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Last week, gold prices briefly touched $1,100/oz before settling just under that number.  Apparently the Indian government decided to sell US dollars and make a 200 ton gold purchase from the IMF, which created the spike in gold prices. Right now, the spot price for the yellow metal is $1,106.

price_of_gold

The IMF still has another 203 tons of gold to sell and the hot favorite to make the purchase has been China.  However, according to a report by Reuters, its a lot cheaper for China to buy domestically mined gold than purchase bullion from the IMF at the current spot price. According to Li Yang, a former adviser to the People’s Bank, “China’s gold is much cheaper than that.”

You may not realize it, but China is the world’s No. 1 gold producer, and its mine costs are much less than $1,100 per ounce. And given China’s propensity to put national well-being over any private individual or firm, they’re likely to just pay for the gold being mined at cost, which would be a lot lower than the spot price.

According to another Chinese Central Bank official,

China is the world’s biggest gold producer, so there’s no urgency for us, as there is for India, to snap up big volumes whenever they come onto the global market. It’s cheaper for us to buy gold from the Chinese market, but it doesn’t help diversify our huge foreign exchange reserves.

To diversify our portfolio, we should spend dollars on things like gold. But the catch is that even if China bought half the world’s annual gold supply, it would only cost a few tens of billions of dollars, which is tiny compared to China’s huge reserves.

China has 2.27 trillion dollars in reserves. Spending 25 Billion a year buying gold is chump change. The question that’s relevant is whether they will, because that will put upward pressure on gold prices.

While no one knows whether China will or will not buying gold on the open market, the one thing we do know is that the monetary base of the US Dollar is growing exponentially making each existing dollar less valuable. Check out this graph from the St. Louis Fed:

money_supply

While its not obvious from the graph, the monetary base has in the past year. Its true that this money hasn’t worked its way in to the economy, but if and when it does we should expect higher inflation and a spike in prices of real assets like gold, silver and real estate.

If I had a few trillion dollars, I’d be buying a few hundred tons of gold every year!

Here’s an excerpt from a recent interview with Jim Rogers on why he prefers investing in China over India.

High oil prices, inflation, food prices etc have hit countries like India very hard. How should counties like India tackle the situation?
• Inflation affects everyone. Not just India. We pay the same price for copper. Copper price is the same in Australia, Germany and the US and India. India is not getting any worse than other countries. Except for the fact that the Indian government spends periodically more money in controlling inflation. The problem with India is that your politicians are worse than American politicians. You know Indian politicians believe and argue that the cause for inflation is commodities trading. How absurd is that.

Recently India banned Futures trading in some commodities like rice, wheat, rubber, potato etc to control price rise and inflation.
• It is the same tactic that politicians have done for hundreds of years everywhere in the world. Politicians would blame for anything wrong on three groups of people. They blame financiers/financial types. They blame foreigners: It is always good to blame foreigners. And they blame the Press. They blame you guys for commodity inflation in India. If the Press is not writing about inflation, we would not have a problem, politicians would say. It is absolutely insanity.

India banned Futures trading in some commodities without any logic or reasoning and study. And it has not done anything good for commodities in India or in the rest of the world. The commodity prices are still up and up. India needs to understand that there is no easy solution to high prices. As prices go up, people use less of anything and people would continue to produce more and that has always been there in the boom market. I read that India produces lots of foodgrains and do not have storage facilities and tonnes of rice and wheat are destroyed in public sector storage facilities.

How sad it is. It is terrible thing to happen. So let India do things to protect commodities rather than ban Futures trading in them. By banning commodities in boom market, the Indian government is making things worse. Look at China. The Chinese instituted price controls. Price controls have been around for thousands of years. They always make things worse. If you tell somebody that rice is only Rs 2, you have no other ways.

If you tell a farmer that you can sell rice only for Rs 2, he will tell I am not going to produce any more rice. Farming is hard work. I cannot make any money with price controls by producing and selling rice for Rs 2. So then you have less rice and shortage of rice. Even Romans had price controls, it never worked. So the Indian government is making things worse for India. It has been making things worse for the people in the last 50 or 60 years.

Some politicians in India blame commodity Futures trading as the reason for price rise; inflation is a big political issue in India.
•By banning commodity Futures, food prices would not go down. Because people sell in any prices they want to in Futures. So banning Futures is a senseless decision. In commodities market, we know what the price of wheat is. There is a public price for wheat according to demand and supply world over. So India banning Futures does not have any effect on wheat market. Indian government instead of being transparent and serious is creating lots of black market by banning Futures trading. It is going to make lots of people desperate. Politicians have been doing the same thing for many years, all over the world. Not just in India. It is worst for all of us.

What is the reason for the global food crisis now?
• The number of hectares of global wheat farming has declined over the years. The inventories of food are in the lowers ebb now in the last 50-60 years. In the last 30 years, farming has been in a terrible state. There is a terrible shortage of farmers now across the world. Young people do not go for farming. They study computers and get jobs. All the farmers in the world are old now. They are all men. Young people do not go to farms these days because farming is a hard physical job.

Seeds, fertilizers, tractors…there is a shortage for these stuff. We have a shortage of even tractor tyres now. That is the reason why we have shortage of food and there is a food crisis. It is not again speculators who have created the food shortage. Speculators take delivery of wheat. They don’t hoard wheat; it is the government that is hoarding wheat. It is the governments that are making the prices higher. Argentina says you cannot export wheat. A lot of counties say you cannot export wheat. The governments should call farmers to produce more and invite more people to farming by offering incentives.

When farming is coming down, governments like in India are trying to introduce price control mechanisms and bring down prices, and ban Futures. So things are getting worse. Things will be bad if it goes like this way. The food crisis will get worse, if countries act like this way. There will come a time when people will not get enough food. They are going to starve. The world is going through several weather problems. There will be droughts. So things are getting worse for farmers. I promise politicians who rule us are not going to go to the fields and cultivate. Do you think your politicians will go to the fields and work hard till evening to raise more rice? No way.

US President George Bush recently commented that it is the large population in countries like India and China that are causing the food shortage and crisis.
• I don’t agree. Look how things are blown out of proportion by politicians. Why can’t the people in Asia eat and live happily? Is it the prerogative of the US that only they should eat? There are three billion people in Asia. Thirty yeas ago Mao Tse-Tung was still running China. Thirty years ago Indira Gandhi was running India. Vietnam was destroyed.

Now there are three billion people in Asia, working hard, saving and investing. They want to eat more and they should. There is nothing wrong in that. Why should the developed world say that you should not eat? That is discrimination. I hope Asia continues to consume more so that their standards of living would go higher. All the western politicians who say that Asia should not eat more, let them go to the fields and work hard and produce more wheat, rice and maize so that food prices do not go higher.

Do you think India and China are driving the global commodities prices?
• Not just India and China. Most countries are driving the global commodities prices. America consumes lots of sugar, wheat and petrol. Europe does, everybody does. If America stops using petrol, there will be lots of petrol available in the world. If Europe stops eating wheat, there will be lots of wheat available. So what I want to say is that everyone is driving the global commodities prices. Everyone in the world is driving the demand for everything.

Which is the commodity you are most bullish on these days? Gold or Crude Oil?
• I am not particularly bullish on a commodity. I am in fact bullish on all commodities. I am not a good market timer. I am a very good or a very bad sure time trader. So I have no idea. I own all the commodities. I go to commodities based on historic fundamentals.

You recently said that it is the right time to invest in agri-commodities. Is there great investing opportunities in agri-commodities?
• I have bought into agri-commodities recently. I am an admirer of agri-commodities, and I hope there are great investing opportunities there. I make plenty of mistakes. But I try to buy commodities cheap. And agri-commodities are cheap and thus hold great investing potential.

What do you think of Indian stock market? Is it overheated and overpriced?
• It was certainly overheated, and that is why it has come down crashing recently. I am not a good judge of the Indian stock markets. Sometimes I get the Indian stock markets exactly right. Sometimes I get it exactly wrong. So I am not a good judge. So, I would not buy Indian stocks because it is too high. And your government continues to do stupid things like don’t trade in commodities. So if I am a foreigner I cannot invest in Indian commodities. It is sad. Vietnam recently said all the problems is because of importing gold. So don’t import gold. So Vietnamese cannot import gold.

Most astonishing thing. So governments keep doing these kinds of things. Vietnam said their problems are because people have been buying gold. Come on, how crazy can you go? Don’t worry; politicians can go crazy at any lengths. You know America said there were weapons of mass destruction in Iraq. There were not. They spent hundreds of thousands of billions and killed tens of thousands of people to find those weapons. So politicians do a lot of crazy things.

Among the three emerging nations, Russia, India and China, which one would you rate first as an investment destination?
• China, of course.

Why not India? Can you compare China with India?
• Indians have the worst bureaucracy in the world. India learned bureaucracy from the British. Indian bureaucracy has remained stagnant. Just stagnant. They do what they think only. There is no proper education, no infrastructure in India. It is the most wonderful country in the world. I admire India’s diversity. I tell my friends, if you can only visit one country in your life time, go to India. India is an amazing country.

But as a place for investment? Oh, no, I would think twice. Even Indians who have been doing great business elsewhere in the world, and when they go back to India to do business, it has not been a good experience for them. Many of them get out of the business and go back to other countries to do business.

You have driven through India?
• I have driven through India a couple of times extensively. In 1988 and 2001. It was spectacular; it was wonderful. I loved it. I love traveling across any place. You learn a lot about that place while traveling. The highway from Kolkata to Mumbai should be one of the greatest highways in the world. But the Indian infrastructure development is so bad, that it took seven days for me to cover Mumbai and Kolkata highway. But everyday in India was an adventure, which I loved. Yes, it is a great place to travel. But if you looking for efficiency and investment, it is not the right place yet.

So it is better to go to China?
• Yeah, in China, a truck driver travels 70 km an hour average. China has the best roads in the world. On the Mumbai-Kolkata road, a truck driver goes 20 km an hour. That shows the efficiency between the nations. To cross state boarders in India, it is a nightmare. In China, it is all great. In China, they do what they say. In India, the government says lots of things, and they do not do it. Yes, smart Indians make lots of money. There are several success stories in India. India has the most beautiful women in the world, but has the worst politicians and bureaucrats.

If you haven’t read his latest book, A Bull In China, I strongly recommend it.

Property prices in India have been on a tear for quite a while now. One of the condos I bought in Ahmedabad in 2006 doubled in just over a year. While the growth has been pretty tame since then, I was nonetheless quite surprised.

But in other parts of India the market has actually begun to correct. After the housing downturn of America, UK, Spain and Australia, it’s finally India’s turn to feel some pain. According to the Economic Times of India, prices are cooling down. The real estate prices in some cities have come down as much as 25%.

Land prices in the national capital region (NCR), Mumbai suburbs, Bangalore and Hyderabad have corrected by up to 25% as property developers slow down their land purchases. Poor sales and lower availability of credit at higher cost have prompted property developers to end the mad rush to acquire land. Some of the developers have even backed out of land deals which were agreed upon as the slowdown hit the sector.

Prices have come down by up to 25% in Mumbai’s distant suburbs, including Thane and Belapur, and pockets of Hyderabad and Bangalore, according to property consultancy firm Knight Frank India.

I think the reason why Ahmedabad shot up so fast between mid-2006 and mid-2007 might have been because it was declared a mega-city and thus suddenly popped up on everyone’s radar. Despite being invested in the market, I wasn’t entirely happy to see prices shoot up so much. I guess that was because we had paid cash – if I had been fully leveraged with 10% down, I might be singing another tune!

Regardless, property prices still seem exorbitantly high in many places in India. Hopefully the 25% correction will bring some much need relief to the average middle class family.

India is a land of many contradictions. And I don’t mean in a good way. One of the most prominent examples is the government-sponsored discrimination. India proudly assets itself as a secular state. Wikipedia defines secularity (adjective form secular) as the state of being separate from religion. However, this isn’t borne out in principle.   If you belong to any specific ethnic or religious minority, then regardless of your economic status, you’re given preferential admission in colleges and government jobs.

Imagine giving admission to a D student in a Medical College, graduating him with a D grade and then giving him a secure, life-time-guaranteed government bank job, solely because he was from a minority group! Poor students from ethnic backgrounds aren’t the ones who take advantage of this. Its usually the educated and economically well-off people that even knows about these “reservation quotas”. In some southern states its so bad that less than 25% of college seats are based on merit.

Another strange law is the fact that while polygamy is illegal amongst the Hindus in India, Muslims are allowed up to 4 wives. I don’t know if any other ‘secular’ country that allows this. As if that weren’t enough, even the taxes are different.

Under the Hindu United Family Act, a Hindu family can set up a separate tax entity called the HUF account. Since it’s common (or was common) for families to live jointly together along with grandparents, sons, the sons families and unmarried daughters could pool money into a separate HUF account.

As an example, suppose I live and work in India. I would of course have to pay tax on my earned income. However, I can transfer my savings/investments to either my HUF or my Dad’s HUF. (Even if my father is deceased, his HUF still continues in his name with me as the beneficiary and as the account holder). Essentially, this creates 2 extra tax entities for me to split my income into.

Its very easy to hit the highest tax brackets in India as the tax brackets are very low (I’m not 100% certain, but I think you hit 33% at $7,500). The standard deductions are also different for men and women. (They’re higher for women, I think to incentivise them to work). So being able to split income this way definitely helps reduce your taxes.

So I guess the question is, would you change your religion if it meant you could have multiple wives, or if it meant you would pay less tax?
I know Hindus with multiple wives and Muslims who evade their taxes, so this isn’t any sort of issue in India, but if it was really enforced, what would you do?

As a continuation to Part 1, the Reliance Power IPO was over-subscribed . There were 3 slices, retail investors, high networth individuals and qualified institutional buyers. All three were over-subscribed by more than 75 times.

In Indian IPOs, you need to send in a cheque for amount you’d like to buy at the IPO price. The company encashes the cheque and then if the issue is over-subscribed, there’s a lottery to see if you’re allotted any shares. Right now, with the intense enthusiasm for investing in IPOs, most issues are over-subscribed. You’re most likely to receive a small fraction of the shares you asked for. Typically, the company gets to sits on your money for about 3 weeks while they figure it out and issue you a full or partial refund.

Anil Ambani’s Reliance Power which was trying to raise $3 Billion, received checks worth $200 Billion! Considering that they might be able to get 5% interest, that works out to around $625 million! Note: all numbers are in US dollars not Indian Rupees. 1 USD = ~40 Rupees.

It is widely speculated that the stock will open about 70% higher when its listed. This will make Anil Ambani the richest man in India, maybe even the world. He’s currently worth about $45 Billion after his networth tripled last year due to the exuberant Indian stock market.

However, the Indian stock market dropped 10% last Monday and a further 20-30% on Tuesday. Its been extremely volatile this week with the markets opening higher and then trending down. Its been reported that a lot of investors in Reliance Power have issued stop-payments on their cheques. Anil Ambani’s networth has also dropped significantly due this correction. Since his companies stock prices are down 25%+, I’d assume that his networth took a $10 Billion hit! The bigger they are, the harder they fall!

This severe correction in the markets has wiped out a lot of investors, mainly the ones that were over-leveraged or those that were speculating in index futures.  A severe correction could happen in the US markets too. Now is a good time to trim back your margin and make sure you’re not over-leveraged.