The Hindu Business Line : India’s Marshal Mackennas

Story so far: Returning from a six-month sabbatical for a diploma in developmental economics, I find things look totally different. Society seems to be in the grip of impatience, with almost everyone watching the charts. Are we becoming greedy as a nation, I wonder? Haven’t larger issues being sidelined to the brink of oblivion, when the Sensex swerves? Isn’t six months too little a time for thirty companies to change their fundamental, leave alon e the economy? Is greed the issue, or the associated consumerism, which feeds on resources?

Episode 167

The biggest strength of gold throughout history has not been that you make money by holding it, but rather you do not lose. But it looks like gold expert Timothy Green’s words need some update with gold prices surging to $823.40 an ounce, for the first time since 1980. In rupee terms, it translates to Rs 11,415 per 10 grams!

If you thought that rupee is not the only thing that has appreciated in value, think again. I was shocked to find out that on November 7, the yellow metal that has been the bane of many civilisations reached a 27-year high. I asked my aunt and she shot back with the most typical answer: “It’s festival season”. I personally don’t think that this explains the steep rise of the precious metal. As recently as 2002, when I was doing my last year of graduation, 10 grams of gold cost Rs 5,030.

Golden opportunity

Our company secretary said something that struck a chord with me. Ramesh, who is the same guy who set me up for my six-month-long sabbatical, reasoned: “Record oil prices deepened concern that inflation will accelerate and a slumping US dollar has in turn boosted the appeal of precious metals as an alternative investment.”

Yes, more and more Indians are actually looking at gold as the golden opportunity. Aren’t stocks and real estate not doing the trick enough?

Swati had to investigate. As always I like to talk with specialists and so called up my uncle Shekar Srinivasan who lives in Ohio, US. He worked with the World Gold Council.

“In my opinion, gold is seen by some investors as a hedge against inflation, and as far as the US in concerned a weaker US currency makes the dollar-priced metal cheaper for holders of other currencies.”

What about India? Some foraging helped. I found some startling facts. Gold prices have appreciated over 30 per cent in a year. Is this why people are buying more of it so that they can land up some gain? Atul Vaid, who is the cashier at a renowned jewellery showroom, felt people are buying gold for investments. “But the flipside is the high prices will deter many buyers from not purchasing it anymore, so demand is not expected to be greater than last year.”

Demand is always going to exceed supply for gold as only three parts out of every billion in the Earth’s crust is gold. Last year, Indians bought 186 tonnes of gold coins and bars, a rise of 34 per cent over the previous year, World Gold Council data showed. Coins in particular are being minted at a furious pace. Everyday you can see some private or public sector bank retailing gold coins to cash in on the opportunity. What started as a trend has turned into a full-blown rush for the metal as the demand has shifted more towards gold coins and bars this season.

Bullishness to continue?

Could people with short-term interests be hoping that the bullish price trend will last for three to four months? What separates the coins from the age-old bars?

“Investors prefer coins over jewellery which involves making charges and hence is a more expensive form of gold,” Shanthi Chandru, a housewife who is equally good at commodity trading, said. All this must be requiring more gold and, hence, the price is just being pushed up.

Deepavali, Dhanteras and Lakshmi Puja are the days when gold prices shoot up; I am not comfortable with the tag of safe investments attached to gold. Gold can’t be kept at home. “I do not think it serves any purpose to have a small bar of gold lying in your house, unless you have dogs and security guards protecting you round the clock,” Jitesh Shah, my Gujarati friend opined.

Apart from having lockers that you seldom seem to remember exist when people change jobs or simply get transferred, bullion and jewellery are subject to capital gains tax and wealth tax, without any exemptions whatsoever.

Aslam Khan, a professional tax return preparer (TRP), points out: “While determining the value of gold ornaments for the purpose of wealth tax, making charges should be ignored, unless the ornaments are studded with precious stones. The value of gold contained in the ornaments can be reduced by up to 20 per cent because the shop-keeper invariably deducts a significant portion of the ruling rate of standard gold when ornaments are sold in the open market.”

Gold, oil prices

Some analysts, statisticians and economists have found a relationship between gold and oil prices. Historically it always had a 15:1 relationship. May be, it is worth finding out. “As I see Mr Murli Deora appearing on TV nowadays, I tell my wife that gold might just provide a temporary shelter for me from being squeezed at the petrol pump in the future. But for that to happen I have to sell my gold, which I don’t think will appreciate more,” quips retired IAS officer Shankar Rao.

Is gold still a safe investment? Is the steep surge in prices temporary or seasonal? Finally, what would you buy your granddaughter if you were to save something today: gold or shares in a blue-chip company?

Send in your thoughts by Friday.

To those who are puzzled by the episode’s title, the reference is to the hero of Mackenna’s Gold, a 1969 film directed by J. Lee Thompson, starring Gregory Peck, Omar Sharif and Camilla Sparv, as Wikipedia informs. “It tells the story of how the lure of gold corrupts a diverse group of people.”

The plot is an old legend about ‘gold’ hidden in the ‘Canyon del Oro’, guarded by the Apache gods. “A man named Adams found it, only to have the Indians capture and blind him and kill all his companions. Years later, Marshal Mackenna (Gregory Peck) kills an Indian chief who tried to bushwhack him and comes into possession of a map that supposedly shows the way to the treasure. Though sceptical, he memorises the directions before burning the map…” On YouTube, you can listen to the golden oldie, ‘Old Turkey Buzzard’, the theme song, sung by José Feliciano and composed by Quincy Jones with lyric by Freddie Douglas.

*****

Letters received in response to Episode-166, ‘Is greed the issue, or the associated consumerism?’ (Business Line, November 5.)

Your article was quite amazing. Though the issues were of interest, I disagree with you on some areas, especially on the Sensex. You had said that it’s greed that is fuelling the stock market and questioned the change in fundamentals in the last six months.

I am presenting a few facts before you to substantiate my argument:

It is the growth story that is fuelling the Sensex and not greed (the Q2 earnings prove it);

The P/E ratio of the Sensex stocks is just 23 compared with China’s 40. So stocks are not expensive and one need not expect a downturn until the onset of global recession.

Due to globalisation, all the countries are interdependent and a recession in one affects the other. But the recent sub-prime crisis has proved that India can sustain its growth despite major global setbacks.

Till October, India has been able to attract more FII investments than China.

From all these statements, it can be easily concluded that despite a worldwide slowdown, India is least affected and it is well on its course to attaining 9 per cent GDP growth this year. Until now, other markets were more attractive than India for various reasons. But this is bound to change soon.

Rahul Dev Jain

I was really surprised to see your column again. Our people have turned greedy due to the money being dumped by the FIIs. In spite of the SEBI ruling on participatory notes and the Finance Minister’s caution, the bull-run continues, defying logic.

The windfall gains made in the last six months have made the investors greedy. The Indian economy is definitely growing and the stock market also tends to reflect this trend.

Now it is up to the market regulator and the Government to take corrective measures in order to protect the small investors from future market crash.

R. Thesinghrajan, Ooty

I have been investing in the stock market for the last 10 years. I have observed that in the last 7-8 years, the upper- and middle-income classes have discovered new ways of creating wealth by investing in stock markets and real estate. These two avenues are definitely riskier than fixed deposits and post-office saving schemes.
The upper-middle-class segment has been experiencing rising income levels that, in turn, finds its way into real estate and the stock market. The returns from both these asset classes have been phenomenal in the past. It is not only because of fundamentals and liquidity but also because of increasing faith of the new breed of investors. As the Prime Minister said recently, the investment as an act of faith is shaped by perceptions, expectations and past performance indicators if any.
Greed, according to me, is relative, varying from person to person, and contextual. However, what is unfortunate is that the underprivileged and the downtrodden segment of the population are reaping the benefits of a growing economy. How long should they wait to experience the benefits?
Lastly, the stock market is doing well not only because of key fundamentals but also because of a strong belief that the new India will shine brightly in the next two decades shared by Indians as well as by overseas investors.
Subramanya Chandrashekar
The Indian economy has not changed much in the last six months and the Sensex is not a barometer of the economy any more. Though the experts bring about changes to the Index in line with the market trend, still it does not reflect the full picture.
Today a number of retail investors are at the mercy of FIIs and their decision to buy or sell influences the market trend. During the dotcom era, investors lost heavily and the stock prices of some of the IT companies are still quoting far below their all-time highs. In the last 18 months, all those investors who had invested in sugar stocks would have lost at least 75 per cent on an average. Though the stock market teaches us many lessons, are we ready to learn our lessons?
Krishnamoorthy S., Mangalore

SwatiListening@gmail.com
Blog at: http://Swati-CA.blogspot.com

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