Will Gold outperform Sensex?

Sep 21, 2009

In this issue:
» These Fortune 500 companies can surprise you
» Pharma companies on a hiring spree
» Armed forces have come to the rescue of Indian IT
» Power finance - replete with obstacles
» ...and more!

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"Of all the many miseries that man faces on his journey from cradle to grave, few of them can be eased by enlightened central banking. And a credit contraction is not one of them." This quote of Mr. Bill Bonner, founder and editor of The Daily Reckoning, in one of his articles on Gold, posted on our website, gives the most concise reasoning for the spurt in Gold prices. We will explain you how.

The Gold speculators are expecting inflation levels to move up. The reality is that all the money that the central bankers in China, US and Europe are pumping into their economy is not filtering into the 'real economy' i.e. consumers. This is because in a recessionary economy consumers cannot borrow. They have nothing to borrow against as they lose jobs and both their wages and value of their assets go down. Hence, the excess money is either lying with banks or funding speculative trades. Thus, as per Mr. Bonner, the resulting inflation is thanks to the modus operandi of speculators and Chinese central bankers, not consumer price inflation.

How long will this illusionary inflation sustain? Whether this will continue to stimulate Gold prices in the days ahead? Only time will tell.

Source: Kitco, Equitymaster

Meanwhile, the International Monetary Fund (IMF) has approved the sale of one-eighth of its gold reserves as China, India and Russia have indicated interest in such purchases as a way of reducing their position in dollar-denominated securities. It may be noted that the IMF is the third largest official holder of gold in the world with 3,217 metric tons after the United States and Germany. While most of this will be sold directly to the respective central banks, any sale in the open market can also pressurise gold prices in the near term.

 Chart of the day
As per CNN, the list of the best-performing Fortune 500 stocks, post Lehman collapse, is one of the most ironical ones investors have seen in recent times. This is because, they are the Goliaths of the yesteryears that succumbed to the subprime meltdown and sent shock waves through the financial system. Yes, we are talking about US government owned mortgage financers Freddie Mac and Fannie Mae. One can also view this in terms of the lessons in valuation that the Lehman collapse taught investors who were riding on a flight of fancy. As today's chart shows, while companies like Freddie Mac and Fannie Mae have managed to recoup some of their lost valuations, the likes of Citigroup seem to have found no takers.

In our domestic markets, while the stocks of companies like Torrent Power, Godrej Consumer, Hero Honda and IDFC have been the biggest gainers over the past twelve months, companies like Glenmark have been less appealing. The difference lay in the companies' future potential and investors' perception of the same.

Source: Yahoo Finance, Equitymaster

In a scenario where deepening recession has compelled global pharma companies such as Eli Lilly, Pfizer, and Merck amongst others to cut costs including slashing jobs by thousands, Indian pharma seems to be following the opposite path. Indian pharma companies have been on a hiring spree with the top 10 domestic drug companies recruiting 200-250 professionals annually over recent years, a number which has now gone up almost 5 times. And why not? Currently, the growth of the global pharma market has considerably slowed down with US expected to witness a decline in 2009 and Europe expected to see a mere 2-3% growth. In contrast, the domestic pharma market is expected to grow at over 16% between 2007-11.

The factors that will contribute to the growth of Indian pharma will be increased spending on healthcare, increasing penetration of health insurance, changing disease profiles and positive regulatory changes. What is more, global pharma companies themselves have realized the potential of growth in the emerging markets and are gradually veering into generics by partnering with many domestic pharma companies. No wonder then that Indian pharma companies are continuing to hire.

Most central banks around the world responded to the global financial crisis with stimulus packages. Given the severity of the crisis, it was perhaps the right thing to do. But now the question is how long the packages should be continued. Since stimulus packages create an environment of easy money, if they are continued too long they might end up creating huge bubbles. Hence it is important that stimulus packages are wound up at the right time.

The time for wrapping up stimulus packages has not arrived, if one were to go by the views of India's finance minister, Mr. Pranab Mukherjee. As per the Wall Street Journal, he says "At this point of time, I cannot accept the 'dear money policy' or credit curbing because that will have an adverse impact on overall growth". It may be noted that the RBI is now worried about inflation. In fact, as the RBI Governor, Dr. D Subbarao, since inflation has come upon us sooner than we had expected, India will be among the first to wrap up its stimulus package. However, as per Mr. Mukherjee, we will have to wait for some time. We hope he gets the timing right.

The armed forces have come to the rescue of Indian IT industry! Well, you read that right. With Indian IT firms having shifted their focus to the domestic markets to wiggle their way out of the global recession, some large government projects for the defence sector have brought them some cheer. A business daily has reported that India is likely to see 'a significant game changer' as the one of the country's largest IT contract to the tune of Rs 100 bn (US$ 2 bn) is likely to be up for grabs soon.

This project will be a mix of hardware and software, which will create a nationwide 43,000 km long alternate communications network for the armed forces (Air Force, Army and Navy). The reason the latter is vacating a part of its radio frequencies is for the usage of commercial telephony (3G and 2G). Software biggies such as TCS, Wipro, HCL, Infosys, Tech Mahindra are just some of the players who are likely to bid for this project. Being a project of such scale, it is likely to be given to multiple vendors. In addition, the successful bidder will also be able earn Rs 50 bn over a period of ten years as part of the contract for managing and maintaining this network.

For a power deficient country like India, power finance is the place to be. Who better to explain the challenges therein than Mr. Satnam Singh, chairman of the country's largest power financing institution, Power Finance Corporation (PFC). In an interview to a leading business daily, Mr Singh has outlined the potential for the power finance sector and the risks associated. What interested us most is that despite the Power Minister expecting to deliver only 65,000 MW capacity addition by the end of the 11th plan period (instead of 78,750 MW), as per Mr. Singh, the power finance sector is facing a funding shortage of well over Rs 4,000 bn to meet capacity addition. Further some of the Ultra Mega Power Projects (UMPPs) floated this year have already run into difficulties. And given the fuel and equipment constraints that the power sector still faces, do we say any more?

While the Indian markets remained closed today on account of Ramzan Eid, the Asian markets opened flat and slipped into the red. The European markets followed the Asian markets and were trading below their Friday close at the time of writing.

 Today's investing mantra
"You should not buy a stock because it's cheap but because you know a lot about it" - Peter Lynch

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2 Responses to "Will Gold outperform Sensex?"


Sep 22, 2009

Precisely for this reason, you can buy through Stock Exchange Traded Funds(ETFs), even half a gram at a time. SBI, Reliance, Quantum and others have ETFs. You can adopt a systematic investment plan and invest a fixed sum every month. Selling also is easy at the market price. No physical handling and limited risk - only the market price fluctuation.



Sep 21, 2009

Frankly speaking, I doubt !
Though Gold is a very attractive channel for investment, it always requires some knowledge of trading, delivery , and very meticulous information on daily market trends . As there is no well developed market for gold investment, as is the case for shares and securities, common layman soon loses the interest and in rural India this would be a nightmare for one to follow and keep updated. It also requires large chunk of money for even a small quantity, any blockage of funds results into losing the opportunities when available. In India, not many are inclined to indulge in Gold investment.

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