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Is the Chinese Yuan set to replace the US dollar?

n the aftermath of the global financial crisis, the status of the US dollar as the world's reserve currency has increasingly come into question. Reckless money printing practices by the US Fed has undermined the value of the dollar as many countries have looked to diversify their assets into other currencies. 

The question then remains is which currency can take over from the US? Despite the crippling debt and weak fundamentals in the US, one of the reasons why the dollar still continues to find weight is because other countries have their share of issues as well. And so the dollar's strength is more relative. But there have been talks that the Chinese currency Yuan can stake a claim to the mantle currently donned by the dollar. 

One of the reasons why this seems likely is the tremendous pace at which China has grown in the recent past and become a force to reckon with in the international arena. Further, as per an article in Firstpost, if China eventually opens its capital market in the next 5 years, its progress as an international currency will be ensured. It will have big implications in countries around the world including India whose ambitions to become fully convertible on the capital account appear a dream at best. 

But all is not hunky dory for the dragon nation. One of the reasons why the US dollar is said to be losing value is because of the massive debt that the country has amassed. And in this regard, China does not fare well either. Indeed, as per the article, China has resorted to debt to fuel growth as a result of which the current level of debt stands at around 205% of GDP. What is more, More than half of that debt was piled on in just the past four years since the 2008 global financial crisis. Further, China will have to ease its capital controls; something which the very structure of its political system may not allow to happen. 

So as far as paper currencies go, it appears that the US dollar will enjoy dominance for some more time to come. But given the kind of economic problems most countries across the world including the US are facing, maybe the right question to ask is whether paper currencies as a whole will lose relevance in the distant future? 

Do you think that the Chinese Yuan will replace the US dollar as the world's reserve currency down the line?

Is the Govt destroying our food market?

A report of Firstpost caught our attention. It talks about the Food Security Bill, The Minimum Support Prices (MSP) and the way the two will affect us. In short, they will work collectively to destroy our agricultural and food markets. And Firspost seems to be using sound logic to back up this claim. Let us understand their logic. 

The Food Bill will ensure that subsidized grains are given to nearly 65% of the country's population. This includes people who need subsidized grain as well as those who do not. Nevertheless the program covers both sections so the fiscal burden of this Bill can be easily imagined. The poor economics of the Bill will lead to fiscal burden. The Commission on Agricultural Costs and Prices (CACP) has already highlighted the hidden costs involved in the Bill. The CACP has stated that the MSP decided by the government is not really based on the demand and supply dynamics. Rather the MSP appears to be arbitrarily decided. Such costs are expected to take the total cost to Rs 6,000 bn over three years. Imagine the fiscal burden this would cause! 

Now come to the darker side of the story. The Food Security Bill will make the government a monopoly in the food grain market. It would be the monopolist buyer as well as the monopolist seller. The scams of the past are a clear testimony to what happens each time the government enters a monopolist position. You guessed it right. There is widespread corruption. So how would this affect us? Well it would lead to higher prices and higher food inflation. This means that the final price of all items will go up. Net result - the Food Security bill will make sure that only the rich are able to afford food. And that corruption is rampant. 

We do agree with the fact that food security is necessary. Particularly for those who cannot afford food. But will the Food Security Bill really provide this security? The arguments seem to be against it.

The Food Security Bill

Take the Food Security Bill. The government had announced this bill about four years ago. It is still awaiting parliamentary go-ahead. We, for one, are highly skeptical of the efficacy such populist measures. But the merit of this bill is a different matter. It is an issue that deserves a separate debate. 

So simply speaking of passing bills and implementing policies, the government's track record is dismal. Several bills of utmost importance such as the Lokpal Bill or reforms related to land are pending without any deadline.

Money laundering allegations pour in

Barely over a month ago, a money laundering allegation on India's top private sector by online magazine Cobrapost shook investor confidence. Not that each of the entities enjoyed the reputation of great management quality. But this instance in particular reiterated our doubts on whether private sector banks deserve the premium valuations they enjoy over PSUs. All this while we at least drew solace from the fact that the RBI continues to do a good job of keeping regulatory policies watertight. 

But the outcome of the central bank's audit report on the operations of HDFC Bank, Axis Bank and ICICI Bank is disappointing to say the least. Adopting a diplomatic approach, the RBI has cited ‘aberrations' in the operating norms of these banks. It has also denied systemic risks in the sector through the money laundering transactions. What it has not clarified is why the banks managed to circumvent critical KYC norms and how this will be prevented. More so, what should bank managements do to ensure that growth and profit motives are not at the cost of ethical operations. 

As if the RBI's lackadaisical approach to this fiasco was not enough, yet another Cobrapost allegation has rubbed salt on the wounds. This time the allegation is that the three private sector banks were not alone in the money making gamble. Several other top PSU banks, other private sector banks and insurance behemoth LIC are all party to it. In fact the allegation names State Bank of India, Punjab National Bank, Bank of Baroda, Reliance Capital and Yes Bank amongst those guilty. The least we can say is that at this rate, not just investors but depositors too could start losing faith in their banks. The earlier the RBI takes a firm stand on this the better!

RBI has announced a cut in the policy interest rate

The Reserve Bank of India (RBI) has announced a cut in the policy interest rate. It has cut both the repo rate as well as the reverse repo rate by 25 basis points (0.25%). The result is that these rates now stand at 7.25% and 6.25%. Since December 2012, this is the third subsequent cut in policy rates that the RBI has undertaken. But despite cutting the rates, the RBI has stated that it is cautious with regards to further rate cuts. The reason for this is the risks in the form of inflation, the current account deficit as well as the impact of further rate cuts on the economy. It has also scaled down its expectation for GDP growth to just 5.7%. Given RBI's renewed hawkish stance, it is unlikely that we would see an interest rates cut unless the deficit situation comes under control. Keeping interest rates high would attract foreign money which in turn can help the current account position. Also, though inflation appears to have eased down in recent times, nevertheless, this decline has been more on the WPI side. The CPI inflation still continues to be above 10%. 


Souce: Reserve Bank of India

Ultra ETF

Definition of 'Ultra ETF' A class of exchange-traded funds (ETF) that employs leverage in an effort to achieve double the return of a set benchmark. The first ultra ETFs were launched in 2006 and the class has grown to include different ETFs with underlying benchmarks ranging from broad market indexes, such as the S&P 500 and Russell 2000, to specific sectors, such as technology, healthcare and basic materials.

Investopedia explains 'Ultra ETF' According to the prospectuses for these funds, they may not achieve double the return of the benchmark during flat markets. Long-run returns may also diverge from the desired return; the ultra ETFs' only aim is to achieve twice the daily return, which they have done fairly accurately in the short time they can be analyzed.  Ultra ETFs can be beneficial to investors who are short on capital or allocation space within a diversified portfolio. For example, they can invest 5% of their portfolios into an ultra ETF and gain closer to 10% exposure due to the leveraged returns. Increased daily volatility is both the biggest benefit and greatest danger of ultra ETFs. They are best suited to short-term investing strategies or quick trading to maximize a given bet in the market. The expense ratios also run much higher than for standard ETFs, as most charge 0.95% of the total assets.

Howard-D'Antonio Strategy

Definition of 'Howard-D'Antonio Strategy'




 An algorithm designed to maximize the expected return of a portfolio. The Howard-D'Antonio Strategy provides a hedge ratio and measures the hedging effectiveness of a given portfolio by explicitly taking into account both the hedger's risk and his/her return. In this way, an investor hopes to get the maximum return for the minimum amount of risk.


 Investopedia explains 'Howard-D'Antonio Strategy' 

The Howard-D'Antonio Strategy recognizes that the classic one-to-one hedge strategy doesn't make sense in all instances. This is because it uses a hedge coefficient of 1, whether past or expected correlations with spot prices and/or futures prices warrant it or not. The Howard-D'Antonio Strategy remedies this situation by assuming one has a choice between three investments: a spot position, a futures contract or a risk-free asset. The Strategy then looks at the risk-return characteristics of all three to derive the best, most profitable mix.

Why buying gold this Akshaya Tritiya isn't advised

Indians are usually looking for an excuse to satisfy their hunger for the yellow metal and the upcoming auspicious occasion of Akshaya Tritiya is likely to provide just that. Akshaya Tritiya is the second biggest festival after Dhanteras for buying gold. With gold prices showing signs of easing after a long time, buying gold on Akshaya Tritiya seems just natural. Right? Think again.

Experts who track the movement of the precious metal believe the recent crash seen in gold price may not be a temporary blip , and that it could remain subdued for a while.

Praveen Singh, senior analyst - commodities at Sharekhan says barring traditional significance, it probably doesn't make much sense to buy gold at current levels.

“The prices are already up 10% from the bottom and the US job report for April is encouraging, so from a short term perspective buying is not advised. Retail investors should wait for lower levels,” he told moneycontrol.com.

Echoing Singh’s view, Kishore Narne (Associate Director Head - Commodity & Currency), Motilal Oswal Commodities says though the size of selloff in gold was rare, one cannot call it blip as investment money or exchange-traded products (ETP) flows continue to move out of gold after the crash.

Gold holdings in ETP plunged more than 7 percent, a drop to 174 metric tons last month alone. Investors pulled out more than USD 10 billion from gold funds in the first quarter, which is the most in more than a decade. Even though the drop in prices was sudden, the rebound in prices in no way can be interpreted as a trend reversal, he elaborated.

According to Narne, seasonality does play a role in determining gold price movement, and gold prices do tend to soften after the wedding season in May and before the festive season that begins after August, but there is no technical or fundamental reason to buy gold on a particular day.

“Investors willing to play on seasonality can look to buy after such festivals. But gold buying on occasions like Akshay Tritiya has more to do with religious reasons than the timing of gold markets, and most of these purchases are long term in nature. We feel they would certainly beat the long term inflation on returns,” he said.

Oh my gold!!!

It is a well known fact that India is the largest consumer of gold. Despite steps taken by the government to discourage people from hoarding the yellow metal, the demand continues to remain high.

A recent Religare report said that central banks own about 30,000 tonne of gold of which Reserve Bank of India has about 560 tonne currently valued at about US$ 26 billion and representing 8% of our forex reserves. The US owns more than 8,000 tonne of gold.

According to Singh, market sentiment governing gold prices tend to react to various macro economic data from the US, so fall in prices is likely. But given the price conscious mentality of buyers, they don't entirely agree with the notions that there is a possibility of a severe correction in prices.

“Strong physical buying led to metal shortage in Dubai,Hong Kong. There were long queues in Japan, London, Turkey, etc. But people are price conscious and they have just witnessed a sharp fall in prices, going by their psychology, they would go slow on physical buying as prices recover,” he explained.

He expects prices to remain subdued for some time; however he says one cannot judge that the metal is in a long bearish phase yet.

On the other hand, Narne feels long term bearish phase is in place. However, the only risk to this outlook is an outbreak of a major crisis to Lehman or a sovereign default by a major Euro zone nation, which is unlikely.

Gold price below 20k again? Conditions apply!

Gold price hit the Rs 20,000 mark in February 2011, since then it has just been heading higher due to various local and global factors. A steep fall to Rs 20,000 would mean nearly 30% decline from the peak price in Indian rupee terms.

Despite the insatiable appetite for the precious metal in India, one cannot rule out the possibility of prices falling below 20,000/10 gms again, Singh said.

However, for that to happen, few factors have to fall in place. “We need to see a string of extremely good economic indicators out of the US and other major economies for at least two quarters continuously, though US numbers are crucial. Secondly, the price of metal needs to drops to $1150 and the rupee should rally to 52 level against the Dollar,” he explained.

Since US indicators are mostly soft and the data elsewhere is also not so encouraging, the chances of such a steep fall seem very dim in near-term.

Narne said, the weakness in rupee has lead to higher price in the domestic market. Unless the Indian currency appreciates significantly, gold may not see 20,000 again.

However given the trend in international prices, Rs.22000-24000 over a longer term looks possible to him.

How bright is gold’s future?

In the worst reasonable case, this year, the downside for gold price is capped at $1150 (Rs 20,000-Rs 21,500). But, before that one should watch out for crucial levels of $1330 and $1250. On the other hand, $1525 (previous solid support) and $1650 are key levels on the upside.

Narne expects gold price to further correct as the global macro environment improves. It could fall towards $1100-$1180 level in the international market and around Rs 22000-24000 in the domestic market depending on the levels of rupee, he said.

Gold: A sip on every slip

Gold is the money of kings, but last month witnessed a takedown of the king from its pedestal. In less than 2 days the price of Gold tumbled over 225 USD or 15 percent triggered by short selling in the futures market. Reason for dump are plenty ,Amidst all the noise and research , one key fact emerges that the big support for the precious metal stands at USD 1200 an ounce , which is really the cost of production for the largest producers in the world, South Africa.

Argument against investing in Gold is not invalid. It produces nothing, pays no dividends, it's inherently subject to theft and incurs negative carrying costs, but that is the price you pay for tranquility.

In a world of undercapitalized banks, over leveraged sovereigns and political ineptitude wherever you look, it is prudent to allocate a portion of one's  capital to an asset that is not someone else's liability An ounce of Gold is an ounce of Gold has to go up in relation to paper money . To what price depends on the pace of inflation and we all know that inflation will continue.

While the short term trend for international Gold prices stays bearish a weaker rupee will prevent domestic prices from crashing.

The main way to tap into investing in Gold stays the traditional method of buying physical bullion / coins from your jeweler. Not as convenient as investing in an ETF or a Gold Fund but definitely safer. For the more sophisticated investor there is always the futures and option market.

We've always maintained that monthly SIPS are the best way to protect any investment, irrespective trends, charts, emotions and sentiment. That view holds true for Gold as well. Sip every slip should be your investing mantra.

Perhaps the best tribute to a SIP lies in the fact that even your grandmother could make money from her investment in Gold.

And she never understood markets.

Authored by Rajiv Goel, C.E.O. of BCS