Moneycontrol Pro Panorama | All that glitters

There will always be someone willing to buy gold even though it is of no practical use to that person at that moment.

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What makes financial investments look good? High returns. In that, gold’s shine is blinding every enamoured investor right now. The precious metal is of little practical use -- there are industrial and medicinal uses of gold but not on a large scale -- and its purpose mostly is to make a human being look good. Since everyone has a desire to look good, which guarantees enough demand for gold, it has become a safe haven asset. Simply put, there will always be someone willing to buy gold even though it is of no practical use to that person at that moment. For now, gold looks good and is good.

So, when everyone, including central banks, want in on the yellow metal, snazzy private equity firms want to take this a step ahead and invest in businesses that deal in gold. For Bain Capital, this means picking up a gold financier where the firm gets to mint enviable returns. We take a look at how Bain Capital’s Rs 4,385 crore initial investment with an intention of more will work for India’s second largest gold financier Manappuram Finance, in our column here.

Gold loan lenders have had a field day, perhaps only overshadowed by gold jewellers. Even as margins erode at one side, banks are beefing them up with their gold loan portfolios. As gold is breaking records internationally, gold loans are growing like never before. Indians cannot get enough of the yellow metal and have found the perfect way to leverage on it too.

If anything looks good, private equity makes it look better. Simply put, private equity brings the charm of professionalism with a healthy side dose of corralling the management towards profitability. Manappuram Finance’s promoters have built a formidable gold loan franchise, but they know that if the company must become a diversified financial conglomerate, it needs outside expertise and money. At the very least, it needs to bridge the valuation gap between itself and the top financier Muthoot Finance. Investors won’t bite unless a big marque wallet is willing to participate. In this case, Bain Capital’s addition to Manappuram’s board room and operational cabins looks good and is good.

Bain has challenges, too. The firm gets operational power and can control management, but to implement a sound managerial vision isn’t easy. Analysts are, therefore, still guarded over Manappuram’s valuation and want to see what Bain can do over the course of the coming quarters. That said, has anyone gone wrong in their bet on gold?

Since our question was whether something is good if it just looks good, here is the other part of the answer. Gold is hurting the government. Shishir Asthana explained here how the sovereign gold bonds (SGB) scheme has backfired for the Centre as the underlying asset’s price has spiked. The government’s liability to the bondholders by way of capital gains is immense, something that has nullified the purpose of the SGB itself, which was to borrow cheap. The government has found itself on the wrong side of the gold rally and for it, the yellow metal has turned out to be a not-good-at-all bet.

The upshot is that what is beautiful may not be practical all the time. Yet another example is the US dollar. A strong dollar looks beautiful, but does not work for the US which is running a high trade deficit with many countries. At the same time, America does not want the dollar’s power to diminish. It may seem that President Donald Trump’s tariffs can address both these worries. Trump’s reciprocal tariffs will take effect in a week, and while most trading partners, including India, have tried to dissuade Washington, Trump has reiterated the plan. Sashi Sivaramakrishnan examines what will happen to the dollar here.

Tariff uncertainties are making it hard for investors to have conviction in their equity bets. This is why rallies in the benchmark indices have been short-lived. What should investors do during uncertain times? For India’s information technology stocks, Ananya Roy has some wisdom in her column here. Our research team puts out timely analysis on how to perceive stocks and the market when new data comes. Madhuchanda Dey gives her commentary on IT stocks after Accenture’s earnings here.

For every other investor looking for some peace in a world of uncertainty, here is a sublime advice from Morgan Housel in his latest post on the blog of Collab Fund. “There is no one-size-fits-all financial plan – a fact that’s easy to overlook because people want to think of finance like it’s physics, with clean formulas and absolute answers. When advice needs to be personal, but you think it’s universal, it’s common to default to what sounds the best, the most intelligent, and the most complex. People drift from practical towards beautiful.”

Investing insights from our research team

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Aparna Iyer
Moneycontrol Pro