Earning million pennies from your penny stocks by Renuka Kinger

These might be low priced due to some reason such as these are of the companies looking for a way to raise capital. These might have good management, better future prospects but with insufficient funds due to which their share is low-priced. It is a matter of fact that a smaller company tends to grow faster and thus their stock tend to move at faster pace. With this Optimism in mind, don’t forget Penny stocks could be worth millions as well. So before underestimating them; keep it in your mind that it might be great opportunity turning your small capital into big amount




Penny stocks are considered more risky investments due to greater volatility factor. Secondly, these are generally traded in lots of 1000. So even if the price goes down by 1 buck, you will loose 1000 bucks in fraction of seconds. Thirdly, penny stocks might not be so frequently traded on stock exchanges. Suppose some rumor broke out and you just wish to exit the stock. But since the stock’s trading volume is low, you do not find buyers to buy your stock. Keeping aside all these factors, a well planned strategy might take you to diamonds hidden inside a coal mine. But before you really enter into the arena ask yourself few questions:



What is there in that penny stock attracting you to buy it?
What is the price at which you must exit the stock?
Once decided upon the stock to buy, exercise your mind to know is it really worth buying? Below are the three criterion helping you take a final decision.

Company fundamentals: Good cash flow is the most important consideration in choosing a penny stock. Spare sometime in knowing company fundamentals in addition to its goodwill and future projects. If a company has a good chance of success, please go for it.

PE and PEG ratio examine the PE ratio of the stock you and compare it with its peers doing well in the market. A safer way however is to find out the Price/Earnings/Growth (PEG) ratio (PE ratio divided by the projected growth in the next 3-5 years). Remember you will choose a stock with higher PE but lower PEG.

Trading volume: Assume yourself in a situation when you want to sell your stock but no one is ready to buy it. Stocks with low liquidity are difficult to buy or sell for the prices you want. So think twice before you buy such stock.

That was all about the reasons for you to buy a penny stock and considerations while deciding which one to buy? But the story does not end here due to associated risks. The best strategy to minimize the risk is to plan your exit having decided your expected profits. Do not just pump and dump the stock for reason that it costs you less than other stocks and will reach very high levels one day.

What does the term term “Margin Trading” mean ?

Many times you would have come across a term Margin trading. What is trading on margin and how is it different from normal trading is what is explicated here.


‘Margin” means borrowing money from your broker to buy a stock. Now the question is why would you borrow? Investors generally go for trading on margin so to increase their purchasing power so that they can own more stock without fully paying for it. That means you will pay a part of the buy price and the broker will lend you the difference.

For the loan you have taken -


You will pay interest in addition to the usual fees.

Broker will hold the stocks as collateral and has the right to sell that as well in case buyer doesn’t meet certain obligations as per margin rules and agreements.

Let us understand this with an example:

Suppose you wish to buy a stock with market price of Rs 50. Under margin trading, you would be paying Rs 25 in cash while remaining 25 Rs will be lent to you by the broker (Assuming the initial margin requirement with your broker is 50%). How does this help? Let’s see. Suppose the price of the stock rises to Rs 75.

In case of Margin trading – Your return on the investment is 100% because you paid Rs 25.

In case of normal trading – Your return on investment is 50% because you paid Rs 50.

However there is also an equal probability of higher loss for trading on margin. Suppose the stock price falls to Rs 25. If you fully paid for the stock, you lost 50 percent of your money. But if you have traded on margin, you lost 100 percent. And on the top of that you are supposed to pay interest for the loan you have taken from the broker along with the broker’s commission. Moreover if the investor doesn’t maintain minimum margin in his account the broker will have the right to sell all your stocks without notifying you. By this you would even loose the chance to make up your losses when the price goes up later. Below are certain terms that would make the concept more clear.

Initial margin: The proportion of total purchase price an investor is supposed to deposit for opening a margin account is referred as its initial margin and is generally 50% of the total value.

Maintenance margin: In order to keep the margin account open for doing margin trading, it is necessary to maintain minimum cash or marginable securities which is called the maintenance margin. This is just to prevent an investor from incurring a level of debt that he would not be able to repay.

Margin call: If your account falls below the maintenance margin, your broker will make a margin call to ask you to deposit more cash or securities into your account. If case you fail to meet the margin call, your broker will sell your securities so to make up for the stipulated maintenance requirement.

Lastly, for novice traders it is very important to have a realization that trading on margin can help you magnify your profit and at the same time multiplies the associated risks.

Trading basics for the beginners

Trading basics for the beginners


The Share market immediately conjures up stories of fortunes made and lost. A share makes the holder a partial owner of the company and different types of shares have different rights associated with them. If you are able to sell off your share at a price higher than your buying price, you make a profit but you also run the risk of incurring a loss if the share price falls. The business you invested in makes profit and they provide you part of it as dividend.

In the share market you are an anonymous player and many have made a reasonable profit. There is no unique formula to ensure consistent gain but before you venture into this market you should know the basics of stock trading.

What does trading stocks mean?

Buying and selling of stocks is referred to as trading in the financial market.

You have to approach a broker in order to trade. You can trade either electronically or on the exchange floor. Exchange floor scene must be familiar to you; the NYSE has been on television as part of news coverage innumerable times. It is here that your broker arranges for your shares to be ordered. . The floor clerk locates the floor trader from whom the shares can be bought. Once the price is agreed upon, the deal is finalized.

Electronic transaction is very common today. It is an efficient and fast method of stock trading. Here too you require a broker but you receive confirmations almost immediately .In online investing your broker will connect to the exchange network and search for a buyer or seller according to your order.

How are the stock prices determined?


The stock prices cannot be predicted, they depend on various factors like political unrest, if there is a huge demand for a particular share at a given time, prices can fluctuate, any event that could adversely affect the company will also cause the share prices to drop.

Before you decide on which stock to buy you must answer the following questions.


Do you know the company well enough?

What is the company’s reputation in the market?

Have you gone through their annual report?

Do you have the confidence to invest in this company?

Is some negative news about the company circulating?

How are analysts predicting the future?

How is the management of the company?

What are their growth prospects?

Am I aware of the insider activity?

Is it an internationally renowned company?

How is their marketing strategy?

Have there been any changes in the management recently?

How consistent has been their performance?

Has there been a sudden shift in their production?

Whenever you invest you should be aware of your limits and remember not to exceed them. Share market involves a lot of risk , risk taking could either lead to fortunate gains or to bankruptcy.

• You should avoid investing money more than you can actually afford.

• Know about your investment well and do not blindly depend upon your broker.

• Follow regular stock market quotes to keep yourself abreast of the market swings.

The share provides you with an earning power, gives you partial ownership of a company and the freedom to buy or sell at any moment. But if you are a novice in stock trading you need to play safe and equip yourself with a lot of information. Unless you are a seasoned player you should invest only after surveying all the alternatives and never go beyond your risk tolerance. Know where to draw the line and begin trading in stocks!

Trading basics for the beginners



By Ezilon.com Articles


Mar 29, 2006, 23:52

Financial planning is essential

Planning is a very crucial starting point for whatever goal we want to achieve in our lives - be it an exam, a marriage, a family, a career. We determine the objective (why do this), weigh various alternatives to achieve the objective (how to do it), allocate resources (what I need and how much) and finally schedule timelines (when to do it). As management books say, "Through planning we attempt to bridge the gap between where we are and where we want to be". It is also said that "One who fails to plan, plans to fail".


When planning is done for almost everything important things in life, why money be any different? One may argue that money is not an end in itself, so why bother about it. But definitely is an important tool to achieve our goals. For instance, an entrepreneur will be very relieved to realize that his savings and investment in appropriate assets and in right quantum have made up for his retirement and he is not required to work once he decides to do so.

One who fails to plan, plans to fail

Financial Planning is one of the most important activities to be done by someone, but is actually done by very few. And if at all people make the effort of doing financial planning themselves, they are not well-equipped to do so. Either they lack understanding of various aspects of planning or are not able to take right investment decisions.

Instead they fall prey of scrupulous brokers, agents and advisors which work for selling the products and do not really bother how well it suits the requirement of the investor.

Financial planning is not a onetime activity

Another important aspect of financial planning is that it is not a onetime activity. One has to make changes to his/her portfolio (total investment in various securities) in response to changes in his liabilities, goals, age, etc. For example, a fresher may not need a very conservative portfolio consisting of less riskier investments or having less exposure towards riskier investments. Why? At this stage he has no major liabilities.

Also he has long term goals like retirement, house and some medium term requirements like marriage. However, he has a regular and possible increasing salary getting added to his account. Even in the eventuality that he incurs some losses due to market, he has an investment horizon within which the losses should turn good and with profits in the long run

Make changes to portfolio


But this can't be said for a 55 year old salaried individual. It can be assumed that he has his Provident Fund and Pension Plan full with lots of savings, but what he should look at is that his capital is preserved.

Putting all the money in savings and fixed deposits which provide returns not even matching inflation, means that the investor in actually losing money in real terms. But at the same time he can't put money to huge risk-bearing investments.Investor must take a survey of the market

Overall investor should be in touch with markets, investment products and so.

It is advisable to check their investment status every one quarter or at least once in the six month.

If it not possible for the investor then he/she can approach any good financial advisor.

You will find all investment related products on our site like stocks for investment, mutual funds updates, ULIPS details and all is free of cost

All About Gratuity

When will you get gratuity payment?



Gratuity payment is a lump sum that your company will pay you as an acknowledgement of your loyalty to the company. Naturally, gratuity becomes payable only after you have spent a certain number of years with the company. You will receive this benefit either at the time of retirement or when you resign from employment.

Let us take a look at how gratuity benefit is paid.

Conditions for receiving gratuity benefit

There are two conditions that must be satisfied in order to be eligible to get the gratuity benefit:

(i) Your organisation has a minimum of 10 people on payroll, i.e., at least 10 employees receiving salaries from the organisation. Note that people on contract are not considered.

(ii) You have completed at least 5 years with the organisation. If an employee dies during the tenure of his employment, the 5-year rule is relaxed. So, even if such employee's period of service is as little as 1 year, he/she will be eligible to receiving gratuity if the first condition is met.

Calculation of the amount of gratuity payable


Your last paycheck before you retire or resign is the amount you should consider in your gratuity computation. Also, only your 'Basic' and 'Dearness Allowance (DA)' should be taken into consideration.

For example, assuming Anil retires this year after completing 30 years with his company and his last pay check looks like the following, let us calculate the amount of gratuity that Anil's company should pay him:

Basic: Rs 60,000

DA: Rs10,000

HRA: Rs 26,000

Education Allowance: Rs 5,000

Travel Allowance: Rs 15,000

Gratuity payable: (Last month's salary / 26) * 15 * Completed years of employment
Last month's salary to compute gratuity = Basic + DA = Rs 70,000.
Gratuity payable = (70,000 / 26) * 15 * 30 = Rs 12,11,538

Since there is a limit of Rs 10L, Anil is entitled to receive Rs 10L towards gratuity. If his company has a policy to pay gratuity up to an amount of Rs 15L, then Anil's gratuity benefit will be Rs 12.11L.

Tax treatment for gratuity

The amount of gratuity received by a person is taxed as salary income under the head 'income from salaries' on the income tax return. If you are a government employee, the gratuity amount paid is completely tax free. For non-government employees too there are tax exemptions equal to the lower of:

• Amount of gratuity paid or

• For every completed year of employment - Rs 3.50L (This is the current limit. It may be increased to Rs 10L in the near future)

Note that this limit is a maximum exemption for all your years of service. It applies to all the amounts of gratuity you will receive in your entire career from all your employers.

So, if you receive gratuity three times in your life and you exhaust the above limit within the first two times you receive gratuity, then the third time you are paid gratuity, it will be completely taxed according to your current tax slab rates.

How increase in gratuity limit will impact you


The government notified the Payment of Gratuity (Amendment) Act, 2010 on May 18, 2010, which increases the limit of gratuity payment to employees in the specified sectors/establishments covered under the Payment of Gratuity Act, 1972 (“Gratuity Act”).

After the amendment, these employees are eligible to receive gratuity up to Rs 10,00,000, which was earlier restricted to Rs 3,50,000. Thus, crores of workers will be benefited in establishments covered by the Gratuity Act.Meaning of Gratuity

Gratuity refers to the emoluments received by an employee from his employer in gratitude for the services rendered. Such sum can be paid on retirement, resignation, superannuation, death or disablement.

Under the Gratuity Act, the sum can be paid only after an employee has rendered continuous service of not less than five years. Exceptions being termination of employment on account of death/disablement.

Taxability of Gratuity

From a tax perspective, gratuity received by an employee is taxable as salaries. The Income tax Act segregates the employees receiving gratuity on the following basis:

• Government employees;

• Non - Government employee covered under the Gratuity Act.

• Non - Government employee and not covered under the Gratuity Act.

Based, on the above segregation, necessary exemptions from tax can be claimed on the gratuity received.

Exemption available for employees covered under the Gratuity Act

In case of employees covered under the Gratuity Act, exemption is limited to the extent of minimum of the following:

i) Gratuity actually received

ii) 15 days salary for every completed year of service or part thereof (i.e. services in excess of 6 months will be treated as full year service)

iii) Rs 3,50,000 (the maximum limit as provided in the Gratuity Act)

The increase in limit to Rs 10,00,000 in the Gratuity Act (from the erstwhile Rs 3,50,000) in a way indicates that the tax exemption may also increase.

Tax impact of the amendment

The tax impact can be explained by way of an example. Suppose, Mr A retires from a software company after servicing for 35 years and at the time of retirement his basic salary was Rs 50,000 per month.
Upon retirement, Mr A is eligible for a gratuity payout of Rs 10,00,000 and is covered under the Gratuity Act. The taxable amount of gratuity would be as under in different scenarios:

Taxable amount of gratuity in different scenarios.When will you get gratuity payment?

Gratuity payment is a lump sum that your company will pay you as an acknowledgement of your loyalty to the company.

Naturally, gratuity becomes payable only after you have spent a certain number of years with the company. You will receive this benefit either at the time of retirement or when you resign from employment.

Conclusion

The above amendment in the Gratuity Act is a welcome step by the government and will bring lots of cheer to employees across the private sector.
 

Time for Tax Planning

It is now the time of the year when one should start the tax planning process. With four months in hand, you have sufficient time to properly plan out your needs. Of particular relevance to tax payers are the different options provided under Section 80C of the Income Tax Act. The section contains various instruments which can be invested in by the taxpayer in order to save on tax.


However, it is to be noted that there are certain conditions and limits subject to which the investments can be made.

Further, the income form these instruments my further be or not be taxable. Accordingly, the choice would be different for different tax payers. Evaluate the various governing factors before taking a decision.

DO not choose the instruments blindly


While doing the tax planning exercise, it is important to note that one does not choose the instruments blindly. One should also keep in mind factors like rate of return, lock in period, taxability of the income earned on the instruments, flexibility of withdrawal in case of need, tenure, inflation rate and so on.

In some cases, one may save on tax in present terms, but in the long term, may erode capital in terms of inflation. In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act.

Investments made under such schemes come under section 80C. Under this section, one can invest a maximum of Rs l lakh. In case one is in the highest tax bracket of 30%, you save a tax of Rs 30,000. Click NEXT to know the various investment options under this section.Welcome to Indian Share MarketYour Desire to EarnResearched Stocks Free Technical Charts Readers Our Target Demat A/C Opening Contact us (Posted date - 08 Dec 2010)Home page Get Free Advice Useful Sites Free Subscription Public

Provident Fund, Provident Fund and Voluntary Provident Fund

An account with a nationalized bank or post office offers a tax-free interest of 8% and the maturity period is 15 years. The minimum contribution is Rs 500 and the maximum is Rs 70,000. The interest is tax free.

Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments.

You can also contribute additional amounts through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free.

Life insurance premium


Any amount that you pay towards life insurance premium for yourself, your spouse or your children can be included in section 80C deduction. If you are paying premium for more than one insurance policy, all the premiums can be included.

Besides this, investments in unit-linked insurance plans (ULIPs) that offer life insurance with benefits of equity investments are also eligible for deduction.

Five-year bank fixed deposit, National Savings Certificate


Tax-saving fixed deposits (FDs) of scheduled banks with a tenure of five years are also entitled for section 80C deduction.

These are six-year small savings instrument, where the rate of interest is 8%, compounded half-yearly. The interest accrued every year is also deemed to be reinvested and thus eligible for section 80C deduction.

Equity-linked savings scheme, Home loan principal repayment

Mutual funds offer you specially-created tax saving funds called ELSS. These schemes invest your money in equities and hence, return is not guaranteed. Money invested is locked for a period of three years.

The principal portion of the EMI qualifies for deduction under Section 80C. Stamp duty and registration charges The amount you pay as stamp duty when you buy a house and the amount you pay for registration of the house can be claimed as deduction under section 80C. However, this can be done only in the year of purchase of the house. Children’s education expenses

These can be claimed as deductions under Section 80C. One would need to keep the receipts to claim the same.

Infrastructure bonds

In addition to the Rs 1 lakh limit, one can also claim an additional deduction of Rs 20,000 by investing in infrastructure bonds issued by specified financial institutions.

The interest earned on these bonds is subject to tax.

Understanding Balance Sheet

A balance sheet, also known as a "statement of financial position", reveals a company's assets, liabilities and owners' equity (net worth). The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company's financial statements. If you are a shareholder of a company, it is important that you understand how the balance sheet is structured, how to analyze it and how to read it.

How the Balance Sheet Works

The balance sheet is divided into two parts that, based on the following equation, must equal (or balance out) each other. The main formula behind balance sheets is:

assets = liabilities + shareholders' equity

This means that assets, or the means used to operate the company, are balanced by a company's financial obligations along with the equity investment brought into the company and its retained earnings.

Assets are what a company uses to operate its business, while its liabilities and equity are two sources that support these assets. Owners' equity, referred to as shareholders' equity in a publicly traded company, is the amount of money initially invested into the company plus any retained earnings, and it represents a source of funding for the business.

It is important to note, that a balance sheet is a snapshot of the company’s financial position at a single point in time.

Know the Types of Assets

Current Assets

Current assets have a life span of one year or less, meaning they can be converted easily into cash. Such assets classes are: cash and cash equivalents, accounts receivable and inventory. Cash, the most fundamental of current assets, also includes non-restricted bank accounts and checks. Cash equivalents are very safe assets that can be are readily converted into cash such as Treasuries. Accounts receivable consists of the short-term obligations owed to the company by its clients. Companies often sell products or services to customers on credit, which then are held in this account until they are paid off by the clients. Lastly, inventory represents the raw materials, work-in-progress goods and the company’s finished goods. Depending on the company, the exact makeup of the inventory account will differ. For example, a manufacturing firm will carry a large amount of raw materials, while a retail firm caries none. The makeup of a retailers inventory typically consists of goods purchased from manufacturers and wholesalers.

Non-Current Assets

Non-current assets, are those assets that are not turned into cash easily, expected to be turned into cash within a year and/or have a life-span of over a year. They can refer to tangible assets such as machinery, computers, buildings and land. Non-current assets also can be intangible assets, such as goodwill, patents or copyright. While these assets are not physical in nature, they are often the resources that can make or break a company - the value of a brand name, for instance, should not be underestimated.

Depreciation is calculated and deducted from most of these assets, which represents the economic cost of the asset over its useful life.

Learn the Different Liabilities

On the other side of the balance sheet are the liabilities. These are the financial obligations a company owes to outside parties. Like assets, they can be both current and long-term. Long-term liabilities are debts and other non-debt financial obligations, which are due after a period of at least one year from the date of the balance sheet. Current liabilities are the company’s liabilities which will come due, or must be paid, within one year. This is comprised of both shorter term borrowings, such as accounts payables, along with the current portion of longer term borrowing, such as the latest interest payment on a 10-year loan.

Shareholders' Equity

Shareholders' equity is the initial amount of money invested into a business. If, at the end of the fiscal year, a company decides to reinvest its net earnings into the company (after taxes), these retained earnings will be transferred from the income statement onto the balance sheet into the shareholder’s equity account. This account represents a company's total net worth. In order for the balance sheet to balance, total assets on one side have to equal total liabilities plus shareholders' equity on the other.

Another interesting aspect of the balance sheet is how it is organized. The assets and liabilities sections of the balance sheet are organized by how current the account is. So for the asset side, the accounts are classified typically from most liquid to least liquid. For the liabilities side, the accounts are organized from short to long-term borrowings and other obligations.

Analyze the Balance Sheet with Ratios

With a greater understanding of the balance sheet and how it is constructed, we can look now at some techniques used to analyze the information contained within the balance sheet. The main way this is done is through financial ratio analysis.

Financial ratio analysis uses formulas to gain insight into the company and its operations. For the balance sheet, using financial ratios (like the debt-to-equity ratio) can show you a better idea of the company’s financial condition along with its operational efficiency. It is important to note that some ratios will need information from more than one financial statement, such as from the balance sheet and the income statement.

ADR Basics

ADR Basics:

Globalization is the dissolution of barriers to trade and the tendency of the world's businesses to integrate customs and values. Globalization is making it increasingly easy to travel, correspond and even invest in other countries.

Investing money in your own country's stock market is relatively simple. You call your broker or login to your online account and place a buy or sell order. Investing in a company that is listed on a foreign exchange is much more difficult. Would you even know where to start? Does your broker provide services in other countries? For example, imagine the commission and foreign exchange costs on an investment in Russia or Indonesia.

However, now there is an easy way around this through American depository receipts (ADRs). More than 2,000 foreign companies provide this option for U.S. and Canadian investors interested in buying shares.

What Is An ADR?
Introduced to the financial markets in 1927, an American depository receipt (ADR) is a stock that trades in the United States but represents a specified number of shares in a foreign corporation. ADRs are bought and sold on American markets just like regular stocks, and are issued/sponsored in the U.S. by a bank or brokerage.

ADRs were introduced as a result of the complexities involved in buying shares in foreign countries and the difficulties associated with trading at different prices and currency values. For this reason, U.S. banks simply purchase a bulk lot of shares from the company, bundle the shares into groups, and reissues them on either the New York Stock Exchange (NYSE), American Stock Exchange (AMEX) or the Nasdaq. In return, the foreign company must provide detailed financial information to the sponsor bank. The depository bank sets the ratio of U.S. ADRs per home-country share. This ratio can be anything less than or greater than 1. This is done because the banks wish to price an ADR high enough to show substantial value, yet low enough to make it affordable for individual investors. Most investors try to avoid investing in penny stocks, and many would shy away from a company trading for 50 Russian roubles per share, which equates to US$1.50 per share. As a result, the majority of ADRs range between $10 and $100 per share. If, in the home country, the shares were worth considerably less, then each ADR would represent several real shares.

There are three different types of ADR issues:
Level 1 - This is the most basic type of ADR where foreign companies either don't qualify or don't wish to have their ADR listed on an exchange. Level 1 ADRs are found on the over-the-counter market and are an easy and inexpensive way to gauge interest for its securities in North America. Level 1 ADRs also have the loosest requirements from the Securities and Exchange Commission (SEC).
Level 2 - This type of ADR is listed on an exchange or quoted on Nasdaq. Level 2 ADRs have slightly more requirements from the SEC, but they also get higher visibility trading volume.
Level 3 - The most prestigious of the three, this is when an issuer floats a public offering of ADRs on a U.S. exchange. Level 3 ADRs are able to raise capital and gain substantial visibility in the U.S. financial markets.
The advantages of ADRs are twofold. For individuals, ADRs are an easy and cost-effective way to buy shares in a foreign company. They save money by reducing administration costs and avoiding foreign taxes on each transaction. Foreign entities like ADRs because they get more U.S. exposure, allowing them to tap into the wealthy North American equities markets.

Risks:

There are several factors that determine the value of the ADR beyond the performance of the company. Analyzing these foreign companies involves further scrutiny than merely looking at the fundamentals. Here are some other risks that investors should consider:
Political Risk - Ask yourself if you think the government in the home country of the ADR is stable? For example, you might be wary of Russian Vodka Inc. because of the characteristic instability of the Russian government.
Exchange Rate Risk - Is the currency of the home country stable? Remember the ADR shares track the shares in the home country. If a country's currency is devalued, it will trickle down to your ADR. This can result in a big loss, even if the company had been performing well.
Inflationary Risk - This is an extension of the exchange rate risk. Inflation is the rate at which the general level of prices for goods and services is rising and, subsequently, purchasing power is falling. Inflation can be a big blow to business because the currency of a country with high inflation becomes less and less valuable each day.
With globalization dissolving borders, it only makes sense that we have the ability to invest in foreign entities. Many nations who are striving to become industrialized are undervalued compared to the levels they will eventually reach.

ADR
An American Depository Receipt (or ADR) represents ownership in the shares of a foreign company trading on US financial markets. The stock of many non-US companies trades on US exchanges through the use of ADRs. ADRs enable US investors to buy shares in foreign companies without undertaking cross-border transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-based companies.

Each ADR is issued by a US depository bank and can represent a fraction of a share, a single share, or multiple shares of foreign stock. An owner of an ADR has the right to obtain the foreign stock it represents, but US investors usually find it more convenient simply to own the ADR. The price of an ADR is often close to the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares. In the case of companies incorporated in the United Kingdom, creation of ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government.

Depository banks have numerous responsibilities to an ADR holder and to the non-US company the ADR represents. The first ADR was introduced by JPMorgan in 1927, for the British retailer Selfridges&Co. The largest depository bank is the Bank of New York Mellon.
Individual shares of a foreign corporation represented by an ADR are called American Depository Shares (ADS).

Algorithmic trading

In electronic financial markets, algorithmic trading or automated trading, also known as algo trading, black-box trading or robo trading, is the use of computer programs for entering trading orders with the computer algorithm deciding on aspects of the order such as the timing, price, or quantity of the order, or in many cases initiating the order without human intervention. Algorithmic Trading is widely used by pension funds, mutual funds, and other buy side (investor driven) institutional traders, to divide large trades into several smaller trades in order to manage market impact, and risk.[1][2] Sell side traders, such as market makers and some hedge funds, provide liquidity to the market, generating and executing orders automatically. In this "high frequency trading" (HFT) computers make the decision to initiate orders based on information that is received electronically, before human traders are even aware of the information.

Algorithmic trading may be used in any investment strategy, including market making, inter-market spreading, arbitrage, or pure speculation (including trend following). The investment decision and implementation may be augmented at any stage with algorithmic support or may operate completely automatically ("on auto-pilot").

A third of all EU and US stock trades in 2006 were driven by automatic programs, or algorithms, according to Boston-based financial services industry research and consulting firm Aite Group.[3] As of 2009, high frequency trading firms account for 73% of all US equity trading volume.[4]

In 2006 at the London Stock Exchange, over 40% of all orders were entered by algo traders, with 60% predicted for 2007. American markets and equity markets generally have a higher proportion of algo trades than other markets, and estimates for 2008 range as high as an 80% proportion in some markets. Foreign exchange markets also have active algo trading (about 25% of orders in 2006).[5] Futures and options markets are considered to be fairly easily integrated into algorithmic trading,[6] with about 20% of options volume expected to be computer generated by 2010.[7] Bond markets are moving toward more access to algorithmic traders.[8]

One of the main issues regarding high frequency trading is the difficulty in determining just how profitable it is. A report released in August 2009 by the TABB Group, a financial services industry research firm, estimated that the 300 securities firms and hedge funds that specialize in rapid fire algorithmic trading took in roughly $21 billion in profits in 2008[9].

History

Computerization of the order flow in financial markets began in the early 1970s with some landmarks being the introduction of the New York Stock Exchange’s “designated order turnaround” system (DOT, and later SuperDOT) which routed orders electronically to the proper trading post to be executed manually, and the "opening automated reporting system" (OARS) which aided the specialist in determining the market clearing opening price (SOR; Smart Order Routing).

Program trading is defined by the New York Stock Exchange as an order to buy or sell 15 or more stocks valued at over $1 million total. In practice this means that all program trades are entered with the aid of a computer. In the 1980s program trading became widely used in trading between the S&P500 equity and futures markets.

In stock index arbitrage a trader buys (or sells) a stock index futures contract such as the S&P 500 futures and sells (or buys) a portfolio of up to 500 stocks (can be a much smaller representative subset) at the NYSE matched against the futures trade. The program trade at the NYSE would be pre-programmed into a computer to enter the order automatically into the NYSE’s electronic order routing system at a time when the futures price and the stock index were far enough apart to make a profit.

At about the same time portfolio insurance was designed to create a synthetic put option on a stock portfolio by dynamically trading stock index futures according to a computer model based on the Black-Scholes option pricing model.

Both strategies, often simply lumped together as “program trading,” were blamed by many people (for example by the Brady report) for exacerbating or even starting the 1987 stock market crash. Yet the impact of computer driven trading on stock market crashes is unclear and widely discussed in the academic community.[10]

Financial markets with fully electronic execution and similar electronic communication networks developed in the late 1980s and 1990s. In the U.S., decimalization, which changed the minimum tick size from 1/16th of a dollar ($0.0625) to $0.01 per share, may have encouraged algorithmic trading as it changed the market microstructure by permitting smaller differences between the bid and offer prices, decreasing the market-makers' trading advantage, thus increasing market liquidity.

This increased market liquidity led to institutional traders splitting up orders according to computer algorithms in order to execute their orders at a better average price. These average price benchmarks are measured and calculated by computers by applying the time weighted (i.e unweighted) average price TWAP or more usually by the volume weighted average price VWAP.

As more electronic markets opened, other algorithmic trading strategies were introduced. These strategies are more easily implemented by computers because machines can react more rapidly to temporary mispricing and examine prices from several markets simultaneously. For example Stealth (developed by Deutsche Bank), Sniper and Guerilla (developed by Credit Suisse[11]), arbitrage, statistical arbitrage, trend following, and mean reversion.

This type of trading is what is driving the new demand for Low Latency Proximity Hosting and Global Exchange Connectivity. It is imperative to understand what is latency when putting together a strategy for electronic trading. Latency refers to the 'delay' between the transmission of information from a source and the reception of the information at a destination. Latency has as a lower bound the speed of light; this corresponds to a few microseconds per kilometer of optical fibre. Any signal regenerating or routing equipment will introduce greater latency than this speed-of-light baseline.

Strategies

Many different algorithms have been developed to implement different trading strategies. Much early algo trading was developed for the buy side in order to reduce transactions costs. Recently, high frequency trading, which is generally a type of market making by sell side traders, has become more prominent and controversial.[12] These algorithms or techniques are commonly given names such as "Stealth", "Iceberg", "Dagger", "Guerrilla", "Sniper" and "Sniffer".[13]

[edit] Transaction cost reduction
Large orders are broken down into several smaller orders and entered into the market over time. This basic strategy is called "iceberging". The success of this strategy may be measured by the average purchase price against the VWAP for the market over that time period. One algorithm designed to find hidden orders or icebergs is called "Stealth".

[edit] Market making and high frequency trading
Market making involves placing a limit order to sell (or offer) above the current market price or a buy limit order (or bid) below the current price in order to benefit from the bid-ask spread. Automated Trading Desk, which was bought by Citigroup in July 2007, has been an active market maker, accounting for about 6% of total volume on both NASDAQ and the New York Stock Exchange.[14]

High frequency traders use computers that execute trades within milliseconds, or "with extremely low latency" in the jargon of the trade. In the U.S., high-frequency trading firms represent 2.0% of the approximately 20,000 firms operating today, but account for 73.0% of all equity trading volume.[15] As of the first quarter in 2009, total assets under management for hedge funds with high frequency trading strategies were $141 billion, down about 21% from their high.[16] The high frequency strategy was first made successful by Renaissance Technologies.[17] High frequency funds started to become especially popular in 2007 and 2008.[16] Many high frequency firms say they are market makers and that the liquidity they add to the market has lowered volatility and helped narrow spreads, but unlike traditional market makers, such as specialists on the New York Stock Exchange, they have few or no regulatory requirements.[18]

These funds are highly dependent on ultra-low latency networks. They profit by providing information, such as competing bids and offers, to their algorithms microseconds faster than their competitors.[4] The revolutionary advance in speed has led to the need for firms to have a real-time, colocated trading platform in order to benefit from implementing high frequency strategies.[4] Strategies are constantly altered to reflect the subtle changes in the market as well as to combat the threat of the strategy being reverse engineered by competitors. There is also a very strong pressure to continuously add features or improvements to a particular algorithm, such as client specific modifications and various performance enhancing changes (regarding benchmark trading performance, cost reduction for the trading firm or a range of other implementations). This is due to the evolutionary nature of algorithmic trading strategies - they must be able to adapt and trade intelligently, regardless of market conditions, which involves being flexible enough to withstand a vast array of market scenarios. As a result, a significant proportion of net revenue from firms is spent on the R&D of these autonomous trading systems.[4]

[edit] Arbitrage
A classical arbitrage strategy might involve three or four securities such as covered interest rate parity in the foreign exchange market which gives a relation between the prices of a domestic bond, a bond denominated in a foreign currency, the spot price of the currency, and the price of a forward contract on the currency. If the market prices are sufficiently different from those implied in the model to cover transactions cost then four transactions can be made to guarantee a risk-free profit. Algorithmic trading allows similar arbitrages using models of greater complexity involving many more than 4 securities. The TABB Group estimates that annual aggregate profits of low latency arbitrage strategies currently exceed US$21 billion.[4]

[edit] More complicated strategies
A "benchmarking" algorithm is used by traders attempting to mimic an index's return.

Any type of algo trading which depends on the programming skills of other algo traders is called "gaming". Dark pools are alternative electronic stock exchanges where trading takes place anonymously, with most orders hidden or "iceberged."[19] Gamers or "sharks" sniff out large orders by "pinging" small market orders to buy and sell. When several small orders are filled the sharks may have discovered the presence of a large iceberged order.

Any sort of pattern recognition or predictive model can be used to initiate algo trading. Neural networks and genetic programming have been used to create these models.

“Now it’s an arms race,” said Andrew Lo, director of the Massachusetts Institute of Technology’s Laboratory for Financial Engineering. “Everyone is building more sophisticated algorithms, and the more competition exists, the smaller the profits.”[20]

The arms race has allegedly included stealing computer code. UBS has sued three of its former traders and Jefferies & Company for stealing algorithmic trading programs.[21]

Yield curve

In finance, the yield curve is the relation between the interest rate (or cost of borrowing) and the time to maturity of the debt for a given borrower in a given currency. For example, the U.S. dollar interest rates paid on U.S. Treasury securities for various maturities are closely watched by many traders, and are commonly plotted on a graph such as the one on the right which is informally called "the yield curve." More formal mathematical descriptions of this relation are often called the term structure of interest rates.


The yield of a debt instrument is the overall rate of return available on the investment. For instance, a bank account that pays an interest rate of 4% per year has a 4% yield. In general the percentage per year that can be earned is dependent on the length of time that the money is invested. For example, a bank may offer a "savings rate" higher than the normal checking account rate if the customer is prepared to leave money untouched for five years. Investing for a period of time t gives a yield Y(t).
This function Y is called the yield curve, and it is often, but not always, an increasing function of t. Yield curves are used by fixed income analysts, who analyze bonds and related securities, to understand conditions in financial markets and to seek trading opportunities. Economists use the curves to understand economic conditions.

The typical shape of the yield curve




Yield curves are usually upward sloping asymptotically: the longer the maturity, the higher the yield, with diminishing marginal increases (that is, as one moves to the right, the curve flattens out). There are two common explanations for upward sloping yield curves. First, it may be that the market is anticipating a rise in the risk-free rate. If investors hold off investing now, they may receive a better rate in the future. Therefore, under the arbitrage pricing theory, investors who are willing to lock their money in now need to be compensated for the anticipated rise in rates—thus the higher interest rate on long-term investments.
However, interest rates can fall just as they can rise. Another explanation is that longer maturities entail greater risks for the investor (i.e. the lender). A risk premium is needed by the market, since at longer durations there is more uncertainty and a greater chance of catastrophic events that impact the investment. This explanation depends on the notion that the economy faces more uncertainties in the distant future than in the near term. This effect is referred to as the liquidity spread. If the market expects more volatility in the future, even if interest rates are anticipated to decline, the increase in the risk premium can influence the spread and cause an increasing yield.
The opposite position (short-term interest rates higher than long-term) can also occur. For instance, in November 2004, the yield curve for UK Government bonds was partially inverted. The yield for the 10 year bond stood at 4.68%, but was only 4.45% for the 30 year bond. The market's anticipation of falling interest rates causes such incidents. Negative liquidity premiums can exist if long-term investors dominate the market, but the prevailing view is that a positive liquidity premium dominates, so only the anticipation of falling interest rates will cause an inverted yield curve. Strongly inverted yield curves have historically preceded economic depressions.
The shape of the yield curve is influenced by supply and demand: for instance if there is a large demand for long bonds, for instance from pension funds to match their fixed liabilities to pensioners, and not enough bonds in existence to meet this demand, then the yields on long bonds can be expected to be low, irrespective of market participants' views about future events.
The yield curve may also be flat or hump-shaped, due to anticipated interest rates being steady, or short-term volatility outweighing long-term volatility.
Yield curves continually move all the time that the markets are open, reflecting the market's reaction to news. A further "stylized fact" is that yield curves tend to move in parallel (i.e., the yield curve shifts up and down as interest rate levels rise and fall).

Types of yield curve
There is no single yield curve describing the cost of money for everybody. The most important factor in determining a yield curve is the currency in which the securities are denominated. The economic position of the countries and companies using each currency is a primary factor in determining the yield curve. Different institutions borrow money at different rates, depending on their creditworthiness. The yield curves corresponding to the bonds issued by governments in their own currency are called the government bond yield curve (government curve). Banks with high credit ratings (Aa/AA or above) borrow money from each other at the LIBOR rates. These yield curves are typically a little higher than government curves. They are the most important and widely used in the financial markets, and are known variously as the LIBOR curve or the swap curve. The construction of the swap curve is described below.

Besides the government curve and the LIBOR curve, there are corporate (company) curves. These are constructed from the yields of bonds issued by corporations. Since corporations have less creditworthiness than most governments and most large banks, these yields are typically higher. Corporate yield curves are often quoted in terms of a "credit spread" over the relevant swap curve. For instance the five-year yield curve point for Vodafone might be quoted as LIBOR +0.25%, where 0.25% (often written as 25 basis points or 25bps) is the credit spread.

Normal yield curve
From the post-Great Depression era to the present, the yield curve has usually been "normal" meaning that yields rise as maturity lengthens (i.e., the slope of the yield curve is positive). This positive slope reflects investor expectations for the economy to grow in the future and, importantly, for this growth to be associated with a greater expectation that inflation will rise in the future rather than fall. This expectation of higher inflation leads to expectations that the central bank will tighten monetary policy by raising short term interest rates in the future to slow economic growth and dampen inflationary pressure. It also creates a need for a risk premium associated with the uncertainty about the future rate of inflation and the risk this poses to the future value of cash flows. Investors price these risks into the yield curve by demanding higher yields for maturities further into the future.

However, a positively sloped yield curve has not always been the norm. Through much of the 19th century and early 20th century the US economy experienced trend growth with persistent deflation, not inflation. During this period the yield curve was typically inverted, reflecting the fact that deflation made current cash flows less valuable than future cash flows. During this period of persistent deflation, a 'normal' yield curve was negatively sloped.

Steep yield curve
Historically, the 20-year Treasury bond yield has averaged approximately two percentage points above that of three-month Treasury bills. In situations when this gap increases (e.g. 20-year Treasury yield rises higher than the three-month Treasury yield), the economy is expected to improve quickly in the future. This type of curve can be seen at the beginning of an economic expansion (or after the end of a recession). Here, economic stagnation will have depressed short-term interest rates; however, rates begin to rise once the demand for capital is re-established by growing economic activity.

In January 2010, the gap between yields on two-year Treasury notes and 10-year notes widened to 2.90 percentage points, its highest ever.

Flat or humped yield curve
A flat yield curve is observed when all maturities have similar yields, whereas a humped curve results when short-term and long-term yields are equal and medium-term yields are higher than those of the short-term and long-term. A flat curve sends signals of uncertainty in the economy. This mixed signal can revert to a normal curve or could later result into an inverted curve. It cannot be explained by the Segmented Market theory discussed below.

Inverted yield curve
An inverted yield curve occurs when long-term yields fall below short-term yields. Under unusual circumstances, long-term investors will settle for lower yields now if they think the economy will slow or even decline in the future. An inverted curve has indicated a worsening economic situation in the future 6 out of 7 times since 1970.[citation needed] The New York Federal Reserve regards it as a valuable forecasting tool in predicting recessions two to six quarters ahead. In addition to potentially signaling an economic decline, inverted yield curves also imply that the market believes inflation will remain low. This is because, even if there is a recession, a low bond yield will still be offset by low inflation. However, technical factors, such as a flight to quality or global economic or currency situations, may cause an increase in demand for bonds on the long end of the yield curve, causing long-term rates to fall. This was seen in 1998 during the Long Term Capital Management failure when there was a slight inversion on part of the curve.

Why gold price will plunge to $800 per ounce ?????

In the last few months, we have been reading predictions and forecasts from bullion analysts who insisted and argued that gold price is booming to touch $2,000, $3,000, $5,000, $10,000 per ounce in the coming years.
These forecasts have caught people’s attention who have been pouring money into gold and other precious metals all these months. But after the big surge of gold price to $1,227 per ounce some two months back, the yellow metal has been climbing down the ladder of speculation.
Despite speculators going on the ‘boom-in-gold-price predictions’, the yellow metal price has been sinking in the last two months. “If the gold price fall continues like this way, it is certain to touch down to $1,000 per ounce or below this level in the next one month,” says bullion analyst Mark Robinson.
Robinson, who is not a great bull on gold, says even if gold price falls to $900 or $800 per ounce, people should not complain. “For those who have invested in gold some years back, even $900 or $800 per ounce is a great price tag. So, there is no room for complaints even if gold price falls to realistic levels,” he said.
Robinson, a keen bullion watcher focusing on China, says that the Chinese government wants gold price to plunge to $800 per ounce level. “China’s biggest ambition these days is to build up gold reserves. For this, the best thing that China wants is a big fall in gold price so that it can buy more gold from IMF, gold miners and from the physical bullion market,” argues Robinson.
It is not just Robinson who is a bear in gold price forecast. On Monday, a senior analyst with Citigroup came out with purely bearish prediction on gold. Citigroup bullion analyst Alan Heap said that gold prices could sink to $820 an ounce by 2014.
Here is that interesting article that TheStreet.com published on the bearish prediction on gold:
“NEW YORK (TheStreet) — gold prices could sink to $820 an ounce by 2014, in the absence of inflation or strong demand from China, says a Citigroup analyst
Alan Heap, an analyst at Citi Investment Research, adds a bearish voice to a crowded debate over where the precious metal is headed. Billionaire investor James Rogers and perma-bear David Tice say gold will hit $2,500. James Turk , Author of GoldMoney, predicts $8,000, while author Mike Maloney is betting on $15,000.
Over the last decade, gold prices have soared from $250 an ounce to an all-time high of $1,227 an ounce, with many analysts believing that gold is in a continued bull market despite short-term pullbacks. Heap broke with this bull view by saying in a research analysis, “Gold: Paper Problems,” that prices will sink to $820 by June of 2014 and head lower long term to $700 an ounce.
As global economies print more money and lower interest rates to survive financial crises, gold becomes popular to own. As paper money loses value, investors turn to gold as an alternative safe haven asset.
As gold prices hit a record high of $1,227 an ounce, the U.S. dollar started to move towards its all-time low of $71.40. As the dollar loses value, commodities become cheaper to buy in other currencies. Many analysts expect low interest rates, President Obama’s $3.8 trillion budget plan, a raised deficit ceiling and money printing pressure the dollar and buoy gold prices.
Over the last 10 years, investors have been diversifying into gold more than any other asset class. You no longer have to be a doom and gloom analyst or store gold bars in a bank in order to own the precious metal. Average institutional investors and world central banks have been increasing their gold holdings supporting high prices. Helping investors buy gold is the emergence of gold ETFs. There are now three physically backed ETFs available SPDR Gold Shares(GLD Quote), iShares Comex Gold(IAU Quote) and ETFS Gold Trust(SGOL Quote).
Central banks have become one of the biggest buyers of gold. Countries increase their gold reserves on a percentage basis, usually irrespective of the spot price. In the past year, countries like China, India and Russia have transitioned from being net sellers of gold to net buyers. Portugal holds 90% of its reserves in gold, while the U.S. has 70%. China currently only holds 1,054 tons of its reserves in gold, which is less than 2%.
The biggest threat to rising gold prices is a substantial decrease in long positions in paper markets, Heap writes in his report. “Positions held by money managers and broader non-commercial positions have fallen since November 2009 when the USD strengthened. Non-commercial net long positions are at 5x the average levels seen over the last 17 years.”
The Euro reached a seven-month low against the U.S. dollar Friday, as sovereign debt fears in Spain, Portugal and Greece continued to devalue the currency. The dollar is playing the role of safe haven asset for investors jolted by global economic recovery fears lead them out of riskier commodities. There is also an expectation that the Federal Reserve might raise its key interest rate target sooner than expected, which would also support the currency.
The most popular physically backed ETF SPDR Gold Shares(GLD Quote) has seen a decline in tonnage since the beginning of 2010 from 1,128.74 to 1,104.54. Heap noted that ETF holdings are high, but stable. As long as worries over a global banking crisis subside, holdings should remain flat.
A big driver for gold prices in 2009 was pent up demand from China. The country has recently increased its gold reserves to 1,054 tons from 600 tons and is expected to continue diversifying. However, recently the Chinese government ordered banks to increase their reserve ratio by 50 basis points and has encouraged them to restrict lending. China is targeting an 8% growth rate for 2010 instead of the 11% analysts had anticipated.
China’s emerging middle class has also unleashed significant gold buying in the physical market. According to the Citi report, from September 2008 to September 2009, China retail demand grew 20 tons out of 260 tons globally. There are worries that the country’s $585 billion stimulus program is slowing down, which would curb gold demand from retail investors as well as central banks Gold is typically seen as a hedge against inflation as investors buy the precious metal as an alternative asset. But Heap argues that it’s not actual inflation that correlates to gold prices, but inflationary expectations. According to the figure above in 2009, the U.S. Consumer Price Index dipped into negative territory, which means no inflation at all. However, gold prices kept rising. Heap thinks that inflationary expectations would have to skyrocket to boost gold; just a pick-up in inflation wouldn’t be the big mover in prices many analysts anticipate.”

“Five Reasons to Avoid the Gold Rush”

The reasons why one should sell the cat, pawn the mother-in-law, and use the proceeds to buy gold are well known: the Fed is printing money faster than you can read this, which will result in inflation; the government is borrowing like a drunken monkey, so the dollar will be devalued; this will debase all currencies, so the only thing that will save you is the shiny metal.
However, here are some arguments why one should think twice before jumping in bed with gold bugs, or at least remain sober while determining gold’s weight in the portfolio .
1. For investors (not speculators) it is very hard to own gold, because you cannot attach a logical value to it. Unlike stocks or bonds, gold has no cash flow and has a negative cost of carry – it costs you money to hold it. It is only worth what people perceive it to be worth right now. The argument I commonly hear is, “What about all those Enrons, Lehmans, Citigroups, etc. that either went bankrupt or got near it? What was the value of those?” If the lesson learned is not to own stocks but to own gold, it is the wrong lesson. The lesson should be: own companies you can analyze (the aforementioned companies were unanalyzable) and diversify – don’t put your all net worth into one stock.
2. The gold ETF SPDR Gold Shares (GLD) is the seventh largest holder of physical gold in the world. If its holders decide to sell (or are forced to sell; think of hedge-fund liquidations), who will they sell it to? This is extremely important, as the presence of GLD changes the dynamics of the gold price, both to the upside and downside. If gold keeps climbing, the ease of buying will drive gold prices higher than in GLD’s absence. In the event of a significant sell-off, there are not enough natural buyers of physical gold. It is a bit like a roach motel – easy to get in, hard to get out.
3. In the past, gold had a monopoly on the inflation and fear trade. Not anymore. Now you have competition from Treasury Inflation-Protected Securities (TIPS), currency ETFs, short US Treasury ETFs, government guaranteed/insured FDIC checking accounts, etc. TIPS suffer from the flaw of the CPI being measured and reported by the US government, which has an inherent bias to understate inflation; returns of commodity ETFs are skewed by price differentials between financial derivatives and spot prices of underlying commodities; returns of leveraged ETFs diverge significantly over the intermediate and long run from the underlying index; FDIC reserves are being depleted with the every-Friday-night bank bailout (but believe you me, the US government will not let FDIC go bankrupt, even if it means it has to raise taxes and impose draconian fees on the banking sector).
The bottom line here is this: none of these investment vehicles are perfect, in fact many have significant flaws; but despite their flaws they attract money away from gold, thus undermining gold’s monopoly on the fear/inflation/currency debasement trade. (I’ve discussed it in greater detail in my book).
4. If, because of points 2 or 3 above, gold fails to perform as expected, the perception of what gold is worth may change dramatically.
5. Over the last 200 years, gold was really not a good investment. It may have a day in the sun, but it may not. And the cost of being wrong is fairly high.
Though gold bugs make it sound as such, gold is not the only and not the best alternative if the worst fears come to pass. The best way to deal with the risks of dollar devaluation and high inflation – with a much lower cost to being wrong – is, instead, to own stocks of companies that have pricing power of their product. When inflation hits, they will be able to raise prices and thus maintain their profitability. Also, companies that generate a large portion of their sales from outside the US will benefit from the declining dollar.
Gold bugs look at gold as a currency, but it is not one and unlikely to be one in our lifetime. Here is why: there is not enough of it around, so even if world government were to adopt a fractional system (currency in circulation as a multiple of gold reserves), they will never go for it, because central banks and governments will never give up their monetary tools – inflation is a very addictive tool to fight growing monetary obligations.
There is a wild card in the price of gold, though: China (John Burbank made that argument at the Value Investor Congress in Pasadena). If it decides to switch partially from owning US Treasuries to owning gold, the price of gold will skyrocket.
Counter to the above
1. 1.) Analysts fail to understand the allure of gold is that it is seen as prudent and not speculative.
2.) A valid point, one should note that the price of gold has gone up $600 since this ETF started trading in 04. However a look at GLD since its inception shows the bulk of volume is a) at a price point above $800 and b) occurs between the March high and now.
3.) The demand for these instruments relative to gold is a function of trust in these days of financial and accounting alchemy.
4.) If an investment fails to perform as expected then yes one will generally cut exposure to it. Gold has performed as expected over the past 200 years so don’t see much risk here.
5.) See point 4.
6.) There seems to be an assumption in this post that every person out there that owns gold or intends to own gold has sold every asset they have in order to do so.