Well I am not against gold, and neither against real estate. However what do you call a market which is completely dependent on new investors bringing their fresh money. Well some people call it a Ponzi scheme. I would call it a Madoff scheme.

What drives the gold market is difficult to say – insecurity? Spain? Korean war? – and periods of extremely long price stagnation are scary. Similarly for gold to come down – just shrinking of demand (which is driven by prosperity?) can spook prices.

Real estate again has many myths. ‘Prices in Mumbai do not come down’. Look at the lucky people whose parents bought flats in Santacruz, Ghatkopar, Bandra, Khar…..the list is endless. However this is just 8% return !!

I still insist that you should have gold and real estate in your portfolio – but stop thinking of them as growth assets. They are not. They are Savings assets. You will see some steady appreciation – or a spike – but on a 10 year rolling basis you would have got about 1-2 % of real return.

FOR MOST PEOPLE I KNOW, THIS IS A FANTASTIC RETURN – they let a few million sleep in their savings bank account. So on a comparative basis they are better off doing a SIP in a gold etf – but stop expecting to get 24% return. Just not possible – the market has enough people who will buy put options soon…and there will be enough WRITERS.

Everybody is asking me one question: Should I be buying gold? I do not have an answer. Gold is in some kind of a tearing hurry to go somewhere – so in spite of the fact that it may not be a great investment, people are rushing towards Gold. What is the reason? Greece? Spain? Pakistan? I do not know.

Look at any situation and today you can only see optimism regarding gold prices. Are you too late to buy? Should you have already bought it in October  2008? Is it still worth buying? Personally I am not for buying a commodity when it is hitting its all time high. Ouch! that hurts, does it not? You bet it hurts!

However I may not be alone – some time in December 2009 I heard Money Watch Editor Eric Schurenbeg say gold is over priced. However Jim Rogers had predicted a price ‘above a couple of ‘000 dollars. So the experts are BATTLING IT OUT THERE. I have done some posts in the past ..take a look:

http://www.subramoney.com/2009/11/reasons-to-sell-gold/ (see the dates also)

http://www.subramoney.com/2009/10/reasons-to-buy-gold/

http://www.subramoney.com/2009/10/buy-gold-many-mutual-funds-are-buying-it/

have fun, get confused, buy gold, or convert a bangle set to cash which will buy you and your family a vacation in South Africa – look at the lions! Or a visit to the North East of India – depends on what you wish to talk at the next cocktail party! I am happier with silver – which has not gone up in such a hurry!

PS: I am completely incompetent to talk about GOLD. I have never bought, kept, or sold. If anything, I have been a consumer – but abysmally small quantities – not worth talking about. So beware of what ever I have said here…Just a caveat. Beware of plugs!!

also look at this http://moneymorning.com/2010/05/14/gold-3/

A few days ago I wrote a post saying why I sold most of my shares in a south based sugar company. It was scary when Rahul Gandhi said – some of the losses have to be borne by the mills if the farmers have to benefit. Politicians can keep prices very different from its market prices for very long periods of time.

It was scary that mills would make losses – and the north based mills fell on that day. However convinced that prices cannot go much further up a lot of my shares hit the market. I exited between 319 to 360 a share.

However the great Mayawati made new rules – she said imported sugar (for crushing) could not enter UP. Simple. Like the say in Hindi – ‘Jiski Lathi Uski bhains’. The state government cannot control food grain movement, but what the hell – she did it!

So the beneficiaries (at least for a short period) are the mills from the south. So if you are holding shares of EID Parry, Shakti Sugar, Kcp, ..rejoice. Sugar shares will hit some senseless highs before it comes down. If you still want to buy, but PUT options in south based sugar shares…

Gold

Gold is seen as a classic inflation hedge. However in India over the last 30 years it has not been a good hedge against inflation. Another issue with gold is one needs to be a good trader or be reconciled to a real return of 1 or 2% over a long run. It is not a ‘business’ and does not have earnings to support the increase in price. It is just a speculative play – and you can find as many reasons to sell gold as you can to buy gold!
It is at best some kind of a speculative play. However for the first time in the World History has it become so easy to buy and store gold – in demat form, in ETF form, coins, bars, etc. The increasing demand (thanks to many people worried about the quality of paper currency) itself is like to create a high price of gold. If all the ETFs try to sell the gold, will there be enough buyers is a good question to ask. Gold surprisingly still has a very exalted place in the commodities space. It is important to remember that there are other commodities too! Silver, Copper, Aluminium are all important metals with somewhat similar characteristics. So if it is a commodity that you are seeing as an inflation hedge there are other metals too!

Commodities
Commodities (like Gold) are also speculative. They will not benefit unless there is inflation (!). Unfortunately in India it is almost impossible for an investor to play the commodity market (other than gold). Crude prices are going up – albeit marginally, but it is difficult for the retail investor to play this market as an investor. Trading in commodities is more an interest arbitrage than anything else. Since trading and investing are two very different things, commodities are not really a great investment opportunity for the serious investor.

Inflation Protected bonds

Even though the Finance Minister spoke about it and RBI has made some noises about ‘inflation protected bonds’ it is still not available. Unlike commodities ‘IFBs’ earn income and are one of the safest ways to protect against inflation. Here the ‘rate of interest’ is adjusted to the inflation rate and it protects the portfolio against inflation. However the closest one can come to this in India is the ‘Floating Rate Bond fund’ which protects your portfolio against a fall in interest rates and gives you an income at the current rate of interest.

1.    It is a contrarian call – when every body is buying, maybe selling makes sense (oops you could have gone wrong last month!)

2.    The amount of oil, aluminium, silver that you can buy with gold is at all time high. Normally the correction starts when you hit such new highs. Or is it that all metals are high so gold can get higher?

3.    If all the governments ‘know’ that printing notes is not as sensible as ‘selling’ gold from their reserves, will they not resort to selling gold? A little selling by Germany, IMF, and USA is enough to meet the appetite of all the RETAIL demand for gold consumption!

4.    Bet against the over-rated analysts – who have predicted a bull run, is it not worth betting a little against them?

5.    I have no idea about China, but the Indian consumer will baulk at the price. In Delhi and Mumbai ‘imitation jewelry’ is what the bride is wearing. Six months in a row Indian imports have fallen. Funnily one community known to be a big buyer of gold has shifted from gold quantum to Rupee quantum of gold. So a bride is asked to bring ‘Rs. 400,000 of gold instead of ‘x’ tolas of gold’. This is a very significant and important shift.

6.    Retail demand is crucial to price – not the ‘gold funds’ or sovereign funds. So if there is a slowdown, prices will come down.
7.    At least one jeweler said in an interview “if one bangle translates to a vacation in a foreign location, people are taking the vacation!”. This means gold is getting recycled at a faster rate – seen from stagnating retail sales (in quantum) and falling imports.
8.    A slow down in the Gulf means many ‘Keralites’ are coming back to India from the UAE – their bread will come from selling gold. Finding a job in Kerala when 1 Million unemployed people are looking for jobs will not be as easy as selling gold.

9. Investment demand is fickle minded. If there is some signal that money is getting dearer gold could move into cash and bank fixed deposits. Australia has increased rates, India will increase in the next quarter perhaps? Real estate companies could offer better fixed deposit rates – with the provisioning norms changing.

Be ready for a change.

1. According to one expert I was speaking to, the total world gold production is decreasing. I was surprised – increasing selling prices make it attractive to search so production should increase. This is what happens in theory, but it is getting to be more difficult to prospect, mine and produce gold.

2. The gestation period even for gold which is spotted is quite long. According to some experts it is as high as 10 years. Hence gold mining companies prices go up over long periods and in a lumpy kind of a fashion. If gold is found it goes up, if mining starts prices go up, if production starts – prices go up. So be careful while buying a gold mining company.

3. Chinese demand (Oh my God!) is likely to go through the roof. Very few people understand the Chinese economy. If the populace does not trust its currency, they are likely to keep their money in gold! The Chinese government had banned the population from owning gold for a very long time. Obviously once the ban gets lifted buying will start (it happened in US if you remember). It may take 2-4 years by which time the retail network to sell gold to the whole Chinese population is set up. Once it is set up, prices will boom.

4. Indian demand is difficult to predict. However there is some talk of Jewelers suicide in Kerala (with prices rising, consumption is going down, so shopkeepers are dying). However there is a huge ‘wannabe’ population which will keep buying and chase prices! Be that as it may, selling may not be enough to exceed demand – another cause for prices to go up.

5. Investment demand is high: All fresh bankers are busy selling gold mutual funds. This is a funny situation where the price is going up because the fund is buying. People are buying gold etf / regular funds which is causing gold prices to go up! Case of tiger chasing its tail.

6. Governments attitude towards gold can be foolish and slow. The rich countries which have a lot of gold (including IMF) have a pact wherein they will not sell more than 400 Tonnes a year (not sure about the figure, but it is right there somewhere). This will restrict supply on the one hand, but mutual fund demand will drive the prices.

7. Currently it is tied to the US $. Nobody n the world knows how the decoupling between the Chinese currency, dollar and the gold will happen. It will gain against other currencies – this will hurt the dollar. At some stage it will break off from the currencies and go on a secular bull run, and the trade will be guaranteed by BIS.

8. Bank relationship managers are pushing gold mutual funds, websites are screaming that gold is a good buy, people without understanding of interest, compounding, etc. think this is a great ideal This almost blind and noisy screaming will push prices high. Most fund managers are buying with a vengance !

However the following are the reasons to own gold:

1. Global currencies are at an imbalance: US $ is not the only currency which is in bad shape. In fact currencies are today at quite an imbalance with each other. So if you do not know whether to hold your money in rupees, lira, yen, dollar, euro or pounds, choose gold. So clearly as much of cash you will keep in your portfolio is the amount of gold you should be having.

2. Investment demand for Gold is accelerating: yes too many people are touting this as a great hedge. And they prove this by doing a 3 year back testing. Fantastic. If you did a 10 year back testing, it will fail and fail badly. What is surprising is that bank relationship managers are now selling gold mutual funds – they will keep selling to keep their jobs. These mutual funds will keep buying gold…so it is a self fulfilling prophesy..

3. Ben Bernanke is converting all the forest in the US into currency! The Gold system having failed, most Central Bank heads are printing too much of currency. Thankfully they cannot create gold.

4. Huge supply and demand gap: India and China will continue to buy gold, as will many other users!

5. Interest rates are more likely to decline, than rise, internationally, adjusted to inflation.

Some day I will give you at least 5 convincing reasons not to buy gold.

Gold as a hedge in your portfolio works, but works over a very long period of time. If you buy gold because it has been going up it would be a wrong reason to buy. However, the fact is, it may still go up – but please stop expecting to get 36% CAGR, that will not happen, for sure.

Obvious reasons to buy:

1. The world is busy printing money so value of currencies will fall but gold will go up.

2. More uncertainty means more gold should be bought – old world wisdom

3. Gold prices will rarely fall, if at all.

4. As Indians and Chinese consumers buy gold prices will go up from here.

5. When there is political uncertainty in the world – you are better off  buying gold.

However here are 5 reasons why the market can only come down from here:

1. Everybody knows about the above 5 reasons, so it is already priced in.

2. As all the money printers are the biggest gold holders they can sell gold instead of printing notes.

3. When all mutual funds launch gold scheme and there is nothing to distinguish between schemes, the product will be at its peak. Will all mutual funds sell when money is being collected? I doubt it.

4. Do not know about the Chinese, Kerala is a net seller of gold. An average unemployed Keralite can sell gold or land to pay for bread. Land he cannot sell for Rs. 2500 or 7500…so he will sell gold.

5. All mutual funds can disturb any market..so you must buy etf!!!

I rest my case..buy gold or sell gold, as a broker I need brokerage. Simple aint it? As a distributor i make no TRAIL commission on gold, so I create activity – buy, sell, buy sell…..and make some money!!

Most mothers (in India for sure, internationally, I do not know) are telling their sons and daughters – Gold is far better than the shares that you have. In the last 1 year it has given 32% return vs. -45% in your shares, so buy gold.

To most common people this looks like good common sense. Does it not?

Well my take is as follows (as usual I am here to confuse you even further):

Reasons to buy gold:

1.    For bailouts all governments are printing money – so inflation will be high. When inflation is high, gold prices will go up.
2.    All fund houses are pushing gold funds, all channels are saying gold funds are doing well all individuals are rushing to gold funds, so you also should.
3.    In case there is a scare people rush to buy gold, so in such times of uncertainty you should buy gold.
4.    Other metals like copper, aluminium, silver, etc. are not doing well, so you should be buying gold.
5.    They do not make it any more! As the demand in China and India increases, prices of gold will increase so you should be buying gold.

I could not think of many more reasons, but as usual I can also give you many reasons to SELL gold. They are:

1.    It is a contrarian call – when every body is buying, maybe selling makes sense (oops you could have gone wrong last month!)
2.    The units of oil, aluminium, silver that you can buy with one unit of gold is at an all time high. Normally the correction starts when you hit such new highs.
3.    If all the governments ‘know’ that printing notes is not as sensible as ‘selling’ gold from their reserves, will they not resort to selling gold? A little selling by Germany and USA is enough to meet the appetite of all the RETAIL demand for gold consumption!
4.    Bet against the over-rated analysts – who have predicted a bull run, is it not worth betting a little against them
5.    I have no idea about China, but the Indian consumer will baulk at the price. In Delhi and Mumbai ‘imitation jewelry’ is what the bride is wearing.
6.    Retail demand is crucial to price – not the ‘gold funds’ or sovereign funds. So if there is a slowdown, prices will come down.
7.    At least one jeweler in Kerala told me “if one bangle translates to a vacation in a foreign location, people are taking the vacation!”.
8.    A slow down in the Gulf means many ‘Keralites’ are coming back to India from the UAE – their bread will come from selling gold. Finding a job in Kerala when 1 Million unemployed people are looking for jobs will not be as easy as selling gold.

9. If all business channel ‘experts’ are recommending you to buy gold, there are ads asking you to buy gold, if there are e-mails telling you how ‘gold’ has ‘outperformed’ equity in the past 12 months, it is normally a great time to be selling gold.

Even if you do not believe a word of what I say, start thinking! Amen.