Bull market for gold has a lot further to run

In this issue:
» Where are small-caps headed in 2010?
» Worst performing sector in 2009
» Outlook for crude oil in 2010
» Raise interest rates, says Bimal Jalan
» ...and more!!

While stock markets have had a brilliant run in 2009, there's another asset class that we believe has grabbed the headlines. Gold! And that's just with a 23% returns since January (in rupee terms). Compare this with the 75% gains that the stock market indicator - BSE-Sensex - has seen during this period.

One key reason for gold's bigger mind share than stocks during 2009 we believe is - the future.

With the printing presses of central banks (led by the US Fed) working overtime, many noted experts are now predicting a return to the Gold Standard! One amongst them is Porter Stansberry, chief of the leading US-based private publishing company, Stansberry & Associates Investment Research.

Porter has been a gold bull for quite a number of years now. And his current view is that gold is ‘nowhere near the top'. This he believes is because central bankers, the key players in the gold price - have begun to buy gold only since the last six months. "So this bull market for gold has a lot, lot further to run," he put its straightforward!

Like he keeps all his savings in gold, Porter also advices people to hold their savings in the yellow metal. And to own as much as they can reasonably afford.

As for Equitymaster's view, we believe that while gold can still perform very well in 2010 and beyond, one should have not more than 10% of his/her investments in the yellow metal. Stocks in good Indian companies must form the biggest portion of this portfolio, especially if it has time on its side.
Just like the stock market, the crude oil market is currently in the wait and watch mode. It is watching the progress of the economic recovery in the developed world. The long term factors for higher crude oil though remain intact. There will be more people in the world in the future. Many of them will consume oil with greater intensity. No large discoveries have been made in the past several years. Over the near term, i.e., in 2010, crude prices will be determined by the pace of economic recovery, OPEC's decision on supplies, geopolitical disturbances, and also by the liquidity chasing crude oil derivatives.



Anyways, Indian markets had another weak day today. The BSE-Sensex was trading down by around 80 points (0.5%) at the time of writing. Midcaps and smallcaps however bucked the trend with the BSE-Midcap and BSE-Smallcap indices raking in gains of around 0.2% and 0.5% respectively.

Most other Asian markets also traded weak today. Stocks across Europe have however opened on a positive note. Gold is trading US$ 2 higher as compared to last week's close.



Bimal Jalan, the former Governor of the RBI, has now joined in on the debate over rising food prices. And he favours monetary policy tightening. "Reduction in availability of money may help in reducing the speculative pressure on retail prices," Jalan is believed to have said recently.

He rightly argues that a stark action is not needed as the inflation is confined mainly to food prices. He also points out that in addition to drought, the fact that India didn't make arrangements for import of rice is also hurting matters right now. This anomaly though may be about to get corrected. With political pressure mounting, imports will have to be resorted to. But even this could come with a steep cost. Importing food grains would mean putting further pressure on the government finances, which is already delicately poised currently.

Improving farm productivity and curbing inefficiencies in the distribution system seem to be the only viable long term solution. And these measures need to be undertaken on a war footing.

Today's investing mantra

"Like most trends, at the beginning it's driven by fundamentals, at some point speculation takes over. What the wise man does in the beginning, the fool does in the end." - Warren Buffett, at the 2006 Berkshire Hathaway annual meeting