Yes, I wish gold falls by -50% - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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2 DECEMBER 2009


I wish gold falls by -50% to Rs 9,000 per 10 grams.

Now, don't get me wrong: I own some units of the Quantum Gold ETF (QGOLDHALF is the scrip code on the NSE) and have no plans to sell it in the near future. And I think that Chirag and the team at Quantum AMC are doing a fabulous job as the fund manager of the Quantum Gold ETF and keeping you informed of their views on gold via The Golden Truth

So, you may ask, I am "long" gold - and yet I wish that the price of gold declines by -50%?

Yes, that is correct. I want the value of my investment in gold to fall by -50%.

Why?

Because if gold declines in price, it will mean that the world is a safer place to stay invested in.
This means that the value of my investments in the Quantum Long Term Equity Fund could appreciate steadily over the long term.

And since I have some 70% of my investments in stock markets, a price appreciation in stocks will offset the sharp -50% decline in the value of my relatively smaller gold holdings.

An agitated reader asked me why I only write about the price of gold increasing.
Why don't you write that gold could fall to Rs. 10,000? - the reader wanted to know.

Well, the way the central banks of the world have behaved over the past few years it seemed logical that people would lose faith in paper currencies and turn to gold.
So, that is why we wrote about gold being a good place to park some of your savings.

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But, yes, the agitated reader is right: I should write why and how gold can fall to Rs 9,000 - even below the Rs 10,000 level that he suggested!

So, here is my case for the price of gold declining by -50%.

What will make gold fall in price?
Let's say there is an election in India next month and we are all asked to vote for one of two candidates.

Candidate Dreamer tells us that - if we vote for him - we will all get free water, free food, free power, and free schooling.
And to make his promises even more real and tangible he will promise us nice air-conditioned buses and trains to travel on - with a high degree of safety.
And our taxes will be lower.

Candidate Realist tells us that - if we vote for him - we will have to pay more for water, more for food, more for power, and more for schools. And even after we pay more, he cannot guarantee that we will actually get all the stuff we paid for.
There are too many people that need the government's help and so those of us who have a lot - will get a little less.
And there may be fewer buses and trains for us to use, warns Candidate Realist.
Oh, yes, and everyday that you leave for work, hug and kiss your family as if it is the last time you will see them. No, it is not the swine flu or malaria or Al Qaeda or LeT that will get you - there is no guaranty that you will survive the bus and train rides.
And, just to ensure that you really cast your vote correctly, Candidate Reality promises you that he plans to increase taxes.

The efficient Election Commission - the unsung heroes of India's democracy - organise the electronic voting machines for the 440 million votes that are cast.

Guess who wins?

Candidate Dreamer, naturally.

A vote to print money
So what does the new government run by Prime Minister Dreamer do?

They do what all politicians everywhere in the world have done for 40 years: they go about trying to fulfil some of their election promises.

But that is a costly exercise.
And there are wars to be fought and borders to protect.
And the salaries and expenses of the government bureaucrats to be paid.

But - as promised in the election campaign - taxes have been reduced a bit.
So the government is spending Rs 100 and collecting only Rs 70 in revenues.
Every year.
From where does it get the other Rs 30?

Aha, the government is a magician.
It produces the Rs 30 out of thin air!

Actually, it is a monopolist: it has an agency called a Central Bank which owns something called a printing press which, when placed on special marked paper in special print with special designs, magically turns into currency notes.

Year after year, decade after decade, country after country, continent after continent: every government in the world has resorted to allowing Candidate Dreamer to use the printing presses of the central banks to fulfil a false promise.

And every voter has been guilty of letting it happen,
Sorry - of wanting it to happen.
Of wanting to believe in the dream and not accepting the reality.

So paper money - backed by nothing - circulates around the world and results in inflation.
A Rs 50 note today probably buys you the same amount of goods that Rs 5 bought you in 1980.
A US one dollar note today probably buys you what 50 cents bought you in 1980.
The value of the paper currency is debased.

Gold, meanwhile, cannot be printed by a monopoly printing machine.
You cannot create gold out of thin air.

What do you think it costs the US government to print a billion dollar bond?
Maybe USD 10 for the special paper, USD 10 for the special print, USD 10 for the watermark to prevent a counterfeit, and maybe USD 100 for the depreciation cost of the printing machine (they use it so often, they need to replace the machines very often!).

So, an investment of USD 130 gives the US government a USD 1 billion dollar bond that they can give to China in exchange for USD 1 billion worth of stuffed toys and microwave ovens.
What a racket.
What a scam.
And the US has spread this lie that blondes are dumb!
And we think the Chinese are smart!
The Chinese (and other exporters to USA) just got conned into the biggest Sting in the history of finance - but that is another Honest Truth!

The point is that, while the central banks can print paper, the central banks cannot print gold.
They need to find it.
Then dig it.
And there is not enough gold of it for all the Candidate Dreamers in the world to dig up every year.
And pay for all their election promises.
That is why gold has been a "store of value" over centuries.

That is why when people wake up and realise how they have been conned into accepting paper, they move to buy gold.
That is why the Reserve Bank of India decided to buy 200 tons of gold for USD 6 billion.
At what was considered a "peak price".
And it may be the "peak price".
It may be the worst investment that the RBI has ever made.

Because we, the voters, may finally have become smarter.

And now the case for gold declining to INR 9,000 for 10 grams....

We may finally elect Candidate Realist.
We may accept that we need to have less consumption - and more modest needs.
We may accept that we need to pay more for things that we take as our birthright.
We may accept that promises eventually come back to haunt us.
That, as the economists say, there is nothing like a free lunch: what you get, you need to pay for.
Somewhere, somehow, it comes back to get you.

We all elected Candidate Dreamer and it came back to haunt us - via inflation and the declining value of every rupee or dollar or euro that we earn.

So, yes, I want us all to elect Candidate Realist.
Then the printing presses will not be needed.
Because the government of Prime Minister Realist will not be spending on any false promises.
In fact, they will be collecting more from us in the form of taxes.
They will no longer need to use the printing press.

And, most importantly, all those financial geniuses who use this freely floating paper money to create dangerous financial cocktails that blow up the world will be digging roads with spades for a living.
(Hopefully, I will still be writing these columns in between digging irrigation canals. The more stupid amongst us in the finance field will be given lowly agricultural work.)
We will all need to do some real work and earn a modest income.
No more pushing fake paper to generate even more fake profits of the financial companies.

With the financial geniuses out of the way, companies will be more focused on building profitable businesses.
Businesses with less risk and no casino-like derivative products populating their balance sheets.

Those that succeed will see their share prices rise - and stay up!

Hopefully, the research and investment management process at Quantum Long Term Equity Fund will show some decent returns (past performance is not any indication of future performance and no investor must invest in any mutual fund till they read and understand the Offer Document.)

So, yes, Candidate Realist's election can be a turning point for gold prices.
And I really hope he wins.
As much as I hope we all vote for this realism.
And the price of gold will collapse because paper currencies will finally start to have more value.
The Rs 100 note of the year 2025 will buy what Rs 200 of today's money can buy.

And my investment in Quantum Long Term Equity Fund will increase, so I will offset the decline in my investment in gold.

Do I believe it will happen?
Well, I have one vote: there are billions of people choosing between Candidate Dreamer and Candidate Reality all over the world.

Till I get to know them all and convince them that Candidate Dreamer is not the right person to vote for, I am happy owning some units in QGOLDHALF freely available on the NSE and also traded on the BSE with the Scrip Code 590099.


Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)
Quantum Long Term Equity Fund Quantum Gold Fund
(NSE symbol: QGOLDHALF)
Quantum Liquid Fund
Why you
should own
it:
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 20% Keep aside money to meet your expenses for 6 months to 2 years

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"


Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.


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51 Responses to "Yes, I wish gold falls by -50%"

ajay shah

Dec 28, 2009

gold may touch $3000 within 2-3 years time.

Like 

H Agrawal

Dec 22, 2009

Yes u r right I think it will definately cross USD 2000/OZ
MAY BE IN EALRY 2010.

Thanks.

Keep digging ur "golden thoughts"
And we r collecting it at every dip by dip.

Like 

Binda Lal

Dec 21, 2009

yes, i agree with u

Like 

Manu

Dec 17, 2009

Down to 1105 today (10:30pm India time). 120 down (10%), another 500 to go, as per your wish!

Some central banks are still to buy more gold, but how much? 10 tons here, 2 tons there, another 5 to 8 tons somewhere else. The "central bank" gold rush may be coming to an end, as the dollar shows signs of holding off its fall somewhat. Once speculators start unrolling their long positions, the price of gold may unravel like oil's did (from 147 to 30+, then to 70), which was also not demand-supply based, but speculation based. Feb and April gold futures are down, and going further down fast.

And it may not mean at all that the world is a safer place. Just that one set of speculators have made their killing off innocents, again like the oil speculators and oil companies - Exxon is the world's most profitable company once again, thanks to the oil up/down. After the oil "game", the world remained as unsafe a place as it was before.

Like 

ningaraja

Dec 17, 2009

thanks

Like 

LSANTA RAM

Dec 14, 2009

very informative and educative.

There are so many words like if and but.

I wish ur dream comes into reality

Like 

s.sudarshan

Dec 13, 2009

thank u.

Like 

NITA JHAVERI

Dec 11, 2009

if it will true, GOD bless to all
regards

Like 

karan

Dec 10, 2009

respected ajit
I strongly endorse your view and personally believe that the bullion has got appreciated more than it deserves and the price ran amok. So I reflect your views and of the opinion that gold price will plummet severely

Like 

bullion

Dec 8, 2009

LOOK GOLD TO SKYROCKET AND IT WILL TOUCH 2000$ PER OUNC BEFORE 12TH FEB 2010 ,MY CHALLENGE ,LETS SEE WHO WIN IT .GOLD IS NT A JOKE ,WHY U PEOPLE MAKE SOME JOKE WITH GOLD ?

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