Should you react to Gold's new record? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Should you react to Gold's new record? 

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In this issue:
» Highway projects worth over Rs1 lakh cr to be cleared soon?
» No DTC, GST before 2016
» Will OPEC cut oil production in 2014?
» Is India stuck in stagflation?
» ...and more!

After giving fabulous returns for nearly a decade, gold has done the unthinkable. Gold has been one of the biggest market casualties of 2013 and if current trends hold to the end of the year, the precious metal is set to post its first annual loss in 13 years and its biggest loss in more than three decades.

What has turned this safe avenue into a loss-making investment? There are several reasons for the decline in the value of gold. The year started well with demand from Asia rising nicely, but then the prospects of stronger economic growth in the U.S. caused gold investors to see the potential for greater profits in equities. As a result they started to dump gold for stocks.

Gold's value also declined due to speculation that the US Federal Reserve would start to scale back its quantitative easing (QE) stimulus program. The Fed finally announced that they will start QE tapering from January, 2014. Gold's prospect was also not helped by the restrictions imposed by India, the largest consumer of Gold. India raised its import duties on physical gold and gold jewelry, to 10% and 15%, respectively, this year in a move to curb imports and shrink its current account deficit. Thus the year which started with full of promise might end up in disappointment for gold.

Does this mean you should dump gold for equities from your portfolio? One should keep in mind the challenges which are prevalent for Indian stock markets. India is still not done with the inflation or growth challenges. Besides growth, concerns related to fiscal deficit, current account deficit, lack of reforms etc still need to be addressed. Thus investors should not be carried away by the market rally.

Remember, gold is not bought for a return. It is bought and kept aside for insurance. In case the world is in trouble and stock markets decline and financial institutions begin to fail, then gold will hold its value. Hence we believe that at least 5-10% of one's total investable assets should be held in gold.

Should you dump gold from your portfolio? Let us know your comments or post them on our Facebook page / Google+ page.

01:12  Chart of the day
If the economy is not doing all that great, chance are even the basic materials industry is facing a similar situation. And this precisely seems to be the case at least as far as the steel industry is concerned. As per reports, steel production was down to a 14-month low during the month of November 2013. A significant proportion of the total steel demand comes from the automobile and the white goods sector. And with these industries facing a slow down, the effect has spilled over into the steel sector as well.

The chart shows cumulative production during the 11-month period of the year stood at 72.3 MT, a growth of 1.9% over the corresponding period last year. Global production of steel during the same period grew by 3.2%. However, producers don't seem to be losing heart. They are well aware that this is more of a cyclical issue than a structural one. And therefore, once the economic scenario improves, growth will be back on track.

In fact, there are some structural changes within the industry that are likely to accelerate demand further. Most important among them could be from auto makers who seem to be on a strong indigenization drive. Owing to the weaker rupee and the need to bring costs down, more and more auto companies are keen to increase the localised content of their vehicles. This in turn is leading to strong demand for such parts thus driving the overall steel demand. Thus, it is structural changes like this which could keep domestic steel manufacturers busy in the medium to long term.

The biggest steel producers in 2013

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Lack of strong infrastructure has always been a bane for India for quite a few years now. And during the reign of the current UPA government, the scenario was no different. Red tapism, delay in getting clearances and the like have stalled many projects in the infra space. Be it in roads, ports, power etc. but things might begin to change. As reported in the Indian Express, The highways ministry expects projects worth over Rs 1 lakh crore, which have been stuck for long, to start moving from next month. This is because a proper decision on the rescheduling of premiums paid by the developers is expected soon. Of course, the government has come under severe criticism for its failure to enact reforms. And this move to ensure that highway projects get the green signal appears to be a step towards correcting that.

But is that really a positive sign? Could it be that in its efforts to be seen as a proactive government in the run up to the elections, it might just fast track these projects without following the required procedures? And in the process some critical environmental concerns may be sidelined? At least the sudden and unexpected resignation of the Environment Minister raises these doubts. One will have to wait and see.

The much awaited tax reforms were supposed to be game changers for the Indian economy. The cash strapped government was supposed to bridge fiscal deficit to quite an extent with the help of these reforms. And all this was supposed to happen before the end of fiscal year 2014. Unfortunately nothing of that sort is in store over the next 3 months. The Direct Tax Code (DTC) and the Goods and Services Tax (GST) are, without doubt, going to be the hallmarks of change for direct and indirect taxes in India. However, even the 2014 deadline for these tax reforms are set to be missed. Worth pointing out that the initial rollout of these reforms were scheduled for 2010. But the UPA government has successfully kept the reforms in cold storage all through its second stint. As per an article in Business Standard, the wait for these tax reforms is set to get longer. Much longer! With the country going to polls next year, the delay could be of not one but at least a couple of years. And hence any hope of India's fiscal problems getting addressed in the near future can be put aside to avoid disappointments.

Ever since the shale discovery has taken the world by storm, theories are floating regarding how the event will impact the supply demand dynamics in energy sector. Some have suggested that it could lead to the end of supremacy of OPEC. Some have gone so far as to say that US will become the biggest exporter by the end of the decade. However, going by the fresh developments, the key OPEC members seem unruffled. Despite the extra supplies from US shale oil and regions like Iran and Libya, the members like Saudi Arabia, Iraq and Kuwait have no intent to cut production. This is quite an unexpected reaction from the cartel that is notorious for manipulating supplies to command high prices on oil. All we can hope for that the cartel remains non chalant. Otherwise, the rising crude prices will further make things tough for Indian economy.

2013 has been a very challenging year for India. The economic growth rate has come down to a decade-low level. Consumer inflation is in double digits. It has been a very volatile period for the currency. Bad loans in the banking system have been rising. Does this mean the Indian economy is in crisis?

As per renowned Harvard University Professor Kenneth Rogoff (who is also the co-author of the book This Time Is Different - Eight Hundred Years of Financial Folly), the word 'crisis' may not be the most appropriate word to describe the state of the Indian economy. However, he admits that India is going through a tough period of stagflation. So how can India come out of this spell of economic weakness? As per him, India's economic revival cannot be achieved through monetary and fiscal stimuli. What India really needs are structural reforms. This would mean improving the country's business environment, developing the country's infrastructure and so on. If India wants the coming decade to see better economic progress, policymakers need to understand and address these real economic problems.

The Indian markets traded firm throughout the day. At the time of writing, the BSE-Sensex was trading higher by about 63 points or 0.3%. Barring stocks from the information technology space, gains were seen across the board with those from the realty and metal spaces leading the pack of gainers. Mid and smallcap stocks were in favour with their respective indices up by 1.3% and 1.2% respectively. Stock markets in other parts of Asia ended the day on a firm note with China, Hong Kong and Japan up by about 0.1% to 0.5%.

04:55  Today's investing mantra
"Everyone has the power to follow the stock market. If you made it through fifth grade math, you can do it." - Peter Lynch
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5 Responses to "Should you react to Gold's new record?"

Sarat Palat

Dec 24, 2013

Gold is Gold. It is proved over generations. Eventhough new investment arenas are currently available, the track record of Gold clearly shows that it should be there in our portfolio. I fully agree with Equity masters view of having 5 to 10% of our investment in Gold.



Dec 24, 2013

if gold is recommended by you for the day when financial institutions are failing the gold should be held in physical form and not as ETF as ETF is again controlled by financial intitutions



Dec 24, 2013

The present fall in the gold price may be considered as correction after a long rise. Moreover,it is reported in the media that the smuggling has increased and may be available at a lesser price and hence the presently owned gold is sold to purchase smuggled gold.


virendra bapna

Dec 23, 2013

our fathers,forefathers,and their forefathers were the smartest investors as they believed and invested only in gold.Thumbs up too them.we should also follow their footsteps.


B K Nandi

Dec 23, 2013

Gold still prevails unrealistic value. Gold should be disposed maximum possible. It raised many folds compete to US Dollar value. Wait for sometime, and if required buy back again. In this process loss will be less than still holding gold for a little rise. Last several months gold price is either stable of going downwards. Risk of selling gold is less than holding it.

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