Do Not Chase Gold Now

Gold Prices have increased over 20% in the last few weeks.

 

It is widely believed that gold is the best hedge against inflation. That theory seemed to hold when fear of inflation was at its peak last year. Then why is gold doing so well when the world is staring at the prospect of deflation? The answer lies elsewhere.

 

The stimulus packages worldwide have injected huge amounts of money into the economy. When paper currencies lose their value, hard currencies like gold and silver become attractive.

 

So, the present demand for gold is not coming from consumption for jewellery or industrial applications. It is coming from financial investors. And that is dangerous territory. Financial investors identify asset classes based on fundamentals. But soon all judgment is dropped in the chase that follows. Without realistic upper limits to valuation, bubbles get formed in asset prices.

 

This happened to real estate, equities and commodities in the past few years. We wonder if now it is the turn of the yellow metal.

 

So please be extra cautious if you are planning to buy / invest in Gold at current prices. Remember there is a pin waiting for every bubble.

 

I would like to finish this article with one interesting quote from Warren Buffet on Gold

 

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

 

(with inputs from Equitymaster)

Indians can help the U.S to tide over depression

 

You may be aware of the popular New York Times Columnist and author of the famous book ‘The World is Flat’, Thomas Friedman.  In his latest post he has mentioned that we Indians are capable of bringing the U.S. out of depression. Sounds Interesting? Please read on.

 

” Indians can help the US tide over the depression like crisis that the world’s largest nation faces. At least this is what the noted writer and New York Times columnist, Thomas Friedman, believes. He writes in his latest post on the newspaper’s website – “Leave it to a brainy Indian to come up with the cheapest and surest way to stimulate our economy: immigration.”  

 

He further quotes Shekhar Gupta, editor of The Indian Express – “All you need to do is grant visas to two million Indians, Chinese and Koreans. We will buy up all the subprime homes. We will work 18 hours a day to pay for them. We will immediately improve your savings rate – no Indian bank today has more than 2 percent nonperforming loans because not paying your mortgage is considered shameful here. And we will start new companies to create our own jobs and jobs for more Americans.”

 

A wonderful mantra for survival indeed! But whether it will find favour within the US is highly doubtful given Obama’s rhetoric regarding saving American jobs by putting restrictions on offshoring. Friedman has indeed long believed that the developed world cannot maintain or improve productivity by closing their gates to immigration and offshoring.

 

In viewing the American immigration laws as too restrictive and damaging to economic output, he said a few years ago – “It is pure idiocy that Congress will not open our borders – as wide as possible – to attract and keep the world’s first-round intellectual draft choices in an age when everyone increasingly has the same innovation tools and the key differentiator is human talent.”

 

Friedman argues against opponents of free trade that by exporting low-skill and low-wage jobs to foreign countries, more advanced and higher-skilled jobs will be freed up and made available for those displaced by the outsourcing. And so, he writes in his latest article – “Dear America, please remember how you got to be the wealthiest country in history. It wasn’t through protectionism, or state-owned banks or fearing free trade. No, the formula was very simple: build this really flexible, really open economy, tolerate creative destruction so dead capital is quickly redeployed to better ideas and companies, pour into it the most diverse, smart and energetic immigrants from every corner of the world and then stir and repeat, stir and repeat, stir and repeat, stir and repeat.”

 

We Indians love you, Thomas! ”

 

Money Mantras….(9)

It has been 2 weeks since I’ve written you. I was suffering from viral fever followed by Vertigo resulting in my long silence. Now I’ve started recovering.

 

I feel good to start writing again and wanted to start my February articles with Money Mantra series.

 

1) The most important quality for an investor is temperament, not intellect…You need a temperament that neither derives great pleasure from being with the crowd or against the crowd – Warren Buffett

 

2) We both (Warren Buffett and I) insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business. We do that because we like that kind of a life.” – Charlie Munger, Partner and Close Friend of Warren Buffett

 

3) Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack. – Peter Lynch

 

4) Once you have ordinary intelligence, what you need is the temperament to control the urges that gets other people into trouble in investing – Warren Buffett

5) Ben’s (Benjamin Graham) Mr. Market allegory may seem out-of-date in today’s investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising ‘Take two aspirins’? – Warren Buffett

 

6) Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid – Warren Buffett

 

7) To suppose that the value of a common stock is determined purely by a corporation’s earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Wells when he told them over the radio that the Martians had landed – Jim Grant

 

Individuals who cannot master their emotions are ill-suited to profit from the investment process.- Benjamin Graham

 

9) Money can’t buy happiness, but it can buy you the kind of misery you prefer.  -Author Unknown

 

10) Before borrowing money from a friend, decide which you need most. -An American Proverb