One reason Gold will continue to surge in 2010 - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

One reason Gold will continue to surge in 2010 

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In this issue:
» Market guru wants the global economy to return to gold standard
» Bernanke warns of 'headwinds' in the US economy
» Retail investors are pulling out of equity mutual funds
» Indian equities to correct in 2010
» ...and more!!

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00:00  Chart of the day
A study by Bloomberg has shown that gold has been a terrible asset class had one invested at its last peak back in January 1980. The return that an investor would have got was just 44% as compared to a similar investment in S&P 500 with dividends reinvested, which would have yielded 2,100%! Hence, it is important that one invests in gold at the right time. And how does one ascertain what is the right time? Well, today's chart of the day could offer some clues. The chart, with data sourced from Daily Wealth shows that whenever the real interest rates have been negative, gold has proved to be a very good investment.

Real interest rates (interest on a risk free government bond minus the inflation rate) were negative in the US between 1973 and 1980 and gold returned 32% per annum! Similarly, the median rate of interest has been negative since 2002 and today, a period where gold has returned nearly 19% on a compounded basis. Also, stocks turn out to be a bad investment if gold soars and vice versa. Please remember that this is the US market that we are talking about and things could be different in India. Any idea what will gold do in 2010? Well, it looks highly unlikely that US Fed will raise interest rates significantly. In other words, real interest rates are likely to remain in the negative zone, thus clearing the field for gold to go even higher.

*Not including dividends and real return
Source: Daily Wealth

James Grant, one of the most widely followed financial experts has set the proverbial cat amongst the pigeons. Looks like he is no believer in half measures. Frustrated with the pure paper currency system and the economic imbalances that it helps create, Grant believes that a return to the gold standard represents the best possible situation. Writing for The Wall Street Journal, Grant opines that investors around the world are losing faith in the dollar and the problem lies with its management. "The dollar is a glorious old brand that's looking more and more like General Motors...There is nothing behind it but congress", he is believed to have said.

Given the misuse to which the government's freedom to regulate money supply - one of the main advantages of the paper currency system over gold standard - has been put, there could well be merit in his argument. It should be noted that in 1971, the then US President Richard Nixon took his country off the gold standard as the government wanted to control the money supply. However, little did he know that nearly 4 decades later, the concerned authorities would take their power so far that it will threaten the very existence of the dollar. But is a return back to the gold standard a solution to all our economic woes? We do not think so. The global economy has seen recessions and depressions even when it was under the gold standard. The answer perhaps lies in taking a balanced approach and not getting married to one particular philosophy. We believe that the model that the Indian central bank RBI has adopted is indeed the best one around. Little wonder, Dr Y.V. Reddy is a much sought after speaker these days.

James Grant is not alone in taking the dollar to the cleaners. Marc Faber, another widely followed investor of our times, also holds a similar opinion. Faber has argued that the Dubai episode is a reminder that governments too can default and hence, investors should steer clear of government bonds of countries that are knee deep in debt and the US is indeed amongst the top contenders for the same. "Nothing has been resolved, it's just being postponed...The ultimate crisis will not just bankrupt the banking system and financial as happened in 2008, it will bankrupt governments," Faber has noted. Looks like all roads lead to the US dollar as far as doomsday is concerned.

It seems like Nano will now have some serious competition. No, we aren't talking cars here. Instead, we are referring to another path breaking product from the Tata stable that has the potential to do to the water purifier market what Tata Nano has done to the car market. Yesterday, Tata group chairman Ratan Tata unveiled two variants of low cost water purifiers called 'Swach'. Priced at an extremely attractive Rs 749 and Rs 999, the purifiers will see a market launch inside the next one month. Considering that the water borne disease is the single greatest threat to global health and the tremendous price-value proposition that the product offers, 'Swach' could really set the cash registers ringing for the Tata Group.

Really, the Tata Group seems to have made addressing what is called as the 'Bottom of the pyramid' market its specialty in recent times. And why not? At nearly 3 billion people, it is easily the largest market in the world and if it manages to address the needs of even a fraction of this market, the implications for the company's growth and profitability could be huge. Its time other companies try to emulate the Tatas.

The first half of 2010 will be positive for equity markets. This is if one were to believe the international financial services major Credit Suisse. The firm has based this view on a 4.1% global GDP growth, low interest rates and subdued inflation. However, it has also warned that the risks to markets can arise if interest rates were to rise. This is because governments across the world are looking set to exit their loose monetary policies.

The firm expects the Asian markets to be amongst the biggest gainers in 2010. As for the Indian markets though, it expects a correction of 15-20% on the downside. The likely triggers for this correction would mainly be valuations and tightening liquidity.

We at Equitymaster also see high valuations as posing a key risk for Indian markets in the medium term. However, we maintain our belief that you as an investor should look for long-term growth prospects and growth drivers of companies where you invest. Do not get carried away by short-term fears. Do your own research on companies and buy only if you have complete conviction.

Once bitten, twice shy. That's seems to be the state of retail investors in India. As per a leading business daily, retail investors in equity mutual fund schemes are currently pulling out their money even though markets are on their way up. Many of them had invested just prior to the crash in 2008 and burnt their fingers. Now that they have finally made good their loss, they don't want to stick around much longer. This is sharp contrast to earlier market rallies. Another factor that seems to contribute is SEBI's recent ban on fund houses from charging investors an upfront fee, typically 2.25%, known as the entry load. This has taken away the incentive of mutual fund distributors for pushing mutual fund products. In our opinion, investors are right in being cautious of rich valuations. We just hope this will turn to enthusiasm when prices correct.

The Fed chief Mr. Ben Bernanke appears to be keen to give up his reputation of being referred to as 'helicopter Ben'. Having had a history of generous distribution of stimulus packages to large US banks and financial firms, the US central banker has lived up to his reputation so far to the tee. But in his own words, the 'formidable headwinds' to the recovery of the US economy has called for a more conservative stance. A weak job market, cautious consumer sentiments and tight credit situation have offered little hopes of accelerated GDP growth in the US. Economists agree that the outlook for the medium term is no better.

The Fed has already warned that it would take five or six years for the US job market to return to normal. The central bank has also kept interest rates near zero for an extended period to entice people and businesses to boost spending, which would aid the recovery. However, nothing seems to be working! Seeing clear signs of hyperinflation looming on the horizon, Mr. Bernanke now wishes to tighten his purse strings.

Meanwhile, a surge in buying activity during the latter part of the day has resulted in a sharp upward movement in the BSE-Sensex and it was trading higher by nearly 200 points at the time of writing. This, even as other Asian markets have closed the day in the red. Europe has however opened largely in the positive.

04:52  Today's investing mantra
"Most high-return businesses need relatively little capital. Shareholders of such a business usually will benefit if it pays out most of its earnings in dividends or makes significant stock repurchases" - Warren Buffett
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10 Responses to "One reason Gold will continue to surge in 2010"


Dec 14, 2009

Valuable inputs. Will read in future before making investments.



Dec 12, 2009

- price now down more than $100
- Jan/Feb gold futures at 1124

Gold may well go up as you suggest. But there is a major fallacy that I see when people talk of gold prices vis-a-vis stocks or other assets - that it has underperformed, and that a correction upwards is long overdue. The fallacy is that of the starting year. Take 1980, and gold seems to have under-performed. Take 1975, perhaps the same. But take 1965 or 1960, and then it has given good (enough) returns, commensurate with its risk class. Take 2000, and it is over-priced.

So this talk of the "correct" historical price is all smoke-and-mirrors.

Also, if the dollar drops, and gold increases(in dollar terms), its price in rupees may still not be as lucrative, because gold's price in rupees may under-perform, since the rupee will gain against the dollar.

Buying rupee-denominated under-priced securities of zero debt high ROCE world-class companies is the best hedge against the gold price rise, against inflation, against interest rate increaes, and against a doomsday scenario.



Dec 9, 2009

Meanwhile, gold falls from a high of 1220 to 1128, an almost 9% drop in 3-4 days, due to speculators unwinding their positions.
Howsoever desperately and optimistically operators and economists dream of the gold standard again, it is unlikely to happen because then the gold producers become too powerful as a bloc, a sort of OPEC of gold. No world power will want that.
Gold has minimal industrial use, and very variable use in jewelry (implies very variable demand). The cyclicity of gold demand implies a cyclicity in its price. Given its almost useless nature, it was clear that once it was no longer the standard for currency exchange rates, it would lose significance.
Just my two bits. For the sake of all people who invest in it, I would love to be proven wrong, but the fundamentals of its business do not seem to justify so.
As this website suggests, one should not over-invest in gold. It would be better to invest in other rare metals which have industrial demand. Better still, invest in high ROCE, high net profit, high brand-name companies at times of recession.



Dec 8, 2009

very good.
I always read your daily coverage before investing.
S P Kakde.


arthur sujith

Dec 8, 2009

respected sir , very much pleased with your services ,, glad to have you as a special advisor .. dear sir could you please help . me in advising , about turkey farming , as i stongly consider as my next family business , in adversity . thank you your's faithfully
Arthur sujith
have a wonderful day ahead !!god bless


arthur sujith

Dec 8, 2009

gold , providing much oppurtunities , in stock market ,, surprises !



Dec 8, 2009




Dec 8, 2009

A scholarly article indeed.In fact all your daily coverage are avidly read by economists and finance professionals.



Dec 8, 2009




Dec 8, 2009

dear sir,
gold production less demand is more.rate of gold increase some country monopoly to inc-res gold stock because con try economic good.

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