Why is an ex-central banker so bullish on gold? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Why is an ex-central banker so bullish on gold? 

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In this issue:
» Turns out that the black money accounts are too small and too old!
» Which sector has eroded Rs 3.3 lakh crores of investor wealth?
» Amazon files regulatory risk for Indian operations
» India: The 142nd easiest place to do business in the world
» ...and more!

With the US reporting its lowest unemployment rate in six years last month, the Fed's bond purchase plan is now finally expected to come to an end. However, the Fed believes that the job market is still in the strengthening mode and that it still not reached the desired levels given the underutilisation of workers. As such, to support the same as well as the economy, the central bank is looking at keeping interest rates at current near zero levels for some more time. As per what we are reading, the estimated time for rate hikes is mid 2015.

At the end of it all... the key question that would pop up is whether the US$ 4 trillion experiment actually worked.

Well... this is something that we have written about time and again. Readers of Bill Bonner's Daily Reckoning would be well aware of it as well.

The Fed may argue that it has averted the impact of a major financial crisis by doing so. However, the fact of the matter is that the flush of money has artificially spruced up the economy. While it may have provided a shot in the arm to the US economy - in the form of cheap money available for financial restructuring and sprucing up capital markets thereby providing 'the wealth effect' to the citizens - as per us, withdrawal of such measures is likely to have an adverse impact on the US recovery. This is especially considering that such large amounts have not had that much of an positive impact in the first place.

Alan Greenspan, who stepped down as Fed Chairman after almost two decades in 2006, seems to be holding the same view. As reported on Moneynews.com, Mr. Greenspan believes that turmoil in the financial markets is inevitable; and that the QE program did not achieve the key objective it was set up for - stimulating growth.

Instead, all it has led to is boosting asset prices.

Well... what is the way out? As per him, the right way would be to buy gold. Why? Because the value of the metal is determined by factors outside of the policies conducted by the government.

While we usually do not agree with Mr Greenspan's stance on most topics, this time around we share the same view.

The irony here is that Mr Greenspan is indirectly asking investors to buy gold to save themselves from a problem that he started.

Nevertheless, we believe that gold has the tendency to hold its value over longer periods; especially when compared to currencies as they can be devalued at will. Given the high possibilities of the US dollar losing its value - due to the relentless dollar printing done by its central bank as well as the many uncertainties that are looming across the world - we believe investors should have gold - despite the asset class being one of the worst performing ones in the recent past - as a small part of their portfolios.

Do you agree with Alan Greenspan's view that the time may be right to buy gold? Let us know your comments or share your views in the Equitymaster Club.

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In yesterday's edition of The 5 Minute Wrap Up we mentioned why the entire episode of creating a list to trace people hoarding black money is nothing but a farce. It is a mere public appeasement exercise. And to back this further we came across some more conclusive evidence today. One article which we read stated that all these 600 odd accounts were too old and had little or no money in it. Hence, tracing would become virtually impossible. What is even more astonishing is the fact that most of these account holders are NRIs and cannot be prosecuted since they hold immunity. Imagine you are being charged for a crime over which you cannot be framed!

If this is indeed true then what was the whole point of first creating the list and then making it public? Was it done to balm public emotions? If that was the case, mind you, that we the public, have been duped big time. Political parties have long known how to maneuver public attention. And by just doling out the names which carry no significance at all they are doing just that. If they really had the firm resolve to bring back the black money and put the culprits behind bars they would have taken some action long back. Indulging in public tamasha is just an excuse to display that some action was taken.

02:20  Chart of the day
We think it was Warren Buffett who once opined that ever since the Wright brothers invented the aeroplane, there has been absolutely no wealth creation in the airline industry for its shareholders. In other words, the net wealth creation has been zero, zilch! Well, do you know which industry in India could give the airline industry a run for money? The answer is the real estate industry. In fact, the wealth destruction that has happened in this industry is nothing short of astounding! As per firstpost.com, six listed realty companies have eroded shareholder wealth to the tune of a little over Rs 3.3 lakh crores cumulatively from their peak prices. Just to put things in perspective, this is 45% more than the entire market cap of Infosys!

Realty stocks: Not the best performing lot
IBRE - Indiabulls Real Estate, PD - Parsvnath Developers; DBR - DB Realty

Now, real estate is considered to be one of the most attractive and safest assets out there. Therefore what makes this even more shocking is how the listed companies in this space have been colossal failures.

Any idea what has lead to this anomaly?

Suffice to say that businesses create wealth only when there is a certain moat around them. But all that most real estate companies in India do is line up a few pockets in order to get access to prime lands and load their balance sheet with debt. The day they start thinking of land as a raw material and not an asset that has to be grabbed at any cost, that will be the day when the sector will have any real shot at generating genuine wealth we believe.

When you sit to analyse a stock or an industry, there are certain key elements in the external environment that you should not avoid scrutinizing. Government and regulatory bodies are one such factor. A sector may have great growth potential. But one whip from the government can sometimes debilitate the future business prospects.

Take the e-commerce industry in India. It's still in a very nascent stage and has immense growth potential. Foreign investors have been pumping in large amounts of money in online portals such as Flipkart, Amazon India, Snapdeal.

Now here is a piece of news that we came across. It seems that Amazon has flagged a regulatory risk pertaining to its Indian operations in its standard quarterly regulatory filing with the US stock market regulator. Did you know India has a ban on FDI in direct online retail? How is it then, you may wonder, that the large online portals are thriving on foreign funding? Here is the twist. Apparently, the e-commerce sites have created complicated structures to escape the regulatory whip. On paper, these companies show that they operate purely as online marketplaces that connect buyers and third party sellers. But regulators may not be easily convinced.

Flipkart is already being probed for likely violation of the FDI norm. Amazon India too is facing the wrath of the tax department in Karnataka. So while the e-commerce sector has solid growth prospects, the ride may be a bit bumpy in the interim.

Now, Amazon is not the only company to be complaining about India's opaque regulatory laws. The new government's stress on 'Make in India' will fall flat if the country fails to ease red tape in setting up businesses. So far the ranking on the 'ease of doing business' list offers no respite. And as per Hindu Business Line, India has slipped two ranks this year to feature at 142, out of 189 countries covered! The only criteria where the country ranks well are getting credit and protecting minority shareholders. In both, the country features amongst the top 50.

With the plethora of banking and financial entities, credit access may have certainly eased. But the minority shareholders continue to remain victims of bad management decisions and mis-selling in the stock markets. Despite the new regulations, minority shareholders have hardly regained their trust in the markets. So the ease of doing business in India is far from the target the Modi government is trying to achieve. And it will have to work on several factors simultaneously to ensure that the Make in India initiative does not turn out to be a damp squib.

In the meanwhile, the Indian stock markets firmed up in the post noon trading session. At the time of writing, BSE-Sensex was trading up by 207 points (0.8%). Barring power, all the sectoral indices were trading in the green led by realty and IT stocks. Asian stock markets were trading mixed with Japan and China being the major gainers whereas Hong Kong and Taiwan were trading in the red. The European markets have opened the day on a strong note.

04:50  Today's investing mantra
"Obvious prospects for physical growth in a business do not translate into obvious profits for investors." - Benjamin Graham
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8 Responses to "Why is an ex-central banker so bullish on gold?"


Nov 11, 2014

Gold and Silver are very attractive now.After the proposed QE by the ECB,these may fall further.
After 2008,prices are up 5 times,but Gold is available at 2.5 times the price in 2008,and Silver 1.87 times.
My Investment Strategy is:-
1.40% cash In Gold and Silver
2.30% in Stocks
3.30% in FD,using maximum return Scheme.


s marthandam

Oct 31, 2014

Yes Sir, I fully endorse the views of Mr. Allen. Gold has strong and long lasting value even though return may be small. But investment is always safe.


Amol jande

Oct 31, 2014

We are getting opportunity to buy gold and silver . Gold and silver will rise overnight. One fine morning you will wake up and find that so. This is artificial suppression of gold and silver price.
Must buy physical gold and silver for protection from financial mess.
My grandfather had told me that gold and silver are life support system and are not dead asset .
They play major role in our life and are most liquid . On must allocate 25 % to gold and silver.
Must for future whatever the rate. Dollar has lost about 95% of its value . Think we play in rupees where are we


Amol jande

Oct 31, 2014

We are getting opportunity to buy gold and silver . Gold and silver will rise overnight. One fine morning you will wake up and find that so. This is artificial suppression of gold and silver price.
Must buy physical gold and silver for protection from financial mess.
My grandfather had told me that gold and silver are life support system and are not dead asset .
They play major role in our life and are most liquid . On must allocate 25 % to gold and silver.
Must for future whatever the rate. Dollar has lost about 95% of its value . Think we play in rupees where are we


PP Sreenivasa Rao

Oct 31, 2014

Yes, I agree


Ranbir T.

Oct 30, 2014

Investment in Gold should be as an asset allocation basis and not be over weight in it, as it is a "dead" asset. Besides, it could correct further. However, countries whose currency is under pressure, e.g., UD$ may take a contrarian view and invest in it in addition to Silver.
Real state apears to be in serious trouble for a whole lot of reasons. It's price graph is trending lower and may continue for a while longer till interest rates do not ease. Right now good options would be to invest in affordable residential property and "agriculture" land. Happy investing!

Like (2)


Oct 30, 2014


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Oct 30, 2014

Do you agree with Alan Greenspan's view that the time may be right to buy gold? Let us know your comments or share your views in the Equitymaster Club.
The answer is Yes. Gold will the best liquid asset to invest in present time.

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Equitymaster requests your view! Post a comment on "Why is an ex-central banker so bullish on gold?". Click here!


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