US$ 2,000 gold is outdated. It could go to... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

US$ 2,000 gold is outdated. It could go to... 

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In this issue:
» Dubai debacle a boon for Indian infrastructure?
» An asset that has returned 40 times in 9 months
» India Inc. may now find it easier to hire expats
» Bhopal tragedy makes a mockery of India's carbon footprint
» ...and more!!

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First, the facts. If you were to take a pen and put a small dot on where the gold price has been at the end of every year starting 2000, every dot of yours would have come higher than the one before it. In other words, gold seems to be all set for a ninth consecutive annual gain as investors across the world seek insurance from potential debasement of paper currencies and higher inflation. Under such a scenario, it is quite normal for one to feel that the gold story may have run its course and we could be in uncharted territories where a sharp decline in gold prices could be just around the corner.

Nothing could be further from the truth. Infact, US$ 2,000 gold seems to be passe. The new target is significantly higher than that. Around 30% higher to be precise. What makes us say that? Bloomberg quotes a statement from an influential Chinese official who has suggested that Chinese central bank increase its gold reserves to 6,000 metric tonnes within 3-5 years and possibly to 10,000 tonnes in 8 to 10 years. Considering the kind of furor gold buying to the tune of 200 tonnes by India created, even if China achieves a small portion of its own gold buying objective, the resultant impact on gold prices can only be imagined. Exactly when the price target would be achieved is not known to us. But it certainly looks like US$ 2,000 an ounce gold is old fashioned and we will shortly have a new high to look up to.

01:14  Chart of the day

Data source: Statistical Outline of India

Indian 'babudom' is a reference specially coined for the country's government officers. This category has traditionally been at the receiving end of media and public mockery. Not just for their inert and inefficient execution track record. But they are also accused of wasting taxpayers' hard earned money. However, better public awareness seems to have brought in some changes. Data from the Statistical Outline of India shows that central government enterprises have become almost 3 times more profitable in the last decade. Nonetheless, their margins and return on capital are yet not comparable with that of leading private sector corporates.

The fate of Dubai hangs in balance at present given its debt woes. Not surprisingly then, a large number of people are looking to relocate to Indian shores. These people range right from unskilled construction workers to senior executives who have worked in construction (which at one point was booming in Dubai), financial services and retail. Headhunters in India are finding CVs from the Middle East pouring in by the dozen as most are probably eyeing opportunities in India. And what is more, the chances of these people finding employment in India seem high. After all, growth in India has picked up in the last couple of quarters. And it is the Indian infrastructure sector that is most likely to make hay while the sun shines. Hit by manpower shortage, many of the infrastructure firms are scouring the world for top and middle-level people. Thus, the ongoing crisis in Dubai gives it the perfect opportunity to lap up some talent. Given the country's need for quality infrastructure, any such move that takes India a few steps towards its goal is always welcome.

Every investor would love to see the value of his / her investments go up. The same is true with sovereign states. Even if the value of the asset is in bubble territory. The best examples to cite here would be the US and China. As reported in CNN Money, the US Treasury Department has 261.5 m ounces of gold in its reserves. This represents about a third of the gold stockpiles held by governments around the world. With gold currently trading at US$ 1,200 an ounce, the US currently has worth US$ 314 bn worth of the precious metal. No doubt, Uncle Sam is looking forward to the yellow metal crossing the US$ 2,000 mark. Meanwhile, China needs to evade the erosion of the value of US Treasuries. Something that the dragon nation is heavily invested into. Even it means allowing asset bubbles to shape up until the Fed finds a suitable exit route.

So profound is the bubble economy in China that it has gone much beyond stocks and real estate. A business daily talks about a commodity in China that has seen prices go up 40-fold since March 2009. Wondering why you never heard about it? Probably because 'garlics' never caught the imagination of the financial media. Yes, you read that right! We are talking about garlic cultivation. Aided by its 'medicinal' qualities, short supply and a flood of bank loans, the pungent vegetable has spun millions of dollars for Chinese investors. So much so, that the garlic mania in China is now being likened to the Dutch tulip bubble in the 17th century.

India has traditionally been quite conservative when it comes to its foreign exchange reserves. But things have changed in the past few years. Economic liberalization backed by years of strong GDP growth has helped. The draconian Foreign Exchange Regulation Act (FERA) is a thing of the past. Now, a much friendlier Foreign Exchange Management Act (FEMA) is in place. In a recent development, the RBI has changed a regulation which allows foreign nationals working in India to remit 100% of their post tax salaries to their home country. The limit was 75% earlier. In our view, this will help sectors such as aviation, telecom and infrastructure to attract foreign talent. Such moves signal a greater willingness on the part of regulators to facilitate business.

Today, the Indian government is expected to announce broad targets for reducing carbon emissions. It is ironic that this announcement comes on the 25th anniversary of the country's worst industrial disasters. On this day in 1984, poisonous gas leaked from Union Carbide's Bhopal plant affecting over 5 lakh people. Nearly 20,000 people are believed to have died that night. The government's lack of concern to the plight of those affected can be clearly judged. All charges against Union Carbide were dropped. In return, the company paid the government Rs. 7.1 bn as compensation. Of this, Rs. 1.1 bn was to be used towards compensation of livestock. Hence, the compensation worked out to a paltry sum of approximately Rs 12,400 per person. Furthermore, till date the government seems to have done little to protect the environment in this area. Even today, ground water around the affected area contains very high levels of the chemical. The Indian government stands on the world stage today to proclaim its commitment toward protecting the environment. However, it must show commitment to its ideal by appropriate actions.

The food price induced inflation quandary has taught some important lessons to the government. Like focusing on agricultural cultivation. The government is now planning to invest Rs 350 bn in the fertiliser sector. It also plans to decontrol the sector along with building up additional capacities. Under the controlled regime, the government directly controls cost of production, subsidies as well as the price of the fertilisers. This system has its inherent operational inefficiencies. It is for this reason that country had to import 12 m tonnes of fertilizer this year. The change in government stance could go a long way in making India more food secure.

Meanwhile, Indian markets witnessed a relatively strong trading session today after a weak start and the BSE-Sensex was up nearly 160 points at the time of writing. Stocks from the commodity and healthcare sectors were amongst the lead contributors to the overall strength. Amongst global indices, while the Asian markets across the board are trading higher, Europe has opened in the positive.

04:55  Today's investing mantra
"People always want a formula - but it doesn't work that way - you have to estimate total cash generated from now to eternity, and discount it back to today. Yardsticks such as P/Es are not enough by themselves." - Warren Buffett
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14 Responses to "US$ 2,000 gold is outdated. It could go to..."


Dec 19, 2009

good reading . thought provoking. cautions you to tread carefully


jitendra kumar

Dec 5, 2009

i want to read in hindi text ur equitymaster. and pls send me hw to download in my pc bcos i take printout each n every page.



Dec 4, 2009

The write-up has given sensible coverage to a variety of issues, like Gold, Garlic, agriculture, Indian bureaucracy etc. It made very interesting reading. Close on the heels of the RBI's purchase of 200 tons of Gold, comes the news that China might go in for about 30 times that. Though the current Gold price is really very high and the investors do have the apprehension that it might dip at some stage or other, you seem to be absolutely correct in predicting that the price of Gold will soar high and go well beyond anticipated limit of US $2000 per ounce, quite soon.


dr.ramnarayan nanda

Dec 4, 2009

sir,thanks for your article regarding gold .my request is to make people conscious regarding not making their money idle by purchasing is the most useless thing in worldly life.thanks.


K G Rao

Dec 4, 2009

Your para on 'babudom' mixes apples and oranges by referring to PSUs in the same breath. The PSUs were created to enable a Govt-owned enterprise to be fee of the shackles of the real 'babudom', i.e. controlling ministries, and to a fair extent they have succeeded in achieving this objective. Comparison with pvt industry will be unfair without complete freedom. The real drag is the direct Govt bureaucracy, who constitute 'babudom' proper, not the PSUs. Please dont mix 'em up.


N.M.R Shreedhar

Dec 3, 2009

Hi Ajit,
with so much hype on buying Gold,looks like soon the metal will vanish from the markets. But really speaking, do u think US will ever allow its dollar to become "worthless paper" as u call it? I think gold is more of an "emotional buy" rather than anything else. cheers



Dec 3, 2009

The gold holding by USA Fed reserve should be quoted in the same international wt unit like tonnes, difficult to get meaningfull info out of different news items

why a welcome change - foreign nationals should be spending atleast 25% of their salaries here in India for their stay or expenses or just as investments. can't see why a welcome move - except for letting some excess inflow go out & have 1 more non-important thing to control or monitor
"RBI has changed a regulation which allows foreign nationals working in India to remit 100% of their post tax salaries to their home country. The limit was 75% earlier."


gupta r k

Dec 3, 2009

where were you so far i have sold rupees one million gold fund last month. what is next for peiple like us


Dr. Atul Tiwari

Dec 3, 2009

One should laways remember, that Gold selling is difficult in India.
I dont undrestand, WHY the banks who sell the Gold with their seal of purity, do not purchase the same (sold by them only!!).
Now when customer goes to sell it in market..the small seeler (as compare to strength of banks) creates a doubt on its purity. Whe custome quotes the seal...he replies...'If they so sure of its purity, why they dont can purchase it them selves'!! Customer has no answer!!
Take Care


SK Damani

Dec 3, 2009

Gold at $2000 is not at all surprising. Read Quantam Funds argument on this site of y,day. The world will always vote for a dreamer politician, and the wise will always prefer to invest in GOLD as that is his only assurance of protecting his Capital.
Indian Rates: Rs.40000/-per 'tola' by 2015!!!!!!

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