HOW AND WHY TO INVEST IN GOLD?

Most of the investors dont have the idea about which is the ideal form of investing in gold. Many investors still prefer buying gold coins and bars sold by reputed banks and safe-keep them in their bank lockers. However this method is the least preffered and inefficient option. This is because of the fact that most banks dont buy back gold and the investor must then turn to retailers to strike a deal. However,in the retail market, often jewellers prefer exchanging the coins or bars with ornaments itself rather than pay cash to such customers. So, if you are investing in physical gold, be prepared for some hiccups when it comes to liquidating it. So, in such a scenario its better to go for exchange-traded gold funds. These are mutual fund schemes investing in gold that you can buy and sell in a stock exchange. Since you dont own gold in physical form, you dont have to worry about liquidating it. You can sell the units of the scheme in a stock exchange at prevailing prices. Besides, you can also think of owning the stocks of some gold mining companies. Yes, they carry more risk but they can also give huge rewards.

Now the second question is why to invest in gold? Always remember that almost every financial instrument carries 3 types of risks. They are- Credit risk, Liquidity risk and Market risk. Credit risk is the risk of debtor not paying back. Liqidity risk is the risk that asset cannot be sold as a buyer cant be found. Market risk is the risk that the price will fall due to a change in market conditions.

Gold is unique in that it does not carry a credit risk and very low liquidity and market risk. Gold is no one's liability. There is no risk that a coupon or a redemption payment will not be made,as for a bond,or that a company will go out of business as for an equity. Also, value of gold cannot be affected by the economic policies of the issuing country or undermined by inflation in that country.

At the same time, 24 hour trading, a wide range of buyers and a wide range of investment channels available(including coins and bars, jewellery, futures and options, ETFs, certificates,etc) make liquidity risk very low.

However, gold is of course subject to market risk, as is clear from the experience of 1980s when the gold prices declined sharply. But many of the downside risks associated with gold prices are very different than the risks associated with other assets. For ex- the specific risks to which bonds and equities are exposed, including pressure on the health of the Govt and corporate sector during an economic downturn, are not shared by gold.

The gold price is typically less volatile than other commodity prices. This is because of the depth and liquidity of the gold market, which is supported by the availability of large stocks of gold. Because gold is virtually indestructible, nearly all of the gold which has ever been mined still exists. This means that sudden excess demand for gold can usually be satisfied with ease. Hence gold is slightly less volatile than heavily traded blue chips.

Also, the value of gold in terms of goods and services that it can buy has remained largely stable for many years. In 1900, the gold price was $20.67/oz,which equates to about $503/oz in todays prices. In the two years to end December 2006, the actual price of gold averaged $524. So the real price of gold changed very little over a century.

So,next time you get confused about where to invest, go for gold, afterall GOLD IS GOLD.

The only question that everyone is asking these days is where to invest? The answer to this is not that difficult. One area of investment could be shares,as Indian share market is on a recovery track. But share market has its own risks.The second area could be Gold. But its known that as share market gets bullish,gold prices usually comes down. So this option is also ruled out. Third area could be Fixed deposits in bank(i.e.FDs). Till few years back the rate of interest that banks were offering on FDs was 9%. But this has now declined to around 7%,making FDs less attractive.Besides,the deposit rates are expected to decline further by 50 to 100 basis points.
In this scenario when everywhere the returns are low,there is one area where good returns still exist and that domain is MIS i.e. the post office monthly income scheme. It offers a fixed rate of 8% per annum. The tenure of deposit is 6 years and unlike FDs, interest is paid out every month. Besides MIS offers 5% bonus on maturity.Thus the effective annual yield become 8.9%,which is much higher than the bank deposits. The minimum amount that can be deposited in MIS is Rs 1000 and the maximium amount is Rs 3 lacs(in case of individual account)and Rs 6 lacs(in case of joint account). However,even this return of 8.9% can be further increased with proper planning. The monthly MIS proceeds could be invested directly in post office’s Recurring Deposit,which effectively extends the annual return to 10.5%.
For example if Mr.X invests Rs 90000 in MIS today,he will get Rs 600 every month for 72 months. So,he is entitled to Rs 43200 in the form of monthly interest till maturity and Rs 4500 as bonus at the time of maturity. So his total return would be Rs 47700 in 6 years. But if Mr x do not require the monthly interest ,he can opt for automatic transfer of MIS interest to recurring deposit. A sum of Rs 600 is deposited in his RD account every month,offering 7.5% per annum compounded quarterly. So,at the end of 6 years Mr x will get almost Rs 51400 from his RD account. The recievabales from from RD and the bonus on MIS amounts to Rs 56000 in 6 years. On the other hand if Mr x had invested in a bank FD,he wouldnt have earned more than Rs 45000(average).

DIFFERENCE BETWEEN FUTURES AND OPTIONS

Both terms are very easy to understand. Lets understand them with the help of examples. First lets talk about futures. Suppose A wants to buy a house from B. The present cost of house is $10,000. now lets assume that today B is not intrested in selling house but he is ready to sell it after an year(say in march 2010). So A makes a contract with B that he will buy house from B after an year i.e on march 20,2010 at a particular price,fixed today. So,even if the price of house goes up from $10,000 to $15,000 by march 2010,A will pay only promised price (say $10,000). Now,the question is,if B knows that the price of house is gonna increase by march 2010,why he is selling house to A at a low price?And on what basis price will be fixed?The answer to this lies in the fact that market is volatile,if prices can go up,there is every probability of these coming down too(see what happened in U.S). Now,how price is fixed?B knows that if he gets $10,000 today from A,he can put it in a bank and can earn interest on that(say 10% interest).So,this way he can earn $11,000 in toto. So,the price that he will fix with A would be $11.000 and not $10,000.In this way he can do away with the losses. This will be beneficial for A also because if the price of house increase in one year to $15,000,then its better to pay $11.000 instead.

Now,if we talk about options,we should realise that there is very thin line that separates futures from options. In options,there is no compulsion on A to go on with the deal and execute it in march 2010. But in future,A has to abide by the deal and execute it in march 2010,i.e he cannot back off. So,suppose A visited the house that he is gonna buy,on january 25 2010 and found that it is haunted.No way he can risk his life and so he decides not to buy it. In this way he can back off from the deal that is due on march 20,2010. But in such a case A has to suffer a loss in the form of the premium that he initially paid to B. Reckon that A paid $1000 to B while making the deal,he wont get this amount back while breaking the deal. In this case both parties can save themselves from suffering losses because anyways the house is haunted and not gonna bring benefits for anyone( A lost $1000 but he saved himself from further losses because it would have been impossible for him to resale that house. Same way,B got atleast $1000 instead of nothing).

FDI Policy of India,Part-1

The process of globalisation of FDI in India is still incomplete. There are hundereds of reasons why we are still behind China as far as attracting foreign investors is concerned. As of 2008,FDI is prohibited in sectors like gambling and betting,lottery business,atomic energy and Agriculture. Besides,the master circular issued by RBI in july 2008 specified additional activities for which FDI is not allowed.These are business of chit fund,a Nidhi company,plantation activities,real estate business and trading in TDRs(Transferable Development Rights).

Ideally FDI should be regulated by a single agency of the government,but in India it is administered by several agencies,some of whose functions overlap with each other. Matters relating to policy are anniunced by Department of Industrial Policy and Promotion(DIPP) [whose executive arm is Secretariat for Industrial Assistance(SIA)] andForeign Investment and Promotion Board(FIPB). On the other hand statutory regulation is effected by Foreign Exchange Management Act 1999(FEMA). But,very often,the non statutory policy measures that are announced by the SIA in the form of the so called "Press Notes"are inconsistent with some of the regulations issued under FEMA. However,policy measures announced by these press notes are non justiciable whereas the decisions of RBImade under FEMA can be subjected to judicial review.

In 1998,Gvt permitted foreign investors to set up wholly owned subsidiaries and joint ventures in India in fields where there was no prescribed sectoral cap on foreign equity. This caused resentment among industrialists in India as they were forced to carry on their businessside by side with foreign investors. The main problem was that a foreign investor could set up another business in Indiain the same field and thus compete with the business of his former joint venture. In order to allay the suspicions of Indians SIA issued a press note no.18 of 1998 through which govt imposed a blanket ban on all new investments by foreign investors who had previous joint ventures or technology transfer or trade mark agreements in Indian companies in the same or allied field,unless the foreifn investor had obtained the approval of FIPB. In prectice it meant that foreign investor(FI) had to obtain an NOC from his joint venture partner before he could even apply to the FIPB for the approval of secondary investment. As can be imagined the Indian joint venture partner started using this opportunity to extract huge amounts of compensation from the foreign investor before granting an NOC.

In order to soften the harshness of press note 18,SIA issued press note no 1 of 2005 which said that prior approval of govt would be required only in cases where the FI has an existing joint venture or TT or TM agreement in the same field. Even if an FI has an agreement in the same field,prior approval of govt is not required if existing joint venture agreement by either of the parties is less than 3%. But this so called softening of the obstruction turned out to create more problems than it was intended to solve. In order to reduce the share of the former Indian joint venture partner in the previous company to 3% or below,the FI would first have to buy off the shares held by the Indian partner in that company. This would give the Indian partner the opportunity to extract a huge amountas a price for such sale. Nor could the FI sell shares representing his investment in that company to a third party because any such sale would require the consent of Board of Directors of the company. Such consent would be difficult to obtain without the full cooperation of the former Indian joint venture partner.

Another regulation that has inhibited the flow of FDI is press note no 9 of 1999. It purports to restrictthe right of foreign owned Indian companies to make downstream investments without prior govt approval. There is no difinition in it of what a "foreign owned Indian company"means. The FIPB considers that even a joint venture company is a foreign owned Indian Company(FOIC). But this is legally invalid. In the first place,a so called FOIC is subject to the same legal regime as any other Indian company. This press note also violates a declaration in manual on FDI,policy and procedures 2008 which says that "once a company has been duly registered and incorporated as an Indian company,it is subject to Indian laws and regulations as applicable to other domestic Indian companies. So an FI cannot be subjected to any restrictions on downstream investments (no such restrictions are prescribed by FEMA). Also it is intresting to note that press note no9 of 1999 was issued when FERA and not FEMA was in force.It is obvious that press note no 9 of 1999 could not survive the repeal of FERA because nothing in FEMA permits the govt or RBI to regulate downstream investments.

Thus there are many road blocks to FDI. There are others also like the regulations made under FEMA. All these road blocks will no doubt continue to spoil FDI game in India.

ITS PIRATES OF SOMALIA NOT CARIBBEAN

Piracy in Somalia is a highly organized,lucrative and ransom driven business. On many ocassions pirates were paid millions of dollars. These juicy payoffs have attracted gunmen from across somalia and the number of pirates are in thousands now. However, Indian navy recently registered a victory in one of the anti-pirate operation in the Gulf of Aden.But is this the solution of the problem? The United States and several european countries,particularly France have been talking about ways to patrol the waters together. The United Nations is even considering something like a maritime peacekeeping force.

This is nothing but piracy by henchmen of Somalia warlords(trying to capture power in Somalia)who are locked in fierce battle on the mainland and who are increasingly using the funds from piracy for their land operations. One of their biggest success was hijacking of Saudi Arabian supertanker "Sirius Star",with its $100 million worth of crude oil.

The question is how all this started?No one expected war hit Somalia to be the centre of such activities. The piracy industry started about 10 to 15 years ago as a response to illegal fishing. Somalia's central government imploded in 1991,casting the country into chaos. With no patrols along the shoreline,Somalia's Tuna rich waters were soon plundered by commercial fishing fleets from around the world. Somali fishermen then armed themselves and turned into vigilantes by confronting illegal fishing boats and demanding that they pay a tax. By the early 2000s,many of the fishermen had traded in their nets for machine guns and were hijacking any vessel they could catch. This is how piracy originated in Somalia.

Now,point is that where exactly this money of plunder going? One route ofcourse goes towords warlords on the mainland. Another route is KHAT. This money is also been used in trafficking Khat,a mild narcotic leaf that is very popular in the region. Banned in many western countries,khat is a flowering plant that is native to East Africa and the Arabian peninsula.

The immediate problem is that more than 20,000 vessels pass through the Gulf of Aden each year and this has resulted in insurance premiums shooting upto as much as $20,000 for a shipment of cargo.

NATO and U.S says that they cant be everywhere(Obviously,as there is no oil there).They are urging for private security. Mere statements wont do. If this problem is to be solved then a collective effort is required,not just India and France but everyone needs to contribute.