A rally you should not miss out on

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!---------------------------------------------- Don't Miss! ----------------------------------------------

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00:00

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.

01:26		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

02:01

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.

02:36

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.

03:11

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.

03:37

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.

04:15

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?

04:44

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.

04:56

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