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  • NOVEMBER 11, 2009

Gold continues to soar

Nouriel Roubini may not like it but the fact remains that the yellow metal " Gold has got into this habit of breaking new highs almost every day. Last heard, it set a record high on Tuesday to settle at US$ 1,102 per ounce. The latest surge has taken the total returns from gold this year to 23%, a number that an investor in any part of the world would be proud of. However, the 23% returns could be true for investors who would like to pay for their gold in dollars. And India is certainly not one of them. Since an Indian investor would pay in rupees, the rupee dollar rate also gets added into the equation. Considering that rupee has appreciated some 4%-5% against the dollar this year, returns from gold for an Indian investor this year has been lower to that extent.

But that should not deter an Indian investor from investing in the commodity. The case for gold will remain intact as long as the world's reserve currency, the US dollar continues to remain weak. And there seems to be no respite in the near term on this front. It is believed that the value of any asset depends on the underlying collateral. Hence, if the US dollar is an asset then the US economy becomes the underlying collateral and this collateral is definitely not in the best of shape. It is already knee deep in debt courtesy the twin deficits and its misery is only likely to increase in the future. Hence, the odds of the US dollar cracking further are high. While no one can predict the timing and the extent of the dollar's decline, it would be prudent that an insurance against this fall is sought. As Warren Buffett says, "Predicting rain does not count, building ark does". The ark in this case is most likely to be gold. While an investor in India may not be as badly hurt as his US counterpart on account of the fall of the dollar, it would do no harm to his portfolio if he has an asset that has very good chances of appreciating over the long-term.

The biggest risk to the global economic climate...
...is the US-China trade fiction, observed noted economist Stephen Roach. Speaking to a leading business daily, Roach opined that since the unemployment levels in the US are extremely high right now and since politicians do not have an easy solution to it, they are most likely to pin the blame on China and this may result in import restrictions put on Chinese goods. Roach further added that China is a proud nation and may not keep quiet at this provocation and in turn may stop buying US treasuries, a particularly nasty scenario for the US dollar. Roach was also of the opinion that rather than blaming each other's currencies, the US and China should do something to curb the structural disparities in savings and consumption between the East and the West. While the US should focus towards increasing the savings rate, China, which Roach believes is the most unbalanced major economy in the world today, will need to shift from export dependency to internal private consumption. Hope the policymakers of the two countries take a leaf out of Roach's book.

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