In my short update on 20th Jan, I warned that Dow will come down and along with that Commodities, Metals, Precious Metals and European markets too will come down.
On 6th Jan, I flashed urgent update on Gold asking you to take out profit from Gold. Gold is $ 100 down since then. I still expect Gold to correct further, may go down up to $1200 and in worst case up to $ 1150. Hence, if you are still completely sink in Gold, hedge it now.
Does this mean, bull run in Gold is over?
No. This is mere healthy pullback. This correction will drive out weak holders from the market, presenting fresh buying opportunity at lower levels.
I have not changed my long term outlook about Gold by one iota.
Because, fundamentals driving Gold up are still intact. Neither Fed has stopped printing money out of thin air nor Govts are abandoning cheapening currencies.
Commodities and Metals
I expect commodities and metals should correct now. There are many reasons for that.
In last 2 quarters, outlook of US economy has improved. When I say improved, do not believe that there is a significant shift. It was “too much bad” earlier, now it is “much bad’ before it becomes ugly later in late part of 2011.
This short term improvement coupled with higher valuation of emerging market will drive dollar either bit up or will remain sideways with upside bias.
Lot of recent run up in commodity prices were attributed to dollar decline. Hence, when dollar reverses trend, commodities and metals should decline against that.
Inflation in Emerging Economies
Almost all emerging economies are currently suffering higher inflation with a probability of out of control hyperinflation.
Due to that, most of emerging economies have hiked rates continuously in last 6 months. Today was RBI’s 6th hike in row. China has also hiked rates aggressively to combat against inflation in last 3 months.
Because of recent aggressive rate hikes, situation has emerged now, which looks like that to control inflation Central bank and Govts would decide to compromise on 0.5 to 1.0% GDP growth to protect economy from out of control hyperinflation.
I had been saying that RBI is continuously behind the curve. Today, that was the topic of the day on CNBC.
Expectation of lower GDP growth for 2011-2012 will also contribute much behind the decline of commodities and metals.
RBI declared today that India’s GDP will moderate in next financial year.
Analysts hardly pay attention to other factors then economic data to understand the situation.
Demographics play important role in inflation expectation.
When your nation is younger, it consumes more driving inflation up and when it grows old it consumes less and driving nation into subdued inflation and sometimes into deflation.
Japan is fighting against deflation since years and yet could not come out of that because Japan is now the nation of senior citizens. Average age of Japanese is now reaching to 46-47.
India has large no of young population. Average age of Indian is now 22-23. And you know, this is the age where consumption is high and productivity low. For this entire decade, even after repeated efforts Inflation will not be contained to the desired level because young Indians will keep spending on all categories motorbikes to high end cars, packaged foods to fancy cloths etc….
Let us look at other interesting statistics.
In 1750, world population was barely 100 crore. It reached to 300 crore by 1955. It took 200 years to add 200 crore.
But, wait… World population as of now is around 650 crore… shocking.. we added 350 crore souls in last 50 short years, we doubled world population in last 50 years.
If this is shocking then wait for forecasts, by 2040 World population will reach to 900 crore. I know, you have stopped reading and just reading this line again.
One estimate says that we need 1.5 times more earth to feed these mind-blowing size population.
We all are stretching mother earth resources like there is no tomorrow. We want to consume everything now and today without thinking or planning of replenishing resource deficits.
I will talk on that in detail in my next letter. But, this is very serious and precarious situation.
Very silently but steadily this population force is driving inflation up across the world. We have to increase agriculture productivity at faster rate and need to protect water resources from pollution and like contaminants.
World has no option but to learn to live with higher inflation in coming years if productivity and capacities not added in time.
Long Term outlook of Inflation
All above mentioned and other forces which I have discussed in my previous newsletters will keep pushing inflation at alleviated level unless something significant done on increasing agriculture output. Even all out push towards increasing Agriculture output will also take couple of years to quell down inflation.
Short Term Outlook of Inflation
I believe, RBI and Govt will get some relief as runaway commodity and metal prices moderate in next 2 quarters.
My stance is completely different than RBI and Economists. RBI believe that Inflation will remain at alleviated level this year and will come down next year. RBI and Govt and Analysts are too much worried about inflation this year and expecting it to come down next year. But, situation looks completely different and contrary to expectations..
My take is different, Inflation will come down this year suddenly giving comfort to RBI and Govt. But, from last quarter of this year, inflation will come back with vengeance and in 2012 it will climb past all historical levels.
Hence, if you have any position in Commodity and Metals come out from that now. I will update you when to re enter at lower levels.