Canara Robeco’s Take On Gold
June 5, 2012 9 Comments
Below is an article from today’s ET.The author has failed to convince me that buying and holding physical gold at current prices is likely to be a good idea in the long term.After all paper currency systems must collapse sometime and gold tends to be around forever.But buying paper gold,especially as part of a blended mutual fund such as a combo of equities,gold and debt might have something going for it.Read the article below and decide for yourself:-
Gold to scale new peaks in coming years: Ritesh Jain, Head of Investments Canara Robeco Asset Management.
It’s a lump of metal with no cash flows and earnings power. The buyer even foregoes gradual accumulation of intrinsic value as it is industrially useless. But just imagine the second-largest economy in the world frantically buying this metal.
Such is the intensity of demand that its total purchase in the first quarter of this year was six times that of last year. The metal we are talking about is “gold” and the country in question is China.
The love for gold in the world’s largest consumer, India, is also known to all. In India, government spending on unproductive assets instead of capital assets has contributed immensely to inflation. Higher inflation is one of the primary drivers for gold demand in India, and the same is expected to continue.
Especially with the current high cost of living the bias to be in physical savings (real estate or gold) over financial savings like deposits, etc., seems pretty obvious.
Till the time we return to a balanced growth path with moderate inflation, which allows for more savings at household levels and positive real interest rates, gold would continue to be the asset of choice.
Countries which have mismanaged their finances have seen gold returns moving much higher in their domestic currency. The same can be seen in India as gold prices in rupee terms increased between September-April by 9%, whereas the metal dropped by 9% in dollar terms.
With the rupee expected to remain under pressure due to inflation and current account deficit, the gains made in gold in rupee terms are here to stay. The rupee might receive some respite if global crude prices decrease. But given the global economic trends, it may be more difficult than it seems.
Gold price in dollar terms is down almost 20% ($1,900 to $1,600 per ounce). The recent sideways to down movement has led investors to question the safe haven properties of gold and whether gold prices have already peaked.
But it is important to understand that bull markets do experience such periods of consolidation and correction which can run as high as 30% from top to bottom.
We have seen market timers exiting positions for some months with sentiment now reaching levels not matched since March 2009, which is reflected by the Rydex Precious Metals Fund.
Patience to stay invested through such correcting movements can be frustrating at times. We believe that we are very near to the end of such a correction phase as most of the ardent gold bugs have thrown in the towel.
Countries like China, Russia, Mexico, Thailand and many others are thus using this consolidation phase to diversify their reserves away from the dollar into gold.
The dent in confidence is not restricted to just other asset classes but has percolated further to currencies and countries as well. The data stream out of the US is anything but sanguine in nature.
The European debt and financial crisis at its current juncture could very well converge into a worldwide debt contagion. The situation becomes even more panic-stricken once the economic crisis turns into a political crisis; something which we can see happening in Greece and France.
Gold does not like Austerity
Austerity requires people to live within their means thus discouraging excess spending. If the world is going to live within its mean then we might have seen the end of the gold bull; but if the future lies in printing money to postpone the problems, than the gold bull is just getting awake again after nine months of deep slumber.
Unfortunately though austerity is the right thing to do, the current market environment does not bode well for such stringent measures.
Just like gold does not like austerity, people don’t like austerity either. Spain, France, Greece and Portugal are amongst the nations which tried to impose austerity and the governments have all been thrown out of power.
With globally, 40 elections scheduled this year, most governments will not be able to resist the temptation to inflate, hoping inflation will help temporarily avoid economic crisis and keep them in power. And it is such inflationary conditions, which will give gold the renewed vigour to take it to newer highs in the next 3-4 years.