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Book of the week: Rise and shine

As the book’s title indicates, Shailendra Kumar is extremely bullish on this precious metal. "Gold is one of the very few assets that can survive every economic calamity that may befall, be that recession, depression, stagflation or hyperinflation, simply because it is money — the truest form of money.

books Updated: Jul 05, 2008 23:06 IST
N Chandra Mohan

Through the ages, gold has been a hedge against uncertain times besides being a store of value. This precious metal is again in the spotlight as the world economy is experiencing turbulence that is unnerving investors. The all-powerful US economy is in recession; stock markets are depressed; inflation is high in most economies due to the third major oil shock and not the least important, the US dollar is headed southwards. With such turmoil, is it terribly surprising that there is a movement to the safe haven of gold?

As the book’s title indicates, Shailendra Kumar is extremely bullish on this precious metal. "Gold is one of the very few assets that can survive every economic calamity that may befall, be that recession, depression, stagflation or hyperinflation, simply because it is money — the truest form of money. This is the most important thing to remember while investing in gold: that it is a currency, and the most important catalyst for it comes from the turmoil brewing in the global financial markets,” he argues.

Take the Indian case, for instance. India is the world’s largest consuming nation of gold and has the largest hoard in private hands of close to 20,000 tonnes. This is 2.5 times the entire gold held by the US Federal Reserve! However, financial turmoils, weakening rupee and rising inflation of late cast a troubled shadow over the economy and forcefully underscore the imperative to invest in gold to hedge for safety and secure better returns.

While the bellwether Sensex dropped from 20,311 on January 1, 2008 to 12,961 on July 1, 2008, gold mutual funds have, in fact, yielded a return of 19 per cent so far this year. Over the past year, investments in gold mutual funds have given handsome returns of 47.6 per cent — that are much higher than those in equity, debt or any other investment options in the country. As Kumar argues, the fundamentals of the rupee are so weak that it even makes sense to borrow in rupees now to purchase God’s Own Currency.

Given the spread, depth and intensity of the world economic crisis — that is reminiscent of the stagflationary 1970s — the author is obviously convinced that there is only one way that gold will move — and that it is up. Kumar is as bullish on gold as Arjun Murti of Goldman Sachs is on a superspike in crude oil prices to $200 a barrel! Observers predict that gold becomes costlier when oil prices surge globally. But as the markets have given more weightage to crude, this signals an anomaly that makes gold undervalued.

In other words, with oil heading to $150 a barrel, there is a massive upside to gold at $943 an ounce. During the past 50 years, an ounce of gold bought about 15 barrels of crude oil on an average. Now that has gone down to 7 barrels — a deterioration in the gold-oil ratio that presages a movement of gold upwards of $1,200 and as high as even $2,500 an ounce. The near-term scenario on gold prices can only be upbeat as mining supplies worldwide are stable at 2,500 tonnes and unlikely to go up in the future.

A fresh gold bull run has just about begun — the yellow metal hit a record intra-day level of $1,007 an ounce on March 14, 2008. But readers would miss the basic point of this persuasive book if they don’t follow the author’s advice to plonk their savings in gold that is outperforming the Sensex by a long chalk— as the immediate future of the Indian economy is not rosy. The only nagging question is that do Indians — with their insatiable appetite for this precious metal — need to be converted on this score?