Canara Robeco’s Take On Gold
June 5, 2012 10 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.
About Keerthika Singaravel
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nice one
Thanks.Glad you liked it.
Schalk, Here is something that might interest you if you haven’t seen it as yet.
http://www.forbes.com/sites/gordonchang/2012/04/22/the-best-reason-in-the-world-to-buy-gold/
Well, I for one am buying physical gold and silver nowadays. Now don’t get me wrong; I would love to invest in productive assets that can actually benefit humankind, but doing so just seems like financial suicide nowadays. Stockmarkets are going crazy in these torrid financial times and I definitely don’t see government bonds as a safe haven considering the gross fiscal irresponsibility displayed by almost every western government. Gold & Silver really is pretty much all that is left.
When the fiat currency system collapses, we will have to go back to a gold-backed system and the people holding physical precious metals at that time will be in a very good position. It therefore seems that steady accumulation of precious metals is the only viable strategy nowadays…
Schalk I was speaking with Indians in mind.
As you probably know we Indians have historically been the largest consumers of gold. So barring some very poor people most Indians have some physical gold. And the poor often have silver. And this gold has helped Indians in bad times. So for Indians the question is more about whether we need more physical gold for investment purposes and at current prices.
Now in recent months the rupee has fallen seriously against the dollar. This is because Indians need oil which is paid for in dollars. India also needs to import all its gold as there are no deposits in the country. This is again paid for in dollars. So while the rest of the world has seen gold prices drop for the last 9 months, there has been no such fall in gold prices in rupee terms.
The inflation rate in India is pretty high now so bond rates are high to enable institutions to compete against gold and real estate to secure deposits.
The central bank’s attempts to control inflation by raising rates has lead to a slowdown in the economy. This combined with a falling rupee, has lead to an outflow of portfolio investors and lead to a muted stock market.
Under these circumstances if the central bank keeps rates high, bonds will keep giving good returns and as FIIS stay way, the rupee will remain weak or may have to be devalued.Gold rates will probably remain high in rupee terms. If rates are lowered, bond prices will first rise and then industry will pick up and the stock market will pick up and FIIS might return. So shares will do well and gold might not rise as much in rupee terms.
So by picking a fund which is a blend of gold, bonds and shares a person will be all right no matter what scenario pans out.
The news from around the world shows that no country is going to bite the bullet and practice austerity. Go competitive devaluation is likely to be the order of the day and a great deal of liquidity is going to chase returns around the world faster and faster. This will lead to more booms and busts till the currency system collapses. But when that will happened and what will be system to follow it is debatable.
But there is a chance that the transition is likely to be acrimonious. And physical gold might not be that safe…..think seizure, nationalization ,wars etc. In case of wars, gold might get a person killed as much as buy freedom. And in case of a prolonged conflict no amount of gold will secure necessities. Once hostilities are over, gold is bound to help in rebuilding lives.
So gold can do many things but not all things. By keeping cash in a hybrid fund we should be able to remain liquid and have some returns. The liquidity will allow us to react quickly to news and help us grab opportunities as they come along. Hard times offer many opportunities to make a fortune.
Thanks for your detailed reply. Although I am reasonably well informed about the affairs of the west, I must confess my ignorance when it comes to Asia. If you would not mind, I would like to ask for your opinion on a few Asian issues:
1. I’ve heard some reports about Asian countries starting to ditch the dollar as a unit of exchange. How long do you think it will be before India buys its oil in some other currency?
2. How long do you think economic growth in India and China can continue before serious environmental resistance spoils the party? Even though India and China consume far less per capita than the west, both countries consume more than double their total biocapacity because of their massive populations. Further growth in this limited environment is completely unsustainable.
3. Have the governments of India and China been more fiscally responsible than the governments of the west or did they also allow cheap credit to distort the market?
4. How is the situation regarding social inequality in India at the moment? It usually is the case that rapidly developing countries make a small elite very wealthy, while leaving the masses behind. Hundreds of millions of poor people can create all kinds of chaos when our impending environmental and economic crises hit home.
5. You have some scary thoughts on what the transition to a new monetary system might look like. Do you think this scenario will play out differently in Asia and the west?
Thank you for your time,
Schalk
Firstly, I don’t see India ditching the dollar as a unit of exchange(remember we still kept sterling balances after the British left).That is not to say that India might not find other ways to pay for imports.Here is an example:. Other than gold and other bullion there is the option of trading in other hard currencies,accepting each other’s soft currency and plain barter.BTW do you know about the Opium wars?
To your second question,I can’t answer for China, but I don’t consider growth will come at the expense of the environment in India.Let me explain:India has been inhabited for many millenia.So in many areas man and environment have shaped each other from ancient times.For example, in ancient times the Ganges Valley was thickly forested,but today the area is just lush farmland.Since the later Vedic Period man has reclaimed forest land and farmed it.Obviously man changed the vegetation in the region and it’s safe to assume that the local fauna were affected too.This massive change did not lead to the extinction of man here.In fact man thrived and many of the great cities of India arose here.A similar story can be seen in many parts of India.
Also you will find a great deal of awareness in India about how pollutants are bad for health.Organic farming was never fully given up in India and today organic produce is gaining a great deal of popularity in the country.We may have new cars but they are pretty clean and there is a greater push towards electric and hybrid vehicles.And given petrol prices, I believe in Indian jugaad to find the alternative.Whether it is green homes,recycling water or solar and wind power you will find that Indians are working at making it accessiblble.And we do have an active press highlighting environmental problems and I am encouraged by the social and political response to deal with them.
For your third question,again I must say I don’t know enough about China to comment.I can’t say I like the current economic perfomance of our cabinet.But I don’t believe that debt is such a big issue in India.For a start we do have a growing and increasingly younger population entering the job market and wages are rising, so in general debt is not likey to be a problem for a while.Many people don’t have a bank account and credit cards are rare.That said there are areas of high indebtedness at the bottom of the pyramid fed by many microfinance organizations.But these will lead to personal tragedies not systemic problems.Our governments tend to play to agricultural vote banks and many subsidies and loans are diverted to land purchases raising the price of agricultural land.This is a pretty serious issue in my opinion as it is likely to lead to a drop in agricultural output as many poor farmers give up farming and their children move to the cities.A self sufficiency in food needs is very comforting to a populous country.
While India has little problem of indebtedness domestically we do have balance of payment problems.This is because India must import oil and when times are precarious as now,our gold imports increase.Our exports of goods and services in the same period suffer if our markets in the West have economic problems.There is an attempt to find newer markets in Asia,Africa and Latin America but its pretty much work in progress.Go in our case BOP crisises are likely to result in currency depreciations making imports expensive.
Going on to your fourth question,in India I don’t see the wealth envy I see in America and I don’t think there are such large resentments.There are still poor people in India and billionaires and there is a big gap between them.But by and large I think things are OK because everybody’s lot is improving.India is becoming increasingly middle class and most people have some aspiration and hope to better their economic situation.As many billionaires are self made, there is still hope that a little bit of luck and lots of hard work will help a person rise.
To question five, my answer is no.The world’s financial systems are interlinked today.Here is a link to an old post with some history .The dollar is today’s international currencey and it took over from the Pound after GBs political eclipse.That political eclipse was not totally without bloodshead and I don’t believe any new system will be accepted without strife.The privileged never give up their advantages without resistance.However I don’t think its a good idea to waste time thinking about when the collapse will happen.At least that is my take after studying the history of currencies.
Wow, thank you. I learnt a lot from this comment 🙂
I wish India all the best and sincerely hope that the Indian people will learn from the grave mistakes of the west and stay on a sustainable growth path.
Could you please provide the link that you mention in the last paragraph? I would really like to read that post.
Thank you,
Schalk