Monday 21 January 2008

Few Lessons

As global investors dump stocks in a flight to safety that has whipped gold prices to a series of record highs, Indians are doing just the opposite.

In a nation that buys a third of the world's gold output, even bullion dealers are selling the stuff in hopes of a seventh year of stock market gains, a trend that could cause gold's record run to above $900 an ounce this year to stumble.

Far removed from gloomy global peers who are bracing for a US recession, Indians increasingly see limited upside for gold after last year's rise of more than 30 per cent, and are ready to shift more of their savings from jewellery toward a stock market that notched up over 40 per cent gains for three years running.

"I, myself, have sold gold and invested in the equity market," Pawan Choksi, a bullion dealer based in Ahmedabad, told Reuters. "I am restructuring my portfolio."

"Who will take a chance with gold at these levels?" he said. "Maybe there will be a correction."

Earlier this decade, most Indians preferred gold to a share market that they viewed as dominated by speculators and saddled with companies that had dubious earnings potential.

The shift, though slow, is already taking its toll on gold.

Imports by India fell as much as a fifth last year and are likely to tumble again this year if prices stay high, says Suresh Hundia, president of the Bombay Bullion Association.

"Imports have virtually come to a standstill in the last 20 days because of the high prices," he told Reuters Tuesday.

Bullion analysts are, for the moment, maintaining a bullish stance, with many expecting the spot price to test the $1,000 an ounce watershed before year's end as the falling dollar and US economic doom and gloom add to gold's allure.

But the prospect of another 10 per cent gain is not luring many buyers into the jewellery shops in New Delhi's famous Karol Bagh, where some banners scream "Sale" at a time when demand usually is high because of marriages in January and February.

"Demand! Where is the demand?" says Ravi Sood, partner of Kidarsons Jewellers, his eyes sweeping over a near-empty shop as a lone customer huddled in a corner took apart some old jewellery to assess its value.

"Only those who are in desperate need because of a marriage in the family are buying," he said. "Even then they bring a bagful of old gold to exchange so that their budget does not go haywire."

Stock Market Appeal

Gold jewellery has a long tradition in India as an auspicious gift for Indian marriages, and a lifetime saving for brides, while the share market was regarded with some trepidation.

But a record-breaking run by India's stock market has elevated its profile in society, with new blue chips, huge share offerings and the rapid growth of mutual funds elevating investor confidence along the way.

Analysts say gains may be checked this year by the risk of a US recession and a slowdown in the influx of foreign funds, although most still see another positive year and there appears to be little waning in retail appetite.

Tuesday, the initial public offering of billionaire Anil Ambani's Reliance Power raised $3 billion, the most ever for an Indian IPO, in under 60 seconds.

Mutual fund holdings, seen as a good barometer of retail investment, are estimated to have accounted for 4.8 per cent of household financial savings in the fiscal year that ended last March, up from only 0.4 per cent two years earlier.

"Gone are the days when fly-by-night companies could float an initial public offering," said Prithvi Haldea, managing director of Prime Database, an expert on India's primary share market. "Almost every IPO in 2007 got listed at a premium."

Indian IPOs raised a record $8.3 billion last year and are expected to nearly double that this year, according to Thomson Financial data.

Gold, in comparison, looks a little less lustrous.

"Everybody and anybody is entering equities as penny stocks worth five to ten rupees are also rallying and going up to 20 to 40 rupees," said Krishna Kumar Nathani, managing director of Indiabullion.com, a local consultancy.

"You are getting 100 to 200 per cent in a month's time on shares," he said. "I have never made 100 per cent in gold in such a short time."

Via Reuters