The January report of the Intelligence Bureau, available with Moneylife, attributes rising prices of gold and silver to higher demand, oblivious of the raging global speculation
If the Intelligence Bureau (IB) has to be really useful in the quality of information it sends to various top officials it will have to drastically improve its knowledge of financial markets. In the January report sent to the offices of the prime minister, the home minister, finance ministry, etc, the IB writes that "Gold as well as silver prices are likely to further appreciate this year on the account of an increase in demand, especially from India and China."
The fact is that gold has been more of a global speculative asset for the last several years. As ace speculator George Soros has said: "Gold is the ultimate asset bubble." According to the IB, however, "Gold prices have increased as a result of sustained global demand for gold investment, together with growth in jewellery and industrial demand. Increasing demand by the world's two largest markets, India and China, on account of rising income levels and strong economic growth continue to push up consumption. Other factors that are expected to keep gold prices bullish are concerns over fiscal imbalances; currency tensions; a weakening US dollar; associated fears of global inflation; and increasing availability and accessibility of gold investment products to retail investors." These are tired and catch-all explanations. Gold has been around for 4,000 years. There has never been a shortage of gold. Higher demand is a remote factor in the rise in gold prices. This is because gold is in continuous supply from hundreds of different sources. Being chemically inert, gold suffers no decomposition and so can be used and reused.
The IB's report on the reasons for the rise in silver prices is even more hackneyed. "Apart from its ornamental value, silver is also used for several industrial and commercial purposes such as batteries, mirrors, catalysts, solar energy, photography, x-rays and in many modern electronic items such as coating of DVDs, CDs, circuit boards and television. On account of these varied uses and the rising growth momentum, the demand for silver is rising." It's laughable if one focused on the demand side as the reason for the prices of this age-old metal having jumped by nearly 60% from August last year. Anybody with some idea of global markets knows why silver prices are shooting up. It's not demand from "industrial and commercial" uses. The reason is speculative and technical. The IB officials should start with some Google search.
As we had pointed out yesterday, the silver market is agog with rumours about the possibility that two large banks, JP Morgan and HSBC, are short in the silver market and they would need to cover up their short sales as the price rises. Comex, where silver futures are traded, increased the margin for long positions on Friday. Normally a rise in the margin leads to a decline in speculation and a fall in prices. However, silver actually shot up past its all-time high on Monday and Tuesday, despite the higher margin, leaving observers wondering whether the rising prices were caused by desperate short-sellers covering up and what is the reality of silver positions. The IB, of course is completely oblivious to all this and sending important-sounding analysis to the highest levels in the government.
SBI chairman OP Bhatt said both the mergers which have been done till now-State Bank of Indore and State Bank of Saurashtra-have been done with prior permission on a case-to-case basis from all concerned bodies
Mumbai: State Bank of India, the country's largest lender, today said it has not sought a blanket approval from the government for merging the remaining five subsidiaries with itself, reports PTI.
Bank chairman OP Bhatt said both the mergers which have been done till now-State Bank of Indore and State Bank of Saurashtra-have been done with prior permission on a case-to-case basis from all the concerned bodies like the respective boards, the government and the Reserve Bank of India (RBI).
"We have not sought any blanket permission for the mergers," Mr Bhatt told reporters here when asked about a media report today which said SBI is mulling to merge all the remaining subsidiaries in the next 12-18-months.
He further said that SBI did not meet the Parliamentary Standing Committee on Finance yesterday.
State Bank of Hyderabad, State Bank of Patiala, State Bank of Bikaner and Jaipur, State Bank of Travancore and State Bank of Mysore are the subsidiaries which are yet to be merged with the bank and it is argued that merging them will usher economies of scale and reduce administrative costs.
On SBI's bond issue, he said that the bank has received subscriptions of around Rs6,000-crore for its Rs2,000-crore retail tax saving bond issue (with the green-shoe option) and expects total subscriptions to touch Rs10,000-crore by 28th February when the issue closes.
Mr Bhatt added he 'regrets' the fact that a majority of investors are unable to access the issue as the branches selling the issue need to have demat facility.
"We have decided to come out with one such issue every quarter. We will increase the branches from next quarter onwards," he said.
Meanwhile, Mr Bhatt, who also heads the industry body Indian Banks' Association, came out in strong support for liberalising the entry of foreign banks into the country, saying this will make the market more competitive which in turn strengthens Indian banks and the processes they follow.
The RBI had invited suggestions on the issue recently and is expected to come out with some possible guidelines soon based on the representations it had received.
While most brokerages say that the deal will shift focus away from RIL’s hitherto underperforming E&P segment to refining and petrochem, questions remain over the company’s hurry to monetise these assets
On Tuesday, newspapers front-paged the $7.2 billion deal between BP and Reliance Industries (RIL) for a stake in 23 oil and gas blocks owned by Reliance, one of the biggest foreign direct investments in India so far.
BP agreed to buy a 30% stake in the oil and gas blocks that analysts believe would help RIL expand its deepsea exploration and development off the east coast and give it financial muscle to buy shale gas assets in the US.
BP could pay up to $1.8 billion more by way of performance payments for successful exploration that ends up in commercial discoveries. The two companies will also set up a 50:50 joint venture for sourcing and marketing gas. According to RIL, the payments and combined investment could amount to $20 billion.
List of RIL's 23 blocks
RIL chairman Mukesh Ambani said the talks between the two companies were going on for a couple of years now. RIL expects money from the deal to come into its books from FY12. BP is funding the deal from cash reserves and expects cash flows from sale of some non-strategic assets.
Oil secretary S Sundareshan has labeled the stake sale as a "farm out" arrangement and not a transfer of control, implying that approval for the deal should not be a problem, unlike in the case of the Cairn-Vedanta deal. BP is buying directly into the blocks instead of investing in RIL.
The best proof of what the market thinks about the deal is in the price. After making an initial 5% spurt, the stock price has steadied at Rs1,000. It was at around Rs950 just five sessions ago.
Most market watchers believe that the deal will secure for RIL the valuations of its exploration and production business (E&P) and that focus will shift from this venture, which has had less than expected production so far. Investors will now tend to focus on refining and petrochem, where margins are looking up.
Of course, not everyone is gung ho on the deal. Kotak says that it is "perplexed by the early monetization of the E&P assets by RIL at a modest premium" and that "BP's technical expertise seems to be the only plausible reason."
Today, RIL conducted an investor conference call on the BP deal, but not all doubts would have got clarified. A lot will get clearer over the next few days. Reliance did not comment about when it will get the $7.2 billion payment beyond reiterating that it will receive the funds in FY12.
It also clarified that the $1.8 billion contingent payment is linked to the filing of field development plans (FDPs)-this includes field development plans from discoveries already made. Therefore, the payment will be triggered even from a finalisation of NEC-25 and the KG-D6 satellite FDPs and is not limited to the success of future exploration work.
Since the nature of the deal is reasonably upfront and the clarification about the contingent payment indicates that the deal value is closer to the $9 billion, CLSA has upped its estimate of the risked net present value of assets attributed to the transaction by Rs40/share to closer to Rs400/share. This is generally where most brokers value the assets.
Very importantly, RIL has clarified that there would be no tax incidence since it is disposing a block of assets where the book value is lower than the proceeds from sales. The company also confirmed it will offset proceeds from the transaction from its capitalised E&P asset base leading to a fall in E&P DD&A (depletion, depreciation and amortization).
CLSA estimates a drop from around $12.5/boe currently to about $9.5/boe. "The one-third fall in Ebitda (Rs17bn-Rs18bn for FY12-13) will be partly compensated by a proportionately higher fall in depreciation allowing E&P Ebit to fall by just Rs6 bn-Rs8 bn. Higher other income on the cash inflow would result in a Rs0.5-Rs3.5/sh upgrade to FY12-13 EPS."
Niko has announced that it has the right to increase its stake in KG-D6 (10%), NEC-25 (10%) and MN-D4 (15%) by 30%. Reliance has clarified that this is off Niko's existing base.
RIL will turn a near-zero debt company by the end of FY12. Its existing cash levels of around $7 billion would have risen to around $14 billion once the deal is complete. It declined to comment on the question of use of cash. There have been worries in the market that RIL will end up wasting its cash on unrelated and unsuccessful diversifications such as telecoms, sports, hotels. In the past its retail diversification has not been successful.
Incidentally, Kotak pointed out in a research report yesterday that assets transferred under the proposed transaction are governed by the terms of the production-sharing contracts (PSC) signed under NELP (New Exploration Licensing Policy). Article 28.1 of the model PSC states, "Subject to the terms of this Article and other terms of this Contract, any Party comprising the Contractor may assign, or transfer, a part or all of its Participating Interest, with the prior written consent of the Government, which consent shall not be unreasonably withheld." Article 28.6 of the model PSC also states, "In the event that the Government does not give its consent or does not respond to a request for assignment or transfer by a Party comprising the Contractor within one hundred and twenty (120) days of such request and receipt of all information referred to in Article 28.3, consent shall be deemed to have been given by the Government."