“Bindra ends 108 year wait” proclaimed the DNA headline. And indeed it was a day to celebrate. But there was another not so golden bit of news. The price of gold, which began the year at USD 834 per troy ounce, peaked at USD 1032.7 on March 17, 2008, and slipped to USD 818.63 on August 11, 2008, the low for the year. Year to date, gold has declined (-)2%.

So, while Abhinav Bindra rightly celebrates his gold necklace, most investors are mourning that the gold in their portfolios feels more like a leaden albatross around their neck.

Cheer for gold

Actually, in a very strange way, the price of gold declining is a good sign! When the price of gold increases, it means that the financial world is in trouble. When there is trouble in financial markets, it generally reflects some problems in the real economy, in the underlying businesses that make up GDP.

That is not good for investors because most of us have our investments in mutual funds or shares. Some of us have investments in property - in a second home which earns a rental yield. In “bad” economic times, the value of our holdings in shares, mutual funds, and property tends to decline.

Sometimes sharply.

Witness the (-)40% decline in the BSE-30 Index from its January peak to its lows in July. And witness the decline in property prices in most parts of the country and a collapse in the volume of transactions in all parts of the country.

Evolving views on gold

Initially, the reason and rationale for buying gold was purely based on the price of samosas, oil, and property prices (Please read - Of Samosas and Gold). The central banks of the world, I argued, were printing so much money that they had created what is called asset-price inflation. All that money printed is more than the new availability of goods and products so the price of the existing goods and services were increasing. Samosas, oil, and property prices had reacted to that “increase in money supply” as the economist call it. Gold, by this measure, should be over USD 3,000 per ounce.

There is another reason - sort of linked to the first. When governments print all this money and debt levels of countries head northwards, people lose faith in that currency. They can buy many samosas and barrels of oil right now today to be consumed in the future.

But since storing samosas and oil for a long time is not really easy (try and freeze the samosas and see what a daily 6 hour power cut does to the edibility of the samosa!), people would turn to a historical store of value - gold.

Gold has been the currency of the world (as has silver to a smaller extent) till the financial wizards created the “fiat” currency which was backed by gold. And then the financial shenanigans began and the currencies were no longer backed by gold but by a fraudulent “In God we trust” printed on every note. Politicians, god men, and financiers have one thing in common. They all have used the “God” word to fool everyone.

People, I surmised, may start heeding the words of The Who “we won’t get fooled again” and start buying gold. In paper they would lose their trust. In God and gold they would keep their faith.

Not out of the woods

The world has seen some pretty scary jolts in the past one year. The Bear Stearns funds announced their meltdown about one year ago and that brought to the surface a lot of crap that was shovelled under the mortgage markets and global investments in real estate linked paper. Banks are likely to see losses of USD 1 trillion (about the size of what all of India produces in one year). So far the banks have declared losses of USD 500 billion. We are at the halfway mark of a long tunnel.

Stock markets like to look ahead. Like an irritant child in the back seat they keep on asking “Are we there yet?”
Like parents-on-the-edge, we keep on saying “Soon, please wait patiently” and then - on the edge of a temper flare-up we lie: “We are nearly there”. The child shouts “Yippee”. So the central bankers tell us we are nearly there. And the stock markets shout “Yippee”.

And gold gets thrown out.

Just like that child’s toy game which kept him busy while he was in the car.

Now that the playground is not too far away, the child throws out the toy. Uh, oh. Parents sometimes speak the half-truths. Central bankers don’t really say much but when they do, it may not be the whole truth. If they did, they would frighten you. “No, my son, we have another two days of driving to get to the playground. Hold your urge to get to the bathroom.”

No, dear investor, the world is not calm, and it is not safe to head out into the open sea to swim. They have not taken care of all the monsters and sharks that lurk out there. There are many people in the world who have lived beyond their means. They have borrowed; they are leveraged up to their necks. They will default. The banks have only felt one pain so far - the mortgage mess from declining real estate prices. The credit card mess is yet to hit them. The personal loan stuff is yet to show its ugly head.

Rising dollar

Gold is down because the US Dollar is strong. The dollar is rising because its alternatives are:

1. The Euro - a currency zone that is so confused about which direction to head in, that it can never be an alternative to the Dollar.
2. The Japanese Yen - a currency of a country that has done nothing for over a decade and stumbles along in past glory on past wealth
3. The British Pound - what can you say about a country whose favourite food (Indian) is not even made in that country? Less said the better.

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