Gold fever. It ain’t what it used to be!

Producers Removing Hedges

In 2007, most gold producers (E.g. Newmont, Barrick etc) removed their gold hedges in anticipation of a rise in gold prices, which came true in the last quarter of 2007, witnessing a substantial increase in gold prices, although top-line gains of these companies were affected and offset by higher operating costs, still the highest operating cost was around $400-500 per ounce which still leaves a decent margin on a price of $800 gold.

Production more difficult, limited supply and consolidation underway

Since the depletion of gold mines is more rapid then the other conventional mining assets like base metals, Gold producers are constantly pushed to acquire new assets. Although prices remained elevated, key producers remain under huge pressure to increase reserves and lower production costs. It should be noted that in most cases there has been no new discovery of precious or base metals, the reserves were lying there for years, just uneconomical to produce because of the low prices.(refer table/charts below.)

Gold fever. It isn’t what it used to be!

We look back on the last time gold hit $850 (1980) with even gold teeth going into the melting pot. Not this time though, as many feel the metal has much further to go yet on its upward path. The hype and hoopla that accompanied gold's record-breaking rise the last time around is probably missing this time partly because although there is plenty of risk around, including high oil prices, there is little 1970s-style doom saying.

Though the price of gold seems very high today, the record $850 an ounce it hit at the London fixing on January 21, 1980, translates in today's money to more than $2,150 and therefore we can say that we are comfortable at these levels (inflation adjusted).
(Refer to http://www.mineweb.com/ for more details)

If that’s the case, why is gold falling now?

The only reason gold peaked recently ($918/ounce), coming back to $880 levels, is a result of current scenario in which the market for gold-specific factors that have been acting unfavorably. There have been two price drivers have become less supportive.

First, central bank selling has picked up for some parts of the world, and second, speculation is underway.

Having said that; a strong recovery in physical demand (particularly from India & China) and positive external drivers outweigh the two gold specific factors for now. Hence in our view the gold prices are likely to maintain their upward momentum in the months ahead.

More room for upside

We anticipate that gold prices will continue to increase on account of a weak U.S. dollar and concerns about inflation. Gold is up approximately 30% for the year, with a year-to-date average price of $760 per ounce. Notably the 5-yr return on gold was a total of 140%. We expect a weak global economic growth, increase in inflation fears, a flight to quality for safe haven and other market concerns with the broader economy which will in turn support for higher gold prices. Historically it has been seen, that a US FED easing cycle results in money flowing into commodities especially oil (a.k.a.black gold) and precious metals.

Some of the charts to support the thesis:

World Consumption Pattern

Gold – a tool against Inflation

Gold – a bet against dollar

Charts Source: http://www.reliancemutual.com/

Some of the recently listed articles for gold outlook http://www.mineweb.com/mineweb/view/mineweb/en/page33 http://www.mineweb.com/mineweb/view/mineweb/en/page33?oid=44725&sn=Detail http://www.mineweb.com/mineweb/view/mineweb/en/page33?oid=44725&sn=Detail http://www.gold.org/value/stats/statistics/investment/index.html

IT Sector – IS Bhav Main?

The sector is falling, rupee is rising, wages are going up, taxes are just 2 years away, US is getting into a recession and EU might just follow. The list is endless, but point is: What an investor should do now?

All those guys who had bought IT stocks at the higher levels with the expectations that it will further go up, are probably wondering what to do now. Can things go bad from the current status? Probably yes. How much more? We don’t know.

All the fund managers and analysts are saying that IT is a contrarian call at the current levels. We tried to do some digging around the statement and the results were quite interesting. The delivery based volume on NSE in TCS and INFY has gone up substantially in last 1 year. The chart below (Blue – TCS, Purple – INFY) goes on to show that delivery %, which used to move between band of 50%-60% in 2006, has now been moving in the range of 60%-70% in 2007.

With relatively stable total quantity traded, increase in the % of delivery proves that the traders and punters are not playing, and only people with serious money are involved right now.

Lets talk a bit about fundamentals - Bloomberg consensus estimates shows an INFY EPS of Rs.108.86 for FY10 assuming the tax rate of 25%. Let’s make the tax rate 35% then our EPS is Rs.88. So the PE is 16.8 FY10. Is that expensive? Kindly note that this PE is less than 1 PEG. If INFY, TCS, Wipro, Satyam, HCL can sustain a +20% EPS growth rate, then these stocks are trading at a steal. So can we buy now?

As wise people say, that it is always the darkest before the dawn. Whether it is 3 am or 3.30 am before the sunrise of 5 am, we don't have an answer. So if the pain is endurable, then let’s jump.

As Lance Armstrong says....Pain is temporary, failure is permanent.

Caveat Emptor!!

Literally “Buyer beware”.

The Indian stock market continues to be in the push-pull mode with research houses split between where to invest in 2008. While the general tone of the market seems to be bullish, with research houses almost unanimous in putting Sensex targets around 23-24,000 by the end of the year 2008, the individual stock recommendations seem to be in disarray.

Everything in today’s market is up for sale. We believe that the situation is quite similar to one witnessed during the annual exhibition sale of wares by small traders/hawkers. During these sales, where a large number of buyers are visiting stalls of traders, one tends to play oneself to the mob psychology. We loosen our purse string to things we would not have bought in ordinary course, or unassumingly pay a price for an item which is not worth half of what we ended up paying.

This is precisely what’s happening in the current market scenario, we believe. Every time we loosen our purse string to buy a new idea, hot tip or the next growth company, we need to very careful of what we are buying. Like always, it is easier said than done.

What we said was evident with investors rushing to invest in mid-caps stock a few weeks ago as if there was no tomorrow, resulting in stock prices shooting by 40-100% in select mid-caps. Over the past week, however, the same stocks have pulled back around 20-30% and we believe that a very small percentage of investors have made money during this period.

5 questions to ask before you buy a mid-cap stock

1. Do you really understand or made efforts to understand the business model?
2. Have you done a gut check on the recent reported numbers by the company?
3. Did you bother to check 3-4 basic valuation ratios of the company at the CMP?
4. Have you decided the time horizon till which you will hold this ticker?
5. Will you buy more of the stock if it tanks 35% or more after you bought?
   
   If the answer to ALL the above questions is a thumping YES than go straight ahead with your investment, else take time out and ponder a little more because the stock markets always opens in a few hours after they closes.
   
   And always remember the golden words 'Caveat Emptor'.