simply bank too much on Warren Buffet's name. Your reports contain a lot of junk and the writing style is simply following some western reports.

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