Gold and the mighty US Dollar

During the last three months, my understanding of economics has been challenged significantly by the movement of Gold and US Dollar.

I always thought that the more deficit financing (or printing money) is done, the less the value of the currency. I also thought that the greater the fiscal deficit, the lesser the value of the currency. To put it another way, if you have too much of currency around, then each unit of the currency has a lesser value compared to something that is limited and does not increase significantly in quantity (i.e. Gold).

So by that token, I was expecting Gold to be in the vicinity of around $1100 per ounce by now. I was quite confounded by the repeated plummeting of Gold and the unstoppable raise of the US Dollar. Going through my online research, I have uncovered quite a lot of theories that attempt to explain the current phenomenon.

One school of thought which I think is quite credible, believes that American investors and corporations are selling off their international investments and bringing home dollars. This leads to demand for dollars and thus an increase in the value of the Dollar. This school of thought believes that soon the value transfer will stop and when that happens, the dollar will plummet. As the dollar plummets, the dollar denominated Gold will increase in value and gain its rightful place in the asset value rating.

Only time will tell if this is true!

A time to invest

Scanning through the news papers this weekend, the common theme was that investors were panicking and exiting the share market much against the advice of the investment advisors.

I guess that at any point in time, you should not invest your bread & butter money. As long as you invest amounts that you can afford to lose, you get the fortitude that enables you to wait out the lows in the market and then be richly rewarded when the markets come back up again.

At times when the market is doing well, every one recognizes that you should buy low and sell high, people remember the positives of systematic investment and asset allocation. Most also talk about keeping the long term trends in mind and not to be distracted by the short term noise in the market. However if one were to invest more than what they can afford to lose, all the accumulated wisdom flies out of the window as soon as market turbulence makes its appearance.

I am pretty convinced that, now is the time to buy in a systematic manner with a focus  on beaten down Blue chips to reap a good reward probably after the middle of 2009! Happy hunting and of course, chins up!!

A case for Animal Existance

It has been a wonderful summer so far and we had the previlage of taking care of our neighbours dog "Jango" for a day while they were away. Now Jango is a wonderful dog and the envy of the neighbour hood. He is pretty young ( less than 2 years old) and is a mix of Collie and Golden Retriever.

Jango is extremely well behaved and affectionate. Pam dropped him at our place in the morning and we had our own doubts if we can handle him for the day. We put up a brave face and Pam left with a heavy heart. Jango kept watching out of the storm door for Pam to come back and get him. When he saw them drive away, he did whimper for a minute and then we felt that he was quite sad. However, he was quiet and well behaved and sat in a corner.

Jango is a rescued dog. I gather that his previous owner was a convict and Jango was given up at some point of time or rescued due to cruelty. Pam had just lost her Labrador of twelve years and was heart broken and adopted Jango. That was just six months ago.

In those six months, Jango has bonded well with Pam and has probably been able to forget the trauma of the past. In the early days he was afraid of men, especially ones in black trench coats. Now he is quite comfortable amidst friends and strangers alike.

I watched him as he sat in the corner ocassionally closing his eyes and responding whenever his name was called. He seemed to have taken life the way it was unfolding. this is where I got my definition of animal existance.

We live in the same time and space, but Jango is perfectly happy and comfortable looking at the blades of grass, the bumble bees, the birds and the sky! I dont know what he was thinking all the time, but Jango was at peace. Jango loves every one, is trusting to a great extent and brings joy to every one around him.

I think we could take a leaf from his book and start trying to cut through the noise in our lives and get a firm focus on what is important. I think these days we are driven towards materialism and to support the materialism, we work as hard as possible and in the process we are preoccupied by a virtual world that has no relation to the real world.

The real world consists of our family, the nature around us and what we want to experience in our life. We only live once and we really need to make the most of it. I remember a song that goes some thing like "Live like you are dying". If you just had 3 months to live, what would you do with your life? would you be hunched up behind a computer working away on that important project or would you rather get away from it all and lead an idyllic animal existance? May be I learnt something from Jango already.

A sad day indeed

I have finished reading about the series of blasts across Bangalore first and then Gujarat. It seems that people who are miserable want company and want to drag every one down.

It was equally unfortunate to hear comments from the Gujarat Congress spokesman that Modi should take responsibility and resign. The blatant attempt to play politics with a national tragedy speaks volumes of the opportunistic politics that have come to undo the Indian growth story.

Equally horrible is the decision of the NDA to oppose the liberalization agenda that UPA plans to push through as a result of winning the no confidence vote.

Seems that India is suceeding despite the inept politicians and that the politicians are getting thouroughly shameless and are opposing the Nuclear deal (which will give energy security) and now prevent liberalization!!

The usual platitudes of the bombing being a cowardly act, asking for people to exercise restraint etc are being bandided around. Meanwhile the few terrorists who were caught red handed trying to enter the parliament are yet to be executed despite a Supreme court order. One wonders what they will do by catching perpetrators of the latest attrocity.

Back to thinking

It has been a very hectic last few months, however with the Victoria day break resulting in a long weekend, I have been able to get back to the blogging.

I think that in the last few months, I have had a ring side view of the impact of the indeterminate state of the economy on daily work. It feels like no one really knows how deep the problems run and how soon things will get back to normal. The result is close monitoring of costs with a very short term vision and frequent course correction.

In my profession as a Project Manager, this has presented some challenges. The normal progress of project is now interrupted by conflicting requests for information. This is leading to additional costs (an unintended consequence) and delays.

I have been reading up on Agile project management and the light weight concepts with the hopes of finding some interim solution to my problems. Meanwhile there is an opinion gaining currency that the problems in the global economy will sort itself out by middle of 2009.

The weekend is now coming to an end! Got to log off for now

Intro and ramblings my favourite topic, entertainment!

Before anyone gets all excited, this starbuck is not related to the gorgeous, spirited and sexy pilot of Battlestar Galactica… a huge fan though.

So, Gregory David Roberts’s pretentious tome, “Shantaram” is being made into a movie, with no less than Johnny Depp and Amitabh Bachchan starring in it. Don’t know if anyone else got the same feeling, but methinks it was created with the hope that it will one day grace the silver screens across the world. It has all the Masala of a Hollywood film complete with prison torture, odd "Madame" characters, War and a dying hero in this same war. Best part is, it will also appeal to the bollywood crowd, as it seems to have bollywood masala cleverly woven into the plot! Ah globalization !

If anyone out there is asking for my opinion, I think Leonardo Di Caprio would have made a far better Shantaram. No substitute for Amitabh Bachchan for the role of Khader Bhai. I hope they pick Rajpal Yadav for the part of Prabhaker.

Charity and Governance

Now that the markets are a bit more stable, I have been able to think of other things. This time it is about Charity.

Charity is a big thing in this part of the world and also while in Ireland, I noticed that the Irish are really big on charity. These days, I have noticed a lot of advertisements asking for charity. Some say you can sponsor a child in Africa or some where in the third world. There are visuals of malnourished kids and emaciated families.

There are tax breaks and various incentives to provide to accredited charities. To facilitate charities, it is now possible to authorize deduction of charities at the payroll itself. This allows mobilizing vast sums towards charities. To mobilize these charities and channel them to the target audience requires overheads of organization. Organizing and deploying charity is an industry in itself and has huge corporate sponsorship and charitable giving is likely to be part of performance appraisals in the near future.

The average Canadian is quite happy to donate to charitable causes the year round. The fact that quality of life is good in the first world allows people to be open to donating and also sensitive when shown human suffering.

What is prominent is the fact that there are campaigns to provide education and basic living facilities to disadvantaged children in the third world. This is really a good achievement. However, I always wonder if there are any charities that are aimed at addressing the root cause of these misfortunes. There is a common link between orphans, poverty and refugee issues and that is poor governance. The difference between regions of prosperity and regions of intense misfortune is governance.

Regardless of whether a country is resource rich (like Nigeria) or totally barren (Ethiopia) or has been prosperous in the past (Zimbabwe), the common thread is poor governance. The responsibility of the government is to be the custodian of the collective futures of its citizens and to manage the resources with a good vision and effective clean administration. Where this element is absent, what happens is that the proceeds of national resources do not reach the people. Corruption becomes rife and when public protests increase; there is a violent clampdown. It is established that those in government can benefit from the national resources, then elections become violent and common people get caught in the cross fire. Democracy becomes a casualty.

The result of all of this is the swelling number of orphans, poverty, and hopelessness. People who can flee such regimes end up as unwanted refugees. They risk their life and limb and end up in the shores of Spain or elsewhere in containers.
I am going to spend some time on the net doing research to find out if any NGO is involved in addressing these root causes and will share my findings. Meanwhile I can only think that if we are in a boat that has a hole in the hull, bailing buckets of water will help only to a certain extent. What will really solve the problem is sealing the hole. Similarly charity addressed at providing education and food to orphans and the needy in the third world is like bailing buckets of water from the boat. The water will continue to fill up until the hole in the hull is plugged.

Things looking much better

Things are looking much better in both BSE/NSE and TSX. Plan to sell everything and hold deposits instead and wait out the volatility. other option is to buy high dividend Blue Chips and wait out the volatility. Waiting for the next interest rate cut to be announced before taking next steps. Let us see how it unfolds!

Relief

Things are looking better this morning. Gains overnight in BSE/NSE have improved the situation. Yet to see what the market holds today in TSX.

As I watch my shares fall in both BSE/NSE and TSX. I feel that I cannot do anything. I simply do not understand what is happening.
My calculation that Gold would be stable and hold value seems to be wrong given the reports that in India, investors are selling Gold to buy blue chips at rock bottom prices. This is in a way mixed news because it would mean that there is optimism in the market and I hope tomorrow sees the BSE/NSE pick up.
Meanwhile, I have been able to pick up some good scrips yesterday in BSE and TSX at really good prices. On hind sight I could have waited it out a day or so more especially since the U.S market was closed.
I am going to try my best not to look any more into my portfolio until this volatile period is behind us, but at the same time feel that i would later regret not having done some bottom fishing!!

Markets in the Red!

BSE index fell below 18K mark to touch 17.5K. World wide there have been reports of heavy losses in the respective stock exchanges across Europe and Asia taking a cue from Wall Street following the announcement of the 145K "stimulus" package by Bush. Out here in Toronto, we have witnessed steady decline everyday for the past four to five days. Drops averaging, I guess, around 175 points per day.
It is interesting to see how things unfolded in Dalal Street. We had the largest IPO from Reliance Power that got oversubscribed many times over in the first hour itself. There was a simultaneous drop in the indices and that was explained as investors divesting their other holdings to get into the Reliance Power IPO. The word on the street is that the earliest project of Reliance Power would take atleast a year to manifest. So we see heavy optimism on one end over some future positive outcome and lots of really good companies losing their market cap very rapidly at the same time.
I have seen my portfolio lose around 18% value, but I am hanging in there. I believe that everything is relative. Everyone is in the same boat. It would be unwise to realise the loss by selling out the positions, instead one has to wait out the spell of negativity. One report says that the Asian markets (excluding Japan) have almost 47% of their trade confined to Asia as against 39% earlier. This implies that the influence of USA is that much less on the Asian Markets. If there is a little strength in Europe and Japan, then Asia should be able to weather the storm.
However, apart from the current woes in USA, it is believed that in the next couple of month another batch of sub-prime mortgage borrowers will enter a phase where their interest rates will go up by 2 to 3%. That is likely to bring about a reasonable amount of delinquency and the second wave of ABCP related issues. Probably those corporates that have estimated and decleared their ABCP losses might revise upward, their estimates. This is not likely to install confidence in the investors.
I also think that in the modern environment where communication technology has collapsed the world into a small global village, the power of media should not be underestimated. We sometimes talk ourselves into really bad economic scenario. The 24 hour news channels repeat the same negative economic news until something new and equally bad comes along. This does not help any one!
Let us wait and watch how things unfold.

Gold Bug!

The price of Gold has dropped once again after touching all time highs of above $900 an ounce only last week. I am quite confident that Gold should go up again and test the $1000 an ounce levels.
As an avid goldbug, I believe that Gold is the only commodity that can provide stability in the times of economic uncertainity. The reasons for this are many. Firstly in an economy, money should be printed only based on productivity delivered. However, such a fine distinction is difficult to make when countries run into deficit. This is what leads to dilution of value of the currency (inflation). In order to combat dilution of value, the common remedy is to increase the interest rate to reduce money supply. When this is done, the rate of depreciation of the currency increases unless the money taken out of circulation generates productivity equal to the interest rate or more.
Having said that, I think that since Gold has a finite supply, it would not be possible to just create more gold to bridge the deficit. Thus Gold can maintain its value. Secondly due to environmental concerns as well as depleting resources, Gold production is not meeting demands. This means that going forward, as the demand for Gold increases, the supply would not be adequate and therefore, the value of Gold will increase.
On the other hand, whatever Gold production takes place now, has a higher cost of production due to increased fuel costs and environmental compliance costs. This in itself will ensure that the price of Gold continues to increase.
If the Gold standard was used to define value of currency, it would be more robust. In other words, the total value of currency issues should be equal to the Gold held in reserve to back it. In the absence of this arrangement, it is very difficult to determine the intrinsic value of a currency except the fact that it is backed by a soverign promise to deliver value.
Over the last 5 years, the tendency of Gold price to rise has been tempered by steady flow of Gold auctions from the Central Banks of Europe. It was only last year that the Kuwaiti central bank bought Gold to diversify its reserves. If you think about it, China, Japan and India have a large foreign exchange reserve predominantly drawn in US Dollars. With the constant drop in the Value of the USD, these countries would like to diversify their reserves to preserve the value. The alternatives are the British Pound, Euro and Gold. The British Pound by itself would find it difficult to act as a reserve while the Euro is a political union with diverse economic scenarios in member states. Thus we find that some countries are moving into Gold while others are creating soverign wealth funds to buy assets at bargain prices.
The biggest boost for Gold will come when China decides to add Gold to its resources. There are unconfirmed reports that this has already commenced. The Gold futures market that just started up in China is another interesting indicator of the interest generated by Gold.
Another aspect to bear in mind is that as long as petrol prices are quoted in USD, the brunt of the economic problems will be borne by the Euro, CAD and British Pound while the USD continues to sink.

Democratic Vs. Autocratic rule - Which will lead to sustained development?

It has been said that since India follows a democratic model, the growth in India will be sustained and strong as compared to China. However, I am not quite sure that this can be taken for granted.
China is in a position to set clear vision and precisely target its resources and tactics to achieve the vision, India on the other hand struggles to articulate a vision and execution of tactics if any is neither reliable nor consistent.
This brings to mind the flashes of excellence that we see every once in a while that transforms an institution and generates renewed enthusiasm. The best example I can think of is that of Abdul Kalam as the president.
Over the years the presidency had become almost a dormant and symbolic institution. There were times when the leader of the ruling party could get the president to do whatever the party wanted. The people were reminded that they have a president only when the President officiated in the Republic day pageantry and was promptly forgotten later.
When Abdul Kalam assumed office, he started off with articulating Vision 2020; then he spoke about how to get there. And most importantly, instead of sitting at Rashtrapati Bhavan, he made it a point to visit school children and kindle in them a desire to bring out their best. The common man for the first time saw the institution of president in action.
Abdul Kalam infused energy, hope and motivation to a large number of people. Simple living and high thinking were the hallmark of his presidency. When the ruling party tried to push through reservations, Kalam had valid questions and requested a re-think. It is a different matter that the bill was shamelessly re-presented without changes and following protocol, Kalam had to assent. However, this was the quality that prevented Kalam from a second term. Abdul Kalam was not a rubber stamp.
We have made the mistake of losing a good president by not extending his term. It seems to me that the less effective the president the longer the term. It remains to be seen how his successor is going to meet up to the new raised expectation for the office of the president.
Our question will be answered when matters of importance go to the new president for assent. However, by the looks of it so far, in my books, this president will have two terms! Democracy is not bad, but with great freedom comes great responsibility.

Progress Report

It is difficult to make sense of the bigger picture when you are in the midst of the noise from various media and groupings. However if one were to take a step back and look objectively, the bigger picture becomes clear.

I took some time last weekend to take a step back and tried to take an objective look at India and here is what I came up with:

a) India has done well if not better than most countries its age and has sustained a democracy. Case in example is the two neighbors.

b) Despite having its industrial base destroyed by the British Raj, India survived the socialist quota regime and now has a strong industrial base.

c) Irrigation systems and the Green revolution have improved farm productivity, but much still needs to be done in the area of agricultural finance and procurement management.

d) The innate cultural programming towards education and service has seen rising levels of literacy. This translates to a large capable manpower base that lends itself to take advantage of the current economic scenario to kick start growth in per capita incomes as well as standard of living.

e) The growth of the I.T sector has been an eye opener and IMHO, created global aspirations for rest of the industries.

f) Relaxation of exchange controls have enabled the Rupee to be among the top 15 popular world currencies.

g) The country has moved from a dismal situation to a stage where there is a potential for higher aspirations for the citizens. There are successful role models in every sphere of activity.

h) Thanks to the lack of local opportunities, we now have Diasporas of PIO and NRI spread across the globe. These ambassadors at large pump in financial resources to invest in the homeland as well as bring India to the world at large.

I) Science and technology frontiers have been conquered. India has produced world class doctors, scientists and engineers. The space program, Nuclear, DRDO programmes have all positioned India in the fore front of Space, Nuclear and defense sectors. This is a creditable indigenous achievement.

I can't help but think that we could have done better if we had diluted the socialist approach a bit earlier than we did. There were a couple of decades when India stood still as an economy while the world marched ahead. Those were the days when one had to wait for 15 years to get a phone, 10 years for a scooter and the list goes on.

India could have done better if there were a better breed of politicians. Bihar which was historically the most advanced state of India slipped to the ranks of a backward lawless land. Society was divided on caste and religion in order to retain political power. Elections were fought and won on non issues while the core issue of better roads, water supply, employment, health etc was ignored.

On the whole, it is a good picture. India has a potential to do better. I am hopeful that people take a page out of Narendra Modi's Gujarat. Modi delivered customer satisfaction by boosting the infrastructure in 7 years (which the opposition could not deliver in 50 years), this won him the election. I am hopeful that rest of India would emulate this example and demand performance from the leaders. It is sad that Chandrababu Naidu could not get similar mandate.

It is indeed a sad day when a leading politician can claim that her immense wealth has been donations to her from her followers. Many of these followers had taken loans to gift her the wealth!
While I cannot understand how impoverished people can be motivated to further indebt themselves to shower such monetary gifts, what really gets me is that the income tax tribunal has accepted the explanation.
This means that in future politicians when faced with charges of wealth beyond known means, can use this precedent. In a country where we had a culture of loan melas and subsequent writing off of the debt, I would not put it beyond politicians to get their followers to take loan and give them money and later legislate to write off those loans.
The only news paper to highlight this issue was the Times of India. In my mind more than the furore generated by the Gujarat elections, this particular case should have been at the forefront of media and public discussions. Once again for unexplicable reasons, such an important issue has faded into the background.
It is also interesting to note that most politicians have significant wealth in this poor country of ours. Many have corruption cases against them. The investigation into these take a life time and delivering judgement after due process takes another. As they say there is no justice if it is delayed!