Gold:: Is it an Investment Oppurtunity now?

Courtsey:Dr.Krishna
I am writing this article on Gold after receiving many enquiries from investors on "Gold as new investment opportunity". Gold is now trading around Rs 15,650 per 10 gram. Gold now suddenly caught the attention of herd investors when value investors are selling their holdings. Another classic Herd Mentality (Reliance Power IPO) is now on the cards.

Gold was traded below Rs 12,000 levels per 10 gram for more than 1 year but no investor asked me about gold as investment. Now Gold is trading in the above 15,500 zone but people are now asking me about investment opportunities in the gold and my opinion on the target of 30,000 levels. This incident once again illustrated the "Herd mentality" of investors. These people will never learn in their life about the "value of investment" and "Margin of safety".

Not many people talked about Sensex and stock markets when it was traded below 14,000 till September, 2007. When Sensex crossed the levels of 18,000, many people started investments in the stocks on the hopes 30,000 Sensex levels. Sensex deceived investors by reaching 21,000 levels and everyone knew the rest of the story.

History of Gold as investment:

Gold is traditionally treated as safe investment in the difficult times. Big investors will treat this as "Safe Hedge" when equities are not yielding good returns and when dollar is weak. Same thing happened in 2003 when equities are in down turn for 3 consecutive years. These people will sell their hedge holdings like Gold and FMCG stocks once equities make bounce back. But Gold is safe hedge against inflation.

History of gold prices (in rupees):

1930: 180 per 10 gram
1940: 360 per 10 gram
1950: 1000 per 10 gram
1960: 1110 per 10 gram

1970: 1840 per 10 gram
1975: 5,400 per 10 gram

2000: 3,000 per 10 gram
2006: 5,400 per 10 gram

2009: 15,700 per 10 gram.

Gold surprisingly gave 300% returns from 1970 to 1975 when world suffered worst ever recession after great Depression. Will the history repeat? That is the reason behind current "Mad Gold rush". But if you invested in the Gold in 1975, your investment gave negative returns for the next 25 years.

Remember 2 things:

1. Gold generally trades in the lower range around March and July. Generally, it is the best time to buy gold and marriage season is the best time to sell God.

2. Below 11,000, Gold is a safe investment but above 15,000- it is only for traders but not for investors.

Future of Gold:
When stock markets are in down turn in 2002, Gold was at Rs 5,400 per 10 gram. Don't forget that Gold traded below 9,000 per 10 gram till 2007 means you might have got routine returns from Gold investment. But investors who made investments in gold in mid-2007 are now making 70% returns in just 20 months. But I don't know what will happen to gold investors who bought it at above 15,000 but they remain in losses even after 3 years. Why? Gold will recede to 11,000 levels once equities make comeback. What happened to crude oil will repeat in case of gold also. Don't forget that Gold is not even an essential commodity. But Gold is a less volatile investment.

Examples:

1. Crude oil prices moved to $147 per barrel and Goldman Sachs people gave $200 per barrel target. It is now trading below the fundamental price at $35 per barrel.

2. Sensex moved to 21,000 and analysts and analysts gave 30,000 target. It is now trading at 9,000 levels.

3. Real Estate prices reached astronomical levels in 2007 but people bought land as if there will be no land available for purchase in future.

Interesting analysis from Zaverat:

If you invested 10,000 in various investments in the early 1999, following are the yields by 2004.

1. Fixed Deposit: 13,794.

2. PPF: 16,025

3. Gold: 15,064

4. BSE Sensex: 20,769. Equities saw the worst bear market in this time zone but gave good returns. 10,000 invested in Sensex is still 10,000 by 2002 but 20,000 by 2004.

Gold may deceive investors for some more time but investors should ask themselves some basic investment questions before making fresh investments.

1. "What is the fundamental value of the investment whether it is a share, real estate or commodities like gold?"

2. Whether the price already included the good news or not?

3. Why analysts are giving bullish estimates? Is there any truth?

4. Are there any better value based investment opportunities?

5. What are the historical moments of that investment?

6. Are we late in joining the party?

7. What is the margin of safety at current price?

My estimate on Gold:

I don't know what will happen to the Gold in the next few days due to these "Herd investments". But Gold will trade below 12,000 levels even after 3 years. What it means that you will not get a single rupee from Gold investments at current valuations if you are a long term investor. If you are a trader, enjoy the mania. Young investors should allocate 5-10% of your portfolio to Gold and buy at reasonable prices.

Article on Gold From 4Ps:

4Ps magazine published an article on "How to plan investments for 2009-10?". Magazine published articles on various investment options like Stocks, Commodities, Gold, Real Estate and Currency.

Highlights of the article:

Warren Buffett: Gold is the most useless commoditiy.

Stat: Rs 100 invested in Gold in 1979 is Rs 400 in 2009.

Gold's fate linked to dollar movement - The Hindu

Courtsey: G.Chandrasekhar, The Hindu

Mumbai, Dec 21 Even 2008 draws to a close, it is becoming increasingly clear that all commodities market participants - traders, investors and others – will remember the year for the extraordinary price performance, gyrations and volatility.

Commodity prices - be they of energy, metals or agriculture - not only hit multi-year record highs at one time, but they also plunged to great depths in a matter of weeks, if not days, precipitating a crisis.

Quite contrary to the first two quarters, in the last quarter, producers, consumers, traders and investors faced daunting challenges in the wake of sharply declining demand, rising inventory and collapsing prices.

Speculators exited the market in a hurry, removing a considerable amount of speculative froth that had developed in many commodities during the bull-run.

What started as global slowdown degenerated into a recession, at least in industrial economies such as the US and the Eurozone. Financial and economic conditions have turned grim. Currency fluctuations, especially that of the dollar, impacted market prices.

There is a widespread expectation that notwithstanding continuing recessionary conditions, commodity prices may largely be bottoming out. From the current levels, further downside risk to prices - crude, base metals, agriculture - seems to be limited. The crisis of confidence continues and may stay for some time.

However, when the process of economic recovery begins, hopefully in the third quarter of 2009 as a result of a series of bailout and stimulus packages, investor confidence may return to the market. Until then of course one must reckon with volatility.

There is also the strong possibility that sizeable output cuts that have been made in crude, steel, copper, aluminium and others will store problems for the future and begin to create a supply bottleneck when demand returns.

However, for the time being cash is still king and poor demand outlook remains the top of market concerns.

Gold
With the dollar rapidly weakening against the euro last week, gold prices got a boost and decisively moved above $800 an ounce. Physical demand at lower levels amid less volatile conditions generated support.

On Friday, in the London spot market gold PM Fix was at $835.75/oz, down from the previous days $855.25/oz. Silver declined too to $10.61/oz (AM Fix) from $11.29/oz the previous days.

Going forward, the yellow metal will be clearly influenced by the strength or weakness of the greenback. If the dollar should weaken further, it should provide a strong base for the metal to move higher. However, foreign exchange experts are of the opinion that currency movements in the next few weeks may cushion gold’s upside.

Interestingly, as the prices ruled above $800/oz, many investors exited their long positions on the Comex. No wonder, net fund length is near the lows of June 2007.

According to technical analysts, gold’s uptrend is erratic. It may be tough for the metal to breach $880 levels. The market is holding above short-term support of $829.

Below $829 would warn of a deeper pullback towards $782, though even in this scenario the choppy uptrend from October lows is likely to remain dominant force. The medium term view is largely neutral within $700-930.

Base metals
After sliding to fresh lows, base metals prices rallied on news that the US government will give an emergency loan of $17 billion to the US car manufacturers. Other wise, it was terrible week for base metals, with the exception of aluminium and zinc which ended the week higher. Lead prices fell by over 16 per cent week-on-week and tin fell by over 10 per cent.

Outlook for the base metals complex over 2-3 quarters into next year is grim with recessionary conditions and lack of demand growth the main theme. Construction sector and automobile sector, two important metals consuming sectors are facing serious downturn in demand. Inventories are rising. Many producers have responded quickly with output cuts.

Copper is the metal with the largest downside potential from current levels. Copper prices are is still above production costs and miners are still making money. So, there could be further cost-related cutbacks, experts assert.

On the other hand, aluminium, nickel and zinc prices have all fallen very close to weighted average production costs, experts point out, adding copper could dip near to this level at $2,100 a tonne.

Notwithstanding short-term weakness, the longer term outlook for base metals appears positive. This is because not only is output being cut, new investments are being put on hold. This will squeeze supplies when demand returns to the market. There will be supply constraints with concomitant impact on market prices.

Crude
Despite announcement of OPEC production cut and drastic decisions in the US monetary policy, crude prices dipped below the psychological $40 a barrel. Demand side concerns have been top of the markets mind. There are as yet no signs of demand revival. The financial crisis and growth concerns may continue for longer time than imagined earlier.

Experts, however, believe, from the current levels, the downside risk to crude prices is limited. Indeed, they are talking about the possibility of over-tightening of the market in the medium term. The supply performance of non-OPEC sources is being closely watched.

Oil @ 30 BBL by March 2009 - Goldman Sachs!!

The continued deterioration in global oil demand has compelled us to again lower our oil price outlook for 2009 to an average of $45/bbl from $75/bbl previously, though we see a growing number of signs that oil markets have entered the bottoming phase of the cycle.

Despite our lowered oil price deck, this is not a call that we are incrementally more bearish on Energy equities. Our global energy team is, however, continuing to stick to a defensive posture within the Energy sector in terms of our top picks, though we have gained comfort in recommending select higher-beta stocks that we might call “offensive defensive” ideas (primarily hedged E&Ps with transformational growth opportunities).

We think a move back to high-beta names that would benefit from a future rally in oil prices is still several months away, pending greater confidence that demand is no longer deteriorating and supply is on-track to decline sharply. The latter we think requires a longer period of oil around $40/bbl (or lower) than we have currently seen; demand globally also shows no signs of improving.

We think that the sharp and sudden collapse in global oil demand exceeds OPEC’s ability to, on its own, balance markets, and necessitates sharply lower non-OPEC crude oil supply.

Unlike OPEC, we believe non-OPEC producers will reduce production and sharply cut capital spending only if cash flow is sufficiently weak, which we believe is the case at oil prices in the $40-$50/bbl range.

However, because there is a lag between capital spending cuts and evidence of lower production—and demand is incredibly weak right now—oil prices may need to fall further to levels that stimulate non-OPEC producers to accelerate activity declines and possibly even shut in production, which we think will occur at oil prices around $30/bbl.

While global oil demand is very weak and the duration of demand weakness is unclear at this time, we believe oil supply will collapse if prices remain below $40/bbl for an extended period of time (6-12 months or longer) suggesting we are likely to have entered the bottoming phase of the cycle.

• Oil prices are now meaningfully below the $60/bbl level at which the average company earns a cost-of-capital return on longterm investments based on current costs; capital spending reductions have begun.

Oil prices have traded near the $40/bbl level below which we think short-cycle activity will be sharply curtailed, which should accelerate near-term declines in supply.

• Industry returns on capital are near historic trough levels at a $45/bbl WTI oil price.

• The WTI forward curve is in “super contango” that historically has coincided with the weakest portion of the cycle.

What is not clear yet is how long the bottoming phase will last. Global economic conditions are the weakest the world has seen since at least the early 1980s and global oil demand is declining at an accelerating rate. In our view, the duration and depth of the downturn will be decided by the interplay of global oil demand weakness and non-OPEC supply declines.

Global oil demand has weakened to the point that OPEC cuts alone are unlikely to return the market to balance, with greater declines in non- OPEC supply now required.

In terms of gaining confidence that a bottom is at hand and a recovery possible, we would need to see the following:

• Demand: A deceleration in the rate of global oil demand declines is critical (no signs yet).

• Non-OPEC supply: A sharp reduction in short- and long-term capital projects is required (early signs emerging).

• OPEC supply: It will be important for OPEC to announce additional cuts at its December 17, 2008 meeting in Oran, Algeria in order to gain confidence that OPEC’s “Big 3” of Saudi Arabia, Kuwait, and UAE are on-track to reduce production by the 2 mn bbls per day.