Gold posts biggest drop since 1980 on Fed fears

Gold futures fell more than $100 on Wednesday, one of the steepest falls ever, as strong US economic data and expectations of more Federal Reserve stimulus accelerated profit taking from the safe-haven record high of a day ago.

Selling spiraled out of control as money managers competed to liquidate positions in COMEX futures, which experienced their biggest single-day dollar loss since 1980. Volume looked like a record.

The price of gold bullion is now more than $150 below Tuesday's all time high of $1,911.46 an ounce, downed by intense speculation about whether the Fed will announce new plans to ease monetary policy at a meeting late this week.

Analysts said it was time for gold investors to take money off the table after the rally extended too far, too fast in recent weeks. Bullion rose as much as $400 since July.

"You have a commodity that retail investors, hedge funds and everybody were long, and the technical indicators showed it was overbought. It was just a matter of time before the market starts cracking," said Mihir Dange, COMEX gold options floor trader for Arbitrage LLC.

Spot gold was down 4.1 percent to $1,754.59 an ounce by 3:37 p.m. EDT (1937 GMT), off its session low of $1,749.39.
Before gold began recoiing Tuesday from above $1,900, it had risen nearly 9 percent over six sessions.

US gold futures for December delivery settled down $104 at $1,757.30 an ounce. Reuters data showed that is the biggest price drop of the continuous, front-month contract since Jan. 22, 1980, when it tumbled almost $150. On a percentage basis, it was the steepest fall since December 2008, during the financial crisis.

COMEX futures volume topped 430,000 lots, on pace to surpass a record from Aug. 9, preliminary Reuters data showed.

Silver dropped 5.9 percent to $39.34 an ounce. Gold came under pressure after steadying overnight, after a report showing new orders for U.S. durable goods orders rose 4 percent in July, more than expected and offering hope the ailing economy could dodge a second recession.

Analysts warned of a sharp correction from this month's rally was possible, especially if Friday's central bank meeting at Jackson Hole, Wyoming does not result in a Fed announcement of a third round of government bond buying, or quantitative easing, also known as QE3.

"The correction really should be taking place now, because of all the (bets) on the table," said Ashok Shah, chief investment officer at London & Capital. "But the journey is not complete until Jackson Hole is done," Shah said. The Fed conference starts on Thursday.

 

CALL-PUT SPREAD NARROWS, MARGINS EYED

On the options front, the spread between the 25-day implied volatility of COMEX gold and that of put options has narrowed since Monday, a sign that gold option investors were turning bearish.

The CME Group said late Wednesday it would raise maintenance margins for trading COMEX 100-ounce gold futures by 27 percent, after the close of business on Aug 25. The Shanghai Gold Exchange and Hong Kong Mercantile Exchange had raised margins on some of gold contracts this month.

Holdings of the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell by nearly 25 tonnes on Tuesday, their biggest one-day outflow since Jan. 25.

Spot platinum dropped 2.8 percent to $1,805.49 an ounce, and palladium was down 1.5 percent at $745.28 an ounce. 3:37

Source: ET

US & Europe crisis: The hidden dangers of investments in gold & treasurys

As Europe's debt troubles intensified earlier this month and the U.S. debt was downgraded, many people rushed into gold and Treasury securities as a safe haven. It was the latest sign that in uncertain times, investors act in ways that can hurt them in the long run.

"They fled the perceived risk of falling stock prices right into the assured risk of overvalued assets," said G. Scott Clemons, chief investment strategist for the wealth management division at Brown Brothers Harriman.

What drove those decisions was not logic but fear - fear of a repeat of September 2008. And that fear may only have intensified when markets dropped again Thursday, sending yields on 10-year Treasury notes to record lows and the price of gold above $1,800 an ounce.

Even if the fear is understandable, however, acting on it may not be the best long-term strategy.

"If you were right about the timing decision to get out, you're going to have to be right again about when to get back in," said Joseph W. Spada, managing director at Summit Financial Resources in Parsippany, N.J. "Even professionals have trouble doing it. If that's not going to be your strategy, then don't do it once."

But now that people have done it once, what are the risks of holding on to large positions in gold and Treasurys?

TREASURYS

While the economy may seem bad to many people, it would not take much improvement for investors to lose money quickly on their investment in Treasury bonds. A week and a half ago, the 10-year Treasury note was yielding only 2.10 percent, after Standard & Poor's downgraded the U.S. credit rating. Since the yield of a bond moves in the opposite direction of its price, this meant demand for 10-year Treasurys was high.

If over the next six months, the yield were to move up another half of a percentage point to 2.60 percent, however, investors owning those bonds would have a negative 6.25 percent return, said Barbara Reinhard, chief investment strategist at Credit Suisse Private Banking in New York. If the yield curve were to move up a full percentage point during that time, the loss would be 14 percent.

She said such a quick increase could easily happen, as it did from October 2010 to January 2011 when the Federal Reserve began its second round of large-scale purchases of government debt, the program known as quantitative easing.

Now, plenty of people buy bonds with the intention of holding them until maturity. In doing that, it would seem that they would earn a return of 2.10 percent. But they would actually lose 1.5 percent, when the most recent inflation rate of 3.6 percent is factored in.

"That's assuming inflation doesn't rise," Reinhard said. "Right now, you're betting inflation will fall below 2.10 percent. You're betting against history because inflation has been around 3 to 4 percent historically."

This is not the brightest picture for people who added to their allocation of Treasury bonds. But many felt it was the only safe place.

J.D. Montgomery, a managing director at Canterbury Consulting, an investment consulting firm in Newport Beach, Calif., said he had a client who wrestled with where to put $5 million that he needed to keep safe. The client chose a three-month Treasury note, even though the interest was only $1,000.

There was at least some logic behind this. Most people who bought Treasurys were abandoning their investment strategy, and wealth advisers say that is more troubling than paltry returns.

"The risk of changing your strategy when it's being tested as opposed to changing it when it's not being tested is you risk derailing your long-term investment plan," said Gregg Fisher, president and chief investment officer of Gerstein Fisher, a wealth management firm in New York.

So what should nervous investors have done? Selling Treasury bonds when everyone else was buying them would have been a start. But that might have taken too much discipline. Moving to cash was the top option because at least investors would have money ready when they felt comfortable returning to the markets.

GOLD

Investors in gold are a different breed. They often have a passion for the metal that goes beyond returns. And they are not going to be swayed by arguments that gold, hovering around $1,800 an ounce, is overvalued.

"When you buy gold, you're saying nothing is going to work, and everything is going to stay ridiculous," said Mackin Pulsifer, vice chairman and chief investment officer of Fiduciary Trust International in New York. "There is a fair cohort who believes this in a theological sense, but I believe it's unreasonable given the history of the United States."

As for the nonbelievers who piled into gold, they need to think practically now. Only about 11 percent of gold has an industrial use. While gold can get lost or buried, it does not get used up like oil or natural gas. And its actual cost is between a third and half of where it is trading. Dan Denbow, co-manager of the USAA Precious Metals and Minerals Fund in San Antonio, said it cost about $600 to produce an ounce of gold, but that rises to about $1,000 when all the costs of mining are factored in.

Yet a bigger risk may come from exchange-traded funds for gold. While they let small investors buy gold easily - the price of one share of the GLD exchange trade fund is roughly one-tenth the price of an ounce of gold - that same ease of buying means investors can just as quickly sell their shares in a panic.

No one I spoke to would venture a guess as to how high gold would rise before it hit its peak. But most stressed that people forgot that gold's value was driven by sentiment.

"Gold doesn't have any intrinsic value," said Larry M. Elkin, president of Palisades Hudson Financial Group in Scarsdale, N.Y. "It's this era's wampum. At one point you could buy Manhattan for beads."

(Elkin said what bothered him the most about investing in gold was how irrational it was, unlike buying a blue-chip stock whose value rises and falls based on what the company produces.)

That said, having gold in a portfolio is still a good buffer against swings in other markets. Fisher calculated that over 43 years ending in June 2011, the average annual increase for gold, accounting for inflation, was 3.82 percent compared with 4.92 percent for the Standard & Poor's 500-stock index. Gold, however, was 28 percent more volatile.

"The smoother the ride, the more likely the investor is going to stay in his strategy," Fisher said. "That produces a better result."

He said that from the perspectives of both return and volatility, a better strategy would have been to put 10 percent in gold and split the rest 60-40 between stocks and five-year Treasury bonds. Rebalancing the portfolio to maintain those ratios would have meant an average annual return of 4.66 percent, with more than half of the volatility of gold alone.

For those who fled to gold and Treasurys, the hardest part will be deciding when to get back into other securities. The best way in uncertain markets may be to go slowly in small chunks - a practice known as dollar-cost averaging.

"There are real and psychological benefits to it, because getting someone to take that first step is the hardest," said Christopher Wolfe, chief investment officer for the private bank and investment group at Bank of America. "With a five-year time horizon, it makes a big difference. You might get one of those wicked big down days you could benefit from. But if you have a 30-year time horizon it doesn't matter."

Of course, if people had thought on such a long time horizon they might not have rushed to buy gold and Treasurys in the first place.

Source: ET

My 150 th Post

Market Crashed...What Next?

It is always darkest before dawn

Initially, I wrote a long note on equity markets and on why it is time to press the pedal on equity investments, but then I was reminded of the saying that a picture is worth a 1000 words.

Time	Sensex Level	1 year fwd P/E	Main news	Total return after 3 years	Total return after 5 years
Sep-01	2812	11	Terrorist attack on twin towers	84%	316%
Jun-04	4795	10	General elections-Unexpected defeat of BJP	203%	212%
Jun-06	9296	13	Collapse of US Housing Market	61%	99%
Nov-08	9093	11	Sub-prime crisis-Lehman collapse	100%	--
Aug-11	16857	13	US downgrade, European Crisis	???	???

The message is so simple that one does not have to be an expert to grasp the implications. Good returns materialize over time on investments made at cheap valuations (meaning low PEs) and PEs are more likely to be low when the news flow is adverse. Simple, isn’t it! To be successful in investing, one should focus more on value and less on news flow.

Ironically, today, apart from the low PEs, even the news flow is getting better. The issue however is, with the US downgrade, with slow growth in West despite low interest rates / large stimulus, with countries on the verge of default, with rising interest rates & high and persistent inflation in India, with the coming to light of corruption scandals in India with alarming regularity, etc how can the news flow be getting better?

Sau sunar ki, ek luhar ki. This is a popular Hindi saying which means - 100 hits by the goldsmith have the same impact as 1 blow by the ironsmith.

The not so appealing news items mentioned above miss one important happening and that is falling crude prices. Falling crude prices is the blow of the ironsmith, the positive impact of which is more than the negative impact of the rest.

Why so? - The structure of the Indian economy

India is one of the few emerging economies that is a net importer of commodities, oil being the largest. Thus every $20 fall saves the country $18 billion p.a., equivalent to 1.1% of GDP. Lower oil prices mean lower fiscal deficit, lower inflation, lower interest rates etc. over time. Indian exports to US/ Europe are only 6 % of GDP. In my opinion, even these are not materially linked to how these economies perform. Consider this: Indian IT exports over last 10 years have grown at a CAGR of 25 % in USD terms compared to 6 % growth in US / European economies in USD terms. Thus, bulk of the growth (nearly 75%) has come from gains in market share, which is driven by competitiveness and nothing else.

Given the miniscule share of 1.6 % of Indian exports in total world trade and improving competitiveness of Indian exports, there should not be a material impact of slowdown in West on Indian exports and even lower on overall Indian economy, given the low dependence of Indian economy on exports. Exports were materially impacted in 2009 after the Lehman bankruptcy as the crisis was unanticipated, due to a paralysis in bank lending and a consequent sharp inventory de-stocking. This is clearly not the situation today.

Downgrade of the US and problems in Europe point to the fact that these economies have lived beyond their means for too long and it is now payback time – growth rates should continue to be low for many years. These also point to the shifting center of gravity of growth in the world economy – contrast the unsuccessful attempts to improve the growth rates in the West with the attempts to slow economic growth in the countries such as India / China.

Scandals were already there, that was the bad news. Their coming in the open is good news. In a democracy with coalition governments, change is difficult. In such an environment, change takes place mostly in a crisis.

Right from the opening up of the economy in 1992 driven by a balance of payments crisis, to improving the security set up after the terrorist attacks in Mumbai, to increasing diesel prices when the subsidy burden was unbearable, to the likely reforms in power distribution driven by mounting losses of distribution companies, all have been triggered by a crisis. India is in transition – the coming to light of these scandals is welcome – it will lead to change for the better in the way India functions. Some of the welcome changes that are already underway are improving transparency in land acquisition, in allocation of natural resources through a bidding process, better targeting of subsidies though cash transfer to the needy etc.

Growth prospects of the Indian Economy

The growth rates have been accelerating by 0.5-1% p.a. every decade. This is in spite of everything or despite so many things! It is almost as if economy is growing due to inertia. The reasons for this behaviour of the economy are so well known i.e., a young and growing population, reducing size of families, increasing incomes and affordability, rising aspirations, improving availability of credit etc, that there is no need to dwell on these in detail.

What is worth highlighting however is, why barring unforeseen developments of a large magnitude India should grow faster in the next ten than in the last ten years and could emerge as the fastest growing economy in the world.

Apart from the above mentioned factors that lead to a secular growth in consumption, capital spending should accelerate as and when interest rates come down. Lower prices of crude in particular and other commodities in general could trigger a reversal in the trend of rising interest rates. Indian exports are also gaining in competitiveness against China because of the depreciation in INR vs the Yuan and the higher wage inflation in China. These are the two key reasons that could lead to a further acceleration in growth rates in the current decade.

A point worth noting here is that despite the impediments, delays, scandals and several rounds of changes in regulation, infrastructure is improving significantly. Apart from the telecom story which is a clear success, India has a rapidly rising number of privately owned world class airports & ports, fast improving inter-city roads, sharply reducing power deficits etc. In my opinion, there are thus several reasons to be optimistic about the growth prospects and about improvement in governance and infrastructure in India. If growth persists and if PEs are low, then equity returns can’t be far, at least not too far.

And finally for the pessimist, if you don’t believe that markets will perform over a reasonable time and if indeed that turns out to be true, then, it is even better for your long-term wealth provided you are a saver. This is so because, the longer the markets stay low, the more is the money that can be invested in equities and therefore higher will be the wealth whenever the markets finally move. This is important, since nearly everyone in India is a saver!

Happy investing!!!

Article by Prashanth Jain

More than 10 Lakh insurance agents call it quits in 2011

More than 10 lakh insurance agents quit the profession in fiscal 2011 as new rules on sale of Ulips made it unviable to remain in business. Data compiled by IRDA for the first time on addition and deletion of agents in any year showed the number of agents leaving was about 35%, or 10.45 lakh of the total number of agents at the beginning of the year. Some five lakh odd agents left during the first half of year, when the regulator was preparing the set of norms for unit linked policies which were selling like hot cake at that time.

Another 5.4 lakh left the segment during the second half of the year, just after the regulator reduced commissions for agents and brought a host of stringent norms, including a cap on policy lapses. Some 100-odd policies vanished from the market since they were rendered ineligible under the new norms. Senior insurance officials feel the 10.45 lakh number is higher than any other year in the past.

"Over the past couple of years, almost all insurers have cut down on the number of their sales managers on their payrolls, the equivalent of development officers at Life Insurance Corporation. These grades of officers are responsible for recruiting agents.

Most of them recruit new agents based on personal relationships, and a large number of agents recruited are family members who are not solely dependent on the commission they earn from insurance sale. These agents lose interest once their recruiter - the sales manager or the development officer leaves the job. They are the ones of fall off," a senior life insurance official told ET.

"Insurers fix targets for agents on the basis of number of policies sold and premium earned for one year. And they wait for a year before they are asked to leave in case they are not able to achieve their targets. Insurers may have pared the number of sales manager last year or the year before, but insurers were waiting to find out the performance of the agents these managers recruited.

Source : ET

Facing a temporary financial crunch, mutual fund (MF) holdings can come to rescue. Banks accept MF units as collateral, or security, to extend loans

Loan features

Tenor: The tenor of the loan is linked to the period of investment in the scheme, if it is a closed-end one. Usually, the tenor gets extended after every quarter, going up to a maximum of five years, in open-ended schemes.

Amount: The amount that banks offer depends upon the net asset value (NAV) of your units and the nature of schemes. For instance, on equity schemes, banks provide loans up to 50% of the NAV, while on debt schemes, including ultra short-term funds and fixed maturity plans, the loan could go up to 80% of the NAV.

Interest rate: It is in the range of 11-16% per annum, depending on the bank.

The time taken to disburse the loan ranges from a few days to few weeks.

How NAV movement affects the loan

What happens if NAV falls: Since banks provide loans up to 50% of the NAV of equity schemes, they enjoy a cushion against any fall in the prices of underlying securities. However, if the value declines drastically, as was the case during the recent downturn, banks may ask for additional units or may ask you to prepay part of your loan. The NAV of debt schemes generally do not change much, hence no such problem arises.

What happens if NAV rises: Most banks offer overdraft facility for loans taken against any security. If the NAV of your scheme rises, it makes you eligible to borrow more from the bank, in case you require additional funds. Usually, this situation arises if you are invested in an equity scheme.

Should you take this loan

This loan is cheaper than personal loans. However, one should avoid taking this loan against debt schemes since the interest charged by banks is usually higher than the returns provided by them. Exiting the scheme and using the proceeds may make more sense even after paying the exit load of 1%.

On the contrary, an equity scheme can generate returns in excess of what the bank charges, especially in the long run.

Source: Mint

RBI panel wants banks to serve customers better

There is some good news for bank customers. It may soon be time to bid goodbye to bad memories of being penalised for non-maintenance of the minimum balance, being charged for shifting home loans, or having struggled to recover money after failed ATM transaction

A high-profile committee on customer services by banks has suggested sweeping changes in banking practices. The report of the committee headed by former Securities and Exchange Board of India (Sebi) chairman M Damodaran has been submitted to the Reserve Bank of India (RBI). It has also been posted on the central bank’s website to seek public feedback by August 27.

The committee has suggested a toll-free common call centre number for all banks, which a customer could call and then be diverted to the bank concerned.
 

PROPOSED CHANGES

PLAIN vanilla savings accounts without a minimum balance requirement

FLOATING rate housing loans with no distinction between old and new customers

SWITCH option for home loans at least once during loan tenure

COMMON toll-free call number

COMPENSATION for delayed return/loss of title deeds in banks’ custody

ZERO liability on loss in ATM and online transactions

ENHANCEMENT of deposit insurance cover to '5 lakh

CHIEF customer service officer for grievance redressal in every bank

On the deposits side, the panel, which emphasised that bank customers be treated fairly, said all banks should offer plain vanilla savings accounts with certain privileges like cheque facility, ATM card, etc without prescribing a minimum balance.

The committee observed that banks offered bundled products not priced in a way that served the customer’s best interests. “It’s like selling a single flower, or a bunch of flowers or maybe a bouquet at the same price, irrespective of the customer’s needs,” the report said, while commenting that most often customers never used all the products.

If the balance in the account fell short of the minimum requirement, the penal charges levied should be in proportion to the shortfall, the report said, adding banks must immediately inform the customer. In addition, all fixed deposit schemes offering different rates for different tenures should indicate the annualised yields so that the customer could take an informed decision.

It has also been suggested that banks not auto-renew deposit accounts without written customer consent. Insurance cover for deposits has been suggested to be raised to Rs 500,000 from Rs 100,000 now.
The report came down heavily on banks which charge customers for making transactions in non-home branches. Saying such charges are not justified, the committee said, “Routine services like passbook updates, which are of an informative nature, should be made available to customers free of charge.”

The report has also given huge relief to home loan borrowers who continue to pay higher rates while new customers pay lower rates.

This practice was rampant in the last couple of years when banks such as the State Bank of India (SBI) offered lower rates to new customers while existing customers continued to pay higher.

“In a floating interest rate scenario, when an entire class of borrowers has the same characteristics and risk level, the point of entry in time (old customers and new customers) should not create discrimination in the interest rate offered. In such cases, the spread over the base rate should not vary when individual risk rating for loans is absent, as is usually the case in retail loans,” it said.

Banks have been asked not to impose exorbitant penal rates for foreclosure of home loans and ensure that customers are not denied the benefit of lower rates offered by other financial institutions. The committee said measures to stop practices discriminating between new and old customers with identical risk profiles on the basis of interest rate offers must also be initiated.

It suggested all home loans permit a switch between fixed and floating rates at least once during the loan tenure, at a reasonable fee. Banks have been asked to return the title deed agreement to customers within 15 days of the loan closure, failing which the customer be compensated.

Source :BS

India to give $2bn to fund bailouts in Europe

India is set to fund bailouts in financially-stricken Europe, marking a dramatic role reversal from 20 years ago when it went knocking on the doors of the International Monetary Fund (IMF) to avert a balance of payments crisis.

The government on Tuesday sought parliamentary approval to provide over Rs 9,003 crore (over $2 billion) in loans to the multilateral agency's New Arrangements to Borrow (NAB), a fund whose corpus was raised to over $500 billion in March when the debt crisis in Europe showed no signs of abating.

So, from Greece, which has received $300 billion so far, to Portugal's $100 billion bailout, India could be playing a part in the international rescue operations.

There are already suggestions that more funding would be required from the European Union as well as multilateral bodies.

Over the past two years, amid increased stress in the global economy, the IMF has been pressed into service on several occasions and has financed bailouts in European countries facing a crisis due to high levels of debt.

The 10-fold rise in the NAB corpus was the result of the new global financing order created by G20, a group of the world's most powerful economies, in the post-financial crisis era. Along with the jump in corpus, membership to the elite club of NAB contributors was also expanded to include 13 emerging economies, which included India.

"The NAB is the facility of first and principal recourse in circumstances in which the IMF needs to supplement its quota resources," the agency said on its website.

Source :ET