Monday, May 19, 2008
Precious metals rise as oil touches $128
Gold futures closed near $900 an ounce Friday, 16 May, 2008 marking their highest level in more than three weeks, as crude oil's rally to a fresh record high near $128 a barrel boosted the precious metal's appeal as an inflation hedge.
Gold has traditionally been used as a safe-haven asset against rising inflation. Investor sentiments are boosted by the fact that gold and silver are alternate sources of good investment in the face of declining dollar and rising energy prices. Generally, a stronger dollar pressures demand for dollar-denominated commodities, such as crude oil and gold, which become more expensive for holders of other currencies. On the other hand, a lower dollar pushes up precious metal prices as their demand lessens as it becomes cheaper for traders holding other currencies.
Comex Gold for June delivery rose $19.9 (2.3%) to close at $899.9 ounce on the New York Mercantile Exchange. Prices touched a high of $904.5 during intra day trading. For the week, gold prices ended higher by $14 (1.6%). On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. Prices have dropped by 13% since then.
This year, gold prices have gained 7.3% for the till date against a 8.5% drop for the dollar against the euro. For April, prices closed lower by 6.3%. For first quarter prices gained 10.7%. In January, prices gained 11%, the highest monthly gain since April 2006. For February, it gained 6%. But in March, prices succumbed and fell by 5.5%.
Comex Silver futures for July delivery rose 28 cents (1.6%) to $16.96 an ounce. Silver has gained 13.1% in 2008 till date. For April, it closed lower by 5.5%. Silver gained 16% in Q1. In January this year itself, prices climbed 14%. In February, it gained another 15%. For March, it ended lower by 13%. The metal had climbed 16% in FY 2007. The metal also has gained for seven straight years.
At the currency markets on Friday, the dollar extended losses Friday, despite better-than-expected housing data, after a weak consumer sentiment index reading kept alive doubts about the strength of the U.S. economy. The dollar index, which tracks the performance of the greenback against other major currencies, fell 0.1% to 72.80.
Among major economic news, according to a report from the University of Michigan, the U.S. consumer sentiment index in May fell to 59.5 from 62.6 in April.
In the crude market, crude-oil futures rallied to a fresh record high near $128 a barrel as Goldman Sachs raised its second-half-of-the-year forecast for oil prices by 32% to $141.
Inflation, as indicated by latest Government data, may be understated and the rate of price rise could be higher than eight percent as global prices of a number of commodities have not been accounted for, say leading economists from HDFC Bank and Crisil.
As per the latest preliminary figures, inflation stood at 7.83 percent for the week ended May 3. The last revision of inflation numbers saw it touching 7.78 percent against the provisional figure of 5.92 percent for the week ended March 8, up by 1.86 percent.
It is possible that the revised data against the provisional figure could move up to 8 percent or a tad higher than that, as revised figures for March and April are likely to go up because prices of a number of commodities were recorded lower than the global prices, HDFC Bank Chief Economist Abheek Barua said to the news agency.
During the UPA regime, highest rate of inflation was 8.74 percent (revised) for the week ended August 28, 2004.
Conforming to the view, Crisil Principal Economist D K Joshi said the sharp upward revision would continue for the next 4-5 weeks and the revised data could touch 8 percent.
Explaining the rationale for the spurt in the revised figure, Joshi said prices of variety of commodities were updated leading to sharp difference between provisional and final figures.
Some of these commodities are metals, edible oil and raw cotton, Barua said, adding that there were gaps between international prices and domestic prices.
This could again be reflected in the revised inflation figure for the week ended March 1, for which the provisional figure was 5.11 percent, updated to 6.21 percent, an increase of 1.1 percent. Thus, for the first two weeks of March, the revision was over one percent.
During 2008, of the 11 revisions, the change from provisional to final has been more than 0.5 percent in 10 cases.
Till the week ended February 23, the revisions were less than one per cent, but thereafter it jumped to over one percent.
Barua said post-April data were better captured and the gap between provisional and final are likely to come down.
Speaking on price rise Prime Minister Manmohan Singh said on his way back to India from Bhutan, "If weather gods cooperate, we would see moderation of inflation after September 15."
"We have taken adequate measures. We have had excellent procurement of rice and wheat. We have taken effective steps. We are hopeful of moderation over the next few weeks," he said.
Singh said there is always a rise in prices between May and September.
The next time you head out to the corner store after reading the morning papers about spiralling inflation, you could take some solace or cold comfort, if you will, from the fact that prices of tea, coffee, soft drinks and certain food items such as confectionery have remained pretty much stable.
But for everything else, be prepared to fork out a lot more than what you did last year. .
It isn’t just fruits and vegetables or pulses and rice which you’re paying more for as sharp increases in input costs across several categories of items of daily consumption (fast moving consumer goods/FMCGs) have seen manufacturers hike prices sharply over the past year.
You could be shelling out far more for that jar of Horlicks or Bournvita, or your detergents, toilet soaps and biscuits, not to mention the oil for your pans and the atta for the phulkas.
With petroleum prices going through the roof, it was inevitable that prices of products such as detergents that use petro-derivatives as inputs would go up.
The prices of palm oil (used in toilet soaps), wheat and milk — key inputs for malted beverages and biscuits — have risen.
And, what’s more, packaging costs have gone up too as prices for LDPE and HDPE plastic, again petro-derivatives, have also shot up, fuelling the price hikes.
After holding prices for over three years between 2005 and 2007, FMCG makers have, over the past year, pegged up prices sharply.
Ask Mr D. Sundaram, Vice-Chairman and CFO, Hindustan Unilever, the country’s largest FMCG maker, whether higher prices of consumer goods are merely keeping pace with the higher inflation, and he says that prices for HUL brands need not necessarily match the underlying inflation in the relevant commodities. “For instance, vegetable oil prices have gone up by over 50 per cent in recent times while the increase in soap prices has been significantly lower; this is true across many categories,” explains Mr Sundaram.
Nor has the reduction in peak import duties over the past two years helped offset the steep increases in input costs of palm oil and petroleum-related raw material.
As Mr Sundaram points out, prices of industrial vegetable oil (which go into soaps) have gone up by over 50 per cent while the duty reduction has been about 5 per cent.
For three years till 2007, a combination of several factors, such as fierce competition among existing players, entry of new players and depressed demand, ensured prices of most consumer goods largely stayed static.
But, a cursory glance of current MRPs of a sampling of FMCGs spread across various categories ranging from beverages to biscuits and detergents to soaps shows that prices have risen in a band of Rs 2-Rs 10.
A 500-gram jar of Horlicks now retails for Rs 128 against Rs 118 last year and Bournvita for Rs 123 against Rs 116 last year.
Or, take detergents. A 1.5-kg pack of Surf Excel Blue retails for Rs 135 today while it sold for Rs 120 in February 2007 (See table on Page 3).
While most brands have seen an outright increase in prices (malted beverages by at least Rs 10), in some categories such as biscuits, manufacturers have chosen to reduce the weight of the packet, tantamount to a price increase.
According to Mr Praveen Kulkarni, Marketing Manager, Parle Ltd, “We reduced our grammage by almost 10 per cent across the brands this January and will continue to do so till the time every other biscuit player does the same thing. There have been input cost increases by 30 per cent for ingredients such as wheat, flour, sugar and vegetable fats. The category is price-sensitive and under these circumstances, we would rather not increase prices for our biscuits.”
So, in the context of higher prices across a swathe of consumer goods, what is happening to the consumer’s shopping basket? Are they downtrading to cheaper products, postponing purchases, refraining…?
Mr R. Subramanian, Managing Director of discount retail chain Subhiksha, who closely observes that “moment of truth” when a customer makes a brand purchase, does see an impact at some levels.
“But the core basket still survives, mostly the impulse discretionary items are clearly suffering at the margin. This month (May) is key — this is the first month of salaries under lower taxes — and hence more cash in consumer hands.”
Shift in preference
Mr Subramanian emphasises that impulse goes down — and substitution happens.
“Gingelly oil at Rs 150 per kg is clearly substituted in large part by groundnut oil while palm oil consumption has also grown at the cost of sunflower oil. There are clear shifts, even in items like rice, but prices of agri-produce have been the biggest pain area in the basket,” he adds.