In the beginning of the year, the safest asset â€“ gold, after having a decade long bull run, saw weakness but in April gold prices (in Indian Rupees) came down more than 20 percent from their peak.
Karmayog Knowledge Academy
While we are approaching the end of another calendar year, there are still some memories of 2012. The biggest fear in 2012 was: the world is coming to an end on 21st December, 2012. Well, it is more than a year – and the world has yet not ended.
At the same time, one may wonder if the world has changed dramatically. Let us look at some of the events that took place in 2013. These events shook our long-held beliefs.
In the beginning of the year, the safest asset – gold, after having a decade long bull run, saw weakness. What happened in April was unbelievable for most – In a sudden move, gold prices (in Indian Rupees) were down more than 20 percent from their peak. Barring a surge in July-August due to the weakness of Indian Rupee against world currencies, Gold has been quite lackluster throughout the year. Before the year began, it was believed to be a safe haven.
The popular belief was that in times of crisis, one rushes to Gold. Well, the safe haven is roughly 17 percent down compared to last year’s price.
One major belief challenged. The safe haven is no longer safe.
Then in July-2013, in a surprise (?) move, the Governor of Reserve bank of India increased overnight interest rates by 2 percent. This move was taken to check the fall in the value of Indian Rupee against world currencies. The Rupee did not recover, but another market felt the tremors – the money market.
In the mutual funds, there is a category of funds, known as liquid funds. The main objective of these funds is to provide a short-term parking place for surplus funds. When the Reserve Bank of India increased short-term interest rates, the NAVs of these liquid funds dropped – an event nobody was prepared for. Well, the NAVs recovered soon thereafter. However, that fortnight was a big negative surprise. Another safe haven lost.
If this was not enough, we had a commodity spot exchange going bust. (We will not get into the fundamentals of the case here, but would focus only on the fact that this was believed to be a robust market institution). This was another event that shook the confidence of people. How can an exchange go bust? Is it not supposed to be a safe place? If an exchange goes bust, what is left?
Do these events indicate that:
1. What was safe till end of 2012 was no longer safe?
2. It was end of the way the world operated, as we knew?
(On a lighter note, the “end-of-the-world” prediction was true.)
The reality is: the world has not changed. It is just that some of the risks manifested. The risks were always there. However, when we evaluate risks, very often we want to see the proof. Thus, if something has not happened in a while, we do not consider the presence of the risk. It is important to note that risk (like truth) does not disappear just because someone refuses to acknowledge it.
The first step in planning your investments would be that you accept that the risks are present, and there is a possibility (however remote) that these risks may manifest.
In order to invest your money, you need to manage the various risks – visible or invisible.
The year 2014 is not going to be different. There are risks in investments and there will be risks in investments. Sometimes these risks would not be apparent, but do not mistake that as permanent absence of the risks.
- Amit Trivedi
The author runs Karmayog Knowledge Academy. Views expressed here are his personal views. He can be reached at firstname.lastname@example.org.