What you must know about investing in gold

 

Let's consider the factors one needs to be aware of and the knowhow of investing in gold.

Forms of buying gold

Any investor has to be aware of the different forms of buying gold.

Jewellery: The most traditional and the dominant form of buying gold in India is in fact not an investment idea.

The reason is that there are heavy losses in the form of wastage and making charges. This can vary from a minimum of 10 per cent to as high as 35 per cent for special and complex designs.

Bank coins: Again not an investment idea as the premium that banks charge for their coins is anywhere between 5 per cent and 10 per cent. Also the bank coins have lesser liquidity as they are not bought back by the banks.

World Gold Council coins: These are coins issued by jewelers who are part of the WGC network. They have lesser premium over the market price (1% to 2%) and are redeemed at the market price when one takes them for selling off.

Bullion bars: These are good modes for investment but the minimum investment here is much higher than a common investor can think of.

Gold Exchange Traded Funds: ETFs are a hot option these days. These are like mutual funds that invest only in gold. They are proving to be an easier and safer mode to buy gold. The charges are very less and the gold can be accessed electronically. The disadvantage is that one never gets to 'see' one's holdings.

Current income

Gold in any form does not give any current income. The only exception is the dividend option in the gold ETFs. If held in the physical form, there is only outflow of cash for the maintenance of lockers.

Capital appreciation

Historically, gold has been the perfect hedge for inflation. This is based on data from the year 1800 AD. But in terms of absolute returns gold has fared rather poorly giving returns at only 0.8% above inflation.

Real estate and shares beat gold squarely on the capital appreciation front. Real estate and shares have given returns of about 11% over inflation since 1979 (1979 as that was the year the index called Sensex was formed).

In the short run, however, gold is a very strong bet, compared to shares which are highly volatile. The idea for gold investment will be to use it at times when the markets are falling and when the inflation is very high.

A 5 per cent of the overall investment portfolio can be considered for gold investments (bullion, WGC coins, gold ETFs). Jewellery is not an investment as far as personal finance goes. It is only an expense for pleasure, symbolising wealth.

Risk

Gold does not carry much risk at least in India, as we hardly see deflation in the real sense. Even when the official figures where showing negative inflation (deflation) during the last year, the actual prices of food items were increasing. This was reflected in the gold prices too.

The real risk with buying gold is in the opportunity cost of investing in other avenues that can actually give higher returns.

Liquidity

Gold scores the highest in terms of liquidity, compared to all other investments. At anytime of the day and any day gold could literally be converted to cash. Banks would give you a jewellery loan. (Remember though that many banks do not give loans on coins, including their own).

So would your friendly neighborhood pawn shop. They can also be sold in some pawn shops, though many are cautious to purchase in these outlets for fear of 'stolen jewellery'.

Gold jewelers would exchange your gold possessions for other gold jewels. But the problem here is that there is going to be making and wastage charges involved again. Here we lose the value (to the extent of 10% to 35%) of gold jewels.

An unfortunate social aspect in most families in India related to liquidity is that, gold has sentiments attached and is the last item to leave the house in case of financial difficulties. This negates the entire purpose of gold having liquidity.

Tax treatment

Gold suffers capital gains tax as per the IT act. So it is better to ask your jeweler for the bill. Close to 90% of the gold jewellery traded in India is unbilled. This is a serious problem for those who look at gold as an investment. Only the branded jewelers would automatically give you a bill. At other places ask for one.

We can make use of indexation benefits when calculating the capital gains of gold. So the tax payable will not be much.

Gold does not have any other tax benefits.

Convenience

Gold scores very high here. But with the per gram price rising, the smallest single investment is becoming higher. With the emergence of Golf ETFs the convenience to hold gold for the short term has increased many folds. Instead of holding cash for the short term, one can today make investments in Gold ETFs.

Conclusion

Gold has proved itself time and again to be the perfect hedge for inflation. But to look at it as a hedge avenue, Indians are yet to consider this market actively as the purchases continue to be dominated by jewellery.

Gold only beats inflation. It fares poorly when compared to real estate or shares when compared on the basis of real inflation adjusted returns.

Any serious investor, however, is advised to have a certain percentage of investment in gold to hedge inflation.

 

Prices to hit gold jewellery demand: WGC

Sky-high gold jwellery prices will haunt buyers in 2010 also though India is better placed than its global peers, where people are slowly turning back to purchases, according to World Gold Council. "In terms of jewellery, it is likely that the high price will continue to adversely affect demand, consumer confidence is returning faster to the traditionally strong jewellery markets of India and China than in other parts of the world," WGC Managing Director India Ajay Mitra said in a statement.

Jewellery demand was hit in 2009, due to global recession and record high prices in the key jewellery buying markets and elevated volatility levels of gold price, it said.

As a result, the demand was significantly lower in 2009 than a year previously, the statement added.

However, investment demand remained strong supported by continued economic and currency uncertainty, especially fears about future inflation, emanating from rapid money supply growth, and dollar weakness, the WGC said.

"Moreover, despite rapid investment inflows in recent years, allocation to gold remain low as a percentage of total global assets and there is ample scope for further growth," it added.

On supply side, mine production has been declining since 2001, and fell further 3 per cent last year to 2,400 tonnes. The outlook for new mine production remained benign, even as there has been a sharp increase in exploration spending since 2004, there has not been any new discoveries of gold.

Mining is, however, only one part of supply and practically all of the gold that has ever been mined still exists in jewellery form. "At the moment, our best estimate of above ground stocks is 163,000 tonnes, most of which resides in the jewellery sector in India," WGC said.

Scrap or recycled gold, it said, had been high this year due to record high prices in many jewellery-buying countries, but it has eased lately as the economy showed signs of recovery and in 2010 "distress selling" of the precious metal may continue to ease.

 

Court bans sale of Microsoft Word in US

Microsoft has lost an appeal in a patent dispute with Canadian company i4i with the US Court of Appeals for the Federal Circuit ordering the software giant to stop selling Microsoft Word 2007 and other Office 2007 products by January 11.

The court also hit Microsoft with a $287 million fine.

Microsoft lost a patent infringement suit against XML specialists i4i back in May when it was found that Word's handling of .xml, .docx, and .docm files infringed upon i4i's patented XML handling algorithms, but the injunction against further Word sales was put on hold pending the results of this appeal.

In August 2009, a US judge had ordered Microsoft to stop selling Microsoft Word in its current form in the US as it infringes upon a patent owned by a Canadian company, i4i.

Judge Leonard Davis of the US District Court for the Eastern District of Texas had passed an injunction to this effect and has given Microsoft 2 months within which the software giant must comply with the order.

A patent infringement lawsuit was filed by i4i in 2007 against Microsoft. The judge on Tuesday forbade Microsoft from selling Word products which let people create custom XML documents. Microsoft has now been banned from selling or importing into the US any Word products which can open .XML, .DOCX, or DOCM files containing custom XML.

However, reports suggest that the patent ruling will have not much effect on Microsoft. The Washington Post said that the ruling only upholds a judge's injunction issued after a district court jury found that a feature in Word 2007, and the Office 2007 suite that includes Word, infringed a patent held by i4i, a Toronto software developer.

Meanwhile, Kevin Kutz, director of public affairs, Microsoft Corporation, said in a media statement: 'We have just learned that the Court of Appeals for the Federal Circuit has denied our appeal in the i4i case.  We are moving quickly to comply with the injunction, which takes effect on January 11, 2010.'

The statement adds that the 'injunction applies only to copies of Microsoft Word 2007 and Microsoft Office 2007 sold in the United States on or after the injunction date of January 11, 2010. Copies of these products sold before this date are not affected.'

Microsoft also said that it has put the process in motion to 'remove the little-used XML features from these products.' 'Therefore, we expect to have copies of Microsoft Word 2007 and Office 2007, with this feature removed, available for US sale and distribution by the injunction date. In addition, the beta versions of Microsoft Word 2010 and Microsoft Office 2010, which are available now for downloading, do not contain the technology covered by the injunction,' the statement added.

 

How bonds add safety to your portfolio

 

Bond is simply a loan taken by the companies or government in order to finance their activities. Investors lend money and receive interest from the borrower at pre-determined intervals. Normally the periods can be quarterly, half-yearly and yearly. The bond can be considered as IOU from the borrower to the lender. The original value of the bond is called as face value.

The rate of interest is called coupon and the period of holding is called as maturity. If you choose not to withdraw the interest, the interest amount is added to your investment amount and earns you interest. At maturity, the amount you get is called as maturity value.

Example, if you buy a bond with a face value of Rs 100, with a coupon of 7 per cent, you get Rs 7 at the end of each year. If you opt to get this interest half-yearly, you get Rs 3.5 every 6 months.

Types of bonds

The bonds are of various types: capital gains bonds, taxable bonds, company bonds, commercial paper, treasury bills, strips, zero-coupon bonds and foreign currency convertible bonds, available to non-residents. Most of these bonds are taxable, while some like those issued by NABARD are tax-free.

Trading in bonds

Unfortunately trading in bonds is not available for Indian retail investors. You have to hold the bonds till maturity or till the borrower decides to repay the loan.

Factors affecting the bonds

The most important factor affecting the bond returns is the rate of interest. As the interest rate goes up, the returns from the bonds go down, since you are stuck at the lesser coupon. Another factor that can affect the bonds is the liquidity risk. This is true for company bonds, as the company may land in financial crisis and would be unable to repay the bonds. This makes bonds a riskier investment option than FDs.

Asset allocation for bonds

Since bonds are quite risky, it is advisable to opt for bonds issued by government or reputed corporate entities. Crisil gives credit rating for various bonds. The bond you want to go for should have at least AA+ rating. Once you do that, you can allocate 10 per cent of your portfolio towards bonds. If possible, choose short-term bond fund to protect yourself against interest risk.

Why choose bonds?

Besides offering you safety, bonds also tend to give you capital tax benefits. It is advisable to opt for mutual funds investing in bonds, as you enjoy the benefit of liquidity. Also you get exposure to different types of bonds at a mere amount of Rs 5,000.

For example, IDFC Dynamic Bond fund has managed to generate returns of 8.8 per cent, since 2002, when it was first introduced. Over the past 1 year, it has given a return of 18 per cent, as compared to the its benchmark, Crisil Composite Bond that offered a return of 7.8 per cent.

Bonds are an excellent diversification tool for those looking for stability and tax-saving. But they also carry certain risks. It is advisable to find out the reputation of the borrower as well as your risk appetite before investing.

 

Dubai property recovery under threat

 

The fear of government-owned Dubai World reneging on its commitments to global lenders is expected to find an echo in a reversal of a recent tentative recovery in Dubai's real estate values unless the emirate manages to strike some sort of deal with creditors and / or somehow raises the cash to meet its obligations, analysts and industry professionals said on Sunday.

The ports, property and hospitality conglomerate last Wednesday asked its creditors for a six-month standstill period while it restructures its debt obligations. Dubai World has borrowed $59 billion to finance its expansion, including the acquisition of port, retail and leisure assets and the setting up real estate ventures globally.

"Unless there is some agreement with creditors on the $10 billion or so that is due in the next two months, I see an indirect perceptional impact on property values in Dubai, maybe even sending them spiralling downward again," said Ashutosh Maitra, one of the partners at a Dubai-based property marketing firm.

This would have a direct impact on the Indian investors in the emirate's real estate sector, who constitute the largest number of property buyers followed by Britons. In real terms, however, such an impact would further push back the possibility of a profitable exit.

An economist attached to an asset management firm at the Dubai International Financial Centre, or DIFC, added: "Such an impact is only likely if there is no quick resolution to the Dubai World crisis. And frankly, this seems to be a storm in a teacup. Dubai World is not seeking to renege on obligations, it is simply asking for some time out from paying off the interest while it restructures its commitments."

By the middle of this year, property values had fallen by about 65 per cent in peak advertised prices since September 2008, when a delayed reaction to the global credit crunch hit the market. According to HSBC data, May 2009 saw a slight uptick in agreed prices month on month, indicating signs of recovery. The lender said distressed stock was gradually clearing due to renewed interest as well as some repricing by sellers. "Anecdotal evidence also suggests that foreign investors seem to be back in the market and there are bulk buyers of property for investment purposes," HSBC said.

The research arm of HC Securities said the main catalyst of an uptick is credit returning to the market as mortgage providers raised their loan-to-value ratios, relaxed credit norms and lowered rates in line with a downward trend in the Emirates Inter-Bank Offer Rate, or Eibor, which fell from 3.87 per cent in January to 1.95 per cent in October.

After dropping to a two-year low of seven per cent and six per cent, mortgage values and volumes as a percentage of total transactions have since steadily recovered to pre-crisis levels, reaching 24 per cent and 14 per cent, respectively, in October. Mortgage volumes have also recorded a strong growth, reaching a two-year high of 374 units in August, as prices drop to attractive levels, only to back-pedal to 191 units in October.

However, a number of factors are likely to keep the recovery fragile. According to HC Securities' own research, 60,000 residential units are likely to hit the market between 2009 and 2011, putting further pressure on prices.

At the same time, rental returns will continue to stagnate or fall marginally as uncertainty over the business environment keeps the expatriate population lower than in recent years. Several rounds of lay-offs by large and small corporations have resulted in rents in most parts of Dubai coming under intense pressure in the past 18 months, making property investments less attractive than they used to be in the glory days of 2002 to 2007, when so-called "flippers" -- investors who bought property with a 10 per cent down payment, only to sell it one or two months later for a 100 per cent return on investment -- made massive amounts of cash.

Asking rentals in Dubai have retreated for 10 months in succession since the start of the year, dropping more than 40 per cent year to date. Occupancy levels have been driven down by expatriates leaving and new stock coming into the market. The pace of the decline, however, seems to be slowing, according to HC Securities, with rent values declining only two per cent month-on-month in September and October.

Advertised rentals on agreed sale prices resulted in yields that are higher, upwards of 10 per cent in October. Considering there is a large bid/ask spread on prices, HC Securities believes rentals are no different and estimates that agreed rental yields have compressed from a high of 8.6 per cent in November 2008 to around 5.7 per cent in October 2009.

On the other hand, this is making life easier for tenants, who now have the upper hand in negotiating down their monthly rents. Over the past four months, there has been a large population shift from the traditionally low-rent areas of Dubai into the relatively upper-crust areas where rents have suddenly become more affordable.

Any quick recovery in realty values driven by massive foreign capital, as witnessed in the boom years, will be predicated on global fund managers allocating larger amounts to the Dubai and UAE markets. "I don't see that happening very quickly," said the DIFC-based economist, who refused to be named. "Primary fund flows will be allocated to more developed markets like New York and London -- where there is an established secondary market that facilitates an exit, and where transparent data shows a clear bottoming out. I believe only the high-risk hot money like hedge funds will be allocated to emerging markets."

Also, other real estate opportunities in the Arabian Gulf itself are looking more attractive, according to several property consultancies such as Jones Lang Lasalle and Colliers. One of them is Dubai's own neighbour, the oil-rich UAE capital city of Abu Dhabi, where severe residential and commercial property shortages are keeping prices and rental yields high.

"If the Dubai World debt imbroglio results in pushing property prices down again, it will be seen as the start of the double-dip in that sector. Since perception is everything these days, the worry is the double-dip will result in a W-shaped overall economic recovery for the emirate," said the DIFC-based economist. This would be bad news for real estate buyers in Dubai, who will witness their investments eroding even more before recovering.

"These worries would prove unfounded, however, if the Abu Dhabi Government or the Federal Government takes a hand in helping out the Dubai Government, as they have done on two occasions in the past," he said.

 

Facebook to get rid of India network

 

Almost 50 per cent of all the 350 million-odd active users on the social networking site are members of regional networks.

The world's largest social networking site, Facebook, has decided to rid itself of regional networks like India and China in a bid to tighten its privacy policy.

Following this move, thousands of Facebook users from India, who had opted for the "India" network when joining the social networking site, will have to revise their settings.

Every Indian who joins Facebook has an option to choose the 'India' network. India has nearly 12 million Facebook users, and the number is growing steadily. And there are numerous "India networks" -- the largest have around 13,198 members. Compared to this, Orkut (owned by Google) has around 16 million users, but the numbers are declining.

Since this update will remove regional networks and create some new settings, in the next couple of weeks Facebook will ask its users to review and update their privacy settings. Users will see a message that will explain the changes and take them to a page where they can update their settings.

When they're finished, it will show a confirmation page so that one can make sure one has chosen the right settings. As always, once the task is done, users will still be able to change the settings whenever they want.

Facebook has its reasons. Almost 50 per cent of all the 350 million-odd Facebook's active users are members of regional networks, "so this is an important issue for us," said Facebook founder Mark Zuckerberg in an open letter to users.

As Facebook has grown, regional networks like India and China have millions of members and "we've concluded that this is no longer the best way for you to control your privacy. If we can build a better system, then more than 100 million people will have more control of their information," said Zuckerberg.

"The positive side is that users will be better able to protect their privacy. On the negative side, users like me who have hundreds of contacts who have added me as friends, would now have to sift through those lists and decide who should see what. This is going to be very painful. It will need a software to manage these third-party contacts," rues Mahesh Murthy, founder and cheif executive officer of search engine marketing firm, Pinstorm.

"This was waiting to happen. The regional networks were not adding any value as such," says Kiruba Shankar, co-founder of F5ive Technologies and founder CEO of Business Blogging. He adds, though, that Facebook probably did this since the regional networks were a drain on resources without adding any value in terms of advertising. "When it comes to advertising, Facebook can't hold a candle to Google," he says.

Another Facebook user, Moksh Juneja, concurs: "It won't make any difference to the users except the fact that the India networks held an emotional appeal. It gave, perhaps, a sense of belonging so some users may protest."

Murthy, on his part, believes that the move also "throws up some very important and sensitive questions". For instance, what happens to large networks? "Is this a precursor to charging for large networks?" asks Murthy. Instances of that are the "Starbucks" network which has over 4.5 fans and the "Coca-Cola" network with nearly 3.6 million fans. "Will Facebook start charging for networks of this size?"

Murthy adds it will also be difficult to rally people around causes that matter -- for instance, the 26/11 terrorist attacks in Mumbai. "I recall that with the help of Facebook and Twitter, we managed to mobilise nearly 220,000 people  from all around the city to protest against the attacks, and pressurise the government to take action," he says.

Incidentally, the first version of Facebook was launched five years ago. Its current privacy model revolves around "networks" -- communities for your school, your company or your region. This worked well when Facebook was mostly used by students, since it made sense for a student to share content with their fellow students. Over time, networks were added for companies and regions as well. Today, Facebook has networks for entire countries, like India and China.

However, as Facebook has grown, some of these regional networks now have millions of members.

Hence, Facebook will now "remove regional networks completely and create a simpler model for privacy control where you can set content to be available to only your friends, friends of your friends, or everyone. We're adding something that many of you have asked for -- the ability to control who sees each individual piece of content you create or upload. In addition, we'll also be fulfilling a request made by many of you to make the privacy settings page simpler by combining some settings", said Zuckerberg, noting that Facebook "began discussing this plan back in July 2008".

 

GM-SIAC eye India's commerical vehicle mart

 

American auto maker General Motors on Friday said it will enter the Indian commercial vehicles market through a partnership with China's Shanghai Automotive Industry Corporation.

"General Motors has entered into collaboration with Shanghai Automotive Industry Corporation to develop and manufacture commercial vehicles and other competitive products for India and export markets," the firm said in a statement.

The tie-up will give GM India, the company's subsidiary in India, access to mini-commercial vehicles and other products from the stable of GM's joint ventures in China, it added.

"These will be produced at GM India's Talegaon and Halol plants alongside GM's portfolio of models for India and global markets," it added.

The statement, however, did not clarify on reports of SIAC picking up 50 per cent stake in GM India. It said: "The collaboration is expected to be finalised shortly."

"This (the tie-up) will give us an opportunity to utilize and expand our manufacturing capacities as we introduce additional products that are tailored to the needs of local vehicle buyers and local driving conditions," GM India President and Managing Director Karl Slym said.

Commenting on the development, GM International Operations President Nick Reilly said over the past decade, GM and SAIC have created one of the world's most successful automotive industry partnerships in China and cooperation in Korea.

"We look forward to bringing our model for success to India, which is one of the world's most vibrant emerging vehicle markets," Reilly added.

The GM-SAIC tie up follows GM India-Reva collaboration to launch electric vehicles in the market.

General Motors currently manufactures the Chevrolet Spark Chevrolet U-Va, Chevrolet Aveo Chevrolet SRV, Chevrolet Optra Magnum, Chevrolet Cruze, Chevrolet Tavera and Chevrolet Captiva at its two state of the art facilities in Halol and Talegaon.

It also operates R&D, Engineering & Design Centres in Bangalore. Its engine plant is also fast coming up at the Talegaon site and will be commissioned by the end of next year.

 

Three IT firms bag $600 million Walmart deal

 

Walmart has selected three IT vendors in India -- Infosys Technologies, Cognizant Technology Solutions and UST Global -- for multi-year contracts worth over $600 million (around Rs 2,750 crore).

The amount is roughly equivalent to the value of goods -- textiles, handicrafts and other products -- that the world's largest retailer sources from India every year.

This development is expected to boost the IT outsourcing landscape in India, given that Walmart typically prefers to develop its retail applications in-house. Walmart gradually started buying packaged retail applications from leading software vendors such as Oracle, HP and SAP only towards the end of 2007. It had, however, given Infosys and Cognizant pilot projects about five months ago.

Initially, the three vendors are expected to earn Rs 250 crore (Rs 2.5 billion) to Rs 300 crore (Rs 3 billion), each, annually. The figure is set to grow as Walmart increases outsourcing of work from its main merchandising division. Infosys and Cognizant are expected to garner a larger share of the pie between them.

"What is more important is that these three vendors have now got a ticket to be in the club of Walmart's list of preferred vendors which will help them in growing this account in the long-run," said a source close to the development.

According to the contract, Infosys and Cognizant will be responsible for application development and support, while UST Global will be responsible for specific testing of these applications.

Asked about the deal, Infosys and Cognizant declined to comment. "As a policy, we do not comment on speculation in the marketplace," spokespeople from both companies said. A UST Global spokesperson in India said the company does not comment on any client specific information as "we have non-disclosure agreements with most of our clients."

UST Global is part of the $6 billion US-based business conglomerate Comcraft Group, with a major presence in India.

Walmart's media relations director John Simley replying to an e-mailed query said, "We have a large and growing business and productive relationship with many Indian companies. We do not comment on speculations about the nature of any business relationship."

Walmart, the largest private employer and grocery retailer in the US with revenues of $404 billion (2009), selected the vendors after a competitive bidding process in which most Indian IT services companies participated, except TCS ,India's largest IT services firm.

Tata Consultancy Services failed to qualify for the bid because it has an exclusive partnership with Target, another American retailer, who is into direct competition with Walmart. Among the bidding companies, Walmart shortlisted six contenders of which three were finalised based on their level of competency in various processes.

Unlike other retailers, Walmart does not want to open its own captive centre in India, even though the company has established a huge sourcing office in Bangalore sometime back.

Some of the world's leading retailers like Tesco, Target and Supervalu have their own software development centres in India. Tesco's Hindustan Service Centre which went live in May 2004, employs close to 3,000 people.

In 2006, Supervalu which is the third-largest grocery retail chain in the US, also set up a captive development centre in India for new applications development, technical operations and testing of applications.