Amit, I doubt if Rupee will rise much - more likely it might fall back to 57.

I doubt if Rupee will in the short term undergo any more major devaluation. Plus minus couple of Rupees from here is anyway daily occurrence. In the long term also Rupee will be steady only - we need to see how much inflation comes in USA - that is crucial.

Any deflation would be very destabilizing and unpredictable - its hanging in the balance - once the presidential election is over, the real truth will come out and only then we can tell. That is just 6 months away.

Most likely, USA will respond to the second twist and inflate soon.

Otherwise world economy is in very big trouble. Rupee will crash to 65-70 in US deflation condition - so any deflation in USA will coincide with massive stagflation in India with imported inflation running at over 10% and very bad news indeed.

Charlie, I would prefer FMP at this juncture. After 50bps rate cut, expecting any more cuts is not worth it - max another 0.25% cut.

I am keeping my bond/Gilt funds for anoither 6 months - since they are already sitting on some profits. I would not commit anything more at this juncture - rate cuts are already over probably.

So go with FMP - it is also tax efficient. Only problem is not many open FMPs right now.

Sanjana, dollar weakness from here is unlikely - bonds will sell off soon, but it will make US bonds more attractive and many will settle for it. US bond yields have to only rise from this point on as inflation starts biting. So with rising US yields, dollar will stay steady or might rise against all currencies.

You are right TIPS are the way to go for USA.

FMP for India in fixed income - stocks in India are now attractive.

Gold is dollars is probably finished - but gold in Rupee will follow Rupee depreciation. It is a dicey game - if gold falls in dollars but Rupee also falls, that can wipe out gold gains in Rupees. Probably still a good bit to gain in gold - maybe 35000 seem possible, but volatile ride for sure.

If world economies recover, gold in dollars will collapse very fast. If Indian economy recovers, both Rupee will rise and gold will fall. If both world and India recover strongly, then gold in RUpee will get double whammy - gold in dollars will fall and Rupee will also rise, making losses in RUpee gold much magnified.

[QUOTE=wiseman;471904]Venky,

What if world economy does NOT recover? I doubt Indian economy will recover under those circumstances (by recovery I mean going back to the 8-9% GDP growth rate). The Chinese economy will probably average less than 5% growth in this decade.

Under these circumstances, where would you see gold going (both $ and Re)?

In addition, gold has never crashed until inflation and interest rates turned down and the debt spigot was turned on bigtime.

This time, interest rates cannot go down any further and inflation (at least official rates) are at rock bottom. We have seen plenty of Debt being created and its not having anything but temporary effect.

In addition, increasing number of people and Central Banks are accumulating gold as a last resort to protect their wealth. Central Banks have reported bought around 400 tons in the last year.

So, exactly what phenomenon would result in gold prices crashing?

cheers[/QUOTE]

Difficult question. If anyone knows the exact answer to this, he can become seriously rich. I dont. I only have some thoughts.

Lets see. First there are 2 different questions and not one question in your post.

1st: Deflation. This is again a serious problem which has raised its head. With deflation US will not only keep its short term rates at zero, but even long term bonds will rise to maybe 0.5% yield or even 0% yield. This will make dollar weaker by maximum another 10-15%. So maximum upside for gold is another 10% - 15% plus whatever risk premium is given to gold. So in USD, gold might go to about 2000 or so, assuming a 25% total rise from current levels.

But in India, Rupee will collapse to about 90/dollar or so - since we will be unable to export anything. There will be serious recession. Gold will rise to about 40-50,000Rs or so - but RBI will ban all gold products, there will be import duties and smuggling. Physical PM should be OK in this scenario. If you are in e-gold, one should exit well before these are banned and well before all this volatility

This is an extreme event and probablility should be low (how low/high no-one knows)

2nd possibility: USA lumbers on like a zombie as it is now. Dollar will stay steady till 2014 or so. Gold will move along with Euro. After that Dollar will rise as US rates slowly rise over next decade or so - initially, as US recovers, they will keep short rates low and allow some inflation to take place. So some small return in gold will come with it - but not like the returns with such massive currency printing which we have already seen - maybe 5-10% only.

After that, if USA can absorb the first rate rise without falling back into recession, then - VERY VERY SLOWLY - over maybe 3-4 years, they will raise the US rates by 1-2%. That will make dollar strong and gold will fall.

Net net, gold is fairly valued in dollars.

But this is importan - in this scenario, there will be a dollar carry trade for investment in India. A massive equity and investment boost will come to India. The flow of dollar will raise the Rupee to below 50 and even close to 45. Gold will then fall a lot - maybe 25000 or so is possible.

Later, post 2014 scenario- as dollar rises with raising of US rates, Rupee will fall again and so gold will again rise in Rupees.


Probability of the 2nd scenario is much higher - again imponderable.

Depending on the strength of the Indian recovery, gold will fall varying amounts, depending on the Rupee.

But overall RBI seems comfortable with current Rupee levels and so gold should maintain steady state. Since Indian policies are stupid, a rise of gold to 35000 levels and fall of Rupee to some 60-65 is always a possibility even within this recovery. But not a major collapse of Rupee/ major gold bull market.

Buying gold at current juncture is only to guard against the first possibility. Maybe 5%.