Archive for September, 2009

GOLD RUSH – Jump in or Wait out? – Final Part

Continuing from the previous post, we will see the few important consumer questions like what to look out and what can you do in this current Gold Rush period.

What to look out?
 

Lakshmi Iyer, head of fixed income and products, Kotak Mahindra AMC India, tells in her interview with FE, “There has been a recent break out in gold prices and into the buying of gold as an asset class. This is a little contrary to the expected trend. Normally, one would see a lot of redemptions happening now, especially since the gold prices have gone reasonably upwards after being range bound for a while.”


“However, with the festive season approaching, the demand for gold on the outside primary markets has gone up as well. The Indian investor’s mood suggests that they now feel that gold will increase in price. So far gold had been range-bound, but now it may not remain that way much longer, and I too believe the price will increase. Most financial advisors and portfolio managers are of the opinion that one should hold gold as an asset class and at least dedicate between 5-15 or 20% towards it,” Iyer adds. This is also being done as a counter-balancing measure as after a long time have people begun increasing their overall portfolio risk by now investing heavily in equity again, she says.


Iyer whilst talking about the future of gold or what is to be expected in the coming months says, “In the short-term we may see a 40-50 dollar rise in gold prices, after which as far as gold funds go, one may notice profit booking and correction phase. However, I do not expect this correction to be all that much, but it will provide investors with another entry point into gold none the less. In the long run I feel that the price of gold will definitely go up. As we go along people should get use to higher gold prices.”


She went on to add, “The world central bankers have all created liquidity within the markets, and it does not appear like they are going to withdraw this money anytime soon. In such a scenario the only hedge to inflation and money supply will be gold. This is not something that will take place instantly and gold is in no hurry. However, I would not be surprised if the price of gold goes as high as $1,500-$2,000 or even double the current market levels. This could happen in the long-run especially, and I feel a 3-5 year holding period is a reasonable frame.”


As the dollar has been weakening and risk aversion is setting into investors mind, gold is once more looking attractive and its demand is high. A shift from currency assets to gold assets is in the process and like in 2008 when gold did well due to a low risk appetite seen in investors, this time round too, a similar strategy may be seen. Inflation expectations are also building and gold is again perceived as the best hedge against inflation.”

What can I do?


The desire of gold is not for gold. It is for the means of freedom and benefit.” Ralph Waldo Emerson, a 17th century American writer’s summary on why gold is so sought after. Gold is considered an hard core asset with real appreciating characteristics in this current economy.


While facts, figures, numbers and historical data all predict that gold is going to have another wave of price rises and increasing demand this September and maybe for the coming time frame after that. Prudence is still a better route while cashing in any windfalls your gold portfolio may make it a good idea, skewing one’s overall portfolio to favour more than 20% or so of gold.


This could be counter-productive as, only last year most investors only painfully learnt that history is not the answer to the future, as things we may not have considered can always occur.


Financial advisors are very much in tune to the idea of gold being a good investment choice, but they too are weary of becoming over-dependent on it and rather use it as a safety net for their clients.


“The price movement in the last six months has been sideways and therefore while many speculators felt that the price of gold would drop and provide an opportune entry point into this asset class that, has not been the case. Also, with the weakening dollar, gold price has strengthened as well.


All in all, gold is looking to glitter all right and the third quarter, starting with magical September looks like a good time for investors to make sure their portfolios and lockers have a decent amount of gold to navigate this wave.


Sources: financialexpress.com

GOLD RUSH, Jump in or Wait out? – Part I

GOLD, the love for the glittering yellow metal has peaked in recent months and it is eyeing to reach previous highest mark of $1033.80 in March 2008. After moving sideways for the last six months, Gold price crossed the $1,000 mark for an ounce once again and strongly moving forward.



There are many factors cited as reasons – relating to economics, psychology, mathematical and of course, currency(inflation).


However, does this thousand dollar crossing mean something more? Or, is it a short-term speculation rather than a longer term trend? Also why it always happens in September? And given this situation, Can I buy some gold before moves up to add in my portfolio or wait to go down, are the critical question.



Why Gold always goes up in September?


Gold cannot escape the viscious economic cycle of supply and demand. When there is increased demand with less/normal supply, any commodity price tends to go up.

September has been the best time to buy gold in terms of its month-on-month price appreciation over the past four decades, according to Frank Holmes, CEO and CIO at US Global Investors. Statistical data from 1969 till today do not show otherwise, and so this time round ironically, gold comes into the limelight at a time it’s always been sought.


September is one of the most important months for gold due to various occurrences around the planet. Firstly, the post-monsoon wedding season in India and Diwali, one of the country’s most important festivals lead to a major increase in gold demand. Gold is restocked by jewellery makers who are preparing in advance, for the Christmas shopping season in the United States.


The holy month of Ramadan, which comes to an end by late September this year and is subsequently followed by Eid, sees a tradition of exchanging gifts on a large scale as a mark of celebration all over. Similarly, in China, the week-long National Day celebration starting from October 1 and the lead-up from then on till the Chinese new year, always fuel gold demand in China as well.


Another most consistent correlations for gold and the most commonly accepted fact is its inverse relationship with the US dollar. When gold is up, the dollar tends to be down, and vice versa. As per data going back 20 years, this relationship occurs nearly 70% of the time and September is one of the dollars favourite months to be down. Out of 39 Septembers going back to 1970, the dollar has seen negative performance 26 times, which is more than any other month of the year.


What to look out?


While reports and opinions are pointing towards the dollar weakening and gold strengthening, certain undeniable facts do lend them credibility as well. The fact that the US fiscal deficit is expected to be a record $1.6 trillion, and the White House projected last month that the deficit will grow another $9 trillion between 2010 and 2019.


These huge deficits will fan inflation fears and keep downward pressure on the dollar. This coupled with the fact that the Federal Reserve’s massive stimulus spending and the likely –hood that a low interest rate scenario will be prevalent for a few mote months, only further weakens the dollar position and strengthens gold’s.

Will be continued in next week blog post…

Sources – financialexpress.com

Cash for Clunkers, A True Success?! – A look back – Final Part

Last week, we looked back the Cash for Clunkers program weighing it on 3 different areas like,  economy impact, consumers view and environmental aspect. This week we flip the coin to look on the other side which adds lot of hurt feelings from many organizations including nonprofits.



Non-Profit’s Loss


Many Nonprofit organizations raise fund for their programs through car donations. They accept old clunkers, repair them with help of their volunteers and sell them to the low income people for reasonable price to make extra cash. These organizations share some mixed feelings about this program. Philanthropy.org reported, Cheryl Rios of Texas Can, a Dallas nonprofit organization that serves troubled kids, estimated the organization has lost $75,000 due to a reduction in car and truck donations.

Similarly,  Point Richmond’s Vehicle Donation to Any Charity has seen a 20 percent drop in donations reported on sfgate.com. A big dent in the $3 million the company usually raises from reselling donated old cars and distributes annually among 4,500 charities nationwide.  Car Talk donation which turns over its share to National Public Radio also hurt by this program. 

Car dealers Struggle


Old auto dealers got to make a living by selling the clunkers. They sell to lower middle class people with lower income who doesn’t have real credit depend on them dealers who sell cars for cash and personal credit. This program means fewer clunkers, and  possibly less cash for these dealers another story reported in Houston Chronicle.


About 750,000 cars removed from the market and sent to junk yard. That accounts for a 2 percent reduction in overall supply, which may create a bubble in used-car prices, according to Kelley Blue Book, which tracks car values. “It’s going to take some of the inventory away from people who sell basic transportation for lower income people.”“It will cause the price of our inventory to go up,” according to a old car dealer in Houston. The sort of increase can make a big difference for his customers, most of whom have an average individual income of less than $25,000 a year.


Many old auto car lots are often called as “note lot.” Note lot dealers pick through trade-ins that new-car dealers don’t want to sell. They repair them, clean them up and resell them at a markup to subprime buyers, who often pay a steep interest rate — as much as 20 percent — because of past credit problems.


“There’s still people who need these cars,” he said. “They need a ‘clunker.’?” The program puts an unfair burden on low-income car buyers, many of whom need inexpensive vehicles to get to work.


Repair Shops worry


The vehicles being mashed by government decree still have value, both as a whole and as parts. According to a repair shops, the clunker program could affect non-clunker repairs, too, by driving up the cost of parts.“The long-term implications are the shortage of good used parts. When you crush a car, you take away a lot of parts that have no effect on fuel economy.” That includes body parts and engine components such as alternators and starters. Used parts, like used cars, tend to appeal to lower-income customers who can’t afford new ones.


It is unneeded hardship as per many auto shop owners. In this economy, increasing the hardship on people struggling the most, those clinging to their jobs and stretching their budgets, isn’t a stimulus.


Dealers Frustration


Even dealers who celebrated this summer with great sales through this program have few things to say. It  was overly complicated, a nightmare to manage for dealers and difficult to understand for consumers. Many dealers worried about getting their money back from government and stopped offering this program. Small dealears funds got strapped when government took its own time to process the reimbursements churing lot of frustration. 



Was the cash-for-clunkers program a true success?


Short answer is Yes and No. With some creative marketing and dealing, dealers were evidently able to  convert many nonqualifying shoppers into the buyers of other new or used cars, a trend that created a sizable positive impact on sales as an indirect consequence of the program. Consumer spending edged up 0.2 percent in July with help of this program to boost the economy.


Many call it as more of a political stunt, psychologically satisfying but not economically meaningful. It’s been good for new-car dealers and the automakers, it’s tweaked the overall economy, and it may even help the environment a tad, but there were many hidden losers gone unnoticed by the government.  If we all can maintain our cars like the young lady tin this video, we don’t even have to create programs like this one. Don’t you think?


Sources – chron.com, sfgate.com, npr.org

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