Gold prices fell to an 11-month low on Thursday, as the dollar continued its relentless upward march. That’s a huge change from the situation in March, when gold prices reached a peak of $1030 an ounce.
Wasn’t gold supposed to be the safe haven to which investors flee in times like these? Indeed, the combination of a huge amount of uncertainty in the markets coupled with high inflation seemed to be tailormade for a rise in the price of gold. But unfortunately for its votaries, the precious metal has been behaving more like any other commodity, rather than fulfilling its role as a dependable store of value.
Gold has historically also been correlated closely to the value of the dollar. It’s no coincidence that the US dollar index hit a low last March before starting to claw its way up. Last month, when gold fell below the $800 an ounce level, was also the month in which the dollar index rallied sharply. Gold has also historically been closely correlated to oil prices, probably for the simple reason that oil prices are a measure of inflation. With the focus of attention shifting from rising inflation to slowing growth, gold’s importance as an inflationary hedge has declined to some extent.
So will gold regain its lustre?
That will depend on the outlook for the dollar. The dollar has started to appreciate against other currencies on the presumption that while the US started slipping into a slowdown earlier than other countries in Europe and Asia, that slowdown has now spread and these regions too will be affected. The assumption is that as growth slows in these areas, they will cut interest rates and thus lower the difference between their rates and US interest rates. That is one reason why global research outfit BCA Research wrote last month: “The setback in crude prices will help to alleviate inflation angst at the major central banks. This, coupled with rising economic pressure on the ECB and BoE to abandon their hawkish stance may bring lower European real interest rates, which is bullish for gold by increasing the supply of fiat money.”
Inverse Correlation (Graphic)
That’s apart from possible downward pressure on the dollar as a consequence of the US government’s decision to fund the losses of mortgage agencies Fannie Mae and Freddie Mac. Inflation may then once again become an issue. As market guru Marc Faber pointed out in a note recently, “it may be possible for Ben, Hank & Co. to support asset prices with enormous support measures and all sorts of market manipulations and government bailouts in nominal terms but it is very doubtful that this very questionable group of government officials (a better term is group of “market manipulators” who in recent years completely mispriced the cost of capital through artificially low interest rates) will be able to boost equity prices higher in real terms.” In short, the environment may not remain as conducive to the dollar and for lower inflation as it is at present. That could lead to a rebound in gold.
In India, the additional reason for investing in gold lies in the weakness of the rupee. That is perhaps the reason why the GOLD BEES exchange traded fund (ETF) is down a comparatively low 18.3% from the highs it reached last March, while international gold prices are down about 27% from their peak.
HCL Infosystems on recovery path, but markets unconvinced
The change inthe HCL Infosystems Ltd’s distribution agreement with Nokia Corp. hasn’t hurt the company as badly as one would have thought.
HCL was the sole distributor of Nokia phones till August 2006, until which its revenues and profit from this business grew at a fast pace. Between January and June 2007, revenues from this business fell by 10.55%, and the fear was that things could get worse, since the company’s share in the distribution of Nokia phones was expected to decline to about 50% by end-2007 and early 2008.
But, in the period between July 2007 and June 2008, the company has maintained revenues from the telephone distribution business. Sandeep Kanwar, chief financial officer of the company, says sales actually grew in unit terms but revenues were flat because of a drop in the average selling price of mobile phones.
To be sure, the growth in the wireless industry has been very high and with customers regularly upgrading phones, the replacement market is also strong. So, although the company now has to share the spoils, the market growth rate has been high enough to compensate it.
Meanwhile, the hardware business, coupled with the relatively new systems integration business, saw revenue grow by 24% last year, and profit by 14.5%.
Despite the steady performance, the HCL Infosystems stock hasn’t recovered from the slump it suffered after announcing the change in the terms of its distribution agreement with Nokia. Back then, the stock had fallen to the Rs175 levels. It now trades even lower at Rs107. While the Sensex has risen by about 47% since the new deal was announced, HCL Infosystems’ shares have fallen by 59%.
The company says it is in the process of reducing dependence on the telephone distribution business, by investing in the systems integration and computer hardware businesses. The systems integration business was non-existent about two years ago, but now accounts for at least 5% of revenues and contributes even more to profit.
But the markets don’t seem to be convinced about the recovery yet—at current levels, the stock trades at just six times trailing earnings.
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