Falling Gold = Rising Economy?

The results season has begun. But there is nothing to cheer about it. The first set of numbers from leading companies has been rather disastrous for the market sentiment. Infosys’ fourth quarter financial performance and its guidance for FY14 wrecked havoc in the markets. The stock tanked miserably, as did the overall markets. Is there anything to look forward to in the present scenario? If Infosys is any indication of what is to follow, where does the market find its bottom?

But just when questions like these were being floated, one event seems to have turned the tide in favour of the markets. Let me set up the background for you before I get to what that event is and how it would be impacting the economy and the markets.

Recent economic developments, particularly on the global front, evoke a sense of déjà vu. Remember 1991? India faced a severe economic crisis at that point. To put things in perspective, India’s problems on the balance of payments front had begun in 1985, and by 1990, it had worsened to an extent that it could damage the economy rather badly. The government was close to default, the RBI had refused it credit and foreign exchange reserves were at levels which could pay for only three weeks of imports. The remedy was found in the country’s gold reserves. These were pledged with the International Monetary Fund for a loan, and that was what brought us out of the rut.

Why am I reminding you of this today? Well, the situation that the European countries are in today reminds us exactly of that time. Cyprus, the latest casualty of bad sovereign economics, triggered a fear which led to something that no one really expected even in their wildest of dreams; a selloff in the most coveted commodity, i.e. gold. From a high of USD 1924 per troy ounce, gold has come off sharply and is currently at USD 1380 a troy ounce.

What does this mean to the Indian economy? Will it make or break the markets? How does it impact the companies? Our cover story fills you in on the details of what has happened and the way it will impact the overall economic landscape. In a nutshell, the decline in gold prices comes as a blessing in disguise for the beleaguered government finances. The burgeoning current account deficit (CAD) will now breathe a bit easy. Higher gold imports coupled with rising gold prices have been the central reason for the CAD to have gone up so sharply. Now that the prices are coming down, it could bring in some respite for the government. How well the government will be able to make good of this god-sent opportunity is something only time can tell. Going by its past records, the UPA II has failed miserably in converting opportunity to advantage. Just hope, it doesn’t do the same this time around.

Another important question is, will the money that is flowing out of the yellow metal find its way into the equity markets now? Well, one primary reason why money has moved out from gold is the improving market sentiment, at least in the US and Japan. How much of this will come to India? For now, though FIIs seem to be fatigued, there is every chance that a pick-up in government finances (which is surely on the cards) will see them look back and allocate funds here. Early signs are already becoming evident and it isn’t too long before the trickle turns into a flood.

On another front, a recent order by the CERC will most probably change the fortunes of the troubled power sector. But does it make any sense to allow power companies to charge a higher tariff until normal coal supply is restored? A special report on this tells you all you would want to know about the implications of this order on the longer term fortunes of the power sector.

As usual, two stocks are being recommended in our primary columns. Our Choice Scrip this time is Gujarat Alkalies and Chemicals while JSW Energy is the Low Priced Scrip recommendation. Apart from these, there are the Hot Chips and the most talked about stocks to quench your speculative thirst. We hope they add glitter to your portfolio too. Do write in to us on comment@dsij.in to let us know your opinion about the issue.