Saturday, 1 August 2015

Is gold really a better asset for investment?

Gold has been a valuable and highly sought-after precious metal for coins, jewellery, and other arts since long before the beginning of recorded history. Running into 2015 for past couple of decades gold process have been showing a consistent positive trend making it a safe bet to invest. Up until the end of 2013 and early 2014 gold was looked upon as the most sought after asset class as a form of Investment. Then, gold had touched almost INR 32,000 per 10 grams, rumours were spreading that gold in near future will touch the level of INR 50,000 per 10gms of gold.  Many fund houses even started with an IPO based on this a new found class: GOLD, on the expectations that gold will rise and give steady but decent returns.

Soon after, gold prices started to fall.  To one’s dismay, gold has now touched an all-time low in past 4yrs of INR 24,000 per 10gms.  This extreme fluctuation has now raised many questions. What led to sudden fall in gold prices?  Is gold indeed an Investment to be trusted upon?  Will gold prices rises in future?  According to a school of thought which says this might be created by China to help them store huge quantity of gold, is that true?

To answer the above question we need to understand why the gold prices rose in the first place.  It is observed that gold rates are inversely proportionate to the overall financial stability of the world but majorly to American economy.  The price of the metal is also determined by its own demand and supply.  Towards the end of 2008, the American economy was hit by the sub-prime crises and the so called Housing bubble, leading to recession in American economy, thus increasing the investor’s faith in this yellow metal.  Also the economic problems in euro zones and with countries like Spain and Greece led to more panic across the countries in world for future wave of depression.  Thus, many countries including China started to buy and hoard the yellow metal, thus increasing the demand of gold vs the expected shortage of gold.
As gold being a metal that needed to be unearthed and gold extractions from the mines were getting deeper, riskier, rarer and hence more expensive.  All these factors led to sudden and steep rise in price of this precious Yellow metal called as “Gold”.

Then, what changed the fate of rising gold prices?  Exact reversal of all the above factors.  The most immediate factor for the drop in prices is strengthening of dollar. Gold is priced in dollars so if the dollar goes up investors marks down the yellow metal.  Dollar is rising because the American economy is on its revival mode and stabilizing from the recession it earlier hit.  The interest rates in America were increased.  The higher interest rates increase the opportunity cost of holding the zero yield assets, thus the money that is otherwise tied up in the bullion investments will earn more return if invested in a treasury bill or other debt. 

The good political news in euro zone also had an impact on gold rates.  The reduced chances of messy default by Greece and hence the break-up of the single currency increased the confidence in Euro leading to the fall in demand for gold.  Another expectation amongst gold fans was that the Chinese govt. who wanted to make yuan a reserve currency would stock up and hoard hefty levels of gold and make its currency creditable, but to surprise China did stock up gold but only little.

So is it all right to say that gold is not a safe asset as a form of investment?  Well that’s for you all to decide.  Investment in any asset should never be lopsided just because it’s showing great returns in a given time period.  Also, investments should be done keeping a longer time horizon in mind.  

Saturday, 18 July 2015

China Bubble Explained

World in recent times has been going through economic turmoil. Be it Eurozone or China crisis. In a connected world with ever increasing globalization, impact of any such undesired situation is far reaching. 

Since the time the Shenzen & Shanghai Stock Exchanges have crashed heavily in end of June and early July leading to many citizens of China losing huge amount of Investments close to $3 trillion worth market value. Apart from small investors, included were the housewives, students & employees who had quit their jobs with a dream to earn quick bucks in these upwardly rising stock market. The government tried to manage this situation by a rate cut but that didn’t help to correct the situation.

Now the real question is, "How did China an economy which was having a promising GDP landed in this bubble situation?" Put in simple words the asnwer is, Chinese economy was giving all the indications of a so called “the bubble situation which was ignored by industry & government, either knowingly or unknowingly.

It all started with successful capitalist reforms led by Deng Xiaoping for privatisation, opening up foreign investments, banking reforms, development of capital market etc.  With reforms urbanization started heavily with people moving to bigger cities from villages for a better lifestyle.

With nearly three decades of unprecedented GDP of 9.5% led by economic liberalization, modernisation and infrastructural development china started to show the sign of speculation and over-exuberance in the year 2008 like a brief stock bubble and housing bubble.  In the global financial crises of 2008 China suddenly changed its focus to potential domestic crises and the threat to its social stability.  With this view in mind China decided to launch a huge economic stimulus program, though it helped temporarily but this newly printed money raised concerns leading to speculative activities, inflation, devaluation of existing currency, taxes on wage earner to fund the stimulus, undertaking highly ambitious but wasteful projects which otherwise wouldn’t have been undertaken.

Further adding fuel to this bubble is the Credit bubble.  The 2008 stimulus program lead to humongous development of Infrastructure most of which is not in use even till date.  100 and more infrastructure projects are currently undertaken, road are built, dug and rebuilt, extravagant government buildings are being built in outer china, “ghost cities “ are built, the rush of completing these projects are leading to bad workmanship and hence bridges or building being closed for safety reasons.

The warning of this credit bubble was already given by Moody and Fitch showing how the local government was funding these extravagant and overly ambitious projects which will lead to bad debts, it is projected that almost $540 billion out of $1.7  trillion might turn out to be bad debt. No doubt economic bubble and reckless credit boom go hand in hand.

The credit boom and economic bubble lead to high inflation and increasing food prices, rent and wages and negative interest rates. With this fear in mind many people felt that the only way to save their money is to invest in realty.  This sudden realty demand led to rise in housing prices close 140% between the years 2007-2011.  These speculations lead the housing prices as high as 27:1 price : income ratio, very much in the line of US and Japanese housing bubble. Local government easily encouraged such speculations case they were to receive land sales taxes which will help them pay off their increasing debts.

China will have to soon take some corrective actions against this “Crises in making” as it has already lost its edge as a cheap labour market where other countries like Philippines and Indonesia are competing with china for the same.
The elite class is speculating for uprising and revolution which is making wealthiest Chinese citizen to immigrate out of china. The credit crises is leading to many loan defaulters, people closing businesses altogether and running underground.

What's in it for India to Learn?
India like China is also witnessing a slump in realty market over past one year or so. In spite of huge response to Make in India as an initiative, markets & inflation are inconsistent. Government should monitor the situation closely in order to keep any such situation at bay.

Is any particular crisis bigger than another? Is Greece crisis bigger than China crisis? In my opinion, if we are thinking on this question then we are missing on important & vital question, big or small, can the world economy afford such crisis & its lasting impact? The country directly involved is directly affected, but does this stop there? Anyone who is linked to the struggling economy, is taking the portion of this burden with themselves, be it an individual or a nation.

Friday, 10 July 2015

Jaitapur Atomic plant: Need of the hour

For India, a country which is currently aiming to be the global hub for manufacturing, competing with China, atomic power plant like the one proposed in Jaitapur is the need of the hour. However, political parties are trying to use it to gain political mileage & taking stands to oppose each other. Locals are opposing the project strongly. Most common question raised by the locals is, “Why Jaitapur? & more importantly why a nuclear power plant when there are alternate sources of energy in abundance”. No one is considering the other side of the story. In current turbulent times of world economy, there is no alternative to industrialization if we are to become a sustainable economy. Power plant would lead to the development & growth in the region & thus there is no alternative to projects like Jaitapur Power plant.
Constructing the large scale power plants & running them efficiently will require huge commitment from the government. However, we currently do not have such large funds available with us. At the same time multinationals from Russia, France, US have shown tremendous interest in building large power plants in India. If we keep these multinationals at the bay we may be missing out on 3 – 5 Lacs crore worth of investments in India, which our country currently cannot afford.
Other aspect of Atomic energy, national security is also equally important. India is surrounded by nations with atomic warheads & relationships in spite of repeated efforts haven’t really been in best of the shapes. In such a critical case, unless atomic warheads are destroyed on global scale retaining capability for national security & defense is essentially inevitable. In the absence of a strong nuclear energy program research & development for nuclear warheads is not possible.
Why is there a strong resistance to nuclear energy? Following are major perceived threats on global platform
1. Potential global destruction that atomic warheads can cause.
2. Radiations that can cause various complications & threat is possesses to living beings.
3. Environmental issues.
Advanced research has been going on for considerable amount of time for effects of Radiations & how best to keep radiation levels to acceptable levels. International Commission on Radiation Protection (ICRP) has been working on research with support from across the world.
Striking the right balance between environment & developments is extremely delicate task.
Jaitapur Challenge
Jaitapur, a small port in Ratnagiri district of Maharashtra hit the news headlines in 2010 when Nuclear Power Corporation of India (NPCIL) proposed Jaitapur Nuclear Power Project. The Nuclear Power Plant was approved during Nicolas Sarkozy's trip to India in December 2010 thus giving French multinational Areva the contract to construct 6 reactors, each of 1650 MW capacity totaling to 9,900 MW.
If the power plant goes operational to the full capacity, it will be the largest in the world, replacing 8,200 MW Kashiwazaki-Kariwa Nuclear Power Plant in Japan.
In case of Jaitapur, though the number of people standing against the project is small, it is not negligible. Everyone has been talking about the radiation & ill effects that it brings to the environment the real concern for common man is different. For politicians, it is an opportunity to take on their opponents & to showcase their might, people who are not even qualified to talk about petty issues are discussing atomic energy & trying to link its impact on livelihoods of the locals.
For locals who may have to relocate are worried about their social standing. For businessman community, the challenge is different. For them development would mean increased wages to workers. For farmers, they are worried about effect of radiation on the crops, which traditionally have been the source of earning for majority of population in the region. Fishermen are worried about the waste being disposed at the sea leading to changes/ relocation of marine species to deeper seas. While these concerns are perfectly valid for the common man, there is no basis for assuming all of this will happen with a power plant starting. Norms for erecting & commissioning of such large establishments are stringent & non-compliance has severe penalty associated with it.
Power plant would require the locals to relocate from the area, which is the biggest concern that the locals currently have. Accepting such a change is not easy. Only expectations that the locals currently have is to get the right price for the land which would be forfeited & relocation into a well-planned & developed premise. Other valid concern is relating to employment opportunities in relocated area. There is nothing wrong with this expectation & there is no reason why government cannot meet this expectation. The only challenge that remains here is, the right price for selling land is perceived value. Each individual would have different expectations on this part & arriving at a consensus could take considerable time.
If these concerns are addressed by giving a rational explanation, there is no reason why people would oppose such developmental projects. NPCIL & government very recently realized the importance of engaging with locals to make them understand the project in layman terms addressing their concerns.
DAE New Chairman- R.K. Sinha said, “NPCIL's would ensure neighborhood development program before this plants starts commercial operation and neighborhood development scheme implemented as part of the Corporate Social Responsibility, Economic Development and transformation of the quality of the life of the neighboring population.”

If government works in a true sense to understand the concerns of the locals & address them there is no reason why Jaitapur cannot be commissioned. Having said this, ability to respond quickly & efficiently in case of any emergency post the power plant is commissioned is altogether a different topic & needs to be evaluated in detail considering the challenges faced during recent times in Japan when power plant had reached a critical level & shutting down the plant was a challenge.