Bonds, Currencies & Commodities
As the greenback loses its sheen, gold’s gleam is shining bright

Countries look to park their funds in the yellow metal due to a falling US dollar and diminishing yields from government securities

The month of December 2009 is expected to be very exciting for gold lovers, bullion dealers, speculators and central banks as the International Monetary Fund (IMF) is set to sell an additional 190 tonnes of gold. India is seen as the leading suitor while smaller countries are expected to jump into the gold-buying fray.

Early last month, the RBI bought 200 tonnes of gold from the IMF for over $6.70 billion.

After India’s big purchase, Sri Lanka announced that the country had bought 10 tonnes of IMF gold for about $375 million while Mauritius purchased 2 tonnes for $71.70 million. This created speculation that almost every country is keen to increase reserves by buying the yellow metal on the back of a declining US dollar.

Speaking on the RBI’s purchase of gold, J Moses Harding, head of global markets group, IndusInd Bank, said that the purpose of the central bank’s investment in gold may have been to re-balance its investment portfolio for better returns.

Mr Harding also said that it does not make sense to hold most investments in low-yielding bonds (issued by the US or other developed countries) and as a strategy, RBI should look at spreading its investment portfolio across different asset classes and across currencies.

Since gold prices are already up by 15%-20% since the RBI’s purchase of gold, it is not sure whether the rally in gold would sustain over the longer term—beyond three-five years—and investments at the current level should be
short term in nature, he added.

The global markets expect gold prices to cross $1,200 per ounce since prices began rising from the September 2009 low of $992 per ounce. Speculations that central banks would purchase more gold to hedge against the falling US currency and fears about inflation in the year 2010 have driven prices upwards.

According to Mr Harding, the weak dollar and low interest rate regimes in developed economies will keep the bull phase of gold intact for an extended period of time. But it is very difficult to set a target as gold is trading at levels not seen before (after a sharp fall from $1,030 to $680 per ounce since March-October 2008), registering a 75% rally since October 2008, he said.

Mr Harding also feels that the yellow metal is now in safe haven due to weak (and uncertain) equity markets across the globe and low yields on bonds. Also, the performance of the real-estate market is under a cloud as a quick global economic turnaround is not expected, he added.

History indicates that gold prices have always been riding on the movement of the US dollar. Hence, investors need to be very cautious when it comes to investment in gold from here on, as gold prices are being clearly driven by the depreciating US dollar. If the greenback shows strong signs of appreciation in the future, a correction in gold prices is probably likely.

Despite the fact that gold prices have made new highs globally, the demand in India still remains suppressed.

According to provisional data released by the Bombay Bullion Association (BBA), India’s gold imports have declined to around 18 tonnes for November 2009, compared to the 34 tonnes the country had imported the same month last year. In October 2009, the country had imported 48 tonnes of gold, a rise of 45% compared to 33 tonnes in the corresponding period last year due to sharp rise in jewellery demand and a pick-up in investment.

In November 2009, Minerals & Metals Trading Corporation (MMTC) had picked up 15.13 tonnes from the global market as against 10.42 tonnes in the same period in 2008-2009. In the first ten months of 2009, gold imports were 156.9 tonnes, down 59% from 383 tonnes in the same period in 2008, as per BBA data. Again, gold imports till November this fiscal remained low at around 400 tonnes, compared with 635 tonnes in the same period last year.
-Swapnil Suvarna [email protected]


Exchanges are planning MF trading platforms

With distributors still trying to come to terms with the new regulations banning entry load in mutual fund schemes, fund houses are feeling the heat, as distributors have lost incentive to push their products. This has meant a 60% drop in mobilisation by mutual funds.

Amidst all this, one of the options being considered to sell mutual funds is to have independent trading platforms for mutual funds, led by the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). This follows the permission given by the regulator Securities and Exchange Board of India to sell funds via the stockbroker-demat route as in stocks. According to sources within the industry, the first one would be set up by NSE and National Securities Depository Ltd (NSDL) while the second one may be set up by BSE, and two registrar and transfer agents (R&TAs), CAMS and Karvy.

Interestingly, the Association of Mutual Funds in India (AMFI), which represents the interests of the Indian mutual fund industry, is considering having a 30% stake in both the trading platforms. However, some members of AMFI have raised a valid concern on this proposed move, pointing to a potential conflict of interest in taking large stakes in two rival platforms. Especially so since some of the leading fund houses like Templeton and Fidelity are planning to introduce their own platforms, which would rival those of BSE and NSE. Again, these are prominent members of AMFI and a stake in BSE, NSE platforms would lead to another round of conflict of interest. “Also, if there are investor grievances with regard to a particular fund, what would be the spill-over effect on the whole platform and wouldn’t other members get dragged into the issue as members of the AMFI-promoted platform?,” asked the CEO of a large asset management company (AMC), requesting anonymity.

When some members raised all these issues in a meeting last week, it was apparent from AMFI’s half-hearted answers that the proposed move hadn’t been thought through in great detail. Also, AMFI had apparently assumed that it would have access to the entire database of R&TAs as a promoter of this platform. But this assumption seems too naïve. “While the AMFI office bearers are now rethinking the entire issue, the whole idea looks like a non-starter,” according to the CEO of another top AMC. 
— Debashis Basu & Sanket Dhanorkar


Dollar will continue to fall: Bloomberg survey

According to Bloomberg’s survey of 46 firms, the dollar will continue to fall next year as the slow economic recovery coupled with ballooning government debt burden is likely to take a toll on the dollar. The dollar has hit a 14 month low this year.

“History tells us the dollar shouldn’t start rising on a sustained basis until 12 months after the Fed starts to lift rates,” Callum Henderson, the bank’s head of foreign exchange strategy told Bloomberg.

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