Category: Your Money

Why Gold?

This is the first of three posts by Abhishek Preetam on why he is bullish on the yellow metal. Please welcome him to StockViz and enjoy the post!

Gold has been in news for quite some time. With prices touching their highest values recently, the yellow metal is becoming red hot day by day. What is causing this sudden spur in the price?

Let’s look at the trend of gold prices (In USD and Euro) for the last 3 decades:


Prices were initially range bound nearly for two decades. Starting from 2001, prices have risen almost non-stop and have been on an absolute tear since 2003, rising over 325% and 150% since 2007. Following the trend, Gold just reached an all time high of $1813.5 an ounce on August this year. Let’s look for the reasons of this trend.

Supply side

Historically gold and silver were used as currencies and it was not until a few centuries ago that fiat currencies came into existence. The value of gold and silver did not lose their actual values, but instead were looked as commodities (a barter resource) and not actual money. Almost all currencies around the world are now fiat currencies.

Gold and silver are non-renewable resources, and with their production decreasing, the supply side of market looks shallow. Looking at the long term production level of gold, we can see the dipping production levels from 2000 till 2007. clip_image004

Mining on an average contributes 63% of gold production; the rest comes from recycling of gold. Recycling takes place majorly in South East Asian countries. In the Q2 2011, 429.3 tons of gold was recycled. This is 3% down Y-O-Y and slightly above for the trailing 10 months average of 407.3 tones.

Global demand report from WCG for Q2 2011 states “Over the ten years that preceded the 1997/98 Asian financial crisis, net new jewelry and investment demand amounted to more than double the tonnage accumulated during the ten years to the end of 2010. This suggests a considerably lower stock of gold to supply the market through recycling.”

As per the data from World gold council, supply of gold for the year 2010 increased by 1.81% whereas the demand shot up by 10% compared with 2009. For Q1 11, supply decreased by 4% whereas demand increased by 10% compared to year ago period.

Demand Side:


Gold is used for 3 main purposes – Jewelry, Technology (Electronics and Dentistry) and Investments. Pre 2008, Jewelry formed 69% and % investments formed 11.5% of the total demand, but after that they form 53% and 25% respectively.

For the last 2 year central banks have turned into the net buyers of gold. Even European countries have started buying up gold for their reserves. The central banks currently stand as the largest holder of gold at 16.5% of all the gold produced.

Finally, applying simple economics lesson of supply and demand on gold, the future looks promising. With almost stagnating supply (mining and recycling) and continuous rise in the investment related interest of central banks and also various end users, there will be a huge gap to fill. There might be some correction in the short run, but long term outlook of the asset seems bright.

So, whether paper or real, they should form some part of your portfolio.

Lady Leverage

Hussman’s Weekly Market Comment is a must read for anyone interested in finance. Here’s a choice quote from his latest:

European leaders have announced “We have agreed to solve our debt problem, leveraging money we do not have, to create a fund, which will then borrow several times that amount, in order to buy enormous amounts of new debt that we will need to issue.”


On a side note, MF Global’s 40:1 leveraged $6 billion bet on PIIGS debt, an itch that Corzine had to absolutely scratch, is probably going to result in a bankruptcy filing and a sale to Interactive Brokers. So much for becoming the next Goldman Sachs…

Nifty 50 the best and the worst months ever

Planet's cheapest car, the Nano xj.

Image via Wikipedia

This has been a dog year for Indian stocks. I am ready to wave goodbye to this year. Can I have 2003 (India Shining) back?

The best months:





















And the worst:





















Now that the Greek can has been kicked down the road and the rest of the PIIGS (PIIS?) yet to work in their demands for a haircut, here’s hoping for a Santa Claus rally by years end. Fingers crossed!

Denial is not a Strategy

Caracalla ( 3D image available)

Image via Wikipedia

I was reading an article by Gideon Rachman on the FT about how America must manage its decline and a line from with it stuck with me: “Denial is not a strategy.” What he meant was that by focusing on the dogma of “American Exceptionalism”, politicians across the aisle have swept the problems facing education, stagnating wages and hollowing out of the middle-class under the carpet.

I wonder if the Roman’s, when faced with the prospect of decline, had the same thoughts running thorough their heads: “We have the best logistics, a great army and a proud citizenry. What could go wrong?” And it did not, for a long time. It took nearly 320 years from the peak for the entire empire to disappear. However, things move faster now.

All the “decay” talk is not to take away America’s (or the North-Western countries’) stupendous achievements over the last century. An entire civilization has climbed up the Maslow’s hierarchy of needs in a very short period of time. However, once you reach the top, you are competing with everybody else who wants to get there too.


Since the past decade, piss-poor Asian countries are slowly but steadily, bootstrapping their way out of the morass that they were trapped in for the bulk of the previous century. Its not that the West is declining, but the rest of the world is simply ascending faster than them.

At this point, the worst that America can do to themselves is to continue to neglect the core of the problems facing them. There’s something seriously wrong when factory jobs cannot be staffed because you don’t find qualified workers.

“If you go to our factories in Germany, the guys on the floor can read engineering drawings.” But in the U.S., most workers lack the education and training needed to “operate in a modern, competitive manufacturing environment.” –Siemens.

Or when physics PhD’s can make more money on Wall Street coding up HFT and CDO models than they can pursuing science. And when a doorman can get credit to lease a BMW.

Somewhere in the pursuit of happiness, the notion that it needs to be backed up with hard work seems to have been forgotten.

No wonder that some Senators are backing a bill that would grant a visa to anyone who buys an expensive house in the US. You know what? This is exactly what the Romans did: Caracalla granted Roman citizenship to all freemen throughout the Roman Empire for the purpose of increasing tax revenue. Are the Americans going to walk down the same path to irrelevance?

There is no easy cure or a magic bullet that can make all these problems go away. But as Churchill once said: “Americans can always be counted on to do the right thing…after they have exhausted all other possibilities.” Here’s to rooting for the home team to turn things around.