The demand for this asset may only go up!

May 26, 2010

In this issue:
» Long term trend for oil prices
» Euro will survive - Joseph Stiglitz
» Commonwealth Games could be an embarrassment
» Are developers rigging Mumbai's realty prices?
» ...and more!

--------------------- Don't Miss! FREE Webinar with Ajit Dayal - Register Now! ---------------------
If you are worried about the global crisis reaching India and impacting your investments, then tune in to the Equitymaster FREE Webinar, titled, 'Global Fears, India Cheers?' Listen to Ajit speak on the opportunity he can foresee for India...and for a long-term investor like yourself. Scheduled for Monday, 7th June, 5.30 pm (IST). Hurry! Register now!

"Gold normally trades like a commodity. However, when investors lose confidence in currencies, because the pool of gold is so much smaller than the pool of currencies, demand for gold can effectively become unlimited". We came across this interesting take on gold in a report published in Financial Times. We are not sure of the demand for gold being 'unlimited'. However, we certainly endorse similar views as the author of this report with regard to the fundamentals of the precious metal. More so, with the crises across global economies and their underlying currencies showing no signs of reprieve.

After US and Greece, the Spanish economy is also showing signs of debt crisis. Whatever may be the nature, the impact of the same is set to squarely fall on government finances. Which means that the already indebted governments will print more money! Given this logic, the chances of the US dollar or the euro carrying their weight against gold are slim.

We are of the view that the demand for gold is here to stay for a very long time. There may be pullbacks in the asset's price along the way. Some big and some small. But as long as central banks continue to print money, gold will be an important asset class to have in one's portfolio. Like we always mention, please do not go overboard with it.

 Chart of the day

Data source: RBI

Over the last five years or so, India has been trying to diversify its currency exposure in its foreign trade. Until FY06, invoicing for exports had been overwhelmingly in favour of dollars. So is the case today, with 84% of Indian exports being billed in dollars. However, as seen in the chart, there has been a conscious move to increase the proportion of other currencies like the euro, albeit marginally.

However, Indian exporters are now shifting back to invoicing in the US dollar fearing sharp depreciation of the euro. Fears are that the European crisis is likely to snowball to encompass Spain, Portugal, Italy and Ireland. The euro stampede resulted in appreciation of the US dollar in the global markets since the beginning of 2010. The euro has already depreciated by over 11% against the US dollar and 13% against the rupee so far in 2010.

Predicting oil prices involves many factors. Crude prices often move in line with the latest economic outlook. That's not surprising given how important energy is for economic activity generally. So the recent sovereign debt crisis in Europe is taking a toll on oil prices. But when we look at the long term, we believe there in only one way oil prices will go - up. Ultimately the prices are set by demand and supply. And given that the average Chinese and Indian will lead a more energy intensive lifestyle, demand will keep rising. Unfortunately, supply is not keeping pace. Moreover, it is getting increasingly difficult and costly to produce oil from the newer sources. Most of these sources are located deep in the sea or are in the form of tar sands etc. In fact, as per Bloomberg, the rising costs of extracting oil are propping up crude oil futures for the years ahead. Clearly then, one cannot simply predict oil prices by look at the recent headlines.

"I am happy that India did not follow the policies prescribed by the US. Our regulatory structure was flawed. I am glad that you didn't follow (Henry) Paulson's advice." These are the words of the Nobel Prize winner and Columbia University professor Joseph Stiglitz.

Stiglitz has been a long time critic of the US financial system. He now believes that the crisis in the west (Europe and the US) is only going to get worse. "We expect the (unemployment) number in 2010 to be larger than in 2009. Things are getting worse. That's one of the reasons why I am not optimistic about a quick recovery," he told The Economic Times.

Anyways, despite all concerns about Europe, Mr. Stiglitz believes the Euro will survive, although facing higher volatility in the future.

The most recent Olympics held in Beijing, China were regarded by many as one of the best in recent times. The games helped raise China's stature manifold across the world and showcased its rising economic power. In exactly 132 days from now, India will stare at a similar opportunity. The country will host more than 70 teams and about 10,000 athletes and officials for the forthcoming Commonwealth Games. However, serious doubts over the timely construction of the facilities are creeping in thick and fast. And it is feared that rather than being a source of pride, the Commonwealth Games can potentially turn out to be a big embarrassment.

As per Reuters, the main stadium is months overdue and completion of the swimming pool and other venues have also been delayed. "The Games will happen, swimming will happen, athletics will happen. But it comes down to the level of standards and completion", the executive officer of the Commonwealth Games federation is believed to have said. We couldn't agree more. Probably the below par conduct of the games in India is the last straw that the Government needs to seriously step up the gas on infrastructure projects and remove several of its frustrating bottlenecks. Otherwise, it will continue to eat into India's GDP growth to the tune of 1%-2% year after year.

It is a well known fact that the Mumbai realty market is overheated. And it is not showing signs of correction either. But what ultimately goes up has to come down. Asset prices cannot deviate from their intrinsic values for a longer period of time. But it seems the real estate players believe that Mumbai is an exception to this rule.

Realty prices in Mumbai have witnessed a significant uptrend in the recent past. In some regions prices have even surpassed their earlier highs. There have been a couple of big ticket deals taking place recently. But the latest one has sent shockwaves across the realty market. Recently, Lodha Developers acquired a 25,000 sq mt plot in Wadala (a suburb in Mumbai) at an exorbitant amount of Rs 40.5 bn. This is at a significant premium to what MMRDA had anticipated while conducting the auctions. Even if one were to assume that a rough apartment size will be 1,000 sq ft each flat would cost around Rs 20 m each. Now what remains to be seen is how many people have an appetite for such kind of investment.

It seems that the developers are again going the same old way of aggressive bidding to increase their land bank. Lodha Developers will require a substantially high FSI on the land purchased and a strong demand for its project to make the purchase profitable. However, we are a bit skeptical considering that the upcoming developments in the adjoining region have not witnessed strong buying interest. Further, buyers may be reluctant to pay higher amount considering the recent run up in prices. We believe that such kind of deals create an artificial price rise and impact absorption rates.

The Finance Ministry and SEBI are contemplating increasing public shareholding of listed entities in India to a minimum of 25%. This is in line with global financial markets in London, Singapore, and Hong Kong. According to Crisil's estimates, there are 179 listed companies which have public shareholdings below this minimum. Based on current market prices, if the dilution for 25% public holding is to take place, companies can raise more than Rs 2 trillion. Given the current market volatility, it would make sense if this proposal is implemented over the long term. It will help existing shareholders to unlock value and new investors will gain more liquidity in these scrips.

Indian stock market had a relatively buoyant session today as investors seem to have warmed up to bluechips across sectors after yesterday's correction. Indian markets are in fact the biggest gainers in Asia today, following South Korea and Singapore. The BSE Sensex was trading nearly 324 points (2%) higher at the time of writing. Stocks from the banking, auto and commodity and software sectors have led the pack of gainers. European markets have also opened higher.

 Today's investing mantra
"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children." - Warren Buffett

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "The demand for this asset may only go up!". Click here!

8 Responses to "The demand for this asset may only go up!"


Jun 4, 2010

its so good for all


Sanjeev Garg

May 27, 2010

i agree that gold and oil prices go further but slowdown in economy effect adversely on oil prices.



May 27, 2010

Just read the ad on equitymaster home page after 5 minutes wrap up. Ha Ha. Become a smarter investor just in 5 minutes. Seriously, nobody thinks one can become a smarter investor by reading this junk.
Boy am I tired of all pundits asking to load up on gold! Think what will happen if everybody just buys gold. What will happen to the economy. Disaster! The production will be seriously distorted in favour of the most useful commodity in the world. The gold shall crash and I would love to see the look on all the people who have been recommending it. It is amazing how human beings even after all the technological advancement badly yearn to go back to stone ages and crave so much for a glittery yellow thing.


a reader

May 27, 2010

depends on the central banks of troubled developed economies. gold for debt swaps can affect gold prices



May 27, 2010

If governments of nations start purchasing GOLD in huge quantities, like China did, demand for gold is bound to go up by leaps and bounds. Otherwise, demand for GOLD will be stable, but supply cannot match demand. So,GOLD prices may go up on that score also.


Dr mulay

May 27, 2010

dont go overboard with gold- is a ridiculous statement to make. present climate demands the need to hold more gold. in 1923 weimar hyperinflation middle class was wiped out.



May 26, 2010

Good wrap in 5 minutes. No dought oil prices has only
one way to go and that is up!



May 26, 2010

Quote"it is feared that rather than being a source of pride, the Commonwealth Games can potentially turn out to be a big embarrassment." Unquote.

Well our worthies in charge of looking after the CW games are made of sterner stuff and embarrassments hardly matter to them.They will take it in their stride and will keep heading forever whatever sports bodies they are heading until death or illness makes them part with it games be a flop or whatever..

Equitymaster requests your view! Post a comment on "The demand for this asset may only go up!". Click here!