PROJECT REPORT On

Gold: An Investment Option during Recession?

SUBMITTED BY
Dheeraj yadav
(Roll No. -0311843907) (MBA –II YEAR) BATCH: 2007-09

SUBMITTED TO:
Prof. A.K Vadehra

FOR THE PARTIAL FULFILLMENT OF THE AWARD OF THE DEGREE OF “MASTER OF BUSINESS ADMINSTRATION” FROM GGS IP UNIVERSITY DELHI

ARMY INSTITUTE OF MANAGEMENT & TECHNOLOGY, GREATER NOIDA (UP) – 201306

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Supervisor Certificate
This is to certify that Mr. DHEERAJ YADAV a student of Master of Business Administration, Army Institute Management & Technology, Greater Noida, has successfully completed his project under my supervision. During this period, he worked on the project titled “Employee’s Resistance Towards Organizational Change” in partial fulfillment for the award of the degree of Master of Business Administration of GGSIP University, Delhi. To the best of my knowledge the project work done by the candidate has not been submitted to any university for award of any degree. His performance and conduct has been good.

(Signature) Prof. A.k .Vadehra AIMT-Gr. Noida Date:

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ACKNOWLEDGEMENT

I want to show our sincere gratitude to all those who made this study possible. First of all I am thankful to the helpful staff and the faculty of Army Institute of Management and Technology. One of the most important tasks in every good study is its critical evaluation and feedback which was performed by our supervisor Prof. A.K Vadehra. I am very thankful to our supervisor for investing his precious time to discuss and criticize this study in depth, and explained the meaning of different concepts and how to think when it comes to problem discussions and theoretical discussions. My sincere thanks go to my family members, who indirectly participated in this study by encouraging and supporting me.

Dheeraj yadav

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Table Of Content
AKNOWLEDGEMENT.......................................3 ABSTRACT.....................................................5 BACKGROUND............................................... .6 INTRODUCTION..............................................9 PROBLEM DISCUSSION...................................3 RESEARCH QUESTIONS...................................4 RESEARCH METHODOLOGY...........................15 REASONING FOR THE SLOWDOWN (FY 08-09) 28 CURRENT SITUATION OF YEAR 2008..............31 COMPARISON WITH OTHER INVESTMENT OPTION ......................................................34 THE ECONOMICS MELTDOWN AND IMPACT ON INDIA............................................................8 CONCLUSION...............................................42

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Abstract
Problem:
When choosing topic for this study the economy was on the brink of a recession. Many experts made varying statements regarding this fact, and further readings in this area led us to question: can gold be the better option for investment or not in recession.

Purpose:
The purpose of this thesis is to look back at the historical price development of gold and Sensex during recessions in order to find out whether an inclusion of gold can gave maximum return

Method:
The methodological approach will be of a quantitative data analysis approach. By using historical data, new empirical findings will be found by using the deductive approach. This method has been chosen due to the nature of the purpose and in order to best give a general answer to our research questions.

Conclusion:
The gold price is strongly influenced by uncertainty, and even though an optimal allocation of gold in each recession could be found, no general optimal allocation applicable in today’s recession could be found. Gold is better option to invest than Sensex and other investment options. 5

Background
George Santayana, a well-known philosopher, once expressed these words: “Those who cannot remember the past are condemned to repeat it.” (Reason in common sense) As the quote above states, the history will repeat itself and it is therefore of vital importance to analyze the past in order to pursue hints for the future. In today’s (2008) financial turmoil, the market has changed dramatically during a short period of time. Starting with the sub-prime mortgage crisis with falling house prices in the US, the world market is today under pressure to recover. Seemingly, history will repeat itself because people with self-fulfilling goals drive the market. Investors have lost large shares of their portfolio investments and multinational companies and banks are struggling with their finances. The largest indexes all over the world have plummeted with 1-day record losses and the situation today is unstable, least to say.

The downfalls that many countries have experienced this year (2008) have caught our attention, and it has made us question what there is to do in order to hinder even further losses for private investors. Are there any assets that could decrease the losses and perhaps even improve the portfolio performance? Gold has long been considered a safe haven in these circumstances, and in an article written by BBC News (2008-01) earlier this year in January, the gold price was on its way up, driven by the weak dollar, strong oil prices and global inflationary fears. In general, people perceive gold and other precious metal commodities as lower risk investments, and with the fear of falling stock prices, people are now looking for various alternatives to safeguard their portfolios.

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Supply and Demand for gold

Supply and Demand for gold is the principle mechanism that guides the price of gold, thus the value of gold. Since gold only falls back on its intrinsic value, it receives no interest or dividend payment, the price increase or decrease is what regulates the capital gain. The major determinants for gold prices are uncertainty, inflation, government auction policy and the supply and demand flow. The short-term demand is a function of the "usage demand" (i.e. jewelry, electrical components etc) and "asset demand" (i.e. dollar expectations, inflation expectations etc) (Levin & Wright 2006). Dempster (2008, p.6) states, “Conventional wisdom argues that recessions are bad for commodity prices”. Since consumer and business confidence falls, demand on goods falls, meaning that inputs in production decreases. Since many of these goods are commodities, the price of commodities falls. However, Dempster also notes that gold has some important characteristics that may turn conventional wisdom around. Gold demand for industry is relatively small, thus not relatively vulnerable to business cycles, while gold in electronics is expected to decrease during a recession, since fewer spends less on excess products. Gold in jewelry sector is also more vulnerable than industry demand, but in relation to other precious metals used in jewelries it stands far better in a recession. The demand in total is based on many other factors, micro economic and macro economic factors, such as, dollar exchange rate factors, inflationary expectations, uncertainty in the economy and political turmoil, returns of other assets, and lack of correlation with other assets. Levin & Wright (2006) In addition to this Gotthelm (2005) argues that gold demand is subject to much uncertainty with the war on terror, the possibility that governments’ re-turn to gold as reserve backing the currencies, dump reserves, or illegalize trade with gold as in the 1930s. Long Run The long run supply and demand function presented by Levin & Wright (2006) is a function of inflation as mentioned earlier, thus making a good inflation hedge. Another important notification made by Levin and Wright (2006, p.23-24) is “surrounding the Army institute of management and technology. 7

assertion that gold reduces portfolio volatility because the types of events that cause stock prices to collapse also tend to raise the price of gold. There is, however a disagreement about the claim that gold has a “negative correlation” because returns to holding gold have the opposite sign to the returns on a market portfolio”. Thus, as seen the factors constituting the price of gold, are highly various in both impact and variability, making gold behave differently from many assets. Some factors are common for others, like inflation, while others, like extraction costs, are solely affecting the gold price.

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Introduction Gold:
Due to more stable economies the last 20 years, and together with the financial markets’ "invention" of different hedging substitutes, the interest of gold as an investment has decreased. Due to this, the academic community has more or less ignored researching the possibility of gold as a diversifier. Even though mainstream economists no longer pay much attention to gold, a study conducted by Jonathan Phair (2004) showed that gold still has "great potential for investors". The main difference between trading with gold and with regular financial assets such as stocks or bonds is that gold is traded from a "storeof-value" point of view, while financial assets are traded in order to secure future income. Consequently, the only gain you will have when investing in gold would be a possible future price increase since it does not yield a return except capital gain (Abken 1980)., the major supply side factors are recycled gold, mine production and central bank selling, while the demand side constitutes of jewelry, investment and industry demand. Price is the most important aspect considering supply and demand of gold, thus understanding the mechanism of price change will help to understand what drives supply and demand (Solt& Swanson, 1981).

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Demand and supply of gold

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A more summarized analysis on the determinants of the price of gold was conducted by Abken , where he located what he called the "probable causes of gold price movements" as: (i) extreme political and economic uncertainty, (ii) flow supply and demand for gold, (iii) inflation, and (iv) government auction policy. 1i) Extreme political and economic uncertainty: Since gold throughout history has had rather unique properties such as scarcity, divisibility, uniformity, liquidity, highly mobile, and almost indestructible. Therefore, it has for long time been highly demanded and together with the fact that the increasing above ground stock level (gold that has been extracted and is on the market) grows very slow (due to requirement in in-fra-structure, labor, and capital), gold has always been considered a relatively good store of wealth. This makes gold even more desirable in times of high uncertainty, compared to other assets, as people tend to flee to gold to secure their wealth. 1ii) Flow of supply and demand for gold: The demand for gold is on one hand the demand of the goods that was produced using gold in industrial production and also of the gold itself i.e. jewelry. While the supply of gold consists of gold ready for market consumption (above ground stocks). An important notice needs to be made, Abken states that: “The salient characteristic of gold markets is that changes in flows, i.e., changes in the rate of commercial demand for gold or in gold’s rate of production, affect the stock of gold insignificantly compared to changes in rates of production and consumption on the stocks of other storable commodities. For this reason flow supply and demand for gold have a relatively small impact on the price of gold 2 1iii) The price of gold in terms of dollars is a measurement of the demand of both gold and dollars, relatively. This depends on the believed future rate of return. If the dollar experiences increased inflation, meaning lower dollar value, the relative price of gold should increase by the same amount. For example would a five-percentage in-crease in inflation rate equal a five-percentage appreciation in gold price. As can be seen in Figure 8, the movement of inflation and gold are following a similar pattern.

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SENSEX:
The SENSEX, short form of the BSE-Sensitive Index, is a "Market CapitalizationWeighted" index of 30 stocks representing a sample of large, well-established and financially sound companies.

Objectives of SENSEX To measure market movements Benchmark for funds performance For index based derivative products

Calculation of SENSEX SENSEX is calculated using a "Market Capitalization-Weighted" methodology. As per this methodology, the level of index at any point of time reflects the total market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. An index of a set of a combined variables such as price and number of shares is commonly referred as a 'Composite Index' by statisticians. A single indexed number is used to represent the results of this calculation in order to make the value easier to work with and track over time. The calculation of SENSEX involves dividing the total market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index maintenance adjustments.

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Problem discussion
One of the main reasons why this topic was chosen is because a new recession (2008) is threatening many countries all over the world. This makes diversifying investments an important measure to take for private investors. In order to understand these kinds of investments during recessions, one must comprehend the historical economic development of the market A returning topic within the fields of safer investments is gold, especially during uncertain times. Historically, gold has been considered a safe haven when other assets have plum-meted due to the unstable situation in an economy. It is therefore of interest to look deeper into this comprehension of gold and its characteristics. Is it possible to look at the historical price movements of gold during recessions to draw the conclusion that an inclusion of gold in a portfolio in today’s recession is profitable Or . investing to other sector like real estate and service sectors

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Research Questions:
1) Is it possible to conclude whether gold should be invested in when holding portfolio(shares), in order to minimize risk or maximize return given risk, during recessions by looking at past performance of gold & sensex

2) If an investor who possesses portfolio chose to invest in gold during a recession

3) Are there any significant differences between the weights and do they vary in recession? What are possible causes behind the differences in weights in recession? And why people take steps towards gold in spite of other sectors during recession

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Research methodology:

After introducing the major topic, i.e. GOLD: An investment option during recession. ,I want to discuss the methods I used, to further conduct this study. This study focuses ‘how gold is better option for investment in this recession period. Secondary data has been collected from books, journals, internet and articles, which enabled us to understand our problem area from different authors point of view. One of the important ways I used for collecting secondary information was to study the references of important articles to understand the broad ideas and background of that study. This thorough search enabled us to discuss and explore another important area. While studying the concept/area of Recession and how gold become more effective compare to other investment option available in the market either share market or different sector like real estate , banking etc. Also the study of literature enabled us to how secondary source information should be collected to proceed.

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Quick look at year 2007:
In the secondary market segment, the market activity expanded further during 2007-08 with BSE and NSE indices scaling new peaks of 21,000 and 6,300, respectively, in January 2008. Although the indices showed some intermittent fluctuations, reflecting change in the market sentiments, the indices maintained their north-bound trend during the year. This could be attributed to the larger inflows from Foreign Institutional Investors (FIIs) and wider participation of domestic investors, particularly the institutional investors. During 2007, on a point-to-point basis, Sensex and Nifty Indices rose by 47.1 and 54.8 per cent, respectively. The buoyant conditions in the Indian bourses were aided by, among other things, India posting a relatively higher GDP growth amongst the emerging economies, continued uptrend in the profitability of Indian corporate, persistence of difference in domestic and international levels of interest rates, impressive returns on equities and a strong Indian rupee on the back of larger capital inflows. The BSE Sensex (top 30 stocks) too echoed a similar trend to NSE nifty. The sell-off in Indian bourses in August 2007 could partly be attributed to the concerns on the possible fallout of the sub-prime crisis in the West. While the climb of BSE Sensex during 200708 so far was the fastest ever, the journey of BSE Sensex from 18,000 to 19,000 mark was achieved in just four trading sessions during October 2007. It further crossed the 20,000 mark in December 2007 and 21,000 in an intra-day trading in January 2008. However, BSE and NSE indices declined subsequently reflecting concerns on global developments. BSE Sensex yielded a Compounded return of 36.5 per cent per year between 2003 and 2007. In terms of simple

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average, BSE Sensex has given an annual return of more than 40 per cent during the last three years.

An overview of year 2007:

2007 Jan Feb Mar Apr May Jun Jul Aug Sep Oct

BSE 14091 12938 13072 13872 14544 14651 15551 15319 17251 19838 17

Army institute of management and technology. Nov 19363 Dec 20287

After touching 14K mark on December 5th 2006, sensex entered into 2007 with a promising figure of 14000+, though the year started on a rather tentative note with a marked slowdown being observed in the FII inflows into the country. The inflows received from FIIs in January and February 2007 was 48 per cent less than what was received during the same period in 2006. The return provided by the BSE Sensex for

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2007 turned into negative territory following the 389-point tumble on Friday, February 23rd; the year-to-date return generated by the Sensex was negative 0.97 per cent. FIIs have pressed substantial sales over those days in contrast to an intermittent surge in inflow in February 2007. As a result, the sensex which closed at 14091 on January 31 st, closed at 12938 on February 28th. As per provisional data FIIs were net sellers to the tune of Rs 613 crore on Friday 2 March, the day when Sensex had lost 273 points. Their net outflow was worth Rs 3080.80 crore in four trading sessions from 26 February to 1 March 2007. Market continued to reel under selling pressure on 5th march 2007 taking cue from weak global markets and heavy FII sales as a result of fall over 400 points, all the indices were in red. On April 24th, The Sensex again crossed the 14K mark and was trading at 14,150.18 having gained 221.85 points or 1.59%. The midcap and smallcap indices were rather moving slow indicating that the actual movers are the large cap stocks but at the month end it finally closed at 13872. Further we can see May and June having month end figures at 14544 and 14651 respectively. The benchmark BSE 30-Share Sensitive Index (Sensex) breached the 15,000-mark, to reach a record high of 15007.22, for the first time intra-day on Friday, July 06 2007 before closing at 14964.12. Despite weak global cues, Indian stocks were in great demand, especially auto, pharma, IT and metals stocks. On Friday, this lifted the Bombay Stock Exchange's benchmark 30-share Sensex past the magical 15,000-mark. The Sensex took 146 sessions to cover the 1,000 point distance from 14,000 till 15,000. This is the highest since the index took 371 trading sessions to move up from 6,000 to 7,000. The sensex experienced its second bigger ever fall on 2nd august 2007. The fall came in after the Fed Reserve cut its discount interest rate at an emergency meeting and JPMorgan Chase agreed to buy Bear Stearns for USD 2 a share. Sensex closed down 951.03 points or 6.03% at 14809.49, When FIIs were pumping money in stock market and were Net Buyers of Equity worth Crores; the Sensex was moving Up , Up and Up on weekly basis. Many thought that FIIs were playing blind in Indian stock market. But when FIIs have turned Net Sellers of Equity and have started booking profit backed by massive sell off of shares in global

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markets; Sensex has to go down. As expected; the Sensex plunged by 600 Points in early trading on 16th August and most of the shares were down by 4 to 5 per cent. But very soon the sensex surpassed the gloomy days and Stock markets on Wednesday, September 19th, 2007 gave thumbs up to the decision of the U.S. Fed Reserve to reduce the rates by 50 basis points, as the benchmark 30-share BSE Sensex moved up sharply by 653.63 points or 4.17 per cent at 16322.75. By staying well above the 16000-mark, it outperformed most Asian peers and it was the biggest single day gain. This trend shows that global cues had an influential effect on our market. On the auspicious occasion of Ganesh chaturathi, India experienced a flow of good news. The festive spirit did not end with the immersion of Ganapati. On Wednesday, it boiled over to the streets of Mumbai and its financial district, the Sensex touched the magical 17,000 number. It took Dalal Street just 5 days to travel 1,000 points. Suddenly, tech stocks, which were the whipping boys till Tuesday, became hot favourites. Why? Hopes that the rupee will soften as a result of RBI's latest announcements to allow more outflow sparked a rally in tech stocks, pushing the Sensex to a new high of 17,073.87 during the day. At the end of the day, RBI's measures may not be enough to rein in the rupee. But there were no takers for this. The bellwether index finally settled at 16,921.39. On October 9th, 2007, Sensex hits a record high of 18,280 on the back of eye-popping rallies in Reliance & Reliance. At the height of the dotcom mania in 1999-00, the easiest way to maximize returns was to buy into any stock with the suffix ‘Software’ or ‘Technologies’. Eight years on, the same seems to hold true for any stock with the prefix ‘Reliance’, given their baffling run-up over the past one month. Eye-popping rallies in Reliance Industries, Reliance Energy and Reliance Communications lifted the 30-share Sensex to a record high of 18,327.42 intra-days. On October 15th 2007, amidst heavy buying by investors, the bull roared to breach the 19000 mark in just 4 sessions Sensex was up by 639.63 points or 3.47 per cent at 19058.67. This rise came on the back of some strong sectors for which the macro picture is quite bright — power, capital goods, infrastructure and telecom. Foreign Institutional Investors were pumping in huge money in the equity market and this too was pushing up the index. Since September, they nearly pumped in more than Rs. 30,000 crore in the cash market. After the U.S. Federal Reserve cut interest rates by 50 Army institute of management and technology. 20

basis points, a re-rating of the emerging markets had been seen wherein liquidity flows were quite robust. Then suddenly happened the second biggest crash the sensex ever experienced when the sensex crashed by 1743 points on 17th October 2007 within minutes of opening, prompting suspension of trade for hour fallout of regulator Sebi's move to curb Foreign Institutional Investors. In a knee-jerk reaction to the cap proposed by the market regulator for the Participatory Notes, an overseas derivative instrument (ODI), used by foreign institutional investors (FIIs), the stock market crashed by 1743 points in intra-day, but recovered substantially later to close with a loss of 336.04 points or 1.76 per cent at 18715.82. but it was followed by a huge one-day gain as on October 23 when the BSE barometer rose 878.85 points after market regulator SEBI allowed sub-accounts of Foreign Institutional Investors (FIIS) to trade It took the index a little over 20 years to reach the first 10,000 mark, but just a little over 20 months to double that score and the sensex made history with touching the 20000 mark on October 29 2007. Significantly, it was the local institutions that were in the driver’s seat. As per BSE data, foreign funds have net sold over Rs 1,100 crore worth of shares over the last three trading sessions while local funds have net bought over Rs 2,300 crore worth of shares. Sceptics point to the fact that there were only a handful of stocks that was driving the market higher. On 13th November, BSE Sensex registered its biggest ever gain in a single of 893.58 points to settle at the third-highest level ever on buying by investors in bank counters and blue chip companies such as Reliance Industries. The market gain was because of global cues. Besides, the political development also gelled well with the sentiment. The rally was driven by short covering, strong buying by domestic investors. However, there was not much involvement of foreign investors. But in December 2007, sensex again experienced a black Monday on 17th December. The market succumbed to profit booking, that came in due to weak global cues as well as profit booking by FIIs in the holiday season. The Sensex ended losing 769 points from the previous close, at 19,261.

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Over look of Gold prices

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Gold price, Rupees per ounce, London pm fix
50,000

45,000

40,000

35,000

30,000

25,000

20,000

15,000 Source: Global Insight 10,000 Jan-00 Oct-00 Jul-01 Apr-02 Jan-03 Oct-03 Jul-04 Apr-05 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09

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Gold price, dollar per ounce, London PM fix
1100 1000 900 800 700 600 500 400 300 Source: Global Insight 200 Jan-00 Oct-00 Jul-01 Apr-02 Jan-03 Oct-03 Jul-04 Apr-05 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09

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Monthly average prices of gold in year 07

Months Jan Feb. march April May June July August September Oct Nov December

Prices(Rs/ ounce) 27,929 29,268 28,858 28,273 27,234 26,670 26,825 27,176 28,268 29,974 31,659 30,974

Growth in gold prices in year 07 end =10.90% Growth in sensex in year 07 end =43.97%

Sensex during year 2008:

After scaling new heights of 20000+, sensex entered year 2008 with rosy pictures. The trade pundits, brokers and even investors predicted new heights for the year. And they felt their predictions coming true when sensex touched the 21000 mark on 8th January 2008. It’s interesting if one sees in terms of flows; the journey from 20,000 to 21,000 is dominated by domestic institutional investors; FIIs were negative sellers, they sold in the cash market to the tune of USD 45 billion. So if one has to take out some pointers from this journey from 20,000 to 21,000, it is the longest journey which we have seen in the last 5,000 marks, the midcaps and smallcaps have been outperformers and in terms of flows, it has been domestic institutional investors which have been really putting the money. But the rosy picture soon turned gloomy. The skyrocketing sensex suddenly started heading south and Sensex saw the biggest absolute fall in history, shedding 2062 points intra-day. It closed at 17,605.35, down 1408.35 points or 7.4 per cent. It fell to a low of 16,951.50. The fall was triggered as a result of weakness in global markets, but the impact of the global rout was the biggest in India. The market tumbled on account of a broad based sell-off that emerged in global equity markets. Fears over the solvency of major Western banks rattled stocks in Asia and Europe. After the worst January in the last 20 years for Indian equities, February turned out to be a flat month with the BSE sensex down 0.4%. India finished the month as the second worst emerging market. The underperformance can partly be attributed to the fact that Indian markets outperformed global markets in the last two months of 2007and hence we were seeing the lagged impact of that outperformance. In the shorter term, developments in the US economy and US markets continued to dominate investor sentiments globally and we saw volatility move up sharply across most markets. The Bombay Stock Exchange (BSE) Sensex fell 4.44 percent on Monday, 31st march the last day of the financial quarter, to end the quarter of March down 22.9 percent, its

biggest quarterly fall since the June 1992 quarter, as reports of rising inflation and global economic slowdown dampened market sentiments. Financial stocks led the Sensex slide along with IT. According to market analysts, IT stocks fell on worries about the health of the US economy. Indian IT firms depend on the US clients for a major share of their revenues.

Reasoning for the slowdown (FY 08-09)

The first month of the financial year 08-09 proved to be a good one for investors with the month ending on a positive note. The BSE sensex showed a gain of 10.5% to close at 17287 points. A combination of firming global markets and technical factors like short covering were the main reasons for the up move in the markets. Though inflation touched a high of 7.57% against 6.68% in march 2008 as a result RBI hiked CRR by 50 bps to take the figure to 8%, still emergence of retail investors was also seen; a fact reinforced by the strong movement in the mid-cap and small- cap index that rose 16% and 18% respectively. So April was the last month to close positive. Then after nobody saw a stable sensex even. Sometimes it surged by 600+ points, but very next day it plunged by some 800 odd points and this story is still continuing. Every prediction, every forecasting has failed. The sensex is dancing on the music of lifetime high inflation rates, historic crude prices, tightening RBI policies, weak industrial production data, political uncertainties and obviously the sentiments of domestic as well as FIIs. The only relief came in the form of weakening Indian rupees which enlightened the IT sector and most recently the UPA gaining vote of confidence. Presently it is revolving around the figures of 14000 and no one knows what next? The 30-share BSE Sensex fell 117.89 points or 0.67% at 17,373.01 on Tuesday, 6 May 2008. The key benchmark indices ended lower as investors resorted to profit booking due to lack of positive triggers in the market. On 30th May an imminent hike in domestic retail fuel prices due to soaring crude oil prices weighed on the market last week. Foreign institutional investors sold close to Rs 2204 crore in the first three trading sessions of the week which accentuated the downfall. However better than expected Q4 gross domestic product figures provided some relief to the bourses on Friday. IT stocks gained on slipping rupee. BSE Sensex rose in two out of five trading sessions. In May, Indian inflation stood at 8.2%.

The market declined sharply as a hike in fuel prices by about 10% announced by the Union government on Wednesday, 4 June 2008, triggered possibility of a surge in inflation to double digit level. The BSE Sensex declined 843.39 points or 5.14% to 15,572.18 in the week ended 6 June 2008. The S&P CNX Nifty fell 242.3 points or 4.97% to 4627.80 in the week. On 6 June 2008, local benchmark indices underperformed their global peers, hit by rumours that the Reserve Bank of India (RBI) may hike cash reserve ratio (CRR) or interest rate later in the day to tame runaway inflation. The 30-share BSE Sensex declined 197.54 points or 1.25% to settle at 15,572.18. On 9th June 2008, Bombay’s Sensex index closed 506.08 points down at 15,066.10, having earlier fallen 4.4% and slipped below 15,000 for the first time since March. Oil prices surged to record levels, fanning fears that they will keep climbing and hurt world growth. Central banks across the globe warned that interest rates may have to rise as they look to keep inflation under control, despite the fact that economic growth is slowing in key nations such as the US and UK. On the week ending 27th June 2008 Sensex declined 769.07 points or 5.28% to 13,802.22. The S&P CNX Nifty lost 210.90 points or 4.85% to 4136.65 in the week. Equities extended losses for the fifth straight day on 24 June 2008 with the barometer index BSE Sensex falling below the psychologically important 14,000 mark for the first time in 10 months since late August 2007. On 25 June 2008, equities staged a solid rebound after touching fresh calendar 2008 lows in early trade. The initial jolt was caused by the Reserve Bank of India's move to hike the key lending rate. A setback to stocks in Asia and US, sharp spurt in crude oil prices and political uncertainty due to Indo-US nuclear deal rattled bourses on 27 June 2008. On July 15th 2008, Indian shares fell 4.9 per cent to their lowest close in 15 months, joining a world equities rout as investors dumped financials on concerns about the fallout from worsening global credit turmoil. Although Indian banks have no direct exposure to the US subprime mortgage sector, the global financial sector turmoil impacts sentiment in the local market and raises worries of more withdrawals by foreign funds.

An 800+ point surge was experienced in the market on the day following UPA gaining vote of confidence but the very next day market couldn’t maintain the momentum and since then its in a doldrums’ position. Presently, we can saw market plunging after the RBI announced further hikes in Repo rate as well as CRR both increased to 9%. Also, the serial blasts at Ahmadabad and Bangalore adding to the worries and enhancing the negative sentiments. And above all we can't see any positive trigger that can dilute the flow of negative news.

Current Situation of year 2008:
With major financial crisis erupting in the U.S., Indian Stock Market benchmark index (Sensex) fell by 469.54 points or 3.35 per cent on Monday to close at 13531.27. Realty stocks led the fall with a loss of 7.65 per cent. The National stock exchange, the NSE Nifty lost 155.55 points or 3.68 per cent. All sectoral indices closed in the negative territory. An eventful week of turmoil has begun in the global financial scenario as stock prices plunged across much of the globe on news that investment bankers, Lehman Brothers Holdings filed for bankruptcy and Merrill Lynch & Co’s forced sale to Bank of America. Even American International Group (AIG), the world’s largest insurance company, asked the U.S. Federal Reserve for an emergency funding before announcing a major restructuring plan. The investments in Indian firms by these U.S. investment bankers are a major worry for Indian investors. Investor confidence is at its lowest ebb. Investors are worried that all these are likely to trigger another round of troubles for banks and financial institutions around the globe. Six months ago, in March, Bear Stearns, the fifth biggest U.S. investment bank, witnessed a full circle before its fall and sell-off to JP Morgan Chase & Co for a rock bottom price of $2 per share.

Monthly average prices of gold in year08
Months Jan Feb. 36,671 march April May June July August September Oct Nov December 39,066 36,432 37,583 38,111 40,317 36,051 37,867 39,322 37,326 39,876 Prices(Rs/ ounce) 35,021

Growth in gold prices at the end of year 08 =13.86% Growth in sensex at the end of year 08= -50% Sensex and nifty both goes down and investors face drastic problem

Comparison with other investment options: Real estate
Realty prices to fall 50%, says SBI chief As the talks of demand slowdown in the real estate sector gather steam, one of the top bankers in the country on Saturday talked about price correction. OP Bhatt, chairman of State Bank of India (SBI), the country’s largest bank, expects 50% correction in the housing sector prices in the country. “In India we may witness up to 50% correction in pricing in the mortgage markets. If that happens, it’s good news for the Indian banking system as NPAs would reduce and new business would fall-in,’’ he said at the concluding session of Ficci-IBA Conference on Global Banking: Paradigm Shift, in Mumbai on Saturday. Refering to the ongoing volatility in the stock markets, he advised not to overreact in the prevailing uncertain scenario where foreign funds are moving out of the country. “There is a natural correction in Indian economy now. As regards to the fall in real estate as well as stock market, only 0.25-0.50% of the country’s population has lost money. That should not be the reason to panic,” he added. Commenting on the inflationary scenario, Bhatt said he expected the inflation to settle down at around 9% by March 2009. “It’s not going to go down at 7% and also, not expected to shoot over the roof as perceived by some.” He further said Indian banks have not really slowed down the credit inflow to certain sectors, but the genuine delay in providing loans to some of the sectors is mainly due to a huge backlog of loan applications.

However, Neeraj Swaroop, CEO, Standard Chartered Bank, India, said current downturn in India would continue and the year 2009 would bring more challenges to the India banking sector as NPAs would tend to rise. Chanda Kochhar, joint managing director and CFO, ICICI Bank, said the bank would cut deposit rates only when the bank’s cost of funds go down. “In the current scenario, Indian banks should prioritise liquidity and risk management over growth and profit aspirations,” she suggests. Joydeep Sengupta, director, McKinsey & Compan said the overall impact of the global volatility would enhance the capital requirement of the Indian banking system, which will need $70-80 billion in the next four years to sustain the India growth story. Rana Kapoor, CEO, managing director, YES Bank, advocated a dire need to attract sovereign wealth funds’ investments Indi

Indian real estate price can fall 60 to 70% from current levels in the next five years

The real estate sector in India may have seen its best time for the next several decades. The real estate markets now heads downward, as people cannot make their mortgage payments. OP Bhatt, chairman of State Bank of India (SBI), the country’s largest bank, expects 50% correction in the housing sector prices in the country. “In India we may witness up to 50% correction in pricing in the mortgage markets. If that happens, it’s good news for the Indian banking system as NPAs would reduce and new business would fall-in,’’ he said at the concluding session of Ficci-IBA Conference on Global Banking: Paradigm Shift, in Mumbai on Saturday. According to other analysts, the market can roll downwards another additional 15 to 20% before stabilizing. The commercial and residential sectors in major metropolis are experience severe credit crunch, defaults and bank takeovers. The glut of unsold apartments is skyrocketing. The residential mortgage market is collapsing faster than the sub prime mortgage market in America.

Example:
Slowdown-hit DLF seeks to exit 5 SEZs
Reeling under a double whammy of slowing industrial expansion and a slowdown in the housing sector, realty major DLF has written to the commerce ministry seeking to surrender five of the nine SEZs allotted to it across the country. “DLF has nine (notified) IT/ITeS special economic zones. They have made an application for dropping five of them, and it will come up after the elections,” a senior official said on Wednesday. The slowdown in the information technology sector has made investments in IT SEZ a less lucrative business than in the past few years. A company spokesperson, when contacted, declined to offer comments. “We do not comment on market speculations,” he said. DLF has land for nine SEZs in Bhubaneshwar, Gurgaon, Gandhinagar, Hyderabad, Sonepat, Pune, Kanchipuram and Kolkata. Of its total 14 SEZ projects, five are operational at present. Other real estate players like Ansal and Parsvnath have also put their SEZ expansion plans on hold Project Today reported that DLF, the real estate company, has approached the Union Government over its plans to surrender five of its nine IT-IT enabled Service notified SEZ. The reason for the company's decision cannot be ascertained; however speculation is that the verdict comes in fray of the credit crunch hitting the real estate sector. As per the SEZ Act, the tax free enclaves cannot be relinquished once they become operational. DLF, however, has not started work on the five SEZs that it wants to give up. The company had earlier surrendered its 40-acre IT SEZ in the central Delhi

The Economic Meltdown and Impact on India
This is a challenging period for all of us, as the global economic outlook has further deteriorated and the recent evidences show that demand has slumped, productions have gone down, there are more and more job cuts and the credit market has gone to a standstill. The effect is contagious- the meltdown is getting transmitted from the developed economies to the developing economies. The world trade is projected to contract by 2.8 percent in 2009, which is an alarming indication.

It is important to understand that this great recession is not going to be over very soon and the recovery will take longer than what was expected earlier, so the policy markers across the globe need to respond accordingly. There are instances where the Governments and central banks across the countries have responded to this economic crisis through big, aggressive and unconventional measure, but we are yet to see the results and each one of us searching for the answer to the question “when will the crisis get over?” Initially, almost a year ago there was belief that the crisis has hit the advanced economies and will have very less effect on the emerging economies, and this was due to the fact that the emerging economies have continuously believed in maintaining substantial foreign exchange reserves, have an updated and improved policy framework, robust corporate balance sheets and a relatively healthy banking sector. This belief relied heavily on the “decoupling theory” which is gradually proving to be invalid as the experiences of the emerging economies have been quite different in past few months.

There are evidences of capital flow reversals, huge corporate debts and currency depreciations which also reinforce that decoupling theory no longer stands true. This reiterates the global economic theory that in a Global world the countries cannot function in isolation. There is a definite ripple effect and growth prospects of emerging economies have an impact from the financial crisis faced by the developed economies. Of course, the there would be variations across countries and the impact is not same for all of them.

We need to accept that India has been hit by the crisis and the impact is much more than what was estimated initially. The argument that stems out is – “How can India be caught up in this crisis when it has not played any direct role in the core crisis?” Our banking system does not have any direct exposure to the mortgage drama or to the sub-prime crisis or to the failed financial institutions. The major banks of India have very limited off-balance sheet activities or securitized assets, so they continue to be safe and healthy, and we come back to the question again that “why at all have we been hit by the crisis?”. The other fact which is bewildering is that the substantial growth India showed in the past one decade was driven by domestic consumption and domestic investment and India’s dependence on external demand has been very limited and this can be estimated by the merchandise export which accounts for less than 15 %of our GDP. So, the question raised again is that if the external demand is so limited then how are we hit by the crisis? The answer lies in the fact that we are now part of the Global Economy and the level of integration of any country with the world economy determines the extent of impact of the crisis on that country. Post liberalization, India’s integration into the world economy has been very rapid and this implies that the involvement is more than just export. To give an idea, the involvement in the two way trade during the previous crisis of similar nature in 1997-99 was recoded 21.2% and now in 2007-08 it has been recoded as 34.7%. India’s financial integration into the global economy is deeper than what it seems to be on the surface, because the Indian corporate sector has largely borrowed from developed economies because they were at a lower cost than the funding available in the domestically. In the year 2007-08 India received a capital inflows amounting to over 9% of GDP’s as against a current account deficit in the balance of payments of just 1.35% of GDP. These capital flows, in excess of the current account deficit, evidence the importance of external financing and the depth of India’s financial integration. Hence it can be established that the crisis has hit India because of its integration into global economy.

The crisis is contagious causing pressure to India’s financial markets and the confidence level. We have seen that the Government and RBI have closely worked to reduce the impact on our country by keeping comfortable rupee liquidity position, augmenting foreign exchange, and maintaining a policy framework that would beep credit delivery on track so as to arrest the moderation in growth. .

The policy packages included conventional measures like reducing interest rates aggressively and rapidly, reduced the quantum of bank reserves impounded by the central bank and expanded and liberalized the refinance facilities for export credit. Among the many unconventional measures taken by the RBI the most important one is the rupeedollar swap facility for Indian banks to give them a comfort in managing their short term foreign funding requirement. This is an exclusive refinance window which serves as a special purpose vehicle for supporting non-banking financial companies and expanding the lend able resources available to apex finance institutions for refinancing credit extended to small industries, housing and exports.

The overall outcome of the monetary measures taken by the RBI or the Government since mid September 2008 has been to keep the Indian financial market function in an orderly manner. The environment is ever optimistic that India would recover through the crisis more rapidly than the developed economies.

At the point when the Government and RBI have joined hands to avoid a financial meltdown the concern that bothers one and all is the measures to handle the social meltdown. The world economic crisis continued to have toiled the Indian economy, damaging both its immediate and long term prospects. The social meltdown is triggered by the job losses across most of the organizations, causing family break-ups, mental break-down of the sort. The government concedes that half a million jobs have been eliminated in recent months in the "globalised" sectors of the economy, including the textile, gem and jewelry, and auto industries and in business processing units across the globe and India is the most important site of IT-enabled offshore operations for the US and British banks that have

been at the center of the world financial meltdown. The impact of the crisis there is very evident on the job market here. Commerce Secretary Kamal Nath has warned that 1.5 million jobs in export-oriented industries could be eliminated in the first six months of this year. Fearing the socialpolitical impact of the rise in unemployment—Indian voters are to go to the polls in a multi-stage general election this April and May—the acting finance minister, Pranab Mukherjee, recently urged employers to slash wages and reduce hours in preference to job cuts. "Jobs," said Mukherjee, "must be protected even if it means reduction in compensation at various levels." For the last five years, India recorded an unprecedented growth of nine percent and this was driven by domestic consumption and investment. There has been a remarkable increase in the share of net exports but the cause of growth was definitely the consumption in the domestic market. India’s integration in the global environment, easy liquidity and low interest rates helped in maintaining the steady growth, but the true reason for the growth lied in the entrepreneurial spirit of Indian corporate house, increased productivity and increase in savings. These fundamental strengths are still in place and will continue to be so. But, now there is a definite dent in the growth curve of India and this is inevitable because in present circumstances investments are low and exports are slow. This is a period where painful adjustments are required and it is in the hands of the government and RBI to manage the adjustments so that the people face as little pain as possible. As mentioned earlier the financial meltdown directly leads to social meltdown and that effect the overall health of a nation. However, once the global economy begins to recover, India will turn around faster than expected because it has strong fundamentals and untapped growth potential. Meanwhile, all we need to do is keep functioning in the present environment with patience.

Conclusion

The purpose of this thesis was to look back at the historical price development of gold and sensex during recessions in order to find out whether an inclusion of gold could improve a portfolio held today. In addition, the allocation of gold and the differences in the weights to an portfolio was part of the purpose. From the results and analyses that have been conducted, it can be concluded that gold indeed have improved the performance of an portfolio by either increasing the return. The combination of an index portfolio and gold has been shown to be profitable in the majority of the recessions. Because prices of gold increases annually . The performance of gold varied heavily in the recessions, but always in a positive direction, making it a safe investment in economic downturns.. As gold has both high return and relatively high fluctuations it has been proved to be more suitable to create optimal portfolios. In my analysis I decided to compare gold to other sectors like real estate and banking etc to see whether its performance in recessions was good in a relative sense. The results of this comparison showed gold to be a good investment, with an overall higher return than the other commodities during the recessions. The fluctuations of the price of gold have made the allocation vary during recession which in turn has complicated a generalization of an optimal allocation in the short run. For an investor with a long time horizon, a high amount of gold could be more easily defended than for a short term investor. In the long run, spotted short term deviations have tended to smooth out, to an optimal allocation around 50% in gold. Of these reasons together with the fact that every investor has different risk aversion it is hard to predict an optimal amount of gold to possess in this recession. Even though it may be hard to predict we would still urge investors to own a portion of gold in his/her portfolio today (20082009), compare to other sectors.