Rupee, Equity & Commodities - burp..!

                     The logic which we are familiar with says – when there is economic uncertainty, especially on the global front, the price of precious metals – gold and silver shoots up. These are the metals, which are said to be the ‘safe havens’. But currently, when global economic uncertainty is at its peak, when one would have expected gold and prices to peak to new heights, the prices are actually going down!

The price of gold, which has fallen in recent weeks as part of a broader market sell-off, has even further to fall, Marc Faber, author of the Gloom Boom and Doom Report said today. Faber, who said that the recent sell-off had come about following nervousness about industrial metals, added that a 40% correction wouldn't surprise him.

                     Gold hit a record peak on 6^th September and after having reached that high, the metal has been on the downward swing. Since the past three weeks, prices have been coming down consistently. At least one logic continues to work – when the US dollar falls, gold rises and vice versa. Thus to a large extent, it is the dollar strength which is pushing the gold price down.  Another major reason stated is liquidation by hedge funds. With stock markets all around the world turning volatile, hedge funds somehow seem to prefer liquidating their holdings and prefer to adopt and wait and watch on the sidelines. They do not seem to want take chances with gold too as they expect it to fall further and this could be the main reason for this plunge in its price. Another reason stated by a punter on Dalal Street, using simple logic of stocks is that prices are down now as profit booking had to come at the unbelievably high, logic defying price.

  

But this brings forth a very important question – is gold a safe haven in times of global uncertainties? It seems to be more of a metal which Indians buy. Coincidentally, the plunge in the price of gold coincides with the ‘pitrupaksha or siradh' is wat they say in our culture’, the period in which buying gold, homes, cars and such long term assets is considered to be inauspicious. This period which began on 13^th Sept, ends tomorrow, 27^th Sept. And from 28^th Sept, as has been seen historically, buying picks up. This is probably the cue which we need to watch out for. Indians are the largest buyers of gold in the world and following close its heel are the Chinese. Thus if gold prices see a spike up from 28^th, be assured, that the fall in gold price was not about hedge funds at all. It was just a case of Indians refraining from buying gold! 

Now the next question :

Will market hold on to 4720?

It was a volatile day of trade for the market. The indices swung violently amidst high volumes. It recovered from a sharp mid-session fall, but still ended up on the losing side. The Nifty struggled throughout the day, and finally closed at 4,835 down 32 points. The Sensex too shut shop 110 points lower at 16,051.

Billionaire investor Rakesh Jhunjhunwala feels the Indian market is well poised at the moment and investors should capitalise on the investment opportunity. 

Udayan Mukherjee, managing editor of CNBC-TV18 says, this week will be an important week for the market as futures and options contract will expire this Thursday. According to him, the set-up is not good. "Fundamentally, things are not great. Chances are that at some point, if not this week, but eventually more downsides open up for stocks."

Food for thought:  No one can predict the bottom of any market today. Best to wait for the storm to subside and once the sun starts peeking from the dark clouds, then would be the best time to invest.

Gold Gold Gold!!

Gold is close to $1825 per ounce. And those in the know say there is more steam left.  Infact gold now a days is behaving like equity, notching up gains of over Rs.1000 per day. Yes, gold has become the new equity. But how many of us can today afford to buy physical gold? Unless it’s a marriage or some such necessity, can we bring ourselves to buy gold now? 

Clearly huge speculation at play, with many taking long positions, keeping an eye on the global uncertainties. Many are blaming the current run up in the gold prices because of the Euro Zone.

But more than Euro zone, today, it is the weak rupee which is laying up the gold prices further. The rupee determines the landed cost of the dollar-quoted yellow metal and hence when the rupee is weak, the cost is higher. Today morning, rupee hit a 2 yr low, it depreciated by 39 paise at Rs 48.01. 

When such a bull run hits the equity markets, we usually book profits, not knowing when you might see the next such high. But then why aren't people selling gold at these highs? News is that scrap sale of gold, which is basically family jewellery is down 50-60%. Only those short of cash were selling with many opting to raise money by mortgaging gold. People are not selling gold as they feel there is a lot more upside left in the yellow metal. People are not looking at the current price but are more driven by what the price could be. 

So how much more steam is left in gold? Will the prices crash, like many predicting a bubble? The word on the street is that even if the news of the crisis dissipating in Europe comes in, gold could come down by around $100-200 but not a crash. By the end of the year, even on a conservative basis, the current target is placed at $2000/ounce and this means, may be Rs 30,000/10 gms in India? Phew.! 

More than looking good, this new found shine of gold is scary. Even today's price of Rs 28000 and above seems preposterous to say the least. Even if on the long term, analyst are bullish, the current feeling is of acute nervousness. Saying the current price is way ahead of its fundamentals is indeed putting it too mildly. Valuations are crazy. 

Thus in the current scenario what would be the sane thing to do? Like stocks, best to book partial profits and make at least part of the holdings 'free'. If you have bought at much lower levels and are sitting on profits of over 50%, best to book partial profits. You can use the profits to buy some frontline stocks, which are at very attractive valuations.  

And if the question is whether one should buy gold or ETF a.k.a Exchange Traded Funds, then it depends purely on your ability to invest on a regular basis. Yes, gold ETFs are much cheaper but gold funds are more efficient when it comes to SIP. While selecting a gold ETF, go for those with the lowest expense as it will leave you that much more on the table. And keep a watch on the liquidity aspect too, which you can get from the gold ETF volumes on the NSE. GoldBees remains the number one. 

Food for thought:-  Remember, investing in gold ETF cannot be a substitute for physical gold, it would be just another form.

To pay or not to pay ???

What if your friend had borrowed a lakh of rupees from you and promised to return the money after  one year, you would wait for a year to even start expecting it back. But if he returned the money, say, within a six months, would you be pleasantly surprised, feeling relieved that you got your money back or would you get angry and charge a penalty on your friend for returning the money? 

 

Well, it sounds incredulous that one could get punished for being fastidious in repaying debt but that is exactly what the banks do. If you won a lottery and decide to first get debt-free by repaying your housing loan, you could be in for a rude shock. Banks charge a penalty of 3-5% on the outstanding loan amount.  Penalty is also charged on customers seeking to shift their loans from one bank to another if they found a better deal. Yes, the advertisement of Axis Bank comes to mind, which states that it does not charge a penalty for prepayment. SBI too does not charge a penalty. ICICI Bank charges anywhere between 2-4% plus service tax and surcharge on prepayment.

The RBI Ombudsman has made a proposal to do away with this prepayment penalty on home and auto loan borrowers on floating rates. This is not a rule or a guideline but this is what RBI has ‘suggested’ to the bankers at the meet and said that the onus was on them to implement this suggestion in the interest of customer service, failing which RBI said it will have to issue guidelines. "Sounds good when such arm twisting is in favour of customers!"

The banks might not be happy about this as for them, prepayment means banks have to adjust to asset-liability mismatches arising out of loans against deposits.  When a bank lends for a longer tenure, it also balances it against funds accordingly. Thus when a loan is prepaid, the bank is faced with liabilities which it will need to pay off before time. Also banks want to make up for the additional administrative and processing costs. Many banks charge lower rates in the initial years, hoping to cover up as the tenure increases. And to make up for that loss too, they charge a penalty.

Many banks, do not charge a penalty when prepayment is made through owners funds but somehow get irked and charge a penalty when prepayment is made by borrowing from another bank. The penalty is to act as a deterrent, to dissuade a client from changing banks. Thus RBI has suggested that irrespective of the source of fund for prepayment, when under floating rates, the penalty should be waived.

Charging a penalty on prepayment on floating rates makes no sense (for the customer but enhances margin for banks). It is the bank which has the right to raise or reduce its rates thus similarly, customer should have the right to choose the best competitive rate and thus improve his own balance sheet. Why should the customer suffer while the bank makes merry? Yes, in fixed rate, it makes sense but when 80% of the home loans are on floating interest rates, then does the penalty on prepayment make any sense?

Food for thought :  All these ‘suggestions’ sound good and hopefully banks will toe the line. Or else RBI is sure to step on their toes!