Investment in Gold - Part 2 of 4

Here’s Part 2 of 3 of the series 'Investment in Gold'.

Gold As Consumption

Bars & Coins:

• Typically in standard weights of 1 gm, 5 gm etc.

• Available from Banks, Jewelers, Gold Marts

• Purity is 24 carats or 22 carats

• Price is subjective to the prevalent rate of the day in the World Market indicated in dollars per troy ounce for 24 carat gold.

• Additional charges include die charges for marking and certification of purity

• 1 Troy Ounce is 31.1 gms

• Price of Gold in India for Gold is calculated by

o Value of USD in INR per Troy Ounce

o Convert the rate from previous point to get rate per gram for 24 carat gold

• Don't buy bars / coins from Banks as they charge a higher premium

• Don't buy 24 carat gold bars / coins. Jewelers prefer to buy back 22 carat gold

• Purity of gold only guaranteed by banks for coins / bars sold by them

• BIS standards exist; all purchases from a jeweler are based on trust / reputation of the jeweler

Jewelry:

• No standard weight for jewelry bought

• Costs include making charges, wastage charges and state VAT.

• Indians typically choose to buy 22 carat jewelry

• More complex the design, higher the wastage and making charges which increases your cost of acquisition

• Though BIS standards exist, all purchases from a jeweler are based on trust / reputation of the jeweler

Additional cost of keeping the above forms of gold in bank lockers. Gold sitting in lockers does not generate any intrinsic value (until price of gold increases).

In many a movies (and in real life), selling of the 'household' gold is the last resort to encash the value of gold.

In India, culturally, Gold is an asset handed over from a generation to another (mother to daughter, mother-in-law to daughter-in-law, etc). Gold is also part of tradition / custom of many castes / religions in India.

Gold is an asset which is traditionally a way of giving a girl's share in the family property.

Now NBFCs (Non Banking Financial Corporations) like Muthoot and Mannapuram offer loans against gold.

• Here the price of the gold is taken as the average of gold price over the last 90 days.

• Purity and total weight of gold are key factors to arrive at the amount of loan you can get.

• Loan sanctioned is 70% of the total value arrived based on the above 2 points

• Interest on this type of loan is between 14 – 16 % per annum

Investment in Gold - Part 1 of 4

Continuing from one of my previous mail threads about Gold, I’ll be sharing a 3 part series about investment in Gold. So here’s Part 1 of 3.

Gold prices are impacted by the following:

• Jewelry off take (pure consumption demand)

• Industrial use

• Geo-political concerns

• US dollar movement against other currencies

• Indian rupee movement against the US dollar

• Central Banks diversifying into bullion (Central Banks normally invest in bonds of other countries mostly US, Germany, France, Canada – AAA+ rating :-) )

• Central Bank Sales Slowing and Massive De-Hedging

• Gold Mine Production

• Fall in Supply

• Buying of gold can be broadly classified into 2 categories

o Consumption and

o Investment

• By world statistics, gold is mostly bought for consumption, investment and finally for industrial use

Gold for Consumption:

• Buying of gold is influenced with the intent to HOLD and NOT SELL

• Forms of buying gold is in jewelery, coins, bars

• Industrial Use

• Mostly bought my individuals and manufacturing companies in the hi-tech sector

Gold for Investment

• Buying of gold is influenced with the intent to SELL and NOT HOLD

• Forms of buying and selling of gold is Gold ETFs, Gold Mutual Funds

• Speculative buying in form or Gold Futures

• Mostly bought by investment management companies, central banks, speculators / traders and lastly by retail investors

FIIs - Boon or Bane

We have time and again heard business news channels blaming FIIs for every ‘massive’ selling which our Indian stock markets have to bear.

It’s analogous to ISI having a ‘hand’ in all terror activities taking place in India.

Though, I’ll not comment on the latter point, let me share my views on the former.

• From the beginning of this calendar year, we have had 166 trading days (including Aug 30, 2011) across the last 8 months.

• On Jan 3, 2011, Nifty opened at 6,177.45 and on Aug 30, 200 it closed at 5,001.00.

• Year to Date (YTD), the Nifty has lost 18.08% (if not for the 2 days of fantastic recovery, the loss was 22.23%)

• Out of the 166 trading days, the Nifty closed lower than the previous day on 93 days (56% of the trading days)

o On these 56% days, a trading day closed anywhere between -0.01% to -3.32% over the previous trading day

o Out of the 44% days, a trading day closed anywhere between +0.01% to +3.49% over the previous trading day

• Domestic Institutional Investors (DIIs - Banks, DFIs, Insurance and MFs and New Pension System) have been net buyers in 5 out of the last 8 months.

• FIIs (Foreign Institutional Investors) have been net buyers in 4 out of the last 8 months

• The biggest surprise

o DIIs have been net buyers to the tune of Rs. 22,594 crores

o FIIs have been net sellers to the tune of Rs. 16,446 crores

o Net-Net, there was more money put in the market than what was taken out in the last 8 months

If I consider the opening level of Nifty on the first trade day of a month vis-à-vis the closing level of Nifty on the last trade day of a month

• Only in 2 months (March & June) was the net level of Nifty in the positive

• Combined trades of FIIs & DIIs, months in which they were net buy were Mar, May, Jun, Jul

• Only in 1 month (March) were FIIs and DIIs on the same side in terms of market position (Net Buyers)

• All other months either FIIs have been net buyers / net sellers while DIIs have been net sellers / net buyers

We continue to be driven by what ‘West’, ‘Westerners’ do, either directly or indirectly.

This has been for the “good, bad, ugly” for our culture (past, present, future), economic policies, financial markets and anywhere else where we can see its influence.

• DIIs have shown confidence in our own markets, so should retail investors

• India is the 3rd fastest country (as per GDP growth rates for Q 1 – FY 2011-12) in the world today even at 7.7%

• Our country is more internal consumption driven than other developed markets

• India will be an economic super power sooner than later.

• When FIIs sell – BUY; when they buy – SELL

• FIIs will always pull out their money as and when they make profits

• Avoid stocks where FIIs holding is significant

IPOs of 2010 - A Reflection

Thought I would share my analysis of IPOs of 2010; a year which saw the stock market run upto 21K on the Sensex and then started to taper off. Today the Sensex is at almost 19K.

• There were 64 odd companies which tapped the primary market (IPOs).
• I have excluded 6 FPOs from my analysis (SCI, Power Grid, NTPC, REC, Engineers India, NMDC).
• IPO ratings have also been a new feature among most of the IPOs. Ratings were to help investors make better judgments before they invested in companies.
• The credit agencies (some of them are well-known) are CRISIL, CARE, ICRA, Fitch & Brickworks.
• Ratings are on a scale of 1 to 5 with 5 being the highest.
• Absolute returns is the absolute (non-annualized) profit or loss from the date of IPO listing till date.
• Annualized return is the return extrapolated to a per annum basis.

Here’s the low down:
Companies with IPO Rating of 1, 2 and No Rating
• Out of the 64 companies which had an IPO in 2010, 25 companies had a rating of 1 or 2 (including 2 which did not have a rating).
• From the previous point, it can be implied that 39% of last year’s IPOs were of companies with weak financial status / fundamentals
o Out of these 25, only 7 have a positive return till date (28% of the weak companies gave a positive return till date)
o 2 IPOs gave returns in the range of 0 to 10% profit
o Remaining 5 (out of the 7 IPOs with positive returns) gave above 10% (2 IPOs in fact have more than 30% profit)
o Negative absolute return range is from -22% to -80%

Companies with IPO Rating of 3
• Another 21 companies out of 64 had an IPO rating of 3 (33% of all IPOs last year had average financials)
o 6 IPOs have positive returns
  - 5 of the 6 have returns in excess of 75% absolute returns
  - The same 5 have an annualized returns of 77% (pa) as the lowest and 298% (pa) as the highest
- Out of these 5 super performers 3 companies have been listed for less than a year
o Remaining 15 IPOs had negative absolute returns ranging from -12% to -93%.
- Out of these 15 IPOs, 7 companies (with negative returns) have been listed for over an year on the stock markets.
o Negative absolute return range is from -12% to -93%

Companies with IPO Ratings of 4 and 5
• Finally, 18 IPOs had a rating or 4 or 5 (28% of all IPOs last year had strong financials)
o Only 2 had a rating of 5 – (Coal India and MOIL)
o Coal India’s absolute return is 54.57% (annualized 110.66%)
o MOIL’s absolute return is 0.97% (annualized 2.56%)
o 5 IPOs (including Coal India and MOIL) have a positive return
o 13 IPOs absolute return ranges from -3% to -55%

Summary
• Only 18 out of 64 IPOs gave positive returns; that’s a dismal 28% success rate of making any profit through IPOs
• 15 out of 64 IPOs gave a positive return more than the return on a fixed deposit (FD rate assumed as 8% pa)
• 8 out of 64 IPOs gave absolute returns of more than 50%; that’s a success rate of 1 in 10
• IPO ratings are only indicators so DO NOT invest in IPOs based on ratings
• Set your profit margins when you invest in IPOs; 10% absolute returns on listing is a safe bet
• Book your profits as soon as you hit your profit margins; preferably take out you capital and leave the profit in shares
• Always invest on the last day of the IPO
• Look at the subscription levels before you decide to invest in an IPO
• Set stop loss levels and exit stocks before you lose out most of your capital
• Don’t be in love with your investments in IPOs
o Don’t be too greedy for more profits
o Don’t wait for a share to come back to its cost price to exit; cut your losses
• Hindsight is always 20 / 20
o Murphy’s Law works; shares will always move up after you sell and always fall after you buy
• It’s better to pay 15% as tax on ‘short term capital gains’ than 20% (or 30%) as tax on interest from FDs. Hence, a 10% absolute return in an IPO is better than a 10% pa return on a FD.

Disclaimer: The views given above are my own and care has been taken to be as accurate as possible in representation of facts, figures and interpretations.

Stock Price Sources: BSE, NSE

Gold - Is it Worth to Buy Now?

Over the last few weeks gold has been creating new highs because everyone seems to think that gold is a safe investment class.

Dollar / Euro / Pound, etc are unsafe as their respective countries have economic problems.

But will there be a situation when you and I will buy petrol / vegetables in exchange for gold. Will we move back to a barter system? When countries have stopped using gold as standard for printing currency, how will investment in gold (by us or countries) help? When people and countries realize that, everyone will sell.

In India, people buy gold in jewellery form as it can be passed on to the next generation and hence not an investment class.

Surprisingly, (as per reports from the World Gold Council), in Q 2 of 2011, the demand in Gold ETFs (pure investment category) fell as compared to Q 2 of 2010. The increased demand for gold was by virtue of the increase in demand in gold jewellery. India and China accounted for 52% of global bar and coin investment and 55% of global jewellery demand.

So, if there’s a second recession, consumption for gold jewellery will fall and so will the prices. All it needs is India and China to grow slower than last year (these countries need not be in recession but slower growth will have its own impact).

Another fact, gold as an asset class gave positive returns in the decade 2001 – 2011; prior to which it was more or less stagnant. Prior to 2001, we have had economic crisis in other parts of the World and in India but gold never gave returns the way they have done in the last decade.

Buy stocks of strong companies. Keep investment in gold (as ETFs, jewellery, coins, bars, etc) to less than 5% of your portfolio.