The case of rising gold prices

Gold prices have been on a roll over the past few years. A quick look at this page would tell you that had you invested in the precious metal 5 years back, it would've given you a return of about 160%.

Even after a steady rise, gold prices are likely to remain high and here are some of the reasons:

1. Central Banks, who have been net sellers for a very long period, turned net buyers in 2010. They bought nearly 76 tonnes of gold. This trend further accentuated in the first quarter of 2011, when Central Banks were net buyers of gold to the extent of 129 tonnes. Turns out, the rise in gold prices has caught the eye of various Central Banks who believe it is a welcome addition to their reserves given its status as 'store of wealth' even during the periods of crisis.

2. Analysis shows existing gold mines across the world are aging and output is falling. A study (titled 'In gold we trust') of 375 gold projects by Standard Chartered Research team suggests a very limited production growth profile for the next 5 years. A 10-year bull market in gold has done little to drive production. A lack of funding from equity markets and shortage of large gold mines makes it difficult for the industry to compensate for the depletion caused by aging mines and falling grades. As a result, there are very few large gold mines commencing operations in the next 5 years. Only 7 gold mines and one copper/gold mine are capable of adding a total of 500 koz gold production over 2011-15.

3. Standard Chartered's analysis of IRR (internal rate of return) for major gold projects under construction (for which the acquisition cost of gold reserves has already been spent) shows the gold price would need to be $1,400 /oz to generate a 20% IRR, usually the minimum return requirement. It's from this point of view that analysts have been saying gold will touch $2,000/oz, since new projects would need that price realization to produce an IRR of 20%. Till then, gold production will face delays.

4. The above study also shows that currently, 1.8% of China's forex reserves is in gold; if China were to bring this percentage in line with the global average of 11%, it would have to buy another 6,000 tonnes of gold, or more than two year's global mine production. Imagine what that would do to the price of gold. This is also true of other major holders of foreign exchange reserves like Japan as well as India. Japan's gold reserves stand at a minuscule 3.2% of its total foreign exchange reserves of $1.14 trillion. India's gold reserves at 8.2% are much closer to the world average of 11%.

5. The rise in the price of gold is also due to the rising per capita incomes in China and India. While Indians have been traditional gold buyers, the Chinese are getting there as well.

The gold run is here to stay. Perhaps it's time to consider those gold ETF's (exchange traded funds) which are fast catching on.

[With inputs from The Economic Times]

Indian equivalents

This is definitely one of the best interactive maps I've come across. Places Indian states at an interesting perspective. Clearly, Northeast needs to buck up!

Deal...no deal

So Europe's finance ministers have put off approval of the next installment of aid to Greece until July. They demand that the Greek Parliament first approve spending cuts and financial reforms that include a large-scale privatization program. This comes after some seven hours of talks in Luxembourg. Greece needs 12 bn euros from the 110 bn euros bail out package by mid-July to avoid default.

Will Greece ever come out of this mess or will it be left dangling in thin air by the IMF? It's a wait and watch situation.

[Image courtesy - http://news.xinhuanet.com]

Secular Art

Art should have no barriers. No religious barriers at least. But that’s not the case in India. Maqbool Fida Husain, India’s renowned painter, died last week while being in exile as a Qatari citizen. Husain had been the target of Hindu activists, especially Shiv Sena, for several years. They objected to his depiction of goddesses in the nude, claiming this was an insult to Hinduism. They threatened to rip his paintings apart, making it difficult to exhibit his paintings without fear of damage.

Husain was not the only one who was driven out of the country due to repression from communal activists. Salman Rushdie, who was born in Mumbai but lives in the UK, saw New Delhi ban his Satanic Verses for its perceived depiction of Prophet Muhammad. Author Taslima Nasrin, a Bangladeshi, was hounded out of her country because she graphically depicted the sufferings of Hindus in Bangladesh. But this did not ensure her a warm welcome in Kolkata. Her writings displayed sexual liberation which didn’t go well with the Muslim communalists and was eventually forced to leave Kolkata.

Trouble is art in India is still a victim of dirty politics. The government is more concerned about gaining popularity with the vote bank. Hindu activists have no problem with the erotic sculptures of Khajuraho but they have a problem when a muslim man depicts the same in the form of a painting. That's convenient! The Supreme Court may have acquitted Husain in majority of the cases filed against him. But did the government really protect him from the attacks and threats? The government talks about woman empowerment but did it take any form of legal action against the activists who assaulted Taslima in public or against the mullahs who issued a fatwa offering huge sums of money for her murder?

Turns out, a secular India is only secular as long as you are politically correct. Husain’s death should be an eye opener for the Indian government. India lost him not after his death but the day he left the country in 2006. RIP Husain.

Wines with IQ? Bleh!

Vinopic, a wine selling company in the UK, has developed a noble way of ranking wines. It recommends wines by way of their Intrinsic Quotient. The website says:

By focusing on key quality indicators in wine, it shows the skill of the winemaker, how well-made the wine is and the quality of grapes used for making the wine. The Intrinsic Quotient is the result of over a decade of groundbreaking research on wine.

Giving wines IQ scores is definitely an innovative way to market the product. It simplifies consumer choice especially benefiting rookie wine drinkers who would buy a bottle of wine that comes with any sort of recommendation. Wine connoisseurs would probably have a good laugh at the concept. Do we really need an IQ score to tell us which wine is healthier than the other? If I were looking for healthy drinking options I would just stick to orange juice. I wouldn’t buy a bottle of wine because it’s healthier for me.

We don’t need no IQ scores for our wines. After all, as William Shakespeare rightly said, “good wine needs no bush”.

Social Bubble

I have never been a fan of tech stocks. They are naturally bubble-prone. Unlike any other industry, say manufacturing or commodities or even finance, their prospects can never really be quantified. Another problem with the industry is the extra hype it tends to create which eventually cools off as and when investors realize the actual worth. Precisely the reason for the dotcom bubble of 2000 which saw the share prices of various tech firms plunge.

But investors haven’t learned from the mistakes of 2000. Another tech bubble is now inflating. The Initial Public Offerings (IPO) by internet or rather social-media companies has come back to life. The recent IPO of LinkedIn, whose share price more than doubled on the first day of trading (from an offer price of $ 45 to the closing price of $ 94) at the New York Stock Exchange (NYSE), places the Company’s valuation at $ 9 Bn. Yandex, Russia’s largest search engine, floated its shares on the NYSE which saw its price rising by 50% on the first day of trading. In December 2010, Youku – China's version of Youtube – went public, with a first day valuation of $ 4.4 Bn against 2010 revenues of $ 59 Mn. And more recently, in May 2011, RenRen – Chinas version of Facebook – had a first day valuation of $ 7.4 Bn against 2010 revenues of $ 77 Mn. Groupon, an online group buying website that offers discount coupons, has recently filed its IPO application and is likely to have a valuation of $ 15 Bn against 2010 revenues of $ 713Mn. And don’t even get me started on the mother of all the madness – Facebook – which is targeting an IPO in October 2011 valuing the Company at a whopping $ 70 Bn.

Dr. Jean-Paul Rodrigue at the Dept. of Global Studies & Geography, Hofstra University, presents the lifecycle of a tech stock in this graph. We have entered the ‘Mania phase’ where we are now witnessing an irrational demand for the tech stocks. What follows the mania phase is disaster.

Unlike software & hardware technology firms, the problem with the social-media companies is that their business model is yet to be fully tested. David Reibstein, Wharton marketing professor, raises few very valid concerns about Groupon's model. He points out that the Groupon business model works better during recession than it does during a vibrant economy. The reason some retailers might be willing to provide supply to Groupon is because they have excess inventory. As the economy picks up and there is less excess inventory, the availability of supply will go down. The willingness of the merchant to offer deep discounts will go down. The business proposition to the customer will be less attractive if [the item or service being offered] doesn't have the same deep discount. Although Groupon may boast of a subscriber base of 83Mn+, the snag is that the Company is still in the red. It lost $390 Mn in 2010 and $103 Mn in the first quarter of this year. A statement by Groupon's chief in its IPO prospectus is laughable:

“The path to success will have twists and turns, moments of brilliance and other moments of sheer stupidity. Knowing that this will at times be a bumpy ride, we thank you for considering joining us”.

How very assuring!

Yes it is true that social networks and mobile applications are reinventing the way businesses function. But irrational exuberance has returned to the internet world & investors should beware. Take a break and rethink those valuations. Are they really justified? Or else what’s next? Soon you will find yourself putting your money in companies like Zynga, creator of the online game Farmville, in which players grow vegetables and breed pigs. That’s beyond disaster!

[With inputs from The Economist & knowledge @ Wharton]

Let the moolah flow

The numbers look disturbing. According to Reserve Bank of India (RBI) data, Foreign Direct Investment (FDI) fell more than 25% in the fiscal 2010-2011 to $ 19.43 Bn compared to previous year. What’s even more disturbing is that India is the lone South East Asian country to witness a decline in FDI inflows. In sharp contrast, FDI in China has soared in recent years. Institutions like the World Bank have credited FDI as a key driver of China’s macroeconomic boom.

The FDI debate has been on for a while now mainly attracting attention in the retail sector. India permits 100% FDI in cash & carry and wholesale trading (which is business-to-business) and 51% in single-brand stores (such as Gucci or Apple). On the other hand, FDI in retail trading is permitted in Brazil, Argentina, Singapore, Indonesia, China and Thailand without limits on equity participation. India was expected to join this long list of countries. But the wait continues. So what stops India from joining the list? The reasons are more political in nature than economical. Reports say India has around 12 million kirana [mom-and-pop] stores who are slated to lose their livelihood altogether if 100% FDI in retail is allowed. And that my friend, is a large vote bank. Not to mention the middlemen and traders who are essential elements to the kirana stores losing their livelihood as well.

The above reasoning is plain rubbish. The kiranas would only integrate with modern retail. One has to keep in mind that about 75% of India’s population still earns less than $2 a day. So unlike in more advanced economies with high per capita income, kirana stores will continue to be a part of the Indian market given the shopping styles of consumers. The culture of shoppers to shop daily coupled with lack of storage space make the kiranastore an integral part of the Indian middle class.

India needs good FDI inflows especially in the retail sector. Besides just the money coming in, FDI would also bring with it advanced technology [supply-chain and logistics], skill enhancement, new employment and more importantly, it would make the retail sector a lot more organized than it currently is. The retail industry in India estimated at $ 400 Bn and organized retail forms a meager 5% of it.

2011 has been a rocking year for Indian politics. With scam after scam hitting the government and the nation demanding strong anti-graft laws [read my previous post], it is highly unlikely that the government would disturb the vote-bank any further. But it’s high time the government took the FDI debate more seriously and come out with attractive policies. India should take care not to lose its share of the pie.

[With inputs from knowledge @ Wharton]

Oh the Graft!

As you read this, a revolution of sorts is underway in the largest democracy in the world. Yoga Guru Swami Ramdev and ‘Gandhian’ social acitivist Anna Hazare have held the Indian government at ransom over the past one week. They demand a corrupt-free nation and a law in place to clean up the mess that has only grown dirtier with every passing day. Though India is one of the largest democracies in the world, with all the trappings of a well-defined structure— parties, assemblies, elections, free press etc—it still appears to be mere gimmickry, with rampant corruption almost everywhere.

Anger over corruption has spiraled as the UPA government lurches from scandal to scandal. The 2G spectrum scam which is estimated to have cost the exchequer up to $ 39 Bn; the Common Wealth Games scam which saw Mr. Suresh Kalmadi, head of the Organizing Committee, awarding illegal Games contracts to a Swiss firm causing a loss of about $ 21M to the exchequer; the Adarsh Housing scam; the fiasco over appointment of Chief Vigilance Commissioner P.J. Thomas; several corporate scams like the infamous ‘Satyam’ case and various money laundering cases like the stashing away of about $ 8 Bn in swiss bank accounts by stud farm owner Hasan Ali Khan. The list goes on and on.

Ramdev and Hazare’s fast-unto-death approach has turned into a full blown media circus. Hazare has given the government a deadline of 15th August to pass an anti-corruption bill. But will that be enough? I believe the problem is far bigger than just having a law in place. The biggest challenge is implementing the law itself. The Economist is right on saying ‘Regulations are not, by and large, deterrents to corruption, but a source of it’. And this is only obvious in a country like India because it is getting richer fast, and the faster its economy grows, the more chances arise for mind-boggling theft.

This new age democracy needs a leviathan revolution to eliminate corruption. The UPA government has several challenges to tackle besides the anti-graft agitations heating up the nation; like rising food inflation, petrol prices and a dancing Sushma Swaraj to name a few.

A piece of Greece? No thanks

About 2 years ago, while my wife & I were lazying on one of the pristine beaches in Mykonos, Greece, it may have occurred to us how cool it would be if we could actually own the beach or a part of it. On reading this article, the thought may seem like a possibility in the near future. Debt-strapped Greece is not only depending on the much awaited EU bail out package but also taking some measures of its own.

The Hellenic Public Real Estate Corp., the government body that manages public property, has a list of about 75,000 individual government-owned properties. The corporation has appointed National Bank of Greece SA to lead a consortium of advisers who are now preparing to sell an initial portfolio of 20 to 30 properties, the first of which could be put on the market in the next few months, according to Aristotelis Karytinos, general manager of the real-estate division at National Bank of Greece.

Noble idea, romantic even, but will this proposition fly with foreign investors? How is owning the land any safer than owning the debt? My guess is Greece would offer long-term leases (99 years or something like that) while retaining the ownership of land. So imagine, your landlord would in fact be the Greek Government! Lovely. And not to mention the poor administrative & taxation systems combined with a sorry state of political affairs which has left the economy dangling.

Property might come cheap in Greece, but should you invest? My advice is rather stay put.