Bonds, Currencies & Commodities
Diamonds Are Forever Because They’re Hard to Sell!

A diamond is the most precious gem, a girl’s best friend, and whatever else the advertisements say. But have you tried to sell one, asks K Saldanha

The Forbes survey of 13,000 women and 1,000 men from five countries in February 2013 on the reasons for their diamond craze found that Indian respondents professed more love for diamond jewellery than any other luxury gift, including...

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Gold & silver are in a crash mode. Will gold ETFs, sold aggressively, face redemptions now?

Gold and silver prices have crashed all over the world. This has confounded those who believed the endless allure of these metals, because pop-economists told them that global monetary easing is good for gold and silver. Indian savers will also be traumatised by the impact on gold loan companies and gold ETFs

On Friday it was a sharp drop. By Monday afternoon it has turned into an avalanche. Gold price crashed by as much by as 11.69% and silver prices by as much 6% on a single day on Monday, stunning those who have been led by pop-economists to believe that gold and silver prices are headed higher because of the endless injection of cash by the central banks. Gold collapsed to Rs26,250 per 10 grams on the MCX at its low today, to touch its lowest level in 15 months. The fall was 6% over Saturday’s close. Silver crashed by over 11% to Rs43,525 per kilogram on MCX. From a high of Rs27,925 on 13th April, gold has crashed by 11.7% and silver has slumped by as much as 17% from its high of Rs52,447 on 13th April. The daily charts of gold and silver show the extent of the rout. The intraday charts of the two metals show utter panic selling today.
 


What is going on? Gold has been always sought as an alternate investment option. And over the past few years the metal had touched new highs and stayed elevated. It is the only asset class in living memory that has gone up every year in the last decade. This was unsustainable.

 

The crash in the bullion market has come as a shock to investors who thought the metal as a hedge against inflation or even had the impression that gold prices would never fall, going by the rally the metal has witnessed in the last 12 years. The price of gold was substantially driven by speculation and now the sentiment for the metal has gone down, added with further rumours and speculation which has led to panic selling of the yellow metal.
 

Specifically about today’s panic selling, there were rumours that some central banks (Cyprus) were selling gold. The other explanation is that since the economic catastrophe that gold bugs have been expecting have not happened, there is no need to hold gold as a hedge.

 

What fuelled the decline in gold prices further was the Shanghai Gold Exchange announcing that following the tumbling precious metal prices and to limit down drop in early trading, it may raise trading margins for its gold and silver forward contracts. The exchange announced that should prices not recover by the end of the trading day (which they didn't), trading margins for the gold forward contract will be raised to 12%, while margins for the silver forward contract will be hiked to 15%, the exchange said in a statement on its website.

 

How will this affect Indian savers? Those who have held gold for use should not be perturbed. Those who have bought gold as an investment or speculation would now ask around about the ‘fundamentals’ of gold. Meanwhile, it is bad news for the two new products/businesses that came up in the up in the past few years riding on the enormous gold rally: gold loan companies sprouting and mutual funds selling gold exchange-traded funds (ETFs). Moneylife in the past has argued that the business model of gold loan companies is flawed. Not surprisingly, the shares prices of these companies have crashed even further. Mutual funds have pushed gold ETFs hard, exploiting the Indian belief that gold always goes up. They would be hard put to justify the severe underperformance of ETFs over the past two years.

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COMMENTS

Steve

4 years ago

@Hemant

I only hope you are right about the deflation..especially in the real estate sector. Hope there will be a liquidity-crunch in Indian banks where banks won't trust each other, causing the credit markets to freeze....leveraged as much as they are at the moment.

Watch the below link to draw an anology as to what will happen when the markets freeze.

http://www.youtube.com/watch?v=quwebVjAE...

Builders will be desperate for cash at the time... so he who has cash will be the king. Stay liquid. Credit will be hard to come by.

A big portion of younger generations in bigger cities have been priced out of the market through this rampant manipulation of house prices by the real estate mafia in collusion with the banks and builders in the last 15 years. High time they should get a bit of "kashaya". It helps with digestion.

It is not out of the equation for cities like Bangalore to have massive deflation in house prices as IT is on the brink of collapse (read Infosys earnings). Most of the West went through the house price crisis. Dubai also did back in 2009 so why not Bombay, Delhi and Bangalore now?

Fingers crossed.

Empathize with the clueless sheep who have purchased overpriced houses so far...The proverbial albatross around the neck will only become unbearable at the time of unemployment.... Learn a bit of economics.

REPLY

Hemant

In Reply to Steve 4 years ago

see steve my worry is gold it rises to 8000 or 12000 dollors then all those hoarding cash are screwd.SO 80 20 rule works here 80 cash 20 gold.Coz the minute gold crosses 2000 dollors govts will panic .Will they allow deflation at that time.My answer is may be just to wash out these people momentum inflationists is YES.
Mkt moves in cycles and real assets are valuable.You need food and water before talking about gold silver real estate.gold has this power to Call the bluff of central bankers.will it rise orderly or will be chaotic is the question

Hemant

4 years ago

The problem here is momentum...there are 2 markets one the derivatives ...gold etfs can go to zero but gold physical can go thru the roof that is what is happening .SOvreign defualts is the real reason gold moves not inflation.India china also can defualt as modern day banking is a ponzi scheme based on fractional reserve banking.In india no one thinks DEFLATION in india is possible well see how that plays out

BHALACHANDRA SINGDE

5 years ago

Madness. Yesterday stocks of gold have exhausted in gold marts and they have started bookings now; with news that the gold price is going to dip down further!

YOGESH GAUTAM

5 years ago

Gold has move up very sharp (100%) in last 2 years. it is natural for gold to go for correction of 20 - 30 %.
gold has been down twice more than 25 % in 2008 & 2006 . see where is gold today.
gold will again come back & reach 40000 mark in next year.
gold is real money & paper money will only promised by governments. we all know how goverment keep their promises.

Digvijay

5 years ago

Its annoying that you have raise a valid question in your headline but not answered in your article.

BHALACHANDRA SINGDE

5 years ago

Late T.A.Pai, Cental Industry Minister, ex Chairman of Syndicate Bank, told me following. When he went to USA, he was taken to Fort Knox, the gold depository of that country. Gold bricks were lying everywhere glittering brightly. One officer asked him, "Have you got such Fort Knox in your country". He said, "There are millions such Forts in India since every woman and person including God in temples hold tons of gold which will be more than your Fort Knox deposits". India is called Suvarna Bhumi and even in the present crashed market you could have seen long queues in front of gold marts.

BHALACHANDRA SINGDE

5 years ago

Late T.A.Pai, Cental Industry Minister, ex Chairman of Syndicate Bank, told me following. When he went to USA, he was taken to Fort Knox, the gold depository of that country. Gold bricks were lying everywhere glittering brightly. One officer asked him, "Have you got such Fort Knox in your country". He said, "There are millions such Forts in India since every woman and person including God in temples hold tons of gold which will be more than your Fort Knox deposits". India is called Suvarna Bhumi and even in the present crashed market you could have seen long queues in front of gold marts

Dayananda Kamath k

5 years ago

it has to happen one day or the other.next in line will be education loans. the govt., rbi, banks are following a flawed policy and distroying the economy. for any financial scam and financial crisis the main reason is land prices. banks are giving loans for housing at 7% and to manufacturing @ 12% earlier.now nobody can eford moderate housing.

GOPAL

5 years ago

Buy low and sell high. But we consumers buy at high levels and keep burning our precious savings.

Nilesh Harishchandra Todarmal

5 years ago

What will be the impact on the investors who have started SIPs in Gold ETF with the long term horizon of 10-15 yrs?
Is the way of investing through SIP is right? So that gold price can be average out.

PRABHAT

5 years ago

GOLD PRICES WILL SHOOT UP . IT IS A TEMPORARY PHASE . THE BELIEF IS BECAUSE , IN 1975 , THE PRICES WERE ABOUT RS. 500/600 PER 10 GMS., WHICH HAS GONE BEYOND 30,000/-

Anshuk

5 years ago

Past 2 years? Your last statement is wrong. ETF has gone from 2100 to 2500 in the last 2 years (this is taking into account Monday's drop) that is still 9.1% CAGR..

Suiketu Shah

5 years ago

Excellent excellent article.

S BHASKARA NARAYANA

5 years ago

What is the fate of Gold loan portfolio of the public sector banks, who lent @2300 per 1 gram at its peak level?

REPLY

Dayananda Kamath k

In Reply to S BHASKARA NARAYANA 5 years ago

today all banks are copying each others business models and go down together.when the gold price are at the top they are advertising people to avail gold loan. which is a flawed decision of bankers. what was rbi doing. they even complimented gold loan companies for doing eomen service . and next day their share prices gone up. last month icici auctioned around 25 kg gold pledged for gold loan. now there may be more selling by other banks and god loan companies. then what will be the fate of these companies and banks. just like govt forcing banks to give loans and now npa s have increased they are directing them to ruthlessly recover. this is the standard of governance.

India Inc mops up $2.34 billion in February via ECBs, FCCBs

The sharp decline in fund raising activities came against the backdrop of uncertain economic conditions and slowing domestic growth

Indian companies seem to be losing their appetite for foreign funds as they mopped up just $2.34 billion from overseas markets in February, nearly one-third lower than the amount mopped up in the previous month.

 

The sharp decline in fund raising activities came against the backdrop of uncertain economic conditions and slowing domestic growth.

 

In January, India Inc raised $3.51 billion through external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs).

 

Of the total 66 companies which raised money from overseas market during February, 58 firms raised over $1 billion through the automatic route that does not require approval from the Reserve Bank of (RBI) India or the government, a RBI data showed.

 

Besides, eight companies raised around $1.26 billion through ECBs under the approval route.

 

The country’s largest private sector company Reliance Industries raised $800 million to finance its rupee expenditure, while Power Finance Corporation mopped up $250 million for on-lending or sub-lending.

 

State-owned NTPC raised $250 million for financing power projects, while IDFC garnered $100 million for sub-lending.

 

Besides, Gitanjali Gems raised $200 million by way of FCCBs for its new projects.

 

Most of the developed world, especially the 17-nation Eurozone combine, continues to grapple with debt crisis. The gloomy scenario has forced many of these developed countries to embrace easy money (low interest rate) policy, which in turn is considered to be a key factor in fuelling high inflationary trends in emerging markets, including India.

 

To tackle rising inflation, some of the central banks in emerging economies are adopting high interest rate regime that is also making funding costlier compared to the developed world.

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