A rally you should not miss out on

May 17, 2011

In this issue:
» There is a need to cut down subsidies
» Rating agencies to rank real estate projects
» Commodities rally is far from over
» Foreign investment in Indian MFs could be capped
» ...and more!
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As has been the case with most commodities, silver and gold have cooled quite a bit in recent times. Does this mean that this is the end of the spectacular rally that one has seen in gold? Not really. For instance, David Skarica of the Gold Stock Advisor newsletter opines that gold could soar to US$ 10,000 an ounce as stocks stagnate.

We are not sure about the price that gold will quote at going forward. But it looks certain that from a long term perspective, gold is headed on an upward path. The reason for this is to do with the US' wanton disregard for the US dollar by resorting to excessive money printing. Debt there has bloated and the scenario in Europe is rather grim too. Meanwhile, the US economy has not displayed any sure signs of recovering. Thus, prolonged weakness in the economy would only spur the US Feds to go in for more quantitative easing. This, in turn would lead investors to flock to the relative safety of gold.

A bull market in equities has never been smooth. It is always marked by many corrections, all of which provide investors opportunities to buy into stocks. Especially those that they missed out on the previous rally. And this same logic applies to gold as well. The status of the US dollar and the paper currencies in general has increasingly been questioned in the wake of dubious monetary policies by governments of the developed world. Against this backdrop, gold will continue to evince considerable interest. Hence, the fundamentals supporting the rally in gold look strong. And a correction in this yellow metal should be looked upon by investors as an opportunity to lap up more of this precious metal.

Do you think that the gold rally is showing signs of slowing down? Share with us or post your comments on our facebook page.

 Chart of the day
India's industrial production in Feb 2011 was rather poor as growth was tepid at 3.6%. But today's chart of the day shows production to have improved in March 2011. Of course, month data by itself does not give a clearer picture and the trend has to be observed over several months to come to any meaningful conclusion. But India's GDP growth so far has largely been driven by services and manufacturing as agricultural growth remained erratic. Hence, if the country has to sustain high levels of economic growth, its industrial production will have to do well too among many other factors.

Data Source: The Economist

Political and social interests often conflict with economic interests. If a balance is not maintained, then the repercussions of the same can be perilous. Take subsidies for instance. There are times when subsidies have to be doled out for obvious socio-economic reasons. But there has to be an end to such benevolence, right? If subsidies don't stop, they directly impact the economy's fiscal health. To give you a numeric idea, subsidies eat away as much as 2% of India's Gross Domestic Product (GDP).

In the Union Budget 2011-12, the finance minister had set an optimistic fiscal deficit target of 4.6% for the fiscal year. But can it really achieve that goal? Montek Singh Ahluwalia, the Deputy Chairman of the Planning Commission opines that we need to cut subsidies to bring our fiscal deficit lower. He points at some very pressing concerns that could derail the government off its fiscal deficit target for the year. We all know that oil prices, especially those of diesel, kerosene and cooking gas are heavily subsidised by the government. It is not difficult to imagine how much burden rising international crude oil prices put on the government's finances. The same holds true for coal. Coal prices are kept artificially close to 50% of global coal prices. If that was not enough, subsidy of electricity nibbles away 1% of the state GDPs.

These are issues that need to be addressed with urgency. Otherwise, the malady that is plaguing the Western world will soon creep to our shores as well.

Cheap money from overseas markets flooding Indian shores has been a worry for the RBI and SEBI for long. And there is a fine balancing act that the policymakers need to do to fix the situation. There is no denying that foreign funds are necessary for India's growth. But allowing too much of hot money words against our long term needs. Hence while the policymakers are encouraging foreign investment in Indian mutual funds, they are debating on the quantum of it. It is also likely that the investment limit by foreigners in Indian mutual funds will have a cap. More importantly it will be only those that have complied with the KYC norms that will get the go-ahead. We think that will be a very wise decision to allow opening up of the sector at a very measured pace.

Leading ratings agency, CRISIL, now plans to start ranking the projects of real estate companies. The company would be rating each project on the basis of its legal title, record of the developer, infrastructure, cost overruns, after sales service, etc. The idea is to provide buyers of these projects with better transparency. Such information would help buyers decide on better projects in any given city. The real estate companies have however argued against the idea. They state that the rating agencies do not have sufficient knowledge of the real estate projects and how they work. As a result, they would not be able to provide a fair opinion on the projects. In our opinion, it is a good idea to have an independent agency review the viability of the real estate projects. This would provide transparency into the workings of the real estate companies, something that has been lacking till now. But at the same time, we do hope that the credit opinion is truly independent and fair. The legendry Warren Buffett has also expressed his doubts over rating agencies doing a fair job of assessing asset quality of their own customers.

They may have had a bad month so far. But there's no denying the fact that they are the best performing asset class so far this year. We are referring to the pack of commodities. The first week of the current month was indeed a nightmare for them. Some of them such as silver received the battering of their lives. Others may not have been as worse off but faced a sizeable decline nevertheless.

All this drama has certainly raised a very obvious question. Is this the end of the road for commodities or just a cyclical downtrend in a journey where commodities would see higher highs? The popular magazine Economist has passed a judgement and it seems to be in favour of the latter. It has argued that demand from China is far from being satiated and hence, this factor alone is enough to light a fire under commodity prices for a long time to come. And mind you, it has not even considered demand prospects from other emerging markets like India. Add to this the fact that it is certainly not easy to increase supplies at a fast enough pace and it becomes clear that commodity prices are not going to stop rising in a hurry. Of course, there would be cyclical corrections along the way. But such opportunities should be looked at from the point of view of making profits and certainly not as some sort of a structural downtrend.

India's wholesale price index (WPI) inflation declined to 8.7% in April 2011 from 9% in March. This was due to an easing in prices of food and other manufactured products. But, this may just have been the calm before the storm. Immediately after election results were declared in 5 states, petrol prices in the country were hiked by Rs 5 per litre. And if that wasn't enough, a group of ministers is scheduled to soon meet to decide on increasing prices of liquefied petroleum gas and diesel as well. Finance Minister, Pranab Mukherjee stated that there would be impact on overall inflation due to the same. Well, it is certain that inflationary pressure has not eased as yet, and will continue to be the thorn in the side of India's growth. The only question is for how long will this go on for?

The Indian stock markets have gotten into the negative zone after opening trade on a slightly positive note. At the time of writing, the benchmark BSE Sensex was trading lower by 66 points (0.4%). Oil&Gas and Autos were leading the losses while FMCG and IT stocks were trading firm. Asian stock markets were trading weak except China and Japan.

 Today's investing mantra
"A business or stock is not an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What's required is thinking rather than polling. Unfortunately, Bertrand Russell's observation about life in general applies with unusual force in the financial world: ‘Most men would rather die than think. Many do." - Warren Buffett

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12 Responses to "A rally you should not miss out on"


May 19, 2011

Fed was not successful in boosting the economy by going in for QE2.Hence as QE2 ends on June 30,We need to wait for the Fed actions on whether it will go for another round of QE or end there itself.In the latter case,the Price of commodities especially GOLD will see a huge correction.If the Fed goes for another round of QE to restructure its debt,there will be escalation in the prices of GOLD.As we are unsure of Fed's action in the near future,My view is to have wait and watch approach on the movement of GOLD.



May 19, 2011

It seems Governance is simply an income/expenditure exercise for the Government. Though it is true to some extent,give subsidies to the properly identified populace with a firm policy and procedure in place and remove corruption with a zero tolerance attitude.I dont think an Ambani or a Tata or a Govt bureaucrat really requires subsidy on LPG/Diesel.The policy should also ensure that once the individual crosses a certain economic criteria is automatically out of the subsidy loop.for this to come lot of political will,political honesty, bureaucrat accountability need to gell. Will this happen in our time is the question.


Radheshyam Sharma

May 17, 2011

While I normally agree with what they write in the newsletter, this time I differ.
If a person like Mukesh Ambani can live in a house costing Rs 40 billion, which has been made possible by the policies which the present finance minister Pranab Mukherjee initiated during the time Dhirubhai ruled. All policies then were made to benefit Reliance.
Just because these big industrialists have voices through the media and the politicians they can get what they want but the poor people just want a few subsidies so that they can live just above subsistence level.
They want just two square meals which is made possible since some items are subsidized.
Even this is not acceptable to the media and the industrialist.
There is a better solution.
Why don't they just collect all the poor in ships and dump then in the Arabian Sea or the Bay of Bengal.
After that they should get very good GDPs.



May 17, 2011

I am right now writing from Nashville US. I have been here for almost a fortnight and do not see any downturn. Of course you see many boards of "for sale" or to rent and also many ads in the local papers for properties available cheap, but it looks more of routine, nothing very excessive. However what i have observed is the amount of wastage here. Wastage of electricity, food, plastics etc. Nobody things of using a thing again/ reuse. Once bought use it and throw it. AT nights most of the shops have their showroom lights full on. (This cannot be for security reason as there are so good security systems that keeping the lights on is definetly not the answer.)
If only US can imbibe in their people the habits of savings as indian have, many of worlds problem can be reduced. Please note there is no mention of any Indian stock exch or indices on any of the tv channels. You have to rely on internet to get the info. Rest later


Sarath Chandra

May 17, 2011

There is more than sufficient talk about subsidy cuts. But why doesn't even a single entity/body even consider tax rationalization on petro products?



May 17, 2011

Comments on subsidies are precise.Unfortunately in India everything has background of POLITICS the great word damaging all good efforts' We will have to face situation like Sub-prime crisis or struggle of Euro & few countries in Europe. They are capable of overcoming the calamity but in our case 2G,Scandal of commenwealth etc. will go out of memory & culprits will again start inventing newer pastures " MERA BHARAT MAHAN" Jay Ho or JAYA Ho ? We have to keep "Adarsh" for our next generation who are ignorent about History & even yesterday.....



May 17, 2011

Gold will continue to appreciate till a point, where quantitative easing would become counter-productive and Erozone nations such as PIIGS would be done with the belt tightening. That would be the time equities would start looking up and Gold would probably revert to moderate growth rate. law of averages has to catch up in not too distant future.


K.J.Haroon Basha

May 17, 2011

David Skarica of the Gold Stock Advisor newsletter opines that gold could soar to US$ 10,000 an ounce as stocks stagnate.

Dont mislead the readers and do not live in fool's paradise. Gold never will touch US $ 10,000 per ounce. Not even in seven more generations.



May 17, 2011

Time and again Equitymaster talks about the tears shed by Indian Oil marketing companies. It would be nice to know the exact break up of the cost per litre of fuel. Not many people know that there is a 40% state and National tax attached to it. can we write about it as well



May 17, 2011

Whenever the gold rally slows down the emerging market's
govt. like India will buy more gold as the confidence on
dollar has gone down.This will again push up the gold

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