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Rates too heavy ?

Every heady bull run has excesses. From stocks being valued on eyeballs, junk bonds being rated AAA or NINJA ( no income no job no assets) loans being distributed by banks, these parties have seen them all. A notable common factor towards the latter phase of all these bull-run periods have been Fed interest rate hikes.


In fact a simplistic view of the situation could make a case that the Federal Reserve prompted the subsequent crashes through the interest rate hikes. Eventually, borrowers could not pay higher interest rates and defaulted or money stopped flowing into stock markets attracted by higher bond yields. It appears that this simplistic view is being taken seriously by none other than the Fed itself. This cannot be dismissed as mistakenly assuming correlation for causation.

The debt levels of today’s world are incomparable to those of earlier eras. Money is literally cheap today. Frighteningly, making it so does not bring inflation and growth. The interest rate hike announcements had been necessary for the Fed to signify that the economic situation was benign as dilly-dallying in the wake of supposedly strong employment and wage data would have been suspicious. Yet, it is impossible for it to deliver on its rate hike promises without precipitating a crash.

Earlier long-term bull-run phases had real earnings pick-ups which allowed the Federal Reserve to raise rates and rein in inflation. The markets did crash but only after years of growth. In any event, stock markets are cyclical. Now we are in an era of tepid growth and tepid inflation in much of the world. Corporate bond defaults are at multi-year highs as are student loan defaults. Yet, the S&P 500 has risen more than 200% since its ‘09 lows and is still rising. It’s a rally whose lifeblood is liquidity, something interest rate hikes are supposed to suck out. This is possible to achieve without immediate negative fallout during strong economic growth periods; this is certainly not the case today.

Regrettably, the Federal Reserve is in a situation where it cannot raise interest rates by more than a percent or thereabouts as it is painfully obvious that the heavily indebted businesses of today would not be able to afford much higher interest rates and neither can it hold firm forever as it would be giving live to its claim of a booming economy and a robust economic environment.


Imagine Janet Yellen trying to lift a big zero shaped boulder towards the sky. You get the picture. She is no Hercules.

P.S: Gordon Gekko said,” Greed is good.” Janet Yellen says, “Debt is good. ” We know how the movie ended.



How zero and negative interest policies are playing with the cost of equity

A lot of things are very different today in the world of finance. However, what has prompted me to write today is the imminent demise in the developed world of something which was at the very foundation of the course on ‘Financial Management’ I studied during my Masters- the concept of the risk free interest rate.

The risk free interest rate is basic opportunity cost. It is traditionally taken as the yield of a long term sovereign bond or some other such asset which is guaranteed by the government. The concept is somewhat ideal as sovereign defaults do happen but it is definitely true that sovereign bonds of first world countries have a good credit history.

The developed world is now a place of either Zero Interest Rate Policy (ZIRP) or Negative Interest Rate Policy (NIRP). In a world having inflation, both policies mean that a person buying a risk free asset would lose money over time. While ZIRP makes its way felt through creeping inflation, NIRP is more direct as a direct debit on your bank account. Effectively though the message is clear, there is no risk free asset that delivers a return. No FD in a sovereign bank or long term sovereign bond that preserves your capital. Even to preserve capital, investors would need to take risk.

The removal of risk free interest rate has far reaching implications, especially on cost of equity. Taking an example, let’s assume that the 10 year Government bond is the risk free interest rate in India. Currently, its yield is approximately 7.5% and an investor’s equity risk premium is also 8%. This means that the cost of equity is 15.5%.

However, in ZIRP, the cost of equity would just be the risk of investing in equity, the equity risk premium i.e 8%. Thus theoretically, it also means a lower expected return from equity.

It is a terrible situation to be in; the inflation indicators are benign in most of the world but the truth is that food, housing, medical bills and education are getting more expensive year on year almost everywhere. If one has to spend in the future on any of these things, one has to save and this means that getting a return is important. However, with no risk free asset, one is literally forced to dabble in the markets. Thus with more demand, equity asset prices go up.

That is theory. In real life too, the US markets have enjoyed a speculative rally fuelled by debt. However, something is seriously wrong when the Dow and S&P 500 reach lifetime highs without any meaningful increase in economic indicators and investors have to bet our life’s savings on the hope that this continues because they simply have nowhere else to go. This is bad because if there are no savings, one can only borrow. Borrowing is based on the premise that one would earn more in the future. Is that really guaranteed when wages have been stagnating in the developed world for decades? Don’t take my word for it, read Michael Lewis’ ‘Liar’s Poker’ that mentions starting 1980s salaries in the USA in Wall Street and it is difficult to believe how little the salaries have changed even in nominal terms. Yet, cars, houses and tuition are phenomenally more expensive now than then.

How do central banks tackle the crisis? They try to remove the ‘risk’ from the equity risk premium by playing to the market. Witness the efforts of the central banks of China, Japan, the Euro zone and of course the US. It is working so far: basic concepts of Financial Management be damned.

I sincerely hope that the rate easing cycle in India never reaches ZIRP in my lifetime but I am afraid the odds are against me.

My PreciousZIRP

The ring is too precious to let go


Precious metals:the next money spinner?

As equity markets wrestle are in another bear market, it is perhaps time to turn our heads towards the likely bull market in precious metals. Precious metals have been in their own bear market since April 2011 but there is very high degree of probability that their bottoming out process has culminated.

International gold chart since 1973

International gold chart since 1973

This chart is even more longer term and adjusted for US inflation

This chart is even more longer term and adjusted for US inflation

Historical Gold Prices – 100 Year Chart

Why invest in a non interest bearing asset?

There are several reasons why investing in gold could be a good idea but the biggest is that gold is synonymous with wealth. While it no longer serves directly as money, it has done quite well as an asset class in terms of returns ever since the final abandonment of the gold standard in the 1970s. While it is debatable whether it serves as a hedge against inflation, it provides a long term hedge against wealth destruction. In times of hyperinflation, gold is the best store of wealth by far but such instances are rare and are not expected in India for many years.

However, the biggest reason to buy gold is that it can generate fantastic returns, even better than equity; this happened in the first 11 years of the new millennium.

The rise and the fall

The rise and the fall

Gold vs. silver
Gold has some use as jewellery and in electronics but most of its demand comes as a store of wealth. Silver on the other hand is a widely used industrial metal and increasingly it is losing its coupling to gold and behaving like a cyclical commodity. What this means is that in times of economic turmoil, silver cannot be relied upon to generate returns. Silver’s status as a precious metal is under threat as the gold to silver ratio has broken down severely. Before the twentieth Century, 16 ounces of silver bought an ounce of gold i.e. 16:1. For most of the twentieth Century, the ratio has been around 50. Currently with gold at $ 1250/oz and silver at $15.55/oz the ratio is 80: 1. In effect, silver is not being considered precious any more.

The extra edge gold has in India

While both gold and silver have seen multiple bull and bear market patterns in international markets, it has largely been a smooth upward trend in India. The exception is the recent period of past several years when gold has seen sharp ups and downs.

Why does gold fall only marginally, stay flat, or even go up in India even in time periods when international gold prices are falling? The answer lies in the USD/INR exchange rate. As gold prices are set in the dollar denominated international trading markets, a rising dollar makes gold costlier in terms of Indian rupees even if gold as an asset class does nothing. Thus gold acts a hedge against dollar appreciation for those who are likely to spend in dollars for education or foreign travel.

5 Year Gold Performance in India

5 Year Gold Performance in India-Note the milder price fall

Ok, got it, how do I invest

There are multiple options today and all have their pluses and minuses.

Buying jewellery is an option but making charges etc. may make it unwise from an investment perspective. Yet, if periodic buying of jewellery is common in your family, it is smart to time the market a bit and buy when prices seem low. Gold jewellery will always have value.

Buying direct gold as coins or biscuit variants too is an option if storage is not an issue. At present, an investor pays an extra 8% of the metal cost on account of taxes like VAT and duties. This is tangible and there is something to feeling the metal in your hand but selling gold in a hurry could be difficult in an illiquid market.

Gold Exchange Traded Funds (ETFs) are a smart option with the ease of electronic buying and selling of gold at the click of a button. The overhead costs are initially not as high as buying physical gold but with a catch. ETFs have administrative costs and the expense ratio is usually around 1%. Add brokerage costs and taxes and over a few years, ETFs could be a costlier method of purchasing gold. However, liquidity is rarely an issue with them which means that it is much easier to move with the market if one is in ETFs as against physical gold.

There is one key philosophical drawback with ETFs though. They do not confer the right to redeem the units for actual gold. This partly defeats the purpose of investing in gold as a permanent store of value even in times of crisis because the investment becomes coupled to the financial risk of the institution issuing the units of ETFs. If the institution goes under as might happen in a 2008 type situation, the virtual ETF units would vanish too.

The National Spot Exchange (NSEL) issued e-series units offering demat gold, silver and platinum a few years ago. The exchange offered easy conversion to physical form whenever the investor desired. For someone could buy and trade 20 grams of gold and when one wanted the metal, take physical delivery from the warehouse. It sounded too good to be true, and it was. The detection of fraud at the NSEL means that only gold ETFs offering investment via routine NAVs remain today.

Investing in silver

Bought cleverly, sliver too offers the opportunity to make good gains when global markets are doing well. It is much more volatile and spikes up faster than gold. However, silver is much tougher to buy. It can be bought physically as bullion from local traders but there is no electronic mode of investment except short-term futures. There is no silver ETF in India. Thus, for the retail investor, investing in silver is difficult. Investing indirectly by buying it as silverware or jewellery is an attractive option but buyers must beware of often steep premiums being charged on simple silver coins or statues by retailers. Buy bricks directly from wholesalers.

Silver price chart since 1985-note the volatility

Silver price chart since 1985-note the volatility


While there is no guarantee that gold’s recent low of $1050/oz would hold, it was a 40%+ correction from the 2011 highs and with a long-term bottom forming process over multiple years. The international price levels are at levels where one could say that they were buying at multiyear lows. Gold has rebounded sharply from its lows to $ 1250/oz and has been one of the best performing asset classes of 2016. For silver, the bottom may not be in as it has not shown the same bounce back from lows. An investor could try to time his/her gold purchase at this time but must consider investing in this must-have alternative asset.

Contrasting Indian Classical Laissez faire and Western Social capitalism


Laissez-nous faire“(French)- “Let us be,” literally “Let us do”

There is a widespread incorrect public perception In India that it has a very large public sector. If anything, the public sector is too small. The US employs persons or approximately 15% of its workforce in all levels of government. The UK employs about 18.5%, 5.6 million of a workforce of 29.7 million. India’s statistics of 17.6 million employed in the public sector of a total workforce of 474 million i.e. 3.7% seems miniscule. Even among those employed, the majority are semi-skilled or unskilled whereas the majority in Western countries are skilled, as is necessitated by the needs of providing health and social welfare benefits. The Indian government employs 162.3 government servants per 100000 persons as compared to 768.1 in the U.S. In an article in 2012, The Hindu, in fact, called the government anaemic.

Why then the public perception?

The problem is that whatever government that exists is so inefficient and corrupt that the little there is seems to be too much. There is a severe shortage of skilled personnel to work in sectors such as health, education, public works etc. but there is no ongoing effort to create such a workforce. Instead, hiring has been, more or less, frozen since 2011 as the government is said to be ‘too big’.

This, when India is actually an example of classical laissez faire. People are left to their means; those with money and power prosper and enjoy resources and facilities while those without attempt mere survival. There is no concept of social security. Even the ability of the state to maintain law and order is not applicable everywhere. Large swathes of the country have only the token presence of a state. On the whole, people are left to do as they deem fit.

'You can't make laissez-faire mandatory!'

‘You can’t make laissez-faire mandatory!’

In a Western country, the government is everywhere. It is omnipresent through the police, in the security cameras, through the laws that govern public property or through working government helplines. India has no emergency response service to match the US 911 or the UK 999. The government exists, in absentia and lets the people rule the land.

This is amply demonstrated by the way that public land is treated by Indians and the way they throw garbage or spit on the street. They know that they can do as they please and nothing can stop them. The Indian spirit is embodied in the classic Indian phrase ‘chalta hai’. Representative of compromise and adaptability in all circumstances, the phrase masks a public apathy towards excellence and demanding of rights considered basic by citizens of developed economies.

Laissez Faire but not Laissez Faire Capitalism

Considering that fiscal spending is considered to be the primary tool for stimulating economic growth in modern Keynesian economic theory, the sums of money actually spent on Central government schemes are not that large with a few exceptions. However, whatever is undertaken is more with the view to offer classic opportunities for graft to the unscrupulous in the government and thus largely a burden on the public exchequer.

On the other hand, it is very hard to do business in India in the organized sector with an interfering government that could arbitrarily impose tariffs, regulations or even tax retrospectively. Indian labour laws and laws governing the establishment of business are hopelessly out of date and favour an economic mindset that went out of fashion half a century ago.

Western Social Capitalism

Modern Western governments, in fact, much more socialist than capitalist in the classical sense. Governments are not just expected to provide civic facilities; they are expected to provide housing, unemployment allowance, pension, and even bail out funds to the occasional big bank. Whatever the problems caused by these massive welfare obligations, it reflects the acceptance of the fact that self-interest may not match with public interest. This mix of capitalism and socialism is the hallmark of the developed economy and necessitates the existence of government bodies to regulate and govern.

The importance of public sector in the Western world

The importance of public sector in the Western world

Thus, India represents neither laissez faire capitalism nor Keynesian economics, just unadulterated laissez faire. With India gradually gaining more prominence, who knows whether a few decades from now, like this classic French phrase, even chalta hai may be studied in economics textbooks;hopefully, only as a relic.

Back into Bull Mode

It has been a long time, a really long time. This May, after so many years of either sitting on the sidelines or occasional rangebound trading, I felt like the bull I was during the time of my blooding into the stock market. It was a moment when I reviewed my entire portfolio and felt that in spite of the recent gains there was only one way, up. After years I feel hope; and the market echoes my sentiment.

The reason I am so bullish on the new government is that unlike the previous one which took no decisions, this one is almost sure to be decisive. The previous government either took no decisions or took terrible ones with major scams unearthed quarter after quarter. The sense of relief on its departure itself is so great that I can’t see a resumption of the bear market under any condition. As I expect the government to do positive work with focus on the essential old economy sectors, I feel that we are going to have a secular multi-year bull run. Retail investors should make use of the first dip they get. They are unlikely to get many.

Current market conditions

The Sensex has been rallying for some time. The Sensex has been rallying since Autumn 2013 but as its composition is heavily skewed and is not really a good indication of the market as a whole, I viewed the rise of the Sensex with cynicism. Only now, in May with the sectoral laggards in large cap, midcap and small cap indices finally moving decisively, we can say that we are in a secular bull market. In the past few trading sessions, we have finally seen midcaps and small caps tying with large caps on percentage gains. The market is green across the board. Selling on news happened only to a limited extent on result day with the Sensex paring down gains as the day went on. We are no longer seeing buying on news. We are seeing buying on expectations.

BSE midcap finally cathes up

S&P BSE midcap finally catches up

As is clear from the chart, the Sensex (green line) has considerably outperformed the BSE midcap and it is only in May that the midcaps have begun to outperform.

Around 10th of May, when I was wondering whether to book profits before the elections, a look at non IT, pharma, FMCG,auto and financial part of the portfolio clearly demonstrated that the profits existed only in those sectors that I just excluded. Elsewhere, multi-year losses were only being partially recuperated.  The stocks in manufacturing, energy, infrastructure, engineering, metals were finally looking alive but they did not seem like star athletes. That has now changed with the rise of these stocks being meteoric in the last few sessions.

A Pause?

However, the market’s movement in the afternoon today (26th May) suggests a pause or partial rollback of the action. The Sensex ended flat but in the green but prominent midcap indices were all down. This is more significant considering the fact that these indices were significantly up in the morning. Many stocks reversed 5% upmoves to end 5% down. This is a likely signal for the profit taking that many of us bulls have been waiting for. We may still see the change of leadership baton to the large caps which could take the rally further but it is more likely that we will see the Sensex and Nifty consolidate or move downwards. Even if the large caps do make a move, it is not going to be a large one. The bull market needs either a price correction or a sideways consolidation phase in order to create strong support levels for stocks to rally from.


Todays's steep afternoon drop

Todays’s steep afternoon drop

Invisible Carnage

On 2nd August 2013, the BSE Sensex and the Nifty closed at 19164 and 5678 respectively. These levels are similar to average market levels of the past year. The Sensex has maintained a tight range between 18500 and 20500 from September 2012 in a movement that may have been irritating for recent market participants who wished the indices to move upwards. I have been feeling that 19000+ is actually a dizzy level considering the actual fundamentals of the Indian economy ( refer my previous article: Markets at 16000 again’).

However, a closer look at the actual market today has managed to shake me out of this illusion. The market is nowhere near highs. In fact it is very much competing with the intermediate lows of the bear market.

Decoupling: S&P 500 and the Sensex

You may remember the infamous decoupling theory of 2007-08. The theory suggested that the Indian markets were decoupled from international markets because of the fundamental strength of the Indian economy and so would not be affected even if American and European markets burned. The theory thus argued that the Sensex could be bought even at 20000.

As the events of 2008 bore out, nothing could be further from the truth.

However, since the beginning of 2013, we have witnessed part of the premise of the theory coming true; Indian markets have decoupled from US markets. Look at the chart and you will see how the S&P and the Dow have been steadily climbing up a mountain while Indian markets have been taking a saunter along the beach.

The Sensex loses badly, very badly

The Sensex loses badly, very badly

Mid caps and Small Caps get smaller still

The two year chart of the Small Cap index demonstrates how Midcaps and Small Caps have dropped sharply whenever the Sensex has fallen but by much more and they have also fallen when the Sensex has only been flat.

The bottom has dropped out for small caps

The bottom has dropped out for small caps

The BSE Small Cap Index has fallen from 13400+ in Jan 2008 to 5178 today. This is only 90% higher than March 2009 lows. The Sensex at 19000 is 140% above March 2009 lows. The BSE 200 is 120% above the lows which seems to be a good performance. However, bear in mind that in times of correction, midcaps and small caps fall much faster and so have much lower bases at historical market lows. Midcaps and small caps are supposed to give greater returns over the long term than large caps. How is it then that we see the Sensex beating their returns so spectacularly?

One chart that shows it all

One chart that shows it all

Illusion behind the Sensex

The level of 19000 too is just an illusion that quickly disappears when we see the stocks that are responsible for keeping it at that level. As it turns out, the only heroes of the index have been in FMCG, IT, Auto, Pharma and HDFC (sorry to place sectors and stocks on the same plane but HDFC and HDFC Bank are a class by themselves). From middle to low levels in terms of weightage in the Sensex, they have risen to the top. Having ITC at max weightage in the Sensex was unthinkable two years ago.

Blood on the Trading Floor

Traditional brick and mortar companies are down to multi year lows across the board. Look at SAIL, BHEL, Hindalco, GAIL, ONGC, RIL, HPCL, Tata Power, Power Grid, NTPC, Tata Steel etc. Look at banking: SBI, Bank of Baroda, Bank of India etc. A behemoth like SBI is struggling at its December 2011 support level of 1600 below which it only has the March 2009 bottom of sub 1000 levels to fall to.

SBI 2 year chart

SBI 2 year chart

For midcaps and small caps, pre 2007 levels have returned and many supposedly strong stocks have given up decade long gains. It is almost as if 2004-2007 had never been. The list of stocks is too long and too painful to read out so all I am telling you is to take a look at almost any midcap in the engineering, manufacturing, mining, power, metals, fertilizers, banking, realty, textile, media space. In fact, look at anything other than IT, FMCG and pharma.

The premises of every wealth manager who has talked of investing over the long term for better returns have come to nought.

The FMCG bull run has relied on the strength of India’s consumer based economy but this cannot last forever as consumption in a bear market economy is not the same as consumption in a booming one. The auto sector is already learning this.

The writing on the wall is clear. We are in a horrible, horrible bear market which is better represented by 12000 on the screen, not 19000.

Gold’s is the true bull run of the 21st Century

Ask Midas and he will tell you that gold is a class in itself. Gold is often called the barbaric relic and rightly so. It has bedeviled people for thousands of years as the ultimate store of wealth. Bappi Lahiri may be one of the best music composers of his generation but he is the most prudent investors too,literally wearing his love for gold on his sleeve.

Gold:The International Story

Gold has lived in tumultous times. It has been loved but it has also been reviled as responsible for financial crises and delays in economic recovery. After all, a gold standard prevents runaway monetary expansion. In 1973, the removing of gold backing of the dollar triggered the greatest boom in the history of gold with gold peaking at $ 850/oz in 1980,rising from $ 35/oz in 1973. Those were interesting times. Crude too had hit $ 100 a barrel only a short time earlier. Gold then saw a terrible bear market for the next twenty years that virtually killed confidence in gold as a store of value. Its obituaries were written and central banks, most notably the Bank of England unloaded the gold in their reserves.

Look at this chart from 1971-2005. You can see how the 20 year bear market in gold had lower tops and lower bottoms till 2000 when the trend suddenly changed spectacularly. It was almost as if it were echoing Jennifer Lopez in her millennium song ‘Waiting For Tonight’. At Y2K, gold launched itself into a bull run that has not ended yet.

Gold has seen big crests and troughs in its career

Note how gold took 25 years to get back to its previous peak but the actual upward movement took almost no time


The first chart covers gold’s trajectory till 2005, the year in which it recaptured 1979 highs once again. The other one covers the 2Ks till present. As you can see, it is a largely undisturbed trend except for except for brief periods of volatility in 2006, 2008 and 2011 (The latest one cannot actually be called a correction yet. It could also be the start of a bear market although I would bet against it).

The stellar run of gold in the new millennium

The stellar run of gold in the new millennium

Gold: the Indian Story

Indians have been gold bulls from the times of Alexander. We never had much of the precious metal naturally available in India but a long tradition of accepting virtually all our foreign trade payments only in gold and silver has led to Indians being the greatest hoarders of gold in the world.

The Indian belief in the value of gold has been vindicated time and again

The Indian belief in the value of gold has been vindicated time and again

However, let’s cut to the present.In the last 40 years, the experience of the Indian consumer has been very different. He has only seen rising prices. Gold imports were banned in the 1970s and thus smuggling was common.(Big B as Don was engaged in gold smuggling).This kept prices even higher than international prices. The graph below does not take that into account. There never have been bear markets except for two periods 80-86 and 96-01 when it dropped but not too significantly.Why is India so decoupled from the global markets?
The hero or villain depending on which side of the buy/sell equation you are is the INR/USD exchange rate.

The rupee weakens, then hangs onto a support, then weakens again

The rupee weakens, then hangs onto a support, then weakens again

It is rather obvious that the rupee has been on a long term downward trend and in spite of being less volatile in recent years, the current stabilization of the rupee at 48-50 instead of 42-44 is part of a larger structural weakness of the rupee. Even if gold prices fall internationally, a falling rupee takes it up.
This rather reinforces Bappida’s and the common Indian’s belief in the yellow metal. India consumes 900 tons of gold every year. Indians have between 20000-25000 tons of gold stored privately which is around 15% of the total gold mined in the word till date(165000 tons). The global gold output is around 2500 tons. Buying gold is no investment(except very recently)for Indians, it is sacred tradition. So we Indians actually drive the price of gold even if the prices in our spot markets do not reflect global trends.

The movers and shakers of gold:

Real interest rates:Gold acts inversely with real interest rates. This is a long term phenomenon that can actually be relied upon. In today’s low interest rate scenario, gold should rule the roost.

Liquidity: There has to be money to buy gold. Even if real interest rates are low and there is no confidence in the equity markets, gold would still collapse in the absence of liquidity. This happened in 2008 when a run on equity markets also led to a run on gold.

Dollar index: Being dollar denominated, gold moves inversely with gold. It is no coincidence that the gold lows of 1999 and 2000 coincided with lifetime highs of the dollar index.

Gold is Money: The non-stop printing of dollars by the US Fed is undermining the dollar.Central banks have turned net buyers in the last two-three years after decades of selling. There is no doubt that the world will have to rely less on the dollar in the future. Gold could very well be back as a reserve currency. Unlike paper currency, it is real and can be felt and touched and its writ is not determined by a government.

Hedge against hyperinflation: Yes, you read that right. In India, because of the depreciating rupee, gold does act as a hedge against inflation but it is not always bought when inflation goes up. Therelationship is more complicated than that. However, in a case of hyperinflation, there is no asset like gold. It is literally te only asset left standing. So if confidence in the fiat currency in which you hold your assets erodes or it devalues itself crazily, only precious metals can save you. Hyperinflation is a very rare event but it can never really be ruled out in an intrinsically flawed financial system.

China: China is also the world’s largest producer of gold but it exports none of it. Its central bank has also been buying gold externally and is rumoured to be building a gold war chest as a hedge against a falling dollar. China is likely to overtake us this year in terms of gold consumption.
Jewellery: In India as well as China, gold has its use as jewellery. In case the investment does not work out, physical gold could be converted into jewellery. Most families do need jewellery on occassions like marriage and so hedging the risk being forced to buy it at a much higher cost in the future is prudent. The physical asset or a gold ETF could be used for the purpose.

Naysayer arguments:

Useless Ponzi asset: Warren Buffett wrote this year that gold is an unproductive Ponzi asset that no use whatsover and is bought in the hope that it would someone would pay a higher price for it in the future. He is right but remember that Buffett held vast quantities of silver from 1997-2006 and mistimed his exit thus completely missing out on the bull run in the white metal.

Technicals: Gold has formed lower tops and lower bottoms after falling from its September peak of $1920/oz. It is currently at 1700. There is not a whole lot of strength in its movements. It has also been in a very long bull market and thus could fall a long way.

Too Many Bulls: There is no doubt that the number of people bullish on gold has increased greatly in 2011. The correction post September has reduced the number. Market peaks and bottoms are usually reached when the buyer seller ratio becomes extremely skewed. Saying this for gold is difficult because we do not see the average Joe giving advice on gold and buying it aggressively yet.

Do I buy it then?

The long term fundamentals for gold are very strong and specially for the Indian consumer, buying gold is never a bad decision. In the last few months, we have seen gold moving in a very narrow band between 27000-29000 per 10 grams while international prices have yo-yoed largely due to the rupee which has played the see-saw with international price movements and led to a cancellation of both factors.
An appreciation of the rupee could make gold cheaper but it is also equally true that if gold breaks out, 1920 is not too far. A close above those highs could take gold to any level. That could make gold completely unaffordable for those who need it for jewellery. Thus, if one does not have gold, accumulating it at present levels may not be a bad idea. Having said that, till it resumes its trend, it is as risky as equity. Do not treat it like a safe haven.