90% chance this will be the gold price in 2014 - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

90% chance this will be the gold price in 2014 

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In this issue:
» Jim Rogers goes after Bernanke yet again
» Nobel laureate Stiglitz feels India's problems are hard to understand
» Another US downgrade a question of when and not if
» Germany should exit the Euro, feels Soros
» ....and more!

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How often does it get cloudy on a particular day and then it starts raining? 50% of the time may be, isn't it? How about rains coming down every time there are clouds on the horizon? That would certainly be a 100% hit rate. Well, in statistical parlance the two events have a correlation coefficient of 0.5 and 1 respectively. In other words, a correlation coefficient is nothing but a measure of how well the change in one value follows the change in another. If one value goes up every time another goes up, the correlation coefficient is said to be a perfect 1. If it happens say only 40% of the time, then coefficient is only 0.4.

Now, what constitutes a good score really depends from situation to situation. In a natural science experiment involving very precise instruments, a score of 0.9 may not be very good actually. But in a field such as economics, where there are multiple factors involved and also human emotions, even a 0.5 correlation coefficient can be considered very healthy. Using this background, what if we tell you that there is a very important asset class out there whose price has shown a very high correlation with a certain macroeconomic indicator. In fact, the correlation coefficient in this case turns out to be an eye popping 0.94!

Now, this is a trend that is certainly worth studying isn't it? This is exactly what guys at Casey research did and they came up with some very interesting conclusion. The asset under consideration is none other than the yellow metal gold and the same has shown an amazing consistency with the expansion of US monetary base. As highlighted, since 2008 financial crisis erupted, gold prices have moved almost in sync with the change in US monetary base.

And thus if this trend is extrapolated, there is a very strong possibility that gold would be still 40% higher in US$ terms by the end of 2014. Of course, for the gold to reach this price, the US monetary base will also have to expand. Well, there would be very few who could doubt that given how the US Fed is doing one QE after another. And wait, we've not even considered other central banks around the world that are also engaged in printing money.

This is yet another evidence of how gold's golden days may not be over yet. Not by a long shot perhaps. Thus, if you haven't started making gold a part of your portfolio, it still isn't too late to do the same.

Do you think gold price will rise substantially from here on? Share your views or you can also comment on Facebook page / Google+ page

01:21  Chart of the day
With most economies no longer agriculture dependant, it will not be wrong to say that cities have become the hotbed of commercial activities. Thus, the better the opportunities cities of a particular nation has to offer, the stronger the prospects of the underlying economy we believe. This is why we read with great interest the list of most significant cities compiled by the global financial firm PwC. Sadly for India though only Mumbai features in the list and that too placed in the last position. However, it does rank pretty high in terms of construction activity and is also one of the cheapest to live. We would love some other Indian cities too to be a part of the list going forward though.

Data Source: PwC

US Fed chairman Ben Bernanke recently said that emerging markets must allow their currencies to strengthen owing to the US Fed's monetary easing. And thereby save their economies from the flood of cheap money. Such comments do not impress commodities guru Jim Rogers, who has a reputation for his blunt statements. And when the person in question is the US Fed chairman, Rogers leaves no chance to hurl a few punches at him. He pointed out that since 2006, the time since Bernanke has been Fed chairman, he has not been right about anything. He even went on to saying that Bernanke knows neither finance nor economics. All he really understands is money printing.

Rogers' remarks may sound a bit audacious. But they certainly bear a lot of merit. Ever since the financial crisis broke out in 2007-08, Bernanke has gone on a money printing binge. And despite the failure of earlier QE programs to show any meaningful improvement in the economy, he has gone ahead with a third round of easing. How much does it really take to understand that reckless printing money is a bad idea?

When Prime Minister Mr Manmohan Singh went into an overdrive and introduced reform after reform, market sentiments perked up. There was a feeling that investor confidence was restored and this alone should be enough to take India's growth to the next level. But is this as easy as it seems? Noted economist Joseph Stiglitz does not think so. He opines that a lot of people put excessive weight on investor confidence as a factor in economic activity. He believes that the weakness in the global markets will impact India both through financial markets and trade. India is part of the global economy and so the magnitude of weakness in the global markets will certainly have some repercussions on India. But Stiglitz believes that India's problems are not easy to understand. This is because unlike China's export-driven economy, it has more domestic demand. So while the weak global environment has played a part in slowing growth, there are many other internal issues as well.

This is certainly true. India's problems are mostly related to corruption, red tape and inability to move quicker as far as the government is concerned. The Prime Minister may have introduced various long pending reforms. But these need to get passed in Parliament after which he faces the bigger task of actually implementing them. So, only improved investor confidence by itself will not be enough to spur India's growth in the longer term.

They were once the darlings of investors hoping to capitalise on India's booming telecom story. But investors today would not want to touch telecom stocks even with the proverbial 'six foot pole'! Bharti Airtel, Vodafone and Idea held most of the 900 Mhz spectrum for almost a decade. That too without making any additional payment. All they had to worry about was growing their subscriber base. But if the regulator has its way, these veterans will have to start from scratch. The Telecom Commission has recommended that the existing telecom operators should surrender the entire spectrum in 900 MHz band at the time of their licence renewal in 2014.

They will then be allowed to re-bid in the auction of 900 MHz band (technically termed as refarming). If successful in the bidding, they can retain the spectrum. However, if the incumbents fail to win the spectrum, they will be given 18 months to move to 1800 MHz. The GSM operators believe that they may have to shell out anywhere between Rs 600 to 700 bn for the refarming process. The government's intent is to create a level playing field between incumbent and new operators. Without doubt, both the new and existing players will have to charge higher call rates to keep themselves profitable.

Who would you rather have on your team? The fittest player or the weakling? Well, the answer may surprise you. The Euro crisis has stretched for eons with no clear resolution in sight. According to George Soros, Germany should either step up to fix the problem or leave the currency union altogether. The crisis is having damaging effects on the entire region and is pushing the European Union into a depression.

Germany needs to act as the leader of this motley crew, much like the United States became the leader of the free world after World War II. Germany should accept greater commitment to help its own as well as the other debtor nation's interests. Or it should just leave the Euro. This will cause the value of the euro to decline and bond yields to adjust. Either route will cause the problem to eventually disappear.

When S&P first downgraded US, it created havoc in the financial markets. Just imagine what could happen if the downgrade happens for a second time in a row. Scott Mather, head of global portfolio management at PIMCO, world's largest bond fund, is of the opinion that another US downgrade is inevitable. It is just a question of how soon. He believes that the widening fiscal gap in US will lead to a downgrade.

On the other hand, the Congressional budget office has warned that the US economy may fall into a recession if steps are taken to cut fiscal gap. So, basically, it is a catch 22 situation for the government at the moment. It can either let the deficit expand and face a downgrade. Or curb the deficit and face a recession. Either of these will have serious repercussions on the world markets. It seems that the US economy is in quicksand. The more you try to get out of it, the more you get sucked into it.

Meanwhile, indices in the equity market of India have gone from strength to strength since late morning with the Sensex higher by around 140 points at the time of writing. Real Estate stocks and bank stocks were amongst the biggest beneficiaries. While most Asian markets closed strong today, Europe is trading mixed currently.

04:55  Today's Investing Mantra
"The person that turns over the most rocks wins the game. And that's always been my philosophy." - Peter Lynch
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14 Responses to "90% chance this will be the gold price in 2014"


Aug 27, 2013

we should understand gold is not a perishable commodity.ever since the human race started mining gold al that thosands of tons of gold must be available somewhere on land under the sea stashed in individual house holds etc maing it permanent asset.apart from this there is lot of gold loans unpaid leading to excessve stocks smewhere more over our people are very clever in that by increasng the duty on gold they will cleverly exchange their old gold for new leadng to increased recycling of goldthey will only be paying for the wastage with the result the market may become flushed with old recycled gold leading to little impact due to increase in the duty this wil lead to further downward drift atleast temporarily in coming months.how long this will lead to downslide depends on other factors. may be the gld price may fall to rs3000 per gramtemporarily which may help people to buy new gold instead of recycling the old gold.all said and done the lusture and sheen of gold is hard to resist and hence in the long term gold will become a good investment provided the coin and biscuit sales are encouraged otherwise people lose a ot by the way of heavy wastage for the ornamental gold

Like (3)

George Elava

Jul 6, 2013

In the current scenario Gold is heading towards South-bound. There should be some long correction as Gold was traveling continuously towards upward since year 2009. I mean the long correction of downward may continue 3-4 years by which time the Gold price would bounce back to the 2009 level or even less. But that trend would not continue long. The Gold will come back even stronger than ever in the long run. No doubt for it.

Like (3)


Oct 31, 2012

sendfulldetails pls

Like (3)

shaheen mohmad ashraf

Oct 30, 2012

yes i am of strong opinion that Gold price will inrease ,

Like (3)


Oct 29, 2012

May be or may not be but it does not matter to the majority retail investors who never let gold go of their investments, to make a return. So it is inconsequential.
My view is that it will not gain another 40% as by that time other investments (greenback / equity) will see a reasonable revival of demand.

Like (4)

lambodar borah

Oct 28, 2012

Share market is nothing but a combination of science and mathematics.Hence when investor will see more benefit in equity market gold price will automatically come down.So I feel that it is difficult to cross Rs. 33000 within next 2years.

Like (6)

Hasan Fazal

Oct 27, 2012

Gold is more of heirloom in our traditional and conservative society. Generations pass out, handing the family gold to the newcomers in the extended group.

Like (3)

Pramod Kudchadkar

Oct 22, 2012

Gold will continue to rise slowly & steadily. Statistics has proved that gold is the only investment which has given consistent value as an asset class and is also considered as a hedge against inflation. Hence buy gold on dips and sleep happily for the rest of your lives.

Like (3)

francis varkey

Oct 20, 2012

in 2014 also the gold price will up.

Like (8)


Oct 20, 2012

Short, concise, to the point.Very enlightening.I liked it.

Like (4)
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