Ride the Golden Wave

Posted On Thursday, Jul 30, 2009


What a day!
What an incredible day!

On Monday, May 18th the Indian stock markets hit 3 upper circuit breakers and - within 1 minute of trading - were shut for the day.
A market that normally closes at 3.30 pm after 19,800 seconds was shut by 11.55 am after 36 seconds of trading.

The BSE-30 Index surged +17% as fears of an unstable government were swept away. The market was looking for stability. It got what it wanted.

Fear seems to have been replaced with "HOPE". A hope, that the UPA government with its pro-reformist agenda will lead the country towards growth and prosperity and see us safely through the current financial crisis.

And we hope that this Congress-led coalition delivers on all our expectations.

"Should I invest now" syndrome...

Investors, wary of the election outcome, did not expect the stock markets to register any strong gains. Most expected the stock markets to falter after the elections and were looking to buy at lower levels. Many mutual funds had high cash levels - hoping to buy at lower level. As a result, investors "missed out" on this recent rally from 8,000 levels in March, 2009 to this higher plane of 14,000 today.

The uncertainty surrounding the elections stopped our markets from rising as much as they could. Meanwhile, based on positive global economic data, many other emerging stock markets had risen sharply. Monday`s surge has helped the Indian stock markets catch on with our other emerging markets counterpart.

India catches up after the stock market rally on 18th May`09

Country, IndexYTD* % change till May 15th
(in USD)
YTD* % change till May 18th
(in USD)
Brazil Bovespa stock index+ 46.31 %+ 54.04 %
Russian RTS Index + 49.70 %+ 50.24 %
Shanghai SE Composite IX + 44.52 %+ 44.91 %
Chile stock market select + 42.70 % + 47.51 %
BSE Sensex 30 Index + 22.97 %+ 48.78 %

Increase in BSE Sensex on 18th May`09+ 17.34 %

Source: Bloomberg
* - YTD or Year To Date refers to change from the start of the calender year.

Why did the stock market surge 17% in one day?

Stocks were trading really cheap from a valuation perspective. The global economic and financial crisis had battered sentiment - and the USD 13 billion sold by FIIs had overwhelmed the buying from local investors.

One trigger; one event; has turned the tables around.
The election of a Congress-led coalition with fewer parties; the wipe out of the Communists; the debacle of
Mayawati, Lalu, Pawar, Thackeray and other local and regional leaders has led to a resurgence of votes for the national parties.

...and so it can be with gold

What has happened to the Indian equity markets could happen to gold.

Gold is a currency; a store of value.
On any measure, gold is undervalued - just as Indian stocks were.

Gold is now trading at USD 920 per ounce.

Some people say gold should be USD 1,500 per ounce.
Some say it should be USD 3,000 per ounce.

There are others who say gold should be USD 400 per ounce.
Like there were people who said that the BSE-30 Index should be 6,000 - when it was trading at the 8,000 level.

Gold has the potential to go up a lot, in our opinion.
And investors must have some of the savings invested in gold.

India may be out of the woods and India - in our opinion - will do well as an economy.

But the world is still in a crisis.
The central banks are printing money.
Every paper currency is being debased - converted to monopoly notes that you can play with.
Money is losing its value.

But you can’t print more gold.
You can mine a little more.
But not a lot.

It takes more than paper and coloured inks and dyes to make gold.

Investing in gold, over a longer term horizon, also looks very promising. Large fiscal deficits combined with ultra expansionary monetary policies have always been the ideal mixture for future high consumer price increases. Gold prices also act as a good hedge against rising inflation. The fact that Central banks are increasingly looking to allocate more to gold, only testifies its importance as a monetary asset and the protection it provides against currency devaluation.

Above article is authored by Quantum.

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