Wednesday, April 30, 2008

Why Gold?

GOLD, I was never very much interested in parking my money in this instrument of investment. But after the current crash of stock market I was looking for some other investment instrument which can at least beat the inflation rate in India. No doubt equity is the best instrument of investment provided you are a long term investor but nowadays Gold is also an equally good investment option and one should definitely have this in his portfolio. Especially considering the fact that future prospect of Gold seems to be very bright. Let’s first see the past two year’s performance of Gold and Sensex:


Date

Sensex

Gold ($/Ounce)

As on 31/03/2006

11279

581.50

As on 30/03/2007

13072.10

663.30

% gain in FY 2006-2007

15.89%

14.06%

As on 30/03/2007

13072.10

663.30

As on 31/03/2008

15644.40

918.00

% gain in FY 2007-2008

19.70%

38.39%



Table above clearly is in the favor of Gold. Apart from this Equity vs. Gold statistics why Gold finds a place in the portfolios are:

1. Statistics shows that Gold is a good hedge against inflation

2. Can be easily converted into hard currency

3. Has ornamental value (more so for Indians)


The price set for the international Gold market is currently dominated by the US Gold Market and the London Gold Market. Domestic Gold is priced according to the international price, so there are significant ties between the international Gold price and domestic Gold price. Statistics show that spot price differences between the international Gold market and the domestic one are usually within one percent of the other.


Factors that influence Gold price in international market:

International Gold price is heavily influenced by global affairs concerning on geopolitical issue, US dollars and oil prices etc.


International political issue:

When the political situation is unstable in key countries, will often affect the Gold price. After 9/11 international Gold price surged by 6%. Recently, the increase in the international Gold price has been attributed to the assassination of Pakistan's former Prime Minister, Benazir Bhutto.


Trend of US dollar:

The trend of US dollar has a very strong impact on the Gold price. When the dollar is weak, people will sell dollars and buy Gold to avoid taking a hit with the dollar's decline, causing a rise in the price of Gold. Conversely, if the dollar is strong, the Gold price will go down.


Trend of Crude oil:

Crude oil is economic resource, so a rise of oil price often causes inflation, when investors subsequently buy Gold to maintain wealth, causing a rise in Gold prices. Gold is seen as a good hedge against inflation.


Limited supply:

In most industries, rising demand kicks off an increase in supply that brings prices down. But Gold is often less than responsive as new supply is limited. There have been no new large discoveries of Gold. Even if a new mine is discovered, it will be about 10 years before the first ounce of Gold sees light of day.

In addition to these factors, performance of major stock markets in the world, the price levels of major commodities and global finance distress also causes Gold prices to fluctuate.


Why Gold????????????????

If we consider these influencing factors one by one………

US dollar is touching its low everyday…… causing Gold price to go up.

Crude prices are touching new high everyday…… again causing Gold prices to go up.

Current subprime crisis also appears to have sent investors into Gold.

Till recently, the dollar was used as a store of money globally due to the currency's stability and the low downside risk of a decrease in its value as it was the currency of the economic superpower of the world. But current downside in the dollar has moved people towards Gold.

The total value of all the paper money and bonds in the world is about $100 trillion, and all the Gold ever mined is just under about 5 billion ounces. So, world money, divided by world Gold, gives a figure of $20,000 per ounce. At $1000 per ounce, there is about $5 trillion dollars (5 billion ounces * $1000/ounce) worth of Gold in the world, but there is $500 trillion in derivatives, $100 trillion in bonds and paper money. Therefore, bonds and paper money must go down, and Gold must go up.

Thursday, April 24, 2008

Crude Realities

Crude oil is the basic need for each country irrespective of whether it is developed economy or under developed economy.

But in developing economies like India and China crude oil demand is expected to grow around 5% in the year 2008. Currently crude oil is trading around at 118$ per barrel in international market and expected to reach at 130$ per barrel very soon, which will push inflation to record high everywhere. Globally, it could be a factor pushing the world economy into a recession. Even though some argue that oil will not swallow a big share of the GDP unless the price reaches $150 a barrel, high prices are here to stay for a fairly long time.

Instead of arguing like this, should not OPEC nation start finding new sources of crude oil. This will be in the interest of everybody. Otherwise developing economy like India and China do not have any other option but to look for the alternatives of crude oil. The government should plan to move towards better energy conservation and develop alternative sources of energy. The main industry that should come forward is the automotive industry. They should start their research and development for the hybrid vehicles.

The other thing that I can think of is that Indian government should start passing the burden of rising crude oil directly to the consumer. Instead of giving the subsidy in petrol, diesel, kerosene & LPG if government decides to pass the burden directly to consumer then only consumers will use these things effectively. When consumers start paying directly, there is every chance that demand will become more realistic. By this demand for crude oil will definitely come down, which can further put a break on the rising prices of crude oil.

Global recession will be in no one’s interest. OPEC should act in its own interest by adding capacities, because if the world turns rapidly to other energy sources, the party may well be over for the oil producers.

Wednesday, April 23, 2008

Reservation, Education and Economy of India

A part of India is in constant agitation because recently our HRD ministry and honorable SC judges have given their decision in favor of implementing 27% quota for other backward classes in higher educational institutes.

I believe it is the education system in any country which the foundation of its economy. Developed economy and underdeveloped economy can be distinguished based upon its education system. Every developed economy in the world is having very robust, efficient and effective educational system.

The Indian education system is at near death. It is not, and in fact has never been, very good. It is one of the most flawed and corrupted system in this county.

Why does India have shortage of qualified college graduates?

  • · Getting admission into a good school or college has become an extremely difficult task. The IITs, IIMs and AIIMs can only admit fewer than 2 percent of applicants. (In IITs annually around 300,000 compete to get a shot at 5,000 seats.)
  • · By the 12th standard, the school dropout rate reaches an astounding 94 percent. Of those who finally graduate out of college, only around 15 percent (less than one percent of those who enter grade one) are employable, leading to a serious shortage of qualified college graduates.
  • · Tens of millions of students do not get a proper education for a variety of reasons. Who knows how many Ramanujans, Venkata Ramans and Vikram Sarabhais have lived and died because they never had the opportunity of getting an education?

Over above what disturbs me most is the negative trend in our system. The above mentioned problems can be solved by creating good quality educational institutes in every part of the country. Instead of creating good quality educational institutes our corrupt politicians are emphasizing for the reservation in the institutes like IITs and IIMs just for pleasing their vote bank.

Education system in India is in the dire need of reform.

One of the reforms that I think can be in this system is to get the government out of this. Lets declare all the educational institutes (specially institutes like IITs, IIMs, AIIMs) autonomous. Let’s appoint Indian entrepreneurs and businessmen in the board of directors of these institutes and let them take the decision about the number of seats and fee of these institutes.

The recent move by the government to further increase quotas in these elite institutions with a view to social justice is ridiculous.

Education is the basic right of every citizen of any country. Everybody needs to be provided equal access and equal opportunity to quality education, irrespective of caste, creed, and economic status, right from the primary to the higher secondary school level.

But…………

What about the underprivileged sections of society (So called OBS, SC, ST) of this county?

  • · Provide scholarships and easy bank loan.
  • · Provide free books.
  • · Provide free lodging and boarding in school hostels.

The education system in India is poor by design and inadequate enough to meet the needs of its poor economy. It must be changed if the country has to develop.

But…………

Will those corrupt politicians who control the present system for their own personal gains are willing to let go for the greater good? I hope for the sake of the beloved country that it comes to pass. Else we are all having a miserable future.