What Mr. Obama's victory means for gold... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

What Mr. Obama's victory means for gold... 

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In this issue:
» El-Erian's advice to the US President
» European Commission cuts growth forecast
» Why private sector investments stay away from power
» More borrowings to finance fiscal deficit
» ...and more!

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Since the start of the global financial crisis, gold has seen a phenomenal run. Indeed, as economies sunk into recession, most of the governments in the developed world resorted to printing more money and expanding the monetary base. Not surprisingly, such short sighted measures were bound to deliver lackluster results. So in the US for instance, despite three rounds of quantitative easing introduced by the US Fed under President Obama's term, the US economy has not really gone anywhere. But gold has.

Indeed, investors around the world realised that reckless monetary expansion by the developed world was bound to result in paper currencies losing value in the longer term. And hence, the flight to gold given that the precious metal is considered a safe haven as it is a tangible asset having value unlike paper currencies.

Now that President Obama has been re-elected for a second term, will gold see another surge? We will not be surprised if that happens. Readers would do well to recall that President Obama assumed his first term in office when the global financial crisis had just unraveled. All government and US Fed policies to solve the crisis were under his tenure. Now that he has been re-elected, indications are that he will stick to what he was doing before. This also means that Ben Bernanke is likely to remain as the US Fed chief. All of this points to only more money printing. And the potential for gold prices to rise higher.

It is difficult to predict what highs gold will attain. But unless there is a dramatic change in President Obama's policies, we believe the precious metal's stupendous run may not be over yet. 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 that President Obama being re-elected means that gold will rise further? Let us know your views or post them on our Facebook page / Google+ page

01:36  Chart of the day
Countries in the developed world may be struggling to keep head above water, but major corporates have not cut back on their R&D spending. Indeed, one of the key factors why US, Europe and Japan have been labeled 'developed' is because of their focus on innovation and technology. This has remained undiminished even now. As today's chart of the day shows, pharma companies accounted for the highest R&D spend as a percentage of sales. Indeed, the R&D spend for pharma companies has been either equal to or higher than what it was five years back.

Data source: The Economist

Now that the victory bugle has been sounded, it is time for Obama and group to get back to business we reckon. For the road ahead, at least from an economic point of view, is still ridden with too many potholes. And suggestions are pouring in from all quarters. Let's hear what El-Erian, the CEO of bond giant PIMCO has to advice to the US President.

Well, Mr Erian has nothing new to offer as per us. All that he has talked about is already there in the public domain. We all know that unemployment needs to be reduced and fiscal imbalances need to be sorted out. But how does the US President go about doing it is the major concern. Unfortunately, Mr Erian is largely silent on this. And we get a feeling he is in support of the policy of piling on still more debt. We don't think this will achieve anything. It could only prolong the problem and give US even bigger headaches few years down the road.

Sadly, there are no signs of bold decision making on the horizon yet. What US needs is few years of austerity so that debt can be repaid. It needs an escape from the current extremely low rates so that savers can generate real income. But hardly anyone in power is talking about this. The more things have changed, the more they have remained the same as per us.

The crisis in Europe does not appear to be easing off any time soon. As a result, the European Commission has cut its 2013 growth forecast for the zone. The Commission now expects the Euro zone to grow at a meager rate of 0.1% as opposed to the May 2012 estimate of 1%. Several things have triggered this downward revision. The worsening conditions in countries like Spain and Greece. Deficit triggered slowdown in the comparatively developed France. Even the performance of Germany has come under the clouds.

It should be noted that Germany is largely dependent on exports to drive its economic growth. As the crisis has continued to bite away into the Euro zone, Germany has become less resistant to the troubles of the southern parts of Europe. Consequently the growth estimate of the zone's largest economy was revised down from 1.7% to 0.8%. The Euro zone's troubles stem from the huge mountains of debt that its countries have amassed. Though the region has undertaken numerous bailouts, things have not really improved. Germany has come to realize that bailouts are more of a short term fix. Euro zone needs a long term solution. Otherwise even the 0.1% growth estimate may be a little too optimistic.

Shortage of funds, uncertainty about fuel supplies and limited scope for tariff revisions. All these bottlenecks have ensured that critical private sector investments stay away from power sector. The result being that not just power generators but also power equipment makers like BHEL suffer. Bharat Heavy Electricals (BHEL) has an order book of nearly 55,000 MW. But according to the PSU, commissioning of new projects is a problem. As reported by Business Line, the chief of BHEL believes that lack of private sector investments in the power sector is a huge problem. Number of projects that were in the pipeline earlier are now getting stalled. Problems of NPAs from state electricity boards (SEBs) have also made banks wary of lending to the sector. During 2008-2010, tenders for more than 30,000-40,000 MW were floated. The same shrunk to just 4,000 MW in 2011. The sector has thus become a black box for suppliers, vendors, consumers and investors alike. Without any clarity in reforms, the deterioration in the sector's prospects could deal a heavy blow to the economy.

It would be no exaggeration to say that the Union Budget that is presented at the end of February every year is nothing more than a farce. No sooner does the year start progressing that the Finance Ministry starts revising its budget plans and deficit estimates. This year is no exception. Rather, frequent revisions of estimates and targets have become a trend. As per an article in Firstpost, the government is likely to borrow an addition Rs 200 bn to finance the fiscal deficit. While the ministry had set fiscal deficit target of 5.1% of GDP in the budget, the same has been revised to 5.3% of GDP. The reason is nothing unexpected. Subsidy outgo increased while revenue did not grow as per expectations. In fact, we wouldn't be surprised at all if there is another round of upward revision for the deficit. The government has managed to raise merely Rs 1.25 bn of its plan to unlock about Rs 300 bn through stake sale in PSUs.

Of course, we do not deny that unforeseeable circumstances could force the government to make budget revisions. But anyone who would have even briefly glanced through the budget estimates would have found them too optimistic. And this is the entire problem. The Finance Minister creates a budget that is unrealistic. And then it conveniently revises the budget as and when it deems necessary.

The Indian equity markets languished in the red for most of the trading session today. At the time of writing, BSE Sensex was down by 66 points (0.4%). Oil & gas, IT and healthcare stocks led the pack of losers. Asian stock markets were also trading in the red with Hong Kong and China down 2% each.

04:56  Today's Investing Mantra
"The four most expensive words in the English language are - This time it's different." - John Templeton
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3 Responses to "What Mr. Obama's victory means for gold..."


Nov 11, 2012

I fully agree with Sai.N.

To me, Gold was an anivestment long time ago. Now its become an 'alter ego' of global printed money. Gold has been rising incessantly as there were more and more of QEs and Bailouts announced. All that new and sterilized money is coming in to paly, gold and similar commodities are going up and up. Why don't we all realize this is a clear and persistent BUBBLE ?.

I am surprised Equity master ( The Indian champion of value investing ) is still treating Gold as investment. Does Eawuity master really believes that Gold still keeps raising and will become 100,000 Rs / 10 Grams in say next 8/10 yes?. I doubt they do. They why this push for the mad rush?.

Next cycle is not beyond 7 years, We should all look for 'value' to invest in and be prepared for the long and scorching summer.




Nov 9, 2012

May not be very wise to go overboard on Gold, as recommended by most Financial planners incl. Equitymaster, gold should be only 10~15% of your portfolio. There are many who think that gold is a dead investment and should be bought solely for the purpose of realising a specific timebound goal, no point in keeping it forever. regds

Like (1)

Sai N

Nov 8, 2012

Equitymaster professes to follow value investing principles. There is a fundamental difference (in my view) between 'invest' and 'trade'. An investor wants to buy something that will grow in a sustainable manner, for an extended period of time. e.g., Buffet's core holdings like Coke. A trader buys something that will grow AND LOOKS TO SELL IT IN FUTURE to make a profit.

For an inherently worthless item like gold, there is no intrinsic value associated with it, except the perception of value. The greater fool theory of bubbles holds particularly true in case of gold.

So - caveat emptor - buyers of gold.

And you, dear Equitymaster, are doing INVESTORS a disservice by calling gold an INVESTMENT. It is a trade. Nothing else.

P.S. I firmly believe in Buffet's dictum that only a fool would
a) dig a hole
b) pull stuff outside and refine it and
c) dig another hole to safeguard it.

That is gold for you.

Like (2)
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