Split theory

It is rare for a bull market in stocks and gold to co-exist

Gold has touched a new high of $500, up from about $450 a year ago, and there are expectations that it will go higher. Stock markets in emerging countries are also touching new levels.

Historically, stock markets and gold have rarely moved in the same direction for very long periods. Gold prices have been on a secular growth since March 2001, though there have been some exceptions. In the recent past, gold prices and the Dow Jones went up simultaneously from February 2003 and March 2004, and since then, the Dow is at about the same levels, while gold has gone ahead. In India, both gold and the Sensex have been rising since April 2002.

Gold prices have made new highs around the fourth quarter of every calendar year since the past four years owing to festive purchases in India and elsewhere in the world, but this price spike has not sustained in the subsequent months.

For example, gold prices fell from $453.4 in November end last year to $422.15 in January 2005 and $414.45 in May end. Since then, gold has appreciated 19 per cent.

To take advantage of this spurt, speculators and hedge funds have also taken large positions in gold, moving out of oil. Funds in US and Europe are flush with liquidity and there are not too many investment opportunities available to them. Though the two asset classes, gold and emerging markets, are at opposite ends of the investment spectrum, both have attracted these funds.

The sharp movement of gold in the past few days, is thus the result of investment purchases combined with speculative buying. Only time will tell if the price will decline after the festive season rally or whether it will touch the $600-plus peak, which happened last in 1980. Also, investors may consider it prudent to sell at these levels.

Closer home too, history suggests that it is unlikely that the bull market in stocks and gold can co-exist for a long time. One can't be sure though, there's always a first time.

Two-wheelers: On a roll

Hero Honda and Bajaj Auto have both reported much slower growth in their sales for November 2005. In case of Hero Honda, total sales expanded 6.5 per cent to 2,51,186 bikes in November 2005 over the previous corresponding period, while Bajaj Auto's vehicle sales grew merely 1 per cent to 1,83,411 units.

In contrast, between April and October 2005, Bajaj Auto's sales expanded 31 per cent y-o-y, while that of Hero Honda's grew almost 17.9 per cent. These two players together account for about 65 per cent of total motorcycle sales in the country.

What has led to a slowdown in sales in November 2005? This year, Diwali was celebrated in the first week of November, while in the previous year it was celebrated toward the middle of November.

As a result, analysts highlight that a significant pre-Diwali purchase of two wheelers this year, took place in October 2005. Bajaj Auto, for instance, saw its October 2005 vehicle sales jump 37 per cent y-o-y to 241,808 units, while Hero Honda's sales jumped 23 per cent to 3.02 lakh units.

The Street however, had a mixed reaction to last month's sales figures "" Bajaj Auto gained almost 0.5 per cent to Rs 2,019 on Thursday. Hero Honda however, fell about 1.2 per cent.

Meanwhile, two-wheeler players are also expected to see an improvement in operating margins in the medium term and that's thanks to long term supply contracts which will come up for renewal soon.

Steel prices, which are about 25 per cent lower on a y-o-y basis, will help two-wheeler companies in reducing manufacturing costs. The street appears to have factored in the improved operating environment - Bajaj Auto trades at about 19.6 times estimated FY 06 earnings, while Hero Honda gets a discounting of about 17 times.