Saturday, July 26, 2008

Newsletter 17 – How to handle catastrophes in equity markets?

Newsletter 17 - How to handle catastrophes in equity markets?

Markets are going through a lot of pain and we believe that they have bottomed out and crude oil, inflation has peaked unless there is any catastrophic event. There are reports that Israel is preparing to attack Iran with the US support if it fails to stop its nuclear programme.

If this happens, it will be really a catastrophic event which can potentially raise crude prices to even $200 per barrel!

How can we handle such situations?

Past examples of catastrophes are World Wars I & II, US-Iraq war, September 9/11 attacks on World Trade Centre. They can totally make the growth projections go awry & cause major upheavals in the markets. Since it is not possible to predict such events beforehand investors cannot be totally insulated from their effects but to a limited extent can be shielded by having GOLD in their portfolio (2-5% of the portfolio) besides some cash (best friend of investor in crisis).

During catastrophic events like wars or big terrorist attacks or major natural calamities - stocks, bonds, property etc. fall but gold gives the best return as all the investors find it the safest investment and best hedge against inflation.

Not surprisingly gold has given best returns in last 1 year and outperformed equities, bonds when world markets are going through high uncertainties, high crude oil prices and high inflation. In the past people could invest in gold only in physical form which has safety and purity issues. Now-a-days various other options available are:

Ø Gold futuresare contracts between seller and buyer at a pre determined price on a future date. They are risky and speculative in nature and best avoided by people who are interested in long term wealth creation.

Ø Gold ETF is exchange traded fund where one unit mirrors the price of one gram of physical gold.

Ø Gold coinsare issued by various banks. Advantage is that purity is assured.

Ø Gold Mutual Funds are of two types:

1) MF that directly invests in gold or related assets.

2) MF that invests in companies involved in gold mining or related businesses (They give exponential returns when gold is increasing because production cost almost remains flat but sales price increases thus giving much better margins. Reverse is also true when gold prices decline, such mutual funds decline at much faster rate). One example is DSPML world gold fund (Returns 35% in last 1 year) which we have been recommending to our friends since last year.

Once the catastrophic event is over or about to be over, we can book profits in gold partially/fully & switch to equities as they are most undervalued at that time.

Go make your portfolio shine with gold!

Warm Regards

Aditya NADIG :)

This message has been posted on HMGoogleGroup by: Adi
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edzillion said...

One method of gold investing that you haven't mentioned is investing in government-backed gold certificates, like The Perth Mint Certificate Programme which has a few benefits over the other options.
* no storage fees (so ideal for longer term investments)
* no counterparty risk (you own the physical gold, unlike an ETF where you just own a share of a fund)
* liquidity (guaranteed to buy the cert back from you)