Is the new gold bull market here?

Nov 24, 2011

In this issue:
» Microfinance industry loses its most visible face
» India Inc once again exposed to the risk of FCCBs
» Power sector may be down but certainly not out
» Roubini's warning on the US economy in 2012
» ...and more!
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Tune into any financial media these days and the experts will all have only one thing to say. That the big elephant in the room as far as the European economy is concerned is Germany. Should the largest Euro economy take steps to stem the crisis, all will be well and it will be back to a period of strong economic growth again. Wish things would have been this simple. But alas, it isn't so. The troubled Euro nations and the US have taken on so much debt that they have well and truly crossed the line of no return. In other words, it is virtually next to impossible for these nations to repay all their debts. Of course, one would be tempted to say that the Governments bailed out the economies between 2007 and 2009 and hence, they should be able to do it this time around as well. However, please be informed that none of the problems of that period have been eliminated. All that the Governments have ended up doing is shifting debt from the private sector to the taxpayers, thus leading to sovereign debt crisis that is currently underway.

And if you are wondering that the policymakers have learnt their lessons, it is high time you banished the thought. Take the US Fed for example. Right from day one, it has stuck to its stance that the only way out of the misery is by printing money. And it has left no stone unturned in trying to achieve this objective. By printing money and buying Government bonds by the trillions, it has laid the groundwork for a huge inflationary tsunami down the road. Thus, the only way out for investors of keeping their purchasing power intact is taking shelter in that perfect inflationary hedge, gold.

True, the yellow metal has had a stellar run in the past decade. But what is also important to add that in inflation adjusted terms, it is still a long way off its previous high achieved in 1980. Besides, the amount of money and leverage in the system has only gone up manifold since then. Also, it is only now embarking on its new phase of wider public acceptance. Hence, given these situations, the stars seem to be perfectly lined up for the yellow metal to soar even higher in the coming decade. And unless there is a realisation amongst the policymakers across the globe that the outstanding debt is impossible to pay back and hence, will have to be restructured, it will not be a bad idea to keep accumulating the yellow metal even at the current price levels.

Do you think gold will touch new highs in the coming decade or has become a bubble now? Share your views with us or you can also comment on our Facebook page / Google+ page.

 Chart of the day
On Nov 22, 2011, rupee marked its worst day ever as it plunged to an all time low of 52.73 mid-session. Today's chart of the day traces the journey of the Indian currency against the US dollar over the last decade. From a high of around 40 to the dollar in late 2007 and early 2008, it has lost more than 30% since then. Besides higher crude prices, what has led to such a state of affair is the exit of FIIs from the Indian markets as they look to accumulate some cash in the wake of the turmoil in the Euro zone. Unless India embarks on some real reforms on the trade front, the future of the Indian currency that only recently got a brand new symbol does not look very bright.


Many will recall a much-hyped IPO (initial public offering) that hit the Indian markets in August last year. It had a quite a few renowned names on its list of investors- George Soros' Quantum (M) Ltd, venture capitalist Vinod Khosla and Infosys founder N R Narayana Murthy. Then things turned sour, the stock tanked and the rest is now history. Any guesses which stock we are talking about? In case you have forgotten, the company was SKS Microfinance, a Mumbai-based micro financing institution and the only listed company in the sector.

From a high of Rs 1,151 after the listing, the stock has lost about 90% of its market capitalisation since then. The company faced severe headwinds after the state of Andhra Pradesh laid restrictions on collections and also capped lending rates. As a result, the company reported a loss of Rs 3.85 bn in 2QFY12, against a net profit of Rs 805.5 m in the corresponding quarter of the previous fiscal. And now, the founder and chairman of SKS Microfinance, Mr Vkiram Akula has announced his resignation. This again raises the old question: Should the microfinance industry be run for profit or should it be a social service run by non-governmental organisations (NGOs)? Akula's resignation is sure to add more fuel to the fire of this all important argument.

Investors having a huge exposure to the once 'sunrise' power sector in India have lost anything in the range of 20% to 60% of their investments over the past 4 years. However, power sector instrumental to the growth of the Indian economy, its long term interests are tied to India's economic well being. Hence the recovery of the sector is a question of not if but when. We do not think that from the current levels, power sector stocks in India, especially the few well managed businesses, will have significant downsides. In fact with adequate margin of safety one can certainly hope that some of these will be the dark horses in the portfolio in the longer run.

The perils of foreign currency convertible bonds (FCCBs) have come to haunt India Inc once again. Readers would do well to recall that these bonds had become a fad in 2006 when buoyancy in the stock markets and the lure of zero coupon rates had led to many corporates rushing to cash in on these bonds. Since then, the risks that these bonds pose have come to the fore time and again. And they are once again set to hurt the fortunes of some Indian companies. FCCBs get converted into equity shares at a predetermined price when the bonds are issued. If the prevalent share price is lower than the predetermined price then the chances of conversion get reduced and the pressure of redemption on the company mounts. This is what is happening now. Indian stock markets have been hammered in recent times as a result of which the stock prices of around 28 companies with FCCBs are lower than the agreed price. These FCCBs amount to Rs 245 bn. 25 of these 28 are most likely to face redemption in the next financial year, which will result in an outflow of as much as Rs 330 bn. This means that they will have to ensure that there are sufficient funds at their disposal to redeem these bonds. If not, borrowing more to fund these redemptions will only increase interest costs and dampen profits. What has further made matters worse is the sharp depreciation of the rupee to a level of 52/US$ which has exacerbated the forex losses on their books and hurt profitability. No wonder then that these are trying times for India Inc. indeed!

The recent failure of the US super committee to approve programs to help reduce deficit has not gone down well with the economists. Noted economist Nouriel Roubini is no exception to this. Roubini says that the political impasse will lead US into another major recession in 2012. He opines that if the measures to reduce US' debt burden of US$ 1.2 trillion are not extended, then it would lead to a 'fiscal drag'. This could amount to nearly US$ 350 bn on account of higher payroll taxes as well as higher burden on account of unemployment benefits. This amounts to nearly 2.3% of total US GDP (Gross Domestic Product). As a result, by doing simple math, if the US economy grows by 2% and the fiscal drag brings it down by 2.3%, then the growth is actually negative. And this drag would continue to spiral, thus making sure that the recession gets worse with each passing year. Therefore, it is high time that the US politicians get their act together and come up with logical and implementable solutions to the problems. Otherwise, the world's largest economy will sink deep into recession.

Meanwhile, indices in the Indian stock markets have recovered well after opening the day deep in the red with the BSE Sensex trading lower by mere 46 points at the time of writing. Heavyweights like Reliance Industries Ltd and Infosys have however continued to act as a drag. Other Asian indices closed mixed today whereas Europe is trading mostly in the red currently.

 Today's investing mantra
"While the law of competition may be sometimes hard for the individual, it is best for the race, because it ensures the survival of the fittest in every department." - Andrew Carnegie

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4 Responses to "Is the new gold bull market here?"

Sarat Palat

Nov 27, 2011

No doubt about it. Taking into consideration the current economic situation,the social unrest around the world the Gold prices will reach new heights.


Pravin Sheth

Nov 24, 2011

No, it cannot stay for longer .It will have to come down



Nov 24, 2011

While the observations and conclusions on gold being in a bull market are correct, there are many points in the authors analysis that must be understood a little better:
1. Gold has never been the perfect inflation hedge, a better inflation hedge has been stock markets held over long term. Gold, however, has always been the perfect Geo-Political hedge to protect capital. This is what is happening right now. Inflation risks are not as high as entire economies going down the dumps with serious implications on law and order.
2. Temporary raw printing of currency, aka currency debasement may not necessarily cause an inflationary tsunami as long as that remains temporary. In today's economic situation, QE1, followed by QE2, followed by 'Twist' etc bandied about by Ben are happening without respite. This will definitely cause not just inflation, but Hyperinflation and usually results in severe economic dislocation before law and order is restored and capital markets start functioning again. This again, is beneficial to gold, because gold simply gets revalued in the new currency whichever becomes accepted after the storm passes.
As an aside, Gold ETFs/MF Units (Paper gold) are good so long as the economic/capital markets are functional, but useless during an economic dislocation, as the govt may simply move to capture the actual physical gold and give peanuts to the unit holders in return!


Suresh Kumar

Nov 24, 2011

Gold has had good run up in last 5 to 7 years. Past performance may not be a true indicator for the future. It may be good for a couple of years, but for long term investors, it might dissapoint.

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