Skip to main content

The Gold Price Crash

Invest In Tax Saving Mutual Funds Online

Call 0 94 8300 8300 (India)

 

Haven't you played with bubbles when you were young? You blew them out of a small bottle and these bubbles rose in the air .After flying for some time they burst. Doesn't this remind you of the speculative bubbles that occur in Commodities, Real Estate and so on? Isn't this similar to a balloon where you continuously blow it up with air and after sometime it bursts? This is the same thing that happens in gold. Here a spike in the prices of a commodity like gold is caused due to the exaggerated expectations of growth followed by a rapid price rise. When these expectations are not met the rapidly rising prices are followed by a great fall….This is the speculative bubble….Here we have the famous proverb "Do Not Look Where You Fell But Where You Slipped". This tells us how experience is a great teacher. Here even though we fall we must rise again

 

We all noticed a strange phenomenon in the month of April. Gold which was rising at tear away prices suddenly experienced a great fall crashing to an 18 month low. So why did this happen? The answer lies in a small tax haven island country in the Mediterranean Sea. This country a tax haven propped up by loads of Russian money .The Russian Elite and Wealthy stashed their wealth most of it ill gotten in the offshore tax haven of Cyprus. So Why Did Cyprus Banks Collapse?

·         The country's largest banks had a heavy exposure to Greek bonds, being neighbors a huge quantity of Greek bonds were absorbed by Cyprus. The falling land prices in Cyprus further accentuated the crisis and caused a solvency crisis for these banks as they held huge quantity of Cypriot land.

·         The currency of Cyprus is the Euro as they had recently joined the Euro zone. They required a bailout package from the European Central Bank because Cyprus uses the Euro. Cyprus has no capital gains tax and a corporate taxation of just 10%.

·         Here a large number of depositors in Cyprus main banks were Russians. The strongest economy in Europe is Germany, and the Germans have a huge say in the bailout packages of the European Central Bank. The Germans were loathe to help the Russians as they felt the rich Russians should pay their way out.

·         The European Central Bank agreed for a bailout subject to certain conditions. The Cypriots should pay a part of the bailout package themselves. Here all deposits above 1,00,000 Euros would take a 9.9% hit. Below 1,00,000 Euros a 6.75% hit. All accounts below 1,00,000 Euro's have a Depositors Insurance. In spite of this people queued up to withdraw their deposits. They were obviously not allowed to do so as the daily cash withdrawal limit from the ATM was 300 Euros. The amount of cash travelers could take out of the country ranged from 2000 Euros later increased to 3000 Euros .Businesses could transfer 3,00,000 Euros for domestic transactions but amounts above that required certification. Basically Cyprus introduced capital controls in order to protect its banks.

 

So What Finally Happened:

·         After much haggling in the parliament, Cyprus second most largest bank Laiki was shut down. All deposits below 1,00,000 Euros where transferred to the Bank Of Cyprus. All deposits below1,00,000 Euros would be insured completely. Those above 1,00,000 Euros would take a big hit losing up to 40% of the amount deposited. The major losers would be the Cypriots with over 1,00,000 Euros .Imagine a guy who has taken a huge loan and finds 40% of the amounts gone from his accounts. Obviously he has to pay back the full loan. The Russians would somehow escape transferring their money to another tax haven. The Greek defaulters would escape. Truly we live in a multi polar world.

·         Here the parliament voted in favor of the bailout packages which results in wealthy citizens of Cyprus losing a lot of money, Major banks shutting down and Cyprus international tax haven status in the doldrums.

·         Here Cyprus secured a 10 Billion Euro bailout and continues to remain in the European Union.

I Understand All This But What Has This To Do With The Gold Price Crashing:

·         Here Cyprus pledged to sell a part of its gold reserves to fund the bailout .Cyprus has a total of about 14 Tonnes of Gold .This translates to a minuscule amount. Here Cyprus was not promised more funds in bailouts no matter what its financial status was and even though it required maybe 2-3 times the sanctioned amount. There are other bigger nations such as Spain, Portugal, Italy and Hungary whose central banks might be forced to sell Gold Bullion to fund their bailout packages thereby flooding the markets with gold. Obviously with such plentiful supply the prices of gold would have to come down. Here even though Cyprus is a small problem it is a symbol of a much bigger Contagion.

We Are The Highest Net Importer Of Gold So What Effect Would This Have On Our Current Account Deficits:

·         Here a current account deficit is when a country's government, businesses and individuals imports more goods and services and capital than it exports. Here we have a trade deficit where the country imports more goods and services than it exports. This is the largest component of the current account deficit. The second largest deficit is when payments made to foreigners by Indian/Indian government is greater than the wages, interest, and dividends made by the foreigners to Indian residents. The smallest component would be Indian government grants to foreigners. Here in the pharmaceutical category we see patents, product development and so on. We are a nation of gold importers because of our craze for the yellow metal. The world's largest consumer of gold drove the demand for gold in the global market in the fourth quarter ending December 2012 with a whopping 41% year on year increase. So What Happened To Our Current Account Deficit Due To Ihe Importing Of Gold? India's current account deficit widened to a record 6.7% of GDP in Q4 led by higher gold imports. According to the finance minister Mr Chidambaram about 80% of this is due to gold imports as India and China together account for about 45% of the world's gold demand .Here India imported a record 255 tonnes in the October-December Q4 2012 .Here India's gold import bill for the year 2012 crossed 40 Billion Dollars. Here in April 2013 we noticed a crash in the gold and oil prices which is good for the Indian Macro economy at large. Here we would notice a moderate fall in Wholesale price index, fall in inflation, Governments fuel and fertilizer bill subsidy, which provides room to policy holders to perhaps cut the interest rates. Here it is anticipated that the gold import bill will go down by 8 Billion Dollars due to the crash in prices in this year. Here we had an average Current Account Deficit Of 5.3% of Gross Domestic Product in the year 2012.This is expected to reduce to about 4.3% of the Current Account Deficit. Truly a God Sent Blessing…

 

So Who Loses Out On This God Sent Opportunity:

·         Gold loan financiers expanded at an astronomical rate in the years 2010-2011 when gold prices skyrocketed .Now these are under heavy losses. So What Went Wrong?

·         RBI got worried about the meteoric rise of these companies and capped the loan to value ratio at 60% brought down from 75%.This basically means that against gold jewellery pledged , only 60% of the value would be given as loans.

·         Only gold jewellery could be pledged and not gold coins or gold bars.

·         The interest rates here range from 22% to around 24%.

 

Why Are The Gold Loan Financiers Worried?

·         The RBI has reduced the loan to value ratio to 60% from around 75%.These gold loan financing companies charge an interest rate of around 22%.Earlier they could have lent INR 75 for every INR 100 of Gold Jewellery pledged. Now they can lend only INR 60 for every INR 100 of Gold Jewellery pledged. Here they lose INR 3.3 for every INR 100 of gold jewellery pledged. This translates to about INR 33000 for INR 10 Lakhs of gold jewellery pledged. Quite a Loss…

·         These Gold Loan Financing companies were required to maintain a higher capital of 12% by April 1st 2014.These were done to avoid risks to banks and the public at large due to their exposure to debentures of these companies.

·         We saw in the month of April the price of gold crashing. This exposes these gold loan financiers to default mainly by those who had pledged their gold at a higher 75% loan to value ratio when the prices of gold where sky high.

 

I would like to end this article with the phrase "As Gold Is Tried By Fire So Are Brave Men By Adversity."Let us not lose heart by this gold crash and just as "The Darkest Hour Is Just Before The Dawn" gold too will once again have its "Hay Days In The Sun".

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. ICICI Prudential Tax Plan Invest Online
  2. HDFC TaxSaver Invest Online
  3. DSP BlackRock Tax Saver Fund Invest Online
  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver MutualFunds Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...
Read more

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...
Read more

National Savings Certificate

National Savings Certificate Here's everything you need to know about the 5-year savings scheme offered by the Government This is a 5-year small savings scheme of the government. From 1 July 2016, a National Savings Certificate (NSC) can be held in the electronic mode too. Physical pre-printed NSC certificates have been discontinued and replaced with Public Provident Fund-like passbooks. What's on offer The minimum amount you can invest in them is Rs100 and there is no upper limit. Under this scheme, all deposits up to Rs1.5 lakh qualify for deduction under section 80C of the Income-tax Act, 1961. The interest earned is taxable. You can invest in multiples of Rs 100. These certificates can be owned individually, jointly and also on behalf of minors. The interest rates for all small savings schemes are released on a quarterly basis. The effective rate for NSC from 1 October to 31 December is 8%. The interest is calculated on an annual compounding basis and is given along w...
Read more

Mutual Fund Review: HDFC Index Sensex Plus

  In terms of size, HDFC Index Sensex Plus may be one of the smallest offerings from the HDFC stable. But that has not dampened its show, which has beaten the Sensex by a mile in overall returns   HDFC Index Sensex Plus is a passively managed diversified equity scheme with Sensex as its benchmark index. The fund also invests a small proportion of its equity portfolio in non-Sensex scrips. The scheme cannot boast of an impressive size and is one of the smallest in the HDFC basket with assets under management (AUM) of less than 60 crore. PERFORMANCE: Being passively managed and portfolio aligned to that of the benchmark, the performance of the index fund is expected to follow that of the benchmark and in this respect, it has not disappointed investors. Since its launch in July 2002, the fund has outperformed Sensex in overall returns by good margins.    While every 1,000 invested in HDFC Index Sensex Plus in July 2002 is worth 6,130 now, a similar amount invested in Sensex then wo...
Read more

Different types of Mutual Funds

You may not be comfortable investing in the stock market. It might not seem like your cup of tea. But you can start by investing in Mutual Funds. Many first-time investors invest in Mutual Funds. This is because they do not know how to invest in individual securities. Basic information on Mutual Funds People invest their money in stocks, bonds, and other securities through Mutual Funds. Each Fund has different schemes with specific objectives. Professional Fund Managers look after these schemes. Your Fund Manager could help you invest in a scheme that suits your financial goal. Functioning of Mutual Funds You could make money through Mutual Funds in different ways. A single Mutual Fund could hold many different stocks, bonds, and debentures. This minimizes the risk by spreading out your investment. You could earn dividends from stocks and interest from bonds. You could also earn capital by selling securities when their price increases. Usually, you could choose to sell your share any t...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now