Why is gold considered to be the best hedge against inflation

Gold is especially attractive in times of economic and political crisis. As the most widely accepted global currency, gold is viewed as a source of stability in times of currency inflation, stock market uncertainty and political conflict. When the US $ collapses we find gold value shooting up manifold. This is simply because crude oil is traded in $ per barrel and when dollar value falls, the price of crude oil shoots up as a concomitant effect. With crude oil prices rising and the OPEC group getting richer by the day, the automatic channelisation of the surplus profits finds its way to gold as a safe investment destination.

Gold prices have the advantage of independence from correlation with stock market prices and gold investments can help offset the risks of a portfolio heavy in stocks and bonds. Gold hedges against the possibility of interest rates moving against one’s bond investments and protects against the devaluation of one’s primary currency.

Gold is now at around USD 900 per ounce. It was trading at USD 37 in 1971. Gold then shot up to USD 850 in 1980, collapsed all the way to USD 260 in 1999, and has only now crossed the previous peak of USD 850 that it established 27 years ago.

Because many of the central banks of the world have lost sight of what they are supposed to do.
As a student of economics, we were taught that the role of a central bank was to ensure that it maintained the value of the paper currency issued. It did this by ensuring that every time it printed paper, it had a fixed ratio of gold lying in its vaults( Also known in economic parlance as gold standard). But, over the past few decades - and increasingly over the past few years - the central banks have shifted to a "fiat" currency system whereby they have been printing more paper and not worrying about the gold they have as a reserve for their paper currencies. And paper currencies are, in the end, paper. History has shown us that governments have fallen and paper currencies have died with them. Gold has been a currency - a medium of exchange - for centuries. No paper currency has existed for that long. Not the US Dollar. Not the Sterling Pound. Not the Indian Rupee. As governments have printed larger amounts of paper currencies, these currencies have lost value against real assets like property, or for that matter even a samosa. The danger with fiat currency is that nations may lose discretion and print too much currency or allow too much credit, devaluing the currency and causing inflation. Gold serves as a bulwark against a dropping dollar and other fiat currencies in part because it can’t be produced at will.

Even as global demand has increased, gold mining efforts have actually decreased production because of a decreasing supply of easily accessible reserves. Limitations in the global supply of gold ensure its precious nature.

In 1980, it probably cost you Rs 1 to buy one samosa. Today, it costs you Rs 10. Has the samosa become 10 times larger over the past 27 years? Not at all. The fact is that Indian rupee has lost value over the past 27 years, so the samosa wallah wants more of your rupee to sell you the same samosa. He wants 10 times the rupees for that same samosa. Or look at the price of your house. In 1980, it cost Rs 200 to buy one square foot of property in Cuffe Parade, Bombay. Today, it costs Rs. 40,000 per square foot. That is an increase of 200 times! Money, obviously, buys less these days. Paper money has lost value. This is what is called "inflation".

Now look at gold. It was USD 850 briefly in 1980 - when samosa was available at Rs. 1 and land in Bombay at Rs 200. Today it is at USD 900. Interesting, isn't it? The one currency that governments cannot print at will and which has, across civilisations, been a "store of value" - a hedge against inflation in the language of economics - has not really seen any increase in price over the past 27 years.

If the price of gold was to move in line with the price of samosas, gold should be trading at USD 9,000 per ounce or over Rs 1 lakh for every 10 grammes. But gold can be bought for around Rs. 11,000 for every 10 grammes today. If gold was to have moved along with the price of Bombay property, gold should be trading at Rs. 20 lakhs for every 10 grammes.

That may sound absurd. But sometimes the most attractive investment opportunities are those that sound absurd. Like Infosys at its IPO in 1992 or Zee at its IPO in 1993. You could have multiplied your money by over 1,000 times in each of them.

Don't get me wrong - not every absurd idea is a good investment.And not every investment will increase in value by 10 times let alone by 1,000 times. But, sometimes, simple logic and harsh facts should allow us to make simple investment decisions. Do I expect the price of a samosa to fall to Rs. 1 ? Do I expect the price of Bombay property to fall to Rs. 200 per square foot? Or do I expect gold to start climbing and get closer to the equivalent price of a samosa and the price of Bombay property?

Inflation and uncertainty require insurance. Gold is an insurance against absurd government policies - worldwide. I own gold. Do invest more in gold but mainly through ETF's (Exchange Traded Funds) as they dont have the drawbacks of investing in physical gold like making charges and impurity charges which reduces the quantum of gold u get to purchase with ur investible funds. Also if we compare the movement of gold prices over the last 27 years, one factor that clearly comes out is that gold prices are clearly bearish during the first half of the year and they pick up steam over the second half (from june onwards)..therefore the best phase to buy gold would be the current first half from Jan- June 2008. The crash in gold prices have already commenced. Place your bulk orders now on NSE through Benchmark Gold ETF that is traded on the NSE just like any other scrip. Buy on a staggered basis until june and hold ur investments for the long term.

Its such a blessed feeling to have an index launched in my name

Dow Jones Indexes has tied up with Dharma Investments, a leading private investment firm pioneering the development of faith-based investment, to launch the Dow Jones Dharma Index.

The new indexes will measure the performance of companies selected according to the value systems and principles of Dharmic religions, especially Hinduism and Buddhism. The objective
is to provide the investment community with the most comprehensive benchmarks that comply with these principles. The Dow Jones Dharma Indexes are the first faith-based indexes created to measure faith-compliant equities. Previously Dow Jones Indexes had pioneered this space by launching the Dow Jones Islamic Market Indexes in 1999, which today has become one of the leading Islamic market indexes worldwide.

The Dow Jones Dharma Index series includes the Dow Jones Dharma Global Index, as well as four country indexes for the US, Britain, Japan and India. Bringing our religious values onto the global stage offers sustainable solutions to the problems confronting the world today. The principle of dharma contains precepts relevant to good conduct and the implicit requirement of mindfulness about the sources of wealth - and thereby responsible investing.

The Dow Jones Dharma Index plans to screen the company on a combination of environmental, social, governance and traditional sin sector filters. If one has to be included in the listings, the company must pass a set of industry, environmental, corporate governance and qualitative screens for Dharmic compliance.

Dharma Investments has clarified that environmental screens would include company's impact or policies with respect to emissions, climate change and carbon footprint analysis, oil and chemical spills and waste management and recycling.

Companies from sectors where the nature of their business activities and operations have been termed unacceptable are excluded form the index. An illustrative list of prohibited sectors like Brewers, casinos and gaming, pharmaceuticals, tobacco, alcohol, adult entertainment, animal testing and genetic modification of agricultural products will never form part of the index

So all in all I feel elated to have become one of the "Dogs of the Dow"

The NFO vs IPO debate

Last week while going out for my regular late evening walks, i came across two gullible investors who were discussing the events of the stock market for the past week that had gone by. I was very happy at the first instance to know the levels of interest the markets have created even among bystanders or the lay man on the streets of India. Investing being my favourite topic, as usual i eavesdropped into their tete- a-tete. The word " Reliance" and the prospects of that stock being a multibagger figured frequently in their conversation. One of them (an old man must be atleast 65 plus..we can safely call him a senior citizen..he runs a cyber cafe at the street corner) was issuing his own target for Reliance Industries to reach 5000 by this March end. The thought bubbles that ran in my mind at that moment are reproduced below "Yes ...old man..Reliance will touch 5000 by March end, only and only if crude oil prices were to touch $ 200 per barrel by that time"...i continued to listen to them...Then the old man fires the next sweetener by talking about how NFO's and IPO's are a quick way to make a buck or two.

For the uninitiated an NFO is known as a "New Fund Offerring" of any mutual fund that wishes to raise money from the public at large and deploy it into various asset classes like equities, debt and money market instruments. An IPO is an "Initial Public Offerring" made by companies to raise money for the first time from the public at large through capital market channels to fund their expansion and diversification plans.

Now there is a huge difference between an NFO and an IPO. While an IPO may result in quick profits for an investor provided the valuation of the company coming out with a public issue is right and its fundamentals are strong enough for the company to attract a hefty premium in the stock market, the same cannot be said about an NFO. NFO's take time to invest or deploy their money into the market. They dont take investment decisions in a haste. Sometimes there can be a significant lag effect from the time of collecting the funds to its investment in the market. Its ultimately the asset management company's call and the fund managers prerogative as to when he wants to utilise the funds collected. However in case of an IPO, clear provisions have been demarcated by SEBI which require companies to get listed on the bourses within 18 days from the close of the offer.

Also another wrong notion of the old man was that investing in an NFO that is offerred at a par value of Rs. 10 is better than investing in a Mutual Fund scheme with an NAV of Rs.50. This view is totally absurd as any scheme of a mutual fund will command a higher NAV only because of its superior Investment dynamics and its fund manager's track record. At the end of the day the movement in NAV is determined by the performance of the investments of the scheme.

An existing scheme will atleast have a performance record or a report card to show unlike a NFO which if not managed well will have its NAV dropping below its face value.

Therefore before selecting a particular scheme of a mutual fund these basic test checks will help a long way in ensuring the safety of your hard earned money :

1. Study the Offer document end to end and page to page
2. Compare the performance of various other schemes of the mutual fund and benchmark the
same with the returns of the index (Sensex or Nifty).
3. Study the fund managers track record, previous schemes managed and how each of them
have fared in the past.
4. Identify your time horizon and investing temparament
5. Identify the focus areas or sectors that the fund is bullish on

Lastly, think long term and be long term greedy!!!