India’s GDP is growing rapidly and is expected to rival China’s GDP growth for the next few years. Prime Minister Manmohan Singh’s government has done an exceptional job. His administration has been able to gradually decrease the bureaucratic overreach into parts of the economy and he has been able to deliver economic assistance to the people in rural areas in a more efficient manner.
Historically, government spending intended for the rural areas has in large part been misappropriated by corrupt politicians and by civil servants who accept pay but do not show up for work. In recent months technology has increased the communication between the government and villagers in the countryside. Rural populations can now report misbehavior by government employees in their regions. The technological developments have led to increased attendance at work by government employees including teachers, nurses, etc. Villagers are beginning to believe that their concerns are being heard. Handheld phones and village computer terminals have given farmers an unprecedented opportunity to sell their crops directly and avoid middlemen.
Villagers’ incomes and consumption are on the rise, and the Indian economy is expanding more rapidly due to the fact that rural as well as urban citizens are enjoying the growth. We expect Indian GDP growth in the 8%-10% range for the next two or three years, which is well above the historical pattern; a very impressive outlook.

According to an article in the August 4th Financial Times by Leslie Hook, “China moved yesterday to further liberalize its gold market, increasing the number of banks allowed to trade bullion internationally and announcing measures that will encourage development of gold linked investment products. The move by Beijing’s central bank comes as the country’s investors pour record amounts of money into gold in a trend that is becoming a significant factor in global prices…” Click the following link to read the entire article.
We have long been of the opinion that Indian and China will be large and growing consumers of gold, and this pattern continues to establish itself. As wealth grows rapidly and inflationary fears rise in both countries, gold is an obvious alternative that will fill a larger part of Chinese and Indian portfolios.


The 14 major derivatives dealers including Goldman Sachs, Morgan Stanley, and J.P. Morgan reported $449.2 trillion dollars in derivatives as of June 30, 2010. The data was compiled by Tri Optima, an infrastructure provider for the over the counter derivatives markets. According to Tri Optima 74% of these derivatives are interest rate swaps. These swaps allow bets on the direction of interest rates, and are used for hedging risk or to increase risk and potential reward. By any measure the amounts of outstanding over the counter derivatives continue to be stunningly large and continue to hold the possibility of another banking collapse if the various sponsors and their counterparties are not carefully managed, and the transactions made transparent.
As we have discussed many times in these pages over the last few years, derivatives led to the over-leverage and eventual downfall of the U.S. and European investment banks and threatened to collapse the developed world’s banking system. While the U.S. and European banking systems were melting down, the more conservatively managed banking systems of many Asian nations, Australia, Canada, and others avoided the problems.
The de-leveraging of the U.S. and European banking systems continues and will be a drag on economic growth in these regions for several years into the future.


The world is awash in fear; fear of war in Middle East, fear of a double dip economic recession in U.S. and Europe, fear of inflation in China and India, and many other fears. In such an environment, gold and oil appear to be two of the wisest investment areas. Among gold alternatives, we recommend gold bullion and gold shares with leverage to higher gold prices. Among oil investments we favor energy producers which combine growth in energy reserves and strong dividend payouts.
We also believe strongly in the long term economic viability for continued growth in India, Singapore, Malaysia, Thailand, China, and Brazil. Although less certain, we will probably see continued growth in Canada, Australia, Taiwan, and Korea.
Europe, Japan and the U.S. appear to be set on low growth trajectories for the next few years. When their currencies fall in value, the U.S., Japan, and Europe will be able to boost their export growth slightly, but all three areas will be dependent upon “quantitative easing” or money printing to keep their economies growing. Longer term, money printing will lead to currency depreciation and inflation. While these major money printing operations are happening, we expect that the respective stock markets may rise, but we believe that they will fall again when the injection of stimulus is completed.
Thanks for listening. We hope you are enjoying the summer season, and we encourage you to contact us with questions, suggestions and criticisms or if we may be of service.

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