Gold's identity as a 'safe haven' for investments may be challenged as the investors in India have discovered yet another safe haven, equities of Reliance Industries Ltd (BOM:500325), which is potentially high yielding investment instrument and has proved to be one of the most sought after asset classes, almost next to gold, among the Indian investor community.
A few days back, Indian investor arena had witnessed a landmark ruling coming from the Apex court of the country on the one of the biggest corporate tussles in India between the two corporate behemoths, Mukesh Ambani-led Reliance Industries Ltd (BOM:500325) and Reliance Anil Dhirubhai Ambani Group (ADAG) firm, Reliance Natural Resources Ltd (BOM:532709) on the pricing of the gas that was to be supplied from RIL's KG basin block.
The conflict over the gas pricing had led the two Ambani-brothers fighting for a long time; putting investors in a state of perplexity as the court verdict was crucial bearing long-lasting implications on the revenues for both the corporate titans. On one hand an adverse judgement would push RNRL's ambitious 8000 MW gas-fired power plant at Dadri in cold waters, while for Reliance it was a matter of losses worth millions of dollars in the profits over next 17 years.
Investors had been tracking the RIL-RNRL case verdict with high eagerness as their interests were at stake as much as the Ambani brothers. This is evident from the stock movement before and on the day of the Supreme Court judgement. RIL stocks had gained after the judgement, while RNRL shed heavy losses on the Bombay Stock Exchange (BSE) on 7th May 2010. Although the judgement led to sharp movements - upward in the case of RIL and downward in case of Anil Ambani group firms, the development would help remove uncertainties in the stock valuations thereby bringing confidence in the investments yet once again.
The impact of the heavyweight Reliance has been so significant that the markets reflect almost similar movement that Reliance might be facing. During the period of judgement, investors had remained jittery, but as the verdict was delivered, investors cheered with increased buying in RIL stocks, which was under pressure from past so many days and bounced back after the verdict against the falling markets.
RIL shares had gained 2% to close at Rs.1,033.85 on Friday, May 7, 2010 amid heavy selling due to global cues and European crisis. Meanwhile, ADAG-firm, RNRL had crashed 23% to Rs.53 and Reliance Power, another Reliance ADAG venture, which has the record of the biggest initial public offer in the country, tumbled 9% to Rs.140. The stock has lost 69% from its IPO price.
What made this corporate tussle so significant for the investor community in recent times is the approach of the common Indian investors towards Reliance stocks. The perception towards Reliance as an investment instrument has been so strong that investors get vigilant about their investments on any news affecting the company stock prices. This is obvious, when we get the facts of the stock movements of Reliance Industries over past ten years. The stock has appreciated by astounding 541.07% against the Sensex's gains of 430.87% during a period of ten years between May 12, 2000 and May 10, 2010.
Stock market experts believe that considering the strong investment returns that Reliance has yielded over the years, people's confidence in the stock has grown almost on the similar lines of that in gold, silver or any other equity investments. In India, investors don't consider equities of Reliance Industries merely as a scrip that can be traded on the bourses, but they perceive it as an asset class, creating wealth for the investors in a sustained manner, they opined.
Although, besides Reliance Industries there have been several equities on the Indian bourses who have appreciated at par with RIL or even greater than that, but the investor's interests that RIL has raised, no other equity seems to have succeeded in doing so. There are people in India, who have been preserving Reliance stocks like an asset by investing a fixed set of amount every month in the company. This is like creating an asset. We have faith in Reliance and its returns. I believe it is even better than gold for investments, an investors in Ahmedabad expressed his crush towards RIL stocks. This shows that the demand for Reliance shares remains upbeat irrespective of its prices.
Although not many in the financial investment sector bank on Reliance alone, the company stocks have remained the key determinant of market movement in India. The company has a total market capitalization of Rs.3.14 trillion as on May 14, 2010.
India's crush for Gold
Historically gold has been considered as the safest investment instrument for Indian investor community. The craving for gold is so brawny that no other investment instrument has potential to attract as much buyers as the yellow metal has. Let gold hit $1235 per ounce, it does not prove to be a deterrent for the high-appetite Indian investors, who have been heavily investing in gold even when the prices have headed remarkably upwards making historical highs.
On Sunday, when the country celebrated one of its most auspicious days for gold purchases, Akshaya Trithiya, investors and consumers in most of the parts of the country thronged jewellery houses. However, the sales remained palpably low owing to the instability in the prices, confusing media reports had kept most of them bewildered, whether to buy it now or wait for prices to cool off.
International gold prices hit the roof when rising to $1241.25 per ounce on NYMEX on Wednesday, May 12, 2010, surging from the recent lows of $1061.40 per ounce in the month of February 2010. However, prices have reversed from their highs of over $1235 in November, 2008. In spite of a steep rise in the prices, Indian gold demand kept rising; however the imports continued falling over past three successive years.
Investors' appetite for gold consumption is evident from the fact that the physical gold demand continued despite prices shooting up. Experts in the industry are of the opinion that gold demand is upbeat primarily due to some of the key characteristics the yellow metal has, which includes store of value, high liquidity, global acceptability etc. Gold demand has increased over the years. But gold valuation has increased at much faster rate, making the bullion metal most preferred asset class, they believed.
However, looking at the historical gold price charts, it is clearly seen that gold prices have appreciated heavily. In past ten years the prices have surged from its lows of $255.3 per ounce during May 2000 to $1237.10 in recent trades in the international markets. The upsurge showed about 385% growth in gold prices in past ten years. Gold as an asset class has always been preferred over any other investment instruments, but the returns in gold have been roughly moderate compare to other more volatile instruments like the stocks of RIL.
As it is believed that in India, gold has much to do with sentiments than its investment valuations, the yellow metal has greater acceptance among the common masses than equities of any corporate giant. At the end of the day, you can see it (gold), touch it and feel it, while in the case of an equity, you never know when your hard earned money turns into merely papers! another investor expressed his reservations over equities investments.
This concludes that be it the precious metal - gold or the equities of the country's largest diversified industrial conglomerate, there are takers for both, who find it the most satisfactory investment asset class as long as the returns and safety on investments are concerned.