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Tuesday, November 4, 2008

Dollar-Gold-Silver-Equity & anyway Inflation

Dollar-Gold-Silver: what’s lying ahead?
The depreciation of the dollar is certain unless crude comes as a savior and starts behaving in the same way as it was a few months ago or some miracle happens. If you would recall, I have initiated a sell on the dollar few days ago. I was long on the dollar (keep dollar) when it was at 38 and now I am short at 50 (sell dollar). In The gold and the silver will give a lot of confidence to the investor community and will be part of safe bets.

I am of the opinion that one should start investing in the gold and the silver, of course along with equity. I am not saying that gold and silver will be moving sharply. But I am saying that in the event of downfall of dollar (if crude continue to dance below $80 then dollar will be under huge pressure and also remember that US has brought huge quantity of dollars in the system which will further put pressure on the value of the dollar) the natural choice will be gold and silver. I would like to protect myself in the event of topsy-turvy times ahead. It is always a good idea to have gold and silver in the portfolio to get right cushion.

A dirty word: Inflation
Inflation is coming down on a week-on-week basis and everyone is happy about it. But there is a strong possibility of inflation going to haunt the governments next year. We have increased the rate of interest sharply in last couple of months/years and that has put break on the growth of the economy. Of course, it was required because easy money (read loans) was chasing too few a goods. That has caused terrible impact on the health of the inflation. So you have had a time when the price of a home was increasing on a daily/weekly basis. But now in the new scenario when the inflation is coming down and so also the growth of industrial production (high rate of interest has made it difficult for industries to borrow money and set up new plants/think of expansions also it has brought down the ever bourgeoning confidence level), the excess liquidity in the system put by the governments world-over create a possibility of high inflation.

The absence of the liquidity was because of the lack of confidence in the system (world over banks have money but they are not forthcoming in landing that because they have lost the confidence in the borrowers’ credibility). But what will happen when the confidence of the financial system improves and all the extra liquidity comes in the market flowing freely. You will see INFLATION may be by March’09...

What is the impact on the Market?
Here is a word of caution while you are reading my views. I am not predicting that the equity market is heading for a doom in the next 6-9 months. In fact, I am of the opinion that collective act of various governments will help to improve the current market situation. It will be a much better place in next 6-9 months when the confidence in the system will improve many fold. There is another possibility that this extra dollar, flooded in the market/system, may make a way to the emerging countries again and that will take equity market to a new level.

That's why I have been saying that it's going to be very interesting time ahead which is going to present huge opportunities. The things are little complicated here, however, I tried to keep them as simple as possible so that we can get right gist out of what has been presented to us.

You may share your thoughts/opinion directly on the blog or write to me at niteen.dharmawat@gmail.com

Niteen S Dharmawat

IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above.


Anonymous said...

Inflation is calculated in terms of change in prices. So what happens even if u put hell lot of liquidity into the system it would be very difficult to emulate the rise in food prices , crude pricese etc etc which happened in the middle of this year. So if things dont go haywire inflation can come down drastically. Do you think a crude price hike can come again in India ! So inflation may drop but not give a real picture as prices may remain same or some points higher then today...

Niteen S Dharmawat said...

More than the definition of inflation (the rise in prices and NOT change in the prices) it's important to understand why does inflation happen? To understand that we need to first understand the most basic law of economics - the law of demand & supply. When demand is more than supply then you have inflation and when you have more supply than demand then you 'can' potentially/finally result in deflation. Even if the rate of inflation is coming down it does not mean that the prices are coming down. It simply means that the rate at which the prices are increasing is now slowed but the prices are still increasing.

Now about excess liquidity in the system and its impact on inflation. The excess liquidity in the system puts a pressure on the demand side of the market. It creates (excess liquidity) a situation when people get easy loans from the banks/financial institute and in extreme case it may result in a scenario when nobody is bothered about whether these loans will be recovered or not (something similar to what happened in sub-prime). Now when we have a very highly liquid system where everyone has money to spent on the items where they should not have spent under the normal circumstance or they start buying the things which are beyond their means/requirements it leads to a demand supply mismatch situation tilted towards demand side and prices increases (just to make it very very simple - available cash in the hand of people because the rise in disposable income/ easy availability of home loans resulted in huge demand for homes which gave a sharp increase in realty prices (inflation)... something similar or dangerous situation is now awaiting unless the governments find out some way of sucking out the extra liquidity which was put to unfreeze the current situation.