Is this the time of a new 'Golden Age'?

In this issue:
» Is the world crisis spelling a better future for Indian IT?
» Another round of rate hikes may be on its way
» Why do FIIs keep flocking to India?
» The US is losing its AAA status
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00:00

In Greek Mythology, the 'Golden Age' was the first sequence in a series of four or five stages of human existence. It was a time of peace and harmony. People were prosperous, and there was stability in the ancient world.

But now things are completely different. In current times of uncertainty and despair, 'gold' is the only stable anchor we have to cling on to. Not surprisingly, gold is constantly breaking new barriers almost every other day. This news accompanies other gloomy headlines of debt defaults and economies going bankrupt. The price of gold yesterday rose to a new record high of US$ 1,594 per ounce. So the question on everyone's mind is whether the golden bull-run will ever run out? Is this the time of a new Golden Age?

Well, judging by the various price drivers of this yellow metal, we believe that the bull-run still has some steam left in it. Besides the usual demand for jewellery and industrial purposes, gold has of late taken on a key role of being a financial investment. It traditionally moves in the direction opposite to the US dollar. Thus it is a good hedge against currency volatility. The US, is in a dicey situation, with its AAA rating being threatened. Economic data is weak, and the government is pretty much helpless. Central banks across the world, have been dumping the US dollar, and buying gold. Asian central banks, and recently Russia and Mexico have added to their gold reserves. All this has supported gold's price rise.

Gold is also considered as a safe haven against fiscal and political tensions worldwide. With no political affiliations the yellow metal has been the key beneficiary of tensions in Middle East and Europe. The metal is also a natural hedge against inflation, which has been plaguing emerging market countries, especially India, and China. If and when QE3 happens, a further flood of cheap money will drive up inflation, and thus gold prices.

Are you still buying gold? Do you also believe that this is the time of a new Golden Age? Share your views with us or post your views on our Facebook page.

01:20		Chart of the day

Sales growth of Indian firms has soared past other world markets over the past five years, rising at an annual average pace of 27%. Sales growth in India was also far higher than an average of 16% for the developing world. This is according to the 2006-2010 study by Ernst and Young (E&Y). In contrast the developed world only managed to grow at a dismal annual average of 5%. Most BRIC (Brazil, China, India, and Russia) nations also saw similar high growth as can be seen in today's chart. Most of the sales growth came on the back of higher GDP growth numbers in these emerging markets. Oil & gas and mining companies benefitted from higher commodity prices too.

Source: Business Standard, E&Y

01:55

It was the maverick economist Maynard Keynes who had once said that we are all dead in the long term. True. But it may be equally true that by focusing too much on the short term, we could fail miserably in our quest of making good returns on our investments. This is exactly the credo that the FIIs seem to be living with currently. For most of them seem to be bullish on India despite its short term concerns. This was borne out by interviews conducted with them by a leading business daily. One of them put it across quite well, we should say. It was of the opinion that India is growing at 8% per annum and at that rate, an economy doubles itself every 8-9 years. Now contrast this with the developed world that is growing at 2.25% and doubling its economy in as much as 30 years and the attractiveness of India becomes apparent. Thus, on a short term basis, India would indeed be expensive as compared to its peers, but FIIs could keep flocking to it over time.

02:30

Worsening debt situation is indeed causing a lot of headaches for the US economy. The government's gargantuan stimulus packages, while they did nothing to contribute to any meaningful economic recovery, instead added on to the economy's already increasing debt. And while reducing the same seems like the most obvious solution, it is easier said than done. The political debate about the US' fiscal stance and the related issue of the US government debt ceiling has only become more entangled. As a result, leading rating agencies including Standard & Poor have warned the US of a possible downgrade from its current AAA rating. Indeed, a downgrade for US debt will have serious repercussions for the global financial markets as given that US bonds are perceived to be the safest investment in the world. But that is a perception that the countries across the world will have to change in light of the sorry state of affairs in the world's largest economy.

03:00

The global environment maybe going through a tough time. But the world's crisis seems to be spelling a better future for the Indian IT industry. This is particularly true, for the country's largest software company, Tata Consultancy Services (TCS). The company, which recently reported its quarterly earnings, is optimistic about future opportunities. It expects the main driver for future growth to be the uncertainty in global environment. This uncertainty is forcing customers to adapt to the changing environment and outsource more work. TCS reported a 7.5% growth in volumes. At the same time, it has stated that it is seeing its deal pipelines growing. These are clear indicators that demand has improved for the company in recent times.

03:30

Looks like another round of interest rate hikes is on its way. While continuous rate hikes will dampen the investor sentiments in the market and pull back growth, the Reserve Bank of India (RBI) does not have much of a choice in the matter. Seasonal effects, rising food prices, hike in the fuel prices and high prices of mineral and manufactured goods are getting reflected in the inflation numbers. The inflation for June at 9.4% has risen up by 0.38% on a month on month basis, calling for further tightening of monetary policy. The upwardly revised inflation numbers for April have further raised concerns that we may already have crossed double digit inflation.

Even the Government cannot do much to contain prices as global commodity prices play the culprit. It is left with two alternatives: Growth or price control? We suggest that the RBI should crack down on inflation. While a rise in interest rates may drag growth in the near term, it will ensure that the long term health of the economy remains intact.

04:05

This was something long overdue. In fact if this is the way the government looks at the business dynamics of PSUs, their valuations could go in for a major overhaul. We are referring to the government decision to resolve the tariff-cost mismatch for the power sector. So far the players in the sector like most other government entities have been treated as means of social welfare. Hence the necessity to ensure the profitability of their operations has been overlooked. However, now the government has awakened to a stark reality. That its disinvestment targets will remain on paper unless the PSU's focus is on shareholder returns. As a step in this direction, the government will allow the power utilities to revise their tariffs so as to be able to pass on rise in fuel costs. Further all outstanding dues from state governments will be cleared promptly. Further loans from the state government will be converted to government equity to ensure improvement in net worth. We believe that steps could go a long way in improving the perception and valuations of PSUs in India.

04:40

The Indian stock markets have wiped early gains and are now trading in the red. At the time of writing, the benchmark BSE Sensex was down by 60 points (0.3%). Barring IT stocks, all sectoral indices were trading in the red. Asian stock markets were trading mixed with Taiwan and South Korea leading the gains while Hong Kong and Malaysia were among the major losers.

04:55

Today's investing mantra

"An important key to investing is to remember that stocks are not lottery tickets." - Peter Lynch