GalaTime

The next step in trying to make some money from oversold precious metal & mining stocks is to buy some gold: I bought some via the Benchmark Gold ETF - GOLDBEES @ 1175.

[Yes, I managed to get in a good entry compared to today's range - only because I had put in a limit order all day. Also, very good entries on longs usually mean the thing is headed down. ]

Why go long now?

• Oversold technicals
• ‘Bargain buying’ by jewellers
• Sentiment
• Overbought dollar
• Because mean reversion works well (sometimes).

Risks:

• Oversold can get more oversold
• Oil & industrial metal down-trends take gold further down with them
• Indian farmers don’t buy gold this year, and instead go shopping at the South China Mall

My target is a 8%+ return on gold & 15%+ return on gold mining stocks, within a few weeks. Let’s see if this experiment succeeds.

• DNA: Steel prices may rise 5%

The extension of the moratorium on steel price hike beyond the first week of August seems to be testing the patience of steel majors. Once the extended moratorium expires, steel producers may increase prices by 5%.

. . . the government is planning measures to cut duty and lower input costs for steel companies. The cost of raw materials has gone up considerably, with the prices of iron ore and coking coal jumping by 65% and 200%, respectively.

I have my doubts - see my previous post: Steel production, consumption & price trends, and the latest from Bloomberg: Jindal Stainless Cuts Prices, Following Posco, as Nickel Drops

• Washington Post: Sovereign Funds Become Big Speculators

Sovereign wealth funds, the massive investment pools run by foreign governments, are now among the biggest speculators in the trading of oil and other vital goods like corn and cotton in the United States.

. . . the CFTC is not detecting the growing influence of foreign funds because they invest through Wall Street brokers known as “swap dealers” who often operate on unregulated markets . . . sovereign wealth funds have moved into U.S. commodity exchanges for profit, not to accumulate goods. In general, they make these investments through index funds.

About two dozen countries have established or are in the process of forming large funds, including Iran, Norway, Singapore, Kuwait, Australia, Russia and Libya. While precise data about each of the funds can be difficult to obtain, Wall Street analysts say their collective value has exceeded $2 trillion and will probably grow at least fivefold by 2012.

• Investors Insight: A Value Investor Looks At China

Analyzing the Chinese economy while it is growing at superfast rates is like analyzing a credit card company or a mortgage originator during an economic expansion - all you see is reward - the growth.  But the defaults - the risk - are masked by a healthy economy and constantly increasing new business that is profitable at first. The true colors of that growth only appear after the economy slows down and new accounts mature.

Industrial production accounts for 49% of GDP, double the rate of most developed nations (i.e. industrial production for the United States is 20.5 % of GDP, UK 18.2% , and Japan 26.5%).

In the past “stuff” stocks were cyclical, their margins played a very predictable foxtrot of bouncing together with the whims of the US economy. Today they are behaving if as Google is their middle name - their sales are climbing in double digits, margins keep expanding and now they are called “growth” stocks. They are not.  It is just Chinese late stage growth obesity, which has disproportionately impacted the demand for stuff, creating an expectation that the “growth story” will continue forever.

• NY Times: Cost-Cutting in New York and London, a Boom in India

Wall Street’s losses are fast becoming India’s gain. After outsourcing much of their back-office work to India, banks are now exporting data-intensive jobs from higher up the food chain to cities that cost less than New York, London and Hong Kong, either at their own offices or to third parties.

“There’s a huge amount of grunt work that has been done by $250,000-a-year Wharton M.B.A.’s,” Mr. Kessler said. “Some of that stuff, it’s natural to outsource it.”

After research, the next wave may include more sophisticated jobs like the creation of derivative products, quantitative trading models and even sales jobs from the trading floors.

• DNA: Last-minute trades, a big help for fund NAVs

MF managers don’t like falling NAVs as they can lead to bigger problems if investors panic and begin to redeem money from their funds. Sitting on huge piles of cash, fund managers, especially the bigger ones, deftly avoid trouble in a systematic manner, says the person, who primarily deals with institutions.

Since NAV of mutual fund schemes are calculated on closing price, the last few trades become crucial for funds irrespective of what price the stocks have traded through the day.

Ah, nice to know that on top of getting a % of your money every year regardless of performance, fund managers also are trying their best to prop up the NAV charts.

• Arabian Business: Sun sets on cement

RAK White Cement is not alone among producers in the region suffering from a lack of power. A shortage in the supply of natural gas, together with pressures to keep up with strong demand, has forced some producers to instead use more expensive fuels like diesel or coal. UAE demand for cement is expected to surge to 26.2 million tonnes by 2011.

Those producers who are turning to alternative fuel sources are experiencing ever slimmer profit margins too. The price of coal has risen to $150 a tonne from $80 to $90 a tonne last year. Meanwhile, the price of diesel is estimated to have rocketed by 50 percent in the last four months.

Pick your poison: this is indicative of huge pent-up demand for real estate in the ME/GCC, or a sign that we are smack in the middle of a ‘top’.

Gold prices are free falling today - the spot price is down over 4% to almost $820/oz. Indian prices are now below Rs 11,200 per 10 gms.

The Philadelphia’s Gold & Silver Index (XAU) index is down over 6% tonight, and my position in gold mining stocks is going to get hit, especially after I bought a few more units of the DSP-ML WGF! Fear not - I intend to further scale in.

Why be a glutton for punishment? Because the time to buy is when there’s blood on the streets!

• Wall Street Journal: Vulture Investors Won’t Have It Easy

Prof. Altman estimates that professional investors currently have assembled $350 billion to $400 billion to buy distressed securities. That is nearly double the amount available in 2001 to 2003, and far more than the early 1990s.

• Washington Post: Slow Economy Puts Value Investing to the Test

Last year was an unusually bad one for value investors. Large-cap value funds gained just 1.42 percent, while large-cap growth funds rose 13.35 percent. This year has not been much better, with some of the largest value funds showing double-digit negative year-to-date returns.

Most value investors brush off that concern by saying you will eventually recoup your losses if you are willing to wait. But, said Sorrentino, “I would caution that you could go broke waiting for these investments to turn around. You can be right in the long run and go out of business in the short run.”

Even hard-core value investors acknowledge that some of their peers were too quick to jump on the financials bandwagon, which ended up being a sinking ship because of a spike in foreclosures and a tightening of credit.

• Hindu Business Line: Rising yields bring foreign investors back into debt market

FIIs invested around $897 million in the debt market in July, while in March, April, May and June, their investments have been negative. FIIs’ outflows between March and June were around $928 million.

“While the one-year Mumbai Interbank Forward Rate is 7 to 8 per cent, the yield on a one-year treasury bill is 9.25 to 9.5 per cent and a AAA-rated corporate bond earns a yield of 10 to 10.5 per cent. So there is a substantial arbitrage opportunity of at least 2 percentage points,”

4 key markets that must be open & liquid: equities, debt, currencies & commodities. We are slowly getting there.

• Hindu Business Line: DSP ML World Gold Fund

Last week, I put on a position in gold mining stocks - they have promptly dropped 3%+, but I am bravely holding on!

• DNA: Investment policy gives urea sector a big leg-up

The Centre on Friday cleared a producer-friendly policy on investments in urea plants, which can increase capacity at existing plants by 3 million tonnes over the next two years through debottlenecking exercises.

India produces 20 million tonnes a year, but that is 40% short of demand, estimated at around 28 million tonnes currently.

“The entire thing depends on gas availability and price. If it is available to fertiliser manufacturers at $5 per mmbtu, urea production will go up,”

• RGE Monitor: Navigating Towards a Global Recession?

A few weeks back we surveyed a group of countries navigating towards (or through) recession. The list included the U.S., Canada, Spain, Ireland, Italy, the UK, the Baltics and New Zealand. Now the growth engine of the EMU, Germany, is faltering, together with France. And a recession might be in the works for Japan as well. This essentially leaves us with a fully fledged G7 recession in the making.

China’s exports to Europe, which marked double digit growth last year are now falling, manufacturing output seems to be contracting and exporters are complaining of higher labor and input costs. With a focus on growth, and headline inflation stabilized, the Chinese government is shifting away from its ‘tight’ monetary policy some lending curbs have been lifted and RMB appreciation has already stalled.

There’s not much doubt about a worldwide slowdown; look at the continuing steep fall in the Baltic Dry Index:

• Economic Times: Rate futures may be here soon

. . . the panel has recommended that futures contracts should be based on the 10-year government bond. This could eventually be extended to 2-year, 5-year and 30-year government securities based on market response.

. . . the duration for short-selling must be extended, in such a manner that the tenor of the short sale transaction coincides with the futures contract. The panel feels that at least in the initial stages, only banks and bond houses should be allowed to undertake short-selling for a longer duration, but on the condition that the transaction is delivery-based.

Hope this doesn’t go the way of the SLBM.

• Bloomberg: India to Increase LPG Imports Next Year as Reliance Cuts Sale

India will need to double imports of liquefied petroleum gas in the year starting April 2009 after Reliance Industries Ltd., operator of the world’s third-biggest refinery, reduces domestic sales of the fuel.

Cooking gas is sold at 349.5 rupees a 14.2 kilogram bottle in Mumbai, or about $825 a metric ton. Saudi Aramco, the largest supplier of LPG to Asia, charges $860 a ton for propane and $890 a ton for butane, the two varieties of LPG.

Reliance may prefer to sell all its petroleum products overseas because of export incentives and the cap on domestic prices.

More inflation and/or subsidies in the pipeline?

• Bloomberg: Auction-Rate Writedowns May Be $4 Billion

Citigroup Inc., Merrill Lynch & Co. and UBS AG are among banks that may have to write down a total of $4 billion as they buy back auction-rate securities, according to Bank of America Inc.

Citigroup said yesterday it will offer to buy back about $7.3 billion of the debt from individual investors, while Merrill Lynch, also in New York, said it would take about $10 billion of the assets. Zurich, Switzerland-based UBS may repurchase auction-rate securities valued at $25 billion by regulators.

In other words: Citi, ML & UBS got their ARS handed to them.

Lots of fun ongoing in Western markets: Dollar Delight

Today the Dollar is having its best day since July 2005 with a gain of 1.167%.

Most hosed is the Euro, followed by crude oil & copper, silver and finally gold; here are the highlights -

The euro fell the most in almost eight years.

The Russian ruble fell by the most in 2 1/2 years against a dollar-euro basket.

Light, sweet crude for September delivery lost $4.03 to $115.99 a barrel.

Gold futures for December delivery fell $16.30, or 1.9 percent, to $861.60.

Silver futures tumbled more than 5% to 2008 lows.

Dollar bears & oil bulls are re-learning this lesson: The trend is your friend, until it bends!

• Mint: Banks woo wealthy customers with PE, gold fund offerings

ICICI Bank is one of many Indian banks devising alternative investment options such as private equity (PE), structured products with a capital guarantee, and gold for high networth individuals (HNIs) at a time when returns from investments in equities and real estate have turned volatile.

Also read: India to become trillion-dollar wealth management mkt by 2012

“The bullish sentiments on the real estate market have died down. Gold is coming up as a good investment option. We are seeing growing interest from individuals to invest in 1kg gold biscuits. Traditionally, gold has always given a return in excess of 8% annually,”

Hmm. Do review the structured products in detail, before committing funds.

• Business Standard: Hedging: 120 firms caught napping

Data culled from the unaudited first quarter results reveal that these 120 companies set aside Rs 8,900 crore for currency fluctuations, exotic derivative products and mark-to-market (MTM) losses to hedge their exports.

The companies took foreign currency loans through external commercial borrowing (ECBs). This increased the cost of funds as the new accounting norms forced borrowers to make provisions for MTM losses following the rupee depreciation. Besides, the meltdown in the global equity markets hurt FCCBs issuers the most. The investors have postponed their conversion plans as shares of most high premium FCCBs are trading at a huge discount.

The MTM losses of the 120 companies show that realised losses on account of derivative products and revenue hedging are modest at Rs 1,700 crore, while the unrealised or MTM losses due to currency fluctuations are higher at Rs 7,200 crore.

Damned if you hedge, damned if you don’t.

• CXO Advisory: Combining Momentum and Roll Return Signals for Commodity Futures

They test combinations that iteratively buy backwardated (positive roll return) winners and short contangoed (negative roll return) losers.

Trend following rules with formation periods of one, three and 12 months and a holding period of one month (Mom1-1, Mom3-1 and Mom12-1) are the best momentum strategies.

The best roll return strategy (TS1) buys the 20% of commodities with the most positive roll returns and shorts the 20% with the most negative roll returns each month.

Time to test this on Indian commodity markets.

The recent plunge in commodity prices, including gold has set up an interesting buying opportunity - gold mining stocks. First some charts:

The gold price - in both dollars & rupees - peaked in mid-July and has corrected over 10%:

Gold mining stocks (with their inherent leverage) got destroyed over the same period - the chart below plots the Philadelphia’s Gold & Silver Index (XAU):

While I think that even gold is approaching a good entry point, the gold mining stocks seem even more likely to turn around, given:

• Oversold technicals
• Dropping oil & commodity prices
• Historical analysis of gold:XAU relative performance
• Seasonality

Given that we don’t really have any major gold miners that trade on the NSE/BSE, there are only 2 options to play this one:

1. DSP ML World Gold Fund
2. AIG World Gold Fund

I found the DSPML-WGF to have a 85%+ correlation with the XAU, so it’s a good enough proxy for this purpose.

• Entry: Scale in, starting today (I got in @ NAV of 11.7077 11.5965)
• Exit (stop loss): If trade not profitable in 2 weeks
• Exit (book profits): When gold:XAU ratio drops below 5

Mind you, this is not based on any sort of valution analysis, but purely on price & relative performance. Also, using funds like these entails high transaction costs (2.25% entry load, 1% exit load).

Warning: This is a ‘pick the bottom’ / ‘catch a falling knife’ / ‘mean reversion’ trade - and the risk is that the downtrend continues further! Moreover, the XAU index is very volatile, and a 20%+ move in either direction can occur in the matter of days.

Update: Bought more of DSP-ML WGF @ 10.8248 on August 11; ‘averaging down’ can be hazardous to your health.