Rising interest rates, tighter lending norms, poor sales--they all add up to an imminent slump in property prices

Property prices in major Indian cities, including Mumbai and New Delhi, are set to slump by as much as 30% in the next three-six months as rising interest rates and tighter lending norms have led to a sharp drop in demand for homes. "Softening in prices would begin in a month or two if sales continue to be low," said Adhidev Chattopadhyay, an analyst at Mumbai-based Edelweiss Securities Ltd. A Credit Suisse note on 19 January forecast that property sales in India may decline unless prices are cut 10-30%.

The Reserve Bank of India (RBI) has signalled borrowing costs will rise further after increasing interest rates seven times in the past year to curb price rise. It has also tightened lending norms for the purchase of property to rein in surging prices. Even as the supply of residences outstrips demand, property developers, who need to repay an estimated Rs14,000 crore to banks by the end of the financial year, are facing the spectre of loan defaults as dropping stock prices make it difficult for them to access equity markets, and banks tighten lending.

"A consensus is emerging that we are seeing the tip of a slowdown or a semblance of a bubble and the nervousness is evident on a pan-India level," said Amit Goenka, national director, capital transactions, Knight Frank India.

The Bombay Stock Exchange realty index, a measure of 15 property stocks, has dropped 26% in the last year, compared with a 17% rise in the benchmark Sen. The realty index has plunged 25% this year.

In November, RBI asked lenders not to loan more than 80% of the value of a property priced at more than Rs50 lakh. It also asked banks to increase the risk weightage of property loans of more than Rs75 lakh to 125%, making it more expensive to lend. Risk weightage assigns the minimum amount of capital that lenders have to maintain, as a percentage, depending on how risky a loan is.



"This was an additional factor along with the price rise which directly impacted investor sales in the higher end of the residential market," said Chattopadhyay.
"The loan-to-value ratio being capped at 80% effectively reduces the purchasing power of a homebuyer," analysts Aashiesh Agarwaal and Chattopaday wrote in a note to clients. "With a homebuyer having to cough up additional 5-10% equity for buying a house, he may have to delay his purchase decision, leading to a fall in incremental sale volumes."

The drop in residence sales has led to an increase of inventory in several cities. Mumbai has been the worst hit with about 88,000 unsold flats in the metropolitan region. About 25,000 of them are within the city limits of India's commercial capital, according to a survey of 2,400 housing projects in Mumbai, conducted by property researcher Liases Foras.

Recent home sales data suggest it may take as many as 22 months for the inventory to be cleared in cities such as Mumbai, Delhi-NCR (National Capital Region), Chennai and Hyderabad, said Pankaj Kapoor, chief executive of Liases Foras.

Residential sales tumbled 15% in Gurgaon, 20-25% in Greater Noida and Ghaziabad and almost 40% in Faridabad during the last two months of the past year, according to PropEquity Research.

Data from across India shows that only 15% of the home deals struck between April and September were at prices less than Rs2,500 per sq. ft, suggesting it is now difficult to buy even a 1,000 sq. ft house for less than Rs25 lakh in most cities. As a result, volumes have begun to slow and new bookings reported by major developers have been lower than expected, Credit Suisse said in their report.

"Builders have started negotiating across the table and are willing to cut prices by 10-15%, but prices need to fall further to become affordable," said Kapoor.

Some prospective buyers have now decided to delay their purchases until prices fall.

Vishal Jain, 35, has taken a break after six months of house-hunting every weekend. Jain, who runs his own optical lens business, wants to shift from his one-bedroom apartment in Ghatkopar, a Mumbai suburb, to a two-bedroom home in the Malad-Kandivali area, another suburban destination. He has a budget of Rs45-50 lakh.

"Even if I stretch my budget by another Rs10 lakh, there is nothing available other than properties in 25-year-old housing societies," Jain said. "So I can either move further north, towards Dahisar, or wait for another six months."

Indiabulls Real Estate Ltd, which is developing the "Bleu" project in central Mumbai at prices that are 15-20% lower than its earlier luxury projects, has also laid out simpler terms for its buyers to ensure sales.

A price correction will help propel volumes, said developers. Analysts predict a 15-20% correction in prices in NCR and rest of India, while "overheated" markets such as Mumbai and Ahmedabad would see a fall of 20% and above.

"If demand is low, we may correct prices," said Vikas Oberoi, managing director of Oberoi Realty Ltd. "We have corrected prices earlier and we will do it again."

In Hyderabad, the Telangana agitation has hurt both property prices and sales. In Bangalore, home to companies such as Sobha Developers Ltd and Prestige Estates Projects Ltd, sales have been stronger.

"You need to keep a price that will be accepted by the homebuyer," said J.C. Sharma, managing director at Sobha Developers. "India is growing and we know people can and are willing to spend now."

The decline in sales, however, has not slowed building activity. Construction in central Mumbai continues, with textile mills being torn down to make way for luxury housing and shopping projects.

An estimated $10 billion (Rs45,000 crore) of new housing projects are in the pipeline in the Lower Parel area of the city, with large developers such as Indiabulls, Peninsula Land Ltd, DLF Ltd and Lodha Developers Ltd in the fray to sell about 10 million sq. ft of luxury housing at an average price of Rs15,000-20,000 per sq. ft.

Knight Frank's Goenka said that despite sluggish sales of premium homes, residences that cost Rs20-40 lakh will find buyers.

Tightened bank lending, declining equity markets, private equity funds demanding steep returns and negligible property sales have compounded the trouble for property developers, said Pujit Aggarwal, managing director at real estate developer Orbit Corp. Ltd.

Indian real estate has always relied heavily on bank financing, with outstanding banking loans to the real estate sector having increased 33% in the past 21 months to over Rs1 trillion, according to Credit Suisse.

Analysts say the pressure is mounting on developers from all sides.

Hari Prakash Pandey, vice-president, finance and investor relations, Housing Development and Infrastructure Ltd, said that if the environment is hawkish--be it the government or financial authorities--decision-making is impacted, affecting business growth.

DLF, the nation's largest developer, said after its third-quarter earnings that it is banking on a series of new properties to generate cash flow and partly pare its Rs20,694 crore debt.

DLF may not meet its sales forecast of 12 million sq. ft by March, as about six of its new projects have been delayed, and due to price rises in recent months, said Angel Broking Ltd in a 1 February report.

To make problems worse, banks may further tighten lending to property developers after DB Realty Ltd and Unitech Ltd have been linked to ongoing investigations into the allocation of telecom spectrum. Lenders are turning down new loan proposals and may also take a close look at the proposed end use of loans that have already been sanctioned, but not yet disbursed to real estate companies.

"Investors want to know whether the money borrowed by developers for real estate purposes are being used for what it is actually meant or are being diverted elsewhere and they want to be doubly sure," said Rajiv Sahni, partner, real estate practice, Ernst and Young India.
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  • Originally Posted by Krazy Yuppie
    A readyreckoner of gold prices


    Thanks for the same.

    Some ' experts ' will conclude that in last 10 years gold has done phenomenally well whenever congress is in power , just as they have simillar mindnumbing theory about RE always doing well when congress is in power. This they use to justify that congress is anyway going to go out of power so RE will crash but magic oh magic Gold will still go up.

    Arguments of convenience you see.

    It is also amazing to see few more coincidences , in a RE theme based social media forum , we have people not having a single comment on merits / demerits of any single project / area . But they will spend extraordinary amount of time in blowing up virtues of gold and debunk RE at every other opportunity , by stocking to the only emotional response which will build up prices of gold ' Fear '.

    At this point since RE is the only other avenue competing with gold for indian investment, it incentivizes people with ' gold bias ' to use their considerable argumentative skills to demonize RE & bring out virtues of gold and the favourite tool available is to debunk the indian growth story somehow.

    While i respect everyone right to comment and discuss any specific areas which might interest them, one needs to take a note of such coincidences also.
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  • Originally Posted by wiseman
    Venky,

    as a pure "investment", what can be more attractive than a risk-free (never ever goes down), high-return (around 12-14% pa over the very long term) asset?
    cheers


    1997-2001 : 5 years of negative return , let me rephrase ..nominal negative returns in rupee

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  • gold the currency of fear

    There are 2 sides to every coin, do your own diligence and do what is good for you. Internet is a great leveller and a good amount of reading is an excellent antidote to dose of panic being constantly dished out .

    ---------------------------------------------------------------
    Personal Finance l Investing in Gold | Stuff.co.nz

    For thousands of years, human beings have had a primal attraction to gold.

    With a powerful magnetism cultivated via legends, mythology and bloody conquest, gold inspires awe like nothing else.

    And though it's been at least 40 years since our monetary systems were based on the otherwise unremarkable metal, some of us are finding it hard to shake off the allure of the shiny stuff.

    Last year, the price of an ounce of gold soared to new heights of US$1889. In 2001, it was trading at US$271.But as dazzling as that ascent may be, it holds no sway over Ben Brinkerhoff, general manager of Bradley Nuttall financial advisers.Over the course of forty minutes, Brinkerhoff methodically strips gold of its mysterious charm until it resembles nothing more than an expensive paperweight."I'm not going to sit here and argue that gold hasn't gone up 500 per cent in the last decade- that's obvious to everyone", he says.But what he does argue, and in no uncertain terms, is that investing in gold is a fool's game. Gold is not productive. It doesn't "do" anything. It lurks under mattresses. It moulders away in bank vaults."The only way I can make money in gold is for someone to buy it from me for more than I bought it for", he says.Gold has limited utility - as a conductor or for jewellery - which drives some demand, but most of its value comes from hoarding.Now, as uneasy investors turn away from ailing currencies and stagnant stock markets, the price of gold is going through the roof.Brinkerhoff reads from a recent article by billionaire investor Warren Buffet in Fortune magazine: "What motivates most gold purchasers is their belief that the ranks of the fearful will grow.""In some ways, the modern-day gold rush resembles a pyramid scheme. As the fear escalates and gold prices rise, investors own theories are validated through self-fulfilling prophecy.''But the only way the price can keep rising is if more and more people buy in, Brinkerhoff says.
    Gold provides no returns in terms of dividends or interest. Instead, demand is driven by perceived solidity in a sea of economic turbulence - gold is a metallic security blanket.Brinkerhoff assumes his heartiest all-American salesman voice: "Have you lost money in investments? The one way to be sure of your investments having value, is gold. Gold Has Value!"But if you look at the history of gold, that's simply not true, he says.

    Between 1980 and 2000, for example, gold lost 80 per cent of its real value. Every $1 invested in the "safe haven" of gold turned into a paltry 20c.There's a sobering lesson in there for all the get-rich-quick gold bugs. But don't be too quick to rub the gold dust out of your eyes - every story has two sides.

    IN FOR THE LONG HAUL

    Charles Drace sounds a little weary. The gold and metals branch of his company, Socrates Fund Management, hasn't performed well recently.
    Drace's current woes are caused by the strength of the Kiwi dollar - or the weakness of the greenback. In US dollars, gold is through the roof, but in New Zealand terms, the current price is only slightly above where it was in early 2009.But Drace is in it for the long haul and he certainly hasn't lost his faith in gold.Socrates runs on much longer investment cycles then your typical managed fund- think at least 20 years.As a self-described economic historian, Drace says there is often a negative correlation between share markets and commodities - when one is up, the other is down.A quick history lesson: In the 1970s, general pessimism saw the price of gold rise more than 23 times over to a peak in 1980. After the crash, share markets began to steadily grow, culminating in the Dotcom bubble of 2001. Since then, gold has been on the rise again.The point is, theoretically at least, gold is only halfway up the 20-year curve. In inflation-adjusted terms, it still has a fair way to go before it reaches the equivalent of that 1980 peak.And this time round the euphoria will be much bigger, Drace says. The price might even hit US$8,000 or US$10,000 dollars. For that to be possible, he must be confident there will be enough fear to keep the foundations of the pyramid solid.Drace says Europe, the United States and Japan will probably keep printing money like it's going out of fashion- and perhaps it is."The only way you can get rid of the debt is to inflate your way out of it."Inflation devalues the major currencies, while adding value to the de facto currency- gold.

    Gold has always been touted as a useful hedge against the spectre of inflation- it might not earn interest, but at least it's not going backwards.But just how good a hedge is it? If you ask Brinkerhoff, pretty dismal.The purpose of hedging is to reduce volatility, but gold is a capricious beast.Using data from the last 35 years, Brinkerhoff says gold has a volatility of 19.27 per cent. To put that in context, his company's most risky portfolio has a volatility of 11.35- just over half.What does that mean? For Brinkerhoff to use gold as an effective hedge, he would need to "have some idea predicting the fearful irrationality of human beings".

    THE BIG PICTURE

    Apparently, Kiwis are just as fearful and irrational as anyone else. New Zealand Mint did a steady trade in gold bullion over the last year, even through a third quarter dip in prices that had commentators screaming the bubble had burst.Over the last 18 months, NZ Mint head of bullion Mike O'Kane has noticed that Kiwi buyers are starting to react to the bigger economic picture."Where we would see surges and dips based on the gold price, we're now seeing more demands over a long period of time that relates more to what's going on globally", he says.For those that do invest in gold, bullion's tangible substance has a strong appeal. As O'Kane says when you physically hold a piece of gold, there's no risk that someone can spirit it away.Compare that to "paper gold". There's a cautionary tale in the recent loss of hundreds of thousands of investor dollars in Bullion Buyer, now under investigation by the Serious Fraud Office.Like anything else, it's all about doing your homework, O'Kane says.

    But all of this ignores the obvious inconvenience- if you buy a big lump of gold, you have to stash it somewhere safe. The NZ Mint looks after some 20 per cent of its clients' gold, but where do people put the rest?

    O'Kane: "Safety deposit boxes, mattresses, holes at the bottom of the garden."He's joking, surely."To be honest, we don't ask", he says. "I've heard some stories which, quite often, make me shudder."

    THE ALTERNATIVES TO GOLD BARS

    Fortunately, there are plenty of other ways to invest in gold- enter David Wilson, investment strategist at NZ Funds Management.

    Wilson is undoubtedly a believer- his company allocates about 20 per cent of its growth portfolios to gold.

    "We do believe that it should make up part of investment- but only part, obviously," he says.

    NZ Funds Management invests in gold futures and gold mining companies. In futures, Wilson says, the only settlement risk lies with the exchange itself, rather than the counterparty.On the production side of things, the company has holdings in New Zealand's OceanaGold and listed Aussie miner Kingsgate, among others.The stock price of these companies is leveraged to the price of gold, but because they actually produce something and turn a profit, they tick the box for even Mr Gold-Averse himself, Ben Brinkerhoff.Brinkerhoff freely admits his investment basket is full of golden eggs- companies that own goldmines, banks that own gold, investment companies with gold funds.
    With stakes spread across 9,000 companies, he has no qualms about investing in the likes of gold miners. The fundamental distinction?

    "These are businesses that have profits."The one thing everyone agrees on is that gold cannot continue to rise forever and even if the bubble is only half inflated, it will burst.The first to sell out, whether they're cautious and canny or just plain lucky, will cream it. To extend the analogy, these are the people at the apex of the pyramid.If you bought 10 years ago, your profits over that time period would vastly outperform even the fastest rising stocks.Those that buy in towards the end, or don't exit until later in the slump will not be so fortunate.

    So we come to the $10 trillion question: when will gold peak?

    "The point is, you don't know exactly how high it's going to get until such point as it does fall," says Wilson.Brinkerhoff says the crash will come eventually- but he doesn't know when.Drace's pick is between 2020 and 2022."My guess being literally as good as anyone else's- we're still a long way off the top", says O'Kane. investment- but only part, obviously," he says.

    NZ Funds Management invests in gold futures and gold mining companies. In futures, Wilson says, the only settlement risk lies with the exchange itself, rather than the counterparty.On the production side of things, the company has holdings in New Zealand's OceanaGold and listed Aussie miner Kingsgate, among others.The stock price of these companies is leveraged to the price of gold, but because they actually produce something and turn a profit, they tick the box for even Mr Gold-Averse himself, Ben Brinkerhoff.Brinkerhoff freely admits his investment basket is full of golden eggs- companies that own goldmines, banks that own gold, investment companies with gold funds.
    With stakes spread across 9,000 companies, he has no qualms about investing in the likes of gold miners. The fundamental distinction?

    "These are businesses that have profits."The one thing everyone agrees on is that gold cannot continue to rise forever and even if the bubble is only half inflated, it will burst.The first to sell out, whether they're cautious and canny or just plain lucky, will cream it. To extend the analogy, these are the people at the apex of the pyramid.If you bought 10 years ago, your profits over that time period would vastly outperform even the fastest rising stocks.Those that buy in towards the end, or don't exit until later in the slump will not be so fortunate.

    So we come to the $10 trillion question: when will gold peak?

    "The point is, you don't know exactly how high it's going to get until such point as it does fall," says Wilson.Brinkerhoff says the crash will come eventually- but he doesn't know when.Drace's pick is between 2020 and 2022."My guess being literally as good as anyone else's- we're still a long way off the top", says O'Kane.
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  • Originally Posted by suwonguy
    Venky bhai :- don't say in this forum that you will buy Gold in
    Physical form because you will be labelled as "Caveman" Like I was labelled....Lots of Jealous People who could not tolerate when I said that I have been heavily buying physical gold from the levels of 8k-9k...They could not digest my 4X return...I am still saying that Gold will reach to 90k Level in next 3-5 years ie another 3X return in 3-5 years(Of course this is based on uncivilized activities of US of printing more dollars, uncivilized activities of people in US overspending by borrowing which they cant afford, our own govt. messing up with economy, Eurozone crisis to deepen etc. etc..)...


    I, for one, am jealous . I must admit. who else was jealous ??... hahaha .. suwonrandomguy from IREF made 4X return and i missed it ..what could possibly be worse than that..

    this is what i miss, when i dont login on IREF for a long time
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  • As one friend would say, lets look at the data!

    Originally Posted by Venkytalks
    Its not a dichotomy as much as complexity. And the reason lies in history.

    I have lived thrugh the seventies and eightees. From 1984 to 2004 which is 20 years our family holdings of gold stood still or gave marginal return.

    In the same time our ppf gave 12% tax free and doubled our money every 5 years. There were years when annual return from ppf were more than annual salary back in the early 90s.

    Some of our stocks went from 1 to 100 in 20 years. That is some7 doublings in 20 years or a doubling every 3 years so some 25 % per annum. returns enough to wipe out deficit of 20 dud stocks. And it did stand still for 15 years also.

    . Our only flat gave 200 percent return in 20 years. Now 1000 percent in 30 years. Say doubling every 4 years so some 17 % return.

    Now gold went from 3000 to 30000 in 30 years so 3.5 doubling in 30 years so some10% return or so. Barely beating ppf.

    There is a place for gold and those things are existing right now increasingly.

    Gold ie shining only now. Yes our original holdings of 30 years have given good return but the etfs I bought and sold gave 30 % return within 6 months.

    I am more cencerned about selling our gold and silver at the right time. For a while I wondered if that time was now.

    But with administrative collapse this is buying time not selling time.


    Here is some data I had compiled a while back. Price for gold every 10 year are as follows (10 gms)

    1970 ... 183
    1980 ... 1452
    1990 ... 3406
    2000 ... 4518
    2010 ... 18350 (peak of 20050)
    2011 ... 26000 (when Dollar price peaked at $1920 per ounce)
    2013 ... 35000 (peak reached recently)

    Now we can see CAGR returns every 10 years as follows

    1970-80 ... 23%
    1980-90 ... 9%
    1990-00 ... 3%
    2000-10 ... 15% (someone had mentioned 2000s gave poor returns!)

    1970-2012 ... 12.52% - 42 year CAGR which is fantastic
    1970-2012 ... 13.00% - 43 year CAGR which is fantastic

    As you can see the 70-90 period was better than most other investment avenues.

    Here is the same statistic in 1000s of percentage gains.

    1970-2010 ... 10027% - 40 year gain
    1970-2011 ... 14208% - 41 year gain ... 12.52% CAGR
    1970-2012 ... 19126% - 42 year gain ... 13.00% CAGR

    Impressive by almost any standards.

    And the real fun is just starting as your PPF and FD returns in REAL rupee terms starts drastically reversing in the coming years as Gold in the same terms starts taking off.

    As far as I'm concerned, by 2015-2016 Gold will be the premier asset to have owned based on a 40-45 year analysis bar none. In the next 3 years approx there will be increasingly panicky stocking of gold (Kinjal you are correct, gold is a doomsday-style asset and every fiat currency-based economy meets doomsday eventually) by everyone from Govts to individuals and there will be major shortages of the physical stuff while there will be defaults in paper gold (the stuff Chidu is pushing down our throats so eagerly - he knows that going to happen, that cunning fellow!). In addition, RE will be left stagnating while gold goes roaring by to the finish line (getting a little dramatic here!)

    Why did I take 1970 as the base? That was the year (1971 actually) when gold got off the $35 control it was for 35 years and started getting priced by the market!

    Let us see if my bet comes true! I'm very confident that the Govts of the world will ensure it! :D

    @Sheeshu - You are right about Gold in 1997-2000 period. Great time to stock up on gold as part of your portfolio! :)

    cheers
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  • Stocks vs Bonds vs Gold Returns for the Past 200 Years

    I write a lot about investing in stock and investing in bonds over at Investing for Beginners at About.com, a division of The New York Times.

    There is a reason I tend to be far more favorable to equity investments (stocks) than fixed income investments (bonds) when it comes to long-term investing and why much of my content is focused on the stock market. History has shown that owning businesses – which all a share of stock is; a piece of ownership in a business – generates the best long-term returns as long as you don’t overpay. Most investors don’t have the experience to pick individual stocks so low-cost index funds are a better choice, which I explained in my most recent article, Top 5 Reasons Index Funds Might Be a
    Better Choice for the Average Investor.

    For the more advanced among you, I thought it might be useful to look at long-term inflation-adjusted compounding rates for stocks, bonds, and gold based upon the work of Dr. Jeremy Siegel and John Bogle, the founder of Vanguard.

    Inflation Adjusted Returns of Stocks, Bonds, and Gold

    Going back nearly two hundred years, if you had invested $10,000, reinvested any dividends, interest, or other gains, and left the money alone, how much wealth would have today in real, inflation-adjusted terms based upon the asset class you selected?

    The stock investor would have turned his $10,000 into $5.6 billion. The bond investor would have turned his $10,000 into $8 million, and the gold investor would have turned his $10,000 into $26,000. That is statistically significant.

    For nearly two centuries, stocks have generated an average return of 7% in real, inflation-adjusted dollars. Historical returns show that stocks almost always adjust to inflation over the long-term. After all, if the dollar became worthless and the United States were forced to switch to a different currency – be it gold, silver, or sea shells – companies like Coca-Cola are still going to be generating large piles of excess surplus as people turn in some of their currency in exchange for the product or service the firm provides.

    Bonds, on the other hand, have generated average real returns of 3.5% but these are far less uniform than stock returns. In fact, it isn’t unusual to have extended periods where bonds generate negative real returns, something that stocks just haven’t been prone to do. For example, during 1966 to 1981, bond returns on an inflation-adjusted basis were -4.2%. From 2000 through 2010, on the other hands, bonds exceeded the stock market returns (which wasn’t difficult to predict when you look at the incredibly low earnings yield on the S&P 500 relative to Treasury bond yields at the beginning of the decade; you can’t pay 50x earnings for an enormous company such as General Electric or Johnson & Johnson and expect to do well).

    If Stocks Are Clearly a Better Long-Term Investment Than Bonds, What Is the Catch?

    Both stocks and bonds fluctuate significantly. But stocks tend to fluctuate more than bonds, all else being equal. In the past 200 or so years, we can actually look at the highest and lowest real (inflation-adjusted) gains or losses generated by stocks and bonds in any given calendar year:

    Depending Upon How You Define Risk, Stocks Can Be Less Risky Than Bonds
    John Bogle, legendary founder of Vanguard, puts it this way in his book Common Sense on Mutual Funds:

    The data make clear that, if risk is the chance of failing to earn a real return over the long term, bonds have carried a higher risk than stock.

    If you consider risk to be short-term market fluctuations, then stocks are riskier than bonds. As periods grow longer, though, stocks begin to beat bonds more and more frequently until any period of outperformance from bonds becomes a statistical anomaly. If the stock market is fairly valued or under valued, it makes no sense for the average investor who is young and has a long-time horizon to be stuffing his or her portfolio with fixed income securities such as bonds.

    A Final Word on Gold Investing as an Asset Class

    Why has gold generated such pathetic inflation-adjusted returns over the long-run? Because gold has no intrinsic value. It isn’t a productive asset. When you own a share of stock, you own a piece of a business that produces goods and / or services to consumers. A good business generates a profit. Every year that passes, gold remains sitting in the vault, but the owner of a company such asProcter & Gamble or Colgate-Palmolive might have a giant pile of cash from the profit generated over that same year by selling dishwashing soap, laundry detergent, and toothpaste.

    From a financial standpoint, gold has one purpose: Rank speculation. It can fluctuate wildly and generate huge opportunities for those who are paying attention to gamble – and that is what it is – on governmental fiscal policy. It can serve as a flight mechanism during times of total catastrophic national collapse, such as a Jewish family fleeing Germany during the second world war who wanted to be able to start over with some capital in a new country. But in terms of productive growth, gold is a dead asset that will eventually return to its baseline. It produces nothing. It creates nothing. The inflation-adjusted returns of the past 200 years reflect this reality.

    Stocks vs Bonds vs Gold Returns for the Past 200 Years
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  • This recently updated article examines graphically the long-term historic performance and returns of the five major asset classes of U.S. stocks, U.S. long-term 20-year government bonds, U.S. T-bills, Gold and the U.S. dollar. The results are truly enlightening and amazing! The results are based on U.S. data from 1926 through 2011. The data source is a well-known reference book called "Stocks, Bonds, Bills and Inflation" 2012 edition. The book is published annually by Morningstar. (Ibbotson SBBI classic yearbook). The cost of the book is $175.

    Gold's long-term performance is from Gold coins Gold bullion Gold bars Gold prices Buy gold coins Sell Gold coins You will see, of course, that Gold has done very well in recent years, but you will also see it has not done very well over the whole period since 1926.

    Note that most analysis of historic returns that you have seen is horribly flawed in that it is based on "nominal" returns before inflation. The graphs and figures below are based on "real" returns after inflation. That is, this analysis shows the real increase in purchasing power generated by each investment asset class.

    The graph below shows the long-term real (after inflation) returns on large capital U.S. stocks (The S&P 500 stocks), long term U.S. Treasury bonds (approx 20 years), U.S. Treasury Bills (30-day cash investments) and the real value of a U.S. dollar after inflation) and Gold. The return is illustrated by showing the growth over the years of a $1.00 invested in each asset at the end of 1925.

    sn't that amazing? In real-dollar terms (adjusted for inflation), large U.S. stocks have absolutely walloped long bonds, short-term cash investments, Gold, and the dollar itself in terms of total growth or return. Each $1.00 invested in large stocks at the end of 1925 is now worth $242 (86 years later at December 31, 2011). Compared to large stocks, the other asset class values after 86 years are so low they barely show up on the graph. (We'll fix that below) $1.00 invested in long U.S. government treasury bonds for those 86 years is now worth $9.47. (It's not shown but $1.00 invested in U.S. long-term corporate bonds in 1926 did slightly better than treasury bonds and is now worth $12.50.) $1.00 invested in T-Bills in 1926 is now worth just $1.63. $1.00 invested in Gold for the 86 years is now worth $5.88. $1.00 left literally in cash and not invested at all is now worth only 8 cents, due to the ravages of 86 years of inflation.

    Remember, all figures are after adjusting for inflation (and so the above figures are the growth in real purchasing power) and assume reinvestment of dividends or interest received and also assume tax-free and no-fee investment accounts. (With taxes the growth would be less dramatic but would be even more in favor of stocks given the lower tax rates on capital gains and dividends. However since the Gold held for the 86 years would attract no taxes and no transaction fees it would improve relative to stocks if those were taken into account.)

    Stocks, Bonds, Bills and Inflation and Gold
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  • You are correct ... upto the finish line but just before!

    Kinjal,

    I too believe that Stocks give the mostest (of course you need to have done your homework) and will continue to do so.

    But we may be (according to many seasoned and serious people whose business it is) nearing a turning point in the world's economy which may be a once-in-multiple-centuries event.

    Under those conditions, except land, most other assets measured only in fiat currency terms may see dramatic declines and collapse. Everything includes especially Sovereign Bonds, Currencies and all financial assets, with gold being the medium of transformation of residual value from these assets switching to physical assets (foodgrain, commodities, metal, etc). Gold will play the pivotal role (apart from barter) in the switch from the predominantly financial-asset civilization of today to the predominantly real-asset civilization of tomorrow.

    You might want to keep that in mind when trying to compare gold (the only asset free from fiat-currency measurement basis) with all other assets (except land).

    As you might have noticed, Akbar's currency is long dead (and so are many of the corporations in the DOW at the turn of the 19th Century going into the 20th, but my Great Grandfather's gold is very much around and doing just great! So is his land!

    Suwonguy's purchases - land and gold - in recent times may perhaps hint at the trend I just outlined. Apparently, the end would come suddenly and uncontrollably - so we cannot do a 2008 rescue again with further can-kicking down the road (the road would have decisively ended in a steep slippery slope!).

    Let us see what the future brings.

    cheers
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  • Originally Posted by wiseman
    Kinjal,

    I too believe that Stocks give the mostest (of course you need to have done your homework) and will continue to do so.

    But we may be (according to many seasoned and serious people whose business it is) nearing a turning point in the world's economy which may be a once-in-multiple-centuries event.

    Under those conditions, except land, most other assets measured only in fiat currency terms may see dramatic declines and collapse. Everything includes especially Sovereign Bonds, Currencies and all financial assets, with gold being the medium of transformation of residual value from these assets switching to physical assets (foodgrain, commodities, metal, etc). Gold will play the pivotal role (apart from barter) in the switch from the predominantly financial-asset civilization of today to the predominantly real-asset civilization of tomorrow.

    You might want to keep that in mind when trying to compare gold (the only asset free from fiat-currency measurement basis) with all other assets (except land).

    As you might have noticed, Akbar's currency is long dead (and so are many of the corporations in the DOW at the turn of the 19th Century going into the 20th, but my Great Grandfather's gold is very much around and doing just great! So is his land!

    Suwonguy's purchases - land and gold - in recent times may perhaps hint at the trend I just outlined. Apparently, the end would come suddenly and uncontrollably - so we cannot do a 2008 rescue again with further can-kicking down the road (the road would have decisively ended in a steep slippery slope!).

    Let us see what the future brings.

    cheers


    irrespective of once in a lifetime event, no asset can be ever safe. Once in a life time will lead to social anarchy and gold hoarded can be stolen, land acquired by government for public purpose , government can nationalize gold assets at a nominal rate .

    so who knows what future holds. Enjoy life why live in a state of fear . That is my moto, one does not need to agree.
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  • Originally Posted by kinjalchato
    Thanks for the same.

    Some ' experts ' will conclude that in last 10 years gold has done phenomenally well whenever congress is in power , just as they have simillar mindnumbing theory about RE always doing well when congress is in power. This they use to justify that congress is anyway going to go out of power so RE will crash but magic oh magic Gold will still go up.

    Arguments of convenience you see.

    It is also amazing to see few more coincidences , in a RE theme based social media forum , we have people not having a single comment on merits / demerits of any single project / area . But they will spend extraordinary amount of time in blowing up virtues of gold and debunk RE at every other opportunity , by stocking to the only emotional response which will build up prices of gold ' Fear '.

    At this point since RE is the only other avenue competing with gold for indian investment, it incentivizes people with ' gold bias ' to use their considerable argumentative skills to demonize RE & bring out virtues of gold and the favourite tool available is to debunk the indian growth story somehow.

    While i respect everyone right to comment and discuss any specific areas which might interest them, one needs to take a note of such coincidences also.


    Congress was in power in 1991-96 but Gold didn't do well that time.
    Gold is a global commodity.

    The point is that there are triggers for trend reversal.
    And in India these triggers in real estate sectors are often presented by regime change as politicians are heavily involved in this sector.
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  • Originally Posted by abc111
    Congress was in power in 1991-96 but Gold didn't do well that time.
    Gold is a global commodity.

    The point is that there are triggers for trend reversal.
    And in India these triggers in real estate sectors are often presented by regime change as politicians are heavily involved in this sector.


    and politicians do not hoard huge stocks of gold :) and during elections time this hoarded gold is the most easy to liquidate as per the election theory of RE crash . so why does not RE correct / crash during up elections/ gujrat elections or any state elections, i guess they did not need money only general elections do . Congress is not in power in many states but still their RE has gone up, so what is that theory for those states.

    very confusing theory :) .
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  • Originally Posted by kinjalchato
    irrespective of once in a lifetime event, no asset can be ever safe. Once in a life time will lead to social anarchy and gold hoarded can be stolen, land acquired by government for public purpose , government can nationalize gold assets at a nominal rate .

    so who knows what future holds. Enjoy life why live in a state of fear . That is my moto, one does not need to agree.



    This woman was probably owner of a priceless land and look what happened when there is anarchy and i really feeling bad to use this picture to prove a point about fickleness of any asset class when society has huge unrest. Never wish the same , just to get an asset class moving. None of us will survive any such event in the form we are . It does not take much time for a genius to be reduced to a commoner in such times.

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  • RBI asks co-op banks not to give loans for gold purchase

    The Reserve Bank today directed state and central co-operative banks not to grant loans for purchase of gold in any form in order to check the significant rise in import of the precious metal in recent years.

    "In view of the concerns...,it is reiterated that state and central co-operative banks should not grant any advance for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold Exchange Traded Funds (ETF) and units of gold Mutual Funds," RBI said in a notification.

    Presently, these banks are permitted to grant loans against pledge of gold ornaments, but not permitted to grant any advance for purchase of gold in any form.

    They grant loans for various purposes against the security of gold/gold ornaments as part of their lending policy.

    The RBI its in second quarter review of monetary policy in October 2012 had said that significant rise in import of gold in recent years was raising concerns and direct financing for purchase of the precious metal could fuel speculative activities.

    It was then proposed that other than working capital finance, banks would not be permitted to finance purchase of gold in any form.

    Rising gold imports has caused the current account deficit (CAD)-- which occurs when a country's total imports of goods, services and transfers is greater than the country's total export of goods, services and transfers -- to touch a record high of 5.4 per cent in July-September quarter.

    RBI asks co-op banks not to give loans for gold purchase - The Economic Times
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  • Sure about that?

    Originally Posted by kinjalchato
    and politicians do not hoard huge stocks of gold :) and during elections time this hoarded gold is the most easy to liquidate as per the election theory of RE crash . so why does not RE correct / crash during up elections/ gujrat elections or any state elections, i guess they did not need money only general elections do . Congress is not in power in many states but still their RE has gone up, so what is that theory for those states.

    very confusing theory :) .


    To my knowledge almost every raid reported on politicians, bureaucrats and even in the case of Sai Baba after his demise, one found large caches of PMs (we are talking kilos).

    So, our political class has affinity for land, property as well as Gold ( mainly in the form of jewellery; silver to a smaller extent as its bulky) and unaccounted cash bundles.

    cheers
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  • Understanding the Importance of Gold and Why Governments hate it

    An economic system consists of various agents.
    An Individual agent can't produce all the goods and services that he needs.
    So there has to be an exchange of various goods and services between these agents

    Now how to make this exchange happen?

    One of the way is the barter system that is direct exchange of goods and services . But this system has the problem of how to establish equivalence of different goods. Moreover the needs of different agents has to match with reciprocal goods acceptable.

    This mechanism was prevalent in primitive societies and is not suitable for modern complex societies.
    The main problem with this system is liquidity. The day I want to sell; there may not be reciprocal demand for that good.

    The system of exchange we have today is called Fiat currency system.
    (Gold Link of Dollar was broken by Nixon in 1970s)
    In this system ; we have a system in which there is an all powerful govt.
    The Govt. introduces a piece of paper as the medium of exchange by guaranteeing to honour its value. (Remember a statement on Rupee Notes at the centre with RBI Governor's signature)
    Now this system is asymmetric because Govt. can print this note at will.

    Suppose that the supply of goods and services in the system is limited or there is just a small incremental increase.
    And there only two agents-:Agent A and the Govt.
    Suppose Both had 100 notes of equal denomination at the beginning. Govt found that its expenditure is more than its income.
    So it printed 100 more such notes.Now this resulted in the loss of value of the notes held by Agent A. 100 notes of Agent A would now buy lesser goods and services.

    So the problem with paper notes as medium of exchange is that they are not store value. The only basis of this system is faith in Govt. and the recent world events has eroded that faith.

    So people are looking at an alternative medium of exchange and Gold is that medium .

    It has both the characteristics of Liquidity as well as store of value.
    It is a store of value because its supply can not be increased by someone's whims and fancies; its easy to store and does not decay.

    A medium of exchange gets a reality and value of its own.
    The classic example of this is US Dollar which as a Global medium of exchange still retains its value in spite of massive printing by Federal Reserve. There would be a sharp decline in it if Gold is accepted as that medium.

    In a Globalized world with different Fiat Currencies ; there is another problem.
    Exports are seen to be creating jobs.So companies tend to depreciate their currencies so that exports become competitive.

    So there is a race to the bottom. Japan is the recent entrant.
    Thus there is a global currency war going on which will result in fiat currencies
    loosing their values w.r.t real assets like commodities whose vale will be measured in a stable store of value like Gold.

    Because of this currency war and massive printing by central banks all over the world; people will start looking at an alternative medium of exchange and Gold (or a currency backed by Gold) will do the Job.

    Gold would be doing the Job that it has been doing for centuries.
    Gold may be was created for this job -: It is completely inert metal, have high density and so is easy to store and carry and is available just in the right quantity.
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