All that will glitter in 2008 is gold

 

 

Chintan Karnani

Director, Insignia consultants

Why not gold and why equities? Investors have to make a choice between paper assets and hard assets. Historically, paper assets have given better returns than hard assets. Paper assets include equities and other derivative instruments, bonds, foreign exchange trading etc. Hard assets are gold, silver, metals, real estate. Over the past few years, hard assets have given investors returns equal or more than paper assets.

Investors now have to make a choice between either of the two before deciding on the investment strategy. Gold is the best form of hard asset and prevents investors from keeping all eggs in one basket. Gold prices have risen to $846 an ounce in November 2007 from $254 in 2001, which is a 233% rise in nearly seven years.

The current global investment scenario is to a certain extent liquidity driven. Chinese growth showing consistent record 10% GDP growth rates has resulted in a competition among all the countries to have a higher rate of growth. Most of countries have tried to:

1) Maintain Ultra Low interest rates.

2) Intervention in foreign exchange markets: Bank of Japan has intervened to prevent the yen from major gains so that the there is an export led growth.

The measures to increase or maintain growth rates by various central banks has resulted in a rise in global liquidity and higher inflation. New Exotic investment avenues are coming every day and there is change in investment pattern. In past gold exchange traded fund (ETF) was not there. Bonds yields do not even cover inflation. Hence the need to invest in an alternate asset. Gold is the best alternate form of investment. Equities are the most preferred form of investment for a retail investor. Let me now try to convince an equity investor to invest in gold. Equity Market Versus Gold

Not all the stocks in equity markets give positive return, if one chooses the wrong stock, returns can be negative. Timing of investment is very important in equity markets as is the case with gold. However even if the equity indices rise, all the stocks do no rise. Globally there are more falling stocks than rising stocks in every stock exchange even in a bull run. Gold does not have any variations. Gold has only one standard of different purity levels. Investors need not choose while making a decision on investing in gold.

India has been in a secular bull market from 2003 and has been the best emerging equity market.

A ratio over 1 (NSE advances to decline ratio) signifies advances greater than declines while a ratio below 1.00 suggests declines greater than advances. In a seven-year-period, there are more declines than advances. The average seven-year-advance – decline ratio is at 0.94. Between April 2000 and October 2007 on an average 434 stocks declined every month and 401 stock rose every month. Investor chooses the wrong stocks and his returns get negative. This further reinforces the need for investment in gold.

Gold Versus Base metals

If I compare gold with base metals, In 2007 Year to Date (YTD) return on copper 5.09%, Zinc (–) 45.96%, Nickel (–) 25.36%, Lead 46.79%, Aluminum (–) 16.14% (all are cash prices of London metal exchange), whereas spot gold has given a return of 26% as on 6 December, 2007. Further, base metals have been much more volatile than gold over the past few years. Considering the risk and volatility gold is a better option than base metals as well.

Summing up, I must say, “All that glitters will be gold” over the next few years. Gold over $1000 an ounce will be a reality. There will be volatile movements in 2008 which can result in gold falling to $660 an once in 2008 while maintaining the long term bullish direction. Gold performs best in a stagflation environment. Globally we are moving from inflation to stagflation. Geopolitical uncertainties are here to stay as world switches into election mode. More than twenty nations face election between March 2008 and November 2009 including USA towards the close of 2008.

Disclaimer : Any opinions as to the commentary, market information, and future direction of prices of specific currencies, metals and commodities reflect the views of the individual analyst. In no event shall Insignia Consultants or its employees have any liability for any losses incurred in connection with any decision made, action or inaction taken by any party in reliance upon the information provided in this material; or in any delays, inaccuracies, errors in, or omissions of information