Sunday, July 13, 2008

Stagflation: Inflation with no Growth

Friday's numbers on Inflation (almost 12% - highest since 1995) and Industrial production growth (3.8% - lowest in six years) have caused a great deal of worry for the Indian Economy: Are we heading towards an era of Stagflation ? There was a period in the 1970's when infllation mvoed up to 20% + while the growth rate was at 2%. That was the period of rising crude prices with rising commidity prices. (Sounds familiar ? ). The public was squeezed between ever rising prices and a stagnant economy. It was a terrible time to be in.
Now, what will be, will be. As traders, we are not in the corridors of power. We have to protect our business of trading & our families from the ravaging effects of stagflation, should it raise its head.
One option seems to be: Gold. A thoughtful article is available here which discusses Stagflation as well as the reason why Gold may be a hedge against inflation without growth.
Traders in India should consider adding Gold to their trading list as well as their portfolios.
Gold can be traded on NCDEX and MCX as well as bought through a number of exchange Traded Funds - ETF available on the NSE. The ETF is just like a share purchase, it goes into your demat account.
New bull markets are born out of extreme pessimism. While this is true, we cannot say when the period of pessimism will be over. Just as bubbles can last much longer than we imagine, these periods of pessimism can also last much longer. The key is to keepw atching our charts for signs of exhaustion. As of now, such signs have not come in. It does appear that there is much more pain left. Hopefuly, I am wrong.