Gold Finger-ed - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Gold Finger-ed A  A  A

20 APRIL 2013

Gold prices fell sharply, by 13% from the peak (19.7% in India) basically on short selling by leading players such as Goldman. The stated reason was that inflation was coming down globally (it went below 6% in India) and that the Central Bank of Cyprus was selling gold, and there would be a sharper drop if larger countries like Portugal and Italy started selling the country's gold, but it was primarily excess speculative demand coming off.

Indians, who covet gold, took the fall as a buying opportunity. Over time gold has been the best preserver of value. The US $ which could buy 14.5 loaves of bread in 1900, can only buy of a loaf today .

In fact, even though the Dow Jones has closed at a new peak, when measured in terms of ounces of gold, it is much lower. At the 1999 peak, it took 44.8 ounces of gold to buy the Dow, today one would need only 10.8 ounces. So if an investor exited the Dow at the 1999 peak and re-entered it now, when the Dow is higher, he would have 76% of his gold left over!

Sure, gold may decline further, perhaps to $ 1200-1250 /ounce, if countries like Portugal or Italy were to sell their gold reserves. Yet, given its track record as a preserver of value, gold remains an investment that people should look at. After US, Britain and the ECB pump primed their economies, Japan is set to do so, in a humungous way. With every expansion of money supply, the value of money falls.

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The reason Cyprus was rumoured to be selling its gold is because the troika has heaped further travail on the country, by demanding a further Euro 6 billion spending cut.

The burden of these demands falls, strangely, on bank depositors and not on lenders. Deposits of over Euro 100,000 are subjected to a haircut (loss) of 40% or more of the deposit amount. Now, arm twisted by the troika, deposits worth some 60% of GDP are being wiped out! How can the Cypriot economy recover? Who will consume?

The article points out that Cypriot banks were pressured by the troika to buy Greek sovereign bonds, which later defaulted. "It is an interesting question why Cyprus has been treated more harshly than Greece, given that the eurozone itself set off the downward spiral by imposing de facto losses of 75pc on Greek sovereign debt held by Cypriot banks.

And, furthermore, given that these banks were pressured into buying many of those Greek bonds in the first place by the EU authorities, when it suited the Eurogroup."

Cosy relationships between Governments and banks are universal. When Governments get into bed with banks, and allow them to become 'too big to fail' (TBTF) then it creates a huge systemic problem.

In West Bengal, a chit fund group, the Saradha group, is in trouble and has defaulted in repaying its depositors. Most of these chit fund schemes, and there are several, are ponzi schemes. They have an army of agents to collect deposits, promising fancy returns. The earlier depositors are paid with money collected from the later ones. At some point the cycle cannot sustain, and the company collapses like a house of cards.

SEBI has been trying to put an end to such fraudulent schemes, but they are allowed to continue because of the political nexus they build up. This is disgusting.

Good governance has gone out of the window. The telecom sector mess reminds one of the adage 'oh what a tangled web we weave when first we practise to deceive'.

The Joint Parliamentary Committee tasked with investigating the telecom spectrum allotment scandal has leaked a draft report (before sending it to members of the JPC, a disdainful lack of propriety) which seeks to exonerate both the Prime Minister and the Finance Minister, which goes on to say that there was, in fact, no revenue loss to the Government, and further goes on to state that a revenue loss of Rs 40,000 crores was caused by the BJP Government when it switched over from a fixed fee to a revenue sharing regime.

The logic is so full of holes it would shame a piece of swiss cheese.

The move to a revenue sharing was, in fact, the move that caused the mobile telephony sector to take off and become a success story.

Its later conversion from a success story to a failure was thanks to the attempt by the UPA coalition Government to allocate telecom spectrum out of turn, to a few.

The UPA Government is now adding several insults to injury.

It is contemplating allocation of future spectrum through administrative action. This will be the least transparent method and a recipe for corruption.

It is also disallowing telcos from a sensible policy of sharing spectrum (a scarce resource must be shared and technology permits it) without paying the Government a high fee, and without both parties having bought spectrum in the same circle (why do they need to share, then?).

This is certain to create disruption in Parliament when it resumes on Monday. That, in turn, will cause foreign investors nervousness, and when they are nervous, they vote with their feet. So one can expect a fall in the coming week.

In corporate news, Wipro followed Infosys with disappointing results. Its revenues fell 3.2% y-o-y in $ terms, and by 13% in rupee terms. However, TCS put on a good performance with revenues growing at 14.8% in $ terms, and by 23.9% in rupee terms. HCL Tech also came out with encouraging numbers, growing revenue 13.6% and 23.7% in $ and Rupee terms, respectively.

The BSE sensex gained 773 points to end the week at 19,016 and the NSE-Nifty added 255 points to close at 5,783.

Political turbulence following the JPC report can be expected to derail the rally

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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4 Responses to "Gold Finger-ed"
Apr 23, 2013
Chandrashekhar, thanks. I had the same question in my mind.
Is there a organised way to sell the gold coin for fair price ?
jkvr setty
Apr 21, 2013
In gold tradeable funds,which are good comparatively to buy. Like 
Apr 20, 2013
Dr M.Chandrashekhar MD
Apr 20, 2013
Sometimes I wonder as to why Gold Coins/ Bars are being bought. In times of emergency ,you find no one is prepared to buy it. Banks which sold you the Gold refuse to buy it from you, Jewellers quote their own rates-- how does one sell in an organised way ? Like 
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