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This is Bhavikk Shah. A witty brain who works at Capital Market Firm as an Equity Analyst..He is regularly sought for his fundamental perspective on markets by his friends & followers, so this Blog is made... BHAVIKK an humble in nature, simple by heart, a keen reader, a thinker & a... More
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  • SYNGENE INTERNATIONAL LTD: SUBSCRIBE THIS IPO !!!
    SYNGENE INTERNATIONAL LTD: SUBSCRIBE THIS IPO ! (INDIA ONLY)

    Price Band: Rs. 240 - Rs. 250.

    Retail Discount : NA .
    Face Value: Rs. 10.00.
    Minimum Lot Size: 60 Shares.
    Issue opens on: 27th July 2015, Monday.

    Issue closes on: 29th July 2015, Wednesday.

    Listing Date on: by 14th August 2015.

    Total No. of Shares offered: 2,20,00,000 shares or 11.00 %.

    Biocon Shareholders Reservation: 20,00,000 shares of total issue.

    Net Public Offer: 2,00,00,000 shares.

    QIB Book: 1,00,00,000 shares or 50 % of issue.
    Anchor Investor Portion: 60,00,000 shares of QIB
    For Mutual Funds Portion: 2,00,000 shares of QIB
    Balance for all QIB including Mutual Funds: 35,00,000 shares of QIB

    Non - Institutional Bidders: 30,00,000 shares or 15 % of issue.

    Retail Book: 70,00,000 shares or 35 % of issue.

    Equity Shares outstanding prior Issue: 20,00,00,000 shares.

    Equity Shares outstanding post Issue: 20,00,00,000 shares.

    Total Size of the Issue: Rs. 528.00 Crs - Rs. 550.00 Cr.

    IPO GRADING: Strong Fundamentals
    FAIR VALUE RANGE - Rs. 320 - Rs. 340.

    KEY FINANCIALS31 Mar 1131 Mar 1231 Mar 1331 Mar 1431 Mar 15
    Total Income(Cr)322.00417.00550.00700.00860.00
    Net Profit (Cr)27.0071.00102.00135.00175.00
    Net Profit Margin8.38 %17.02 %18.54 %19.28 %20.34 %
    EPS (.)1.403.605.106.708.80
    NAV (.)11.0014.8025.9033.0043.70
    Net Worth (₹Cr)220.70296.80518.60659.30844.90
    ROE (%)12.3323.9219.7020.5020.70
    ROCE (%)7.4018.0019.7016.6017.50
    *Thee face value of company was Rs. 5 and then it consolidated its face value to Rs. 10 on March 16, 2015.

    SYNGENE INTERNATIONAL LIMITED:

    Incorporated in 1993 and headquartered in Bengaluru, Syngene International Limited is a subsidiary of Biocon Limited, a global biopharmaceutical enterprise focused on delivering affordable formulations and compounds. Biocon, owns about 85 % of Syngene, and will reduce its stake to about 74 % through the IPO. Syngene International Ltd is one of the leading Indian-based contract research organizations, offering a suite of integrated, end-to-end discovery and development services for Novel Molecular Entities ("NMEs") across industrial sectors including pharmaceutical, biotechnology, agrochemicals, consumer health, animal health, cosmetic and nutrition companies. Company's service offerings also support the development of biosimilar and generic molecules. In the near term, it intends to forward integrate into commercial-scale manufacturing of NMEs. As an experienced CRO with a proven track record of providing quality NME discovery, development and manufacturing services and continued focus on reliability, responsiveness and protection of client's intellectual property, Syngene is well-positioned to benefit from the expected growth in the CRO industry The company offers services through flexible business models that are customized to their client's requirements. During Fiscal 2015, Syngene serviced 221 clients, ranging from multinational corporations to startups, including 8 of the top 10 global pharmaceutical companies by sales for 2014. It has several long-term relationships and multi-year contracts with their clients, including three long-duration multidisciplinary partnerships, each with a dedicated research centre, with three of the world's leading global healthcare organizations Bristol-Myers Squibb Co. ("BMS"), Abbott Laboratories (Singapore) Pte. Ltd. ("Abbott") and Baxter International Inc. ("Baxter").

    SOME FACTS ON SYNGENE:

    Syngene provides contract drug discovery, research and manufacturing services to 17 of the world's top 20 pharmaceutical companies, including Bristol Myers Squibb & Co and Abbott Laboratories Ltd. Its revenue rose 25 % in the last three years. It manages a pool of 2,122 scientists including 258 PhDs and 1,665 scientists with master's degree, to ensure timely execution of projects, cost effectiveness and quality of the projects, confidentiality and protection of intellectual property. The company owns state-of-the-art research facilities spread over 900000 sq. ft., certified by major regulatory bodies. As an experienced CRO, Syngene is well positioned to capitalize on the advantages of its flexible business models that customizes to their client's requirements globally. There are great opportunities for CROs from the outsourcing markets and thus increasing their share towards global R&D expenditures. The company's increasing clientele, expanding capacities as well as capabilities, along with plans for forward integration into commercial manufacturing will enable the company to drive growth by benefiting from the opportunities in future. Syngene is well poised to cash in on growing global pharma R&D outsourcing trend. Global pharmaceutical players are facing structural issues such as profit pressures arising from impending patent cliff, drying product pipeline and rising R&D costs. Surprisingly, however, the new product approvals from the USFDA are on the rise. Hence to maintain the cost balance at one end and maintain the new product introduction at the other, these players are inclined to outsource some of the R&D budget to CROs like Syngene. The parent Biocon is looking for a demerger may be considered when Biocon is less financially dependent on Syngene.

    OUTLOOK:

    The global CRO market for discovery services was estimated at US$14.7 billion in 2014 and is expected to reach US$22.7 billion in 2018, reflecting a CAGR of 11.5 % (2014-18), according to the IQ4I Report. The global CRO market for development services was estimated at US$28.8 billion in 2014 and is expected to reach US$44.6 billion in 2018, reflecting a CAGR (2014- 18) of 11.6 %, according to the Frost & Sullivan Report. Contract research organisations (CROs) offer outsourced services to support discovery and development for R&D driven organisations across industrial sectors like pharmaceuticals, biotechnology, biopharmaceuticals, neutraceuticals, animal health, agro-chemicals, cosmetics and electronics. CRO services span the range of R&D activities from new molecular entity (NME) discovery, development and manufacturing. Growth in the CRO market has historically been driven by growth in R&D spending and increased outsourcing of R&D activities. CROs offer clients an opportunity to manage costs, have flexible operations and realise efficiencies in R&D and related functions. Also, the need for greater flexibility has reduced the willingness of these players to incur large fixed costs associated with large scale R&D programmes. Outsourcing allows clients to convert a portion of their R&D budgets from a fixed to a variable cost, giving them greater flexibility to shift strategic and development priorities in response to market conditions. India has offered a significant cost advantage and skilled personnel. However, as global pharma outsources more R&D functions, outsourcing to India is increasingly seen as a strategic move to garner quality and value, rather than just a tactical decision to lower costs. High recall value Due to its integrated service offerings coupled with consistent performance and high data integrity ethos, Syngene has enjoyed high recall value, which is reflected from the fact that eight out of top 10 clients have been engaged with the company for the past five years. The company has also established dedicated centre for its three major clients Bristol-Myers Squibb Co (NYSE:BMS), Abbott and Baxter. BMS has also recently extended this engagement with Syngene to 2020. Syngene stands to gain from forward integration to become a Contract Manufacturing Organization (NYSE:CMO). Further, Syngene's plan to foray into CMO of novel drugs will add significant upside over the next 3-4 years. Entry into the CMO business will open up the large revenue source (like Divi's) and make Syngene a complete turnkey solution provider amongst the Indian bourses.

    VALUATION:

    Syngene is likely to incur capex of US $200mn in the next 2-3 years for greenfield as well as brownfield expansion. It currently manufactures small & large molecule to support clinical trials for multiple clients. It has shown healthy financial performance in the last 5 years. During the last 4 years, revenue grew 28 % and shown PAT CAGR of 59 %. During the same period its EBITDA grew by 31 %. In FY15, the company derived 96 % of revenue from the export market. During FY15, revenue grew 23 % YoY, to Rs. 860 crore, 95 % of which came via exports, while EBITDA margin was healthy at 34 %, leading to an EBITDA of Rs. 293 crore, up 32 % YoY. Since the company enjoys many tax concessions in form of SEZ unit and additional depreciation on plant and machinery, income tax rates are very low, and stood at just 14 % for FY15. Thus, net profit of Rs. 175 crore was earned in FY15, translating into net margin and EPS of 20.3 % and Rs. 8.89 respectively. On equity of Rs. 199 crore (face value of Rs. 10 each), company has net worth of Rs. 845 crore, as of 31st March 2015. While it has total debt of Rs. 155 crore, balance sheet shows current investments and cash balance of Rs. 262 crore, indicating net cash surplus of Rs. 107 crore, or Rs. 5.36 per share. At upper band of the IPO, Enterprise value of SYNGENE comes at Rs. 5,048 Cr and at lower band it comes at Rs.4,848 Cr.

    According to me one should look for subscribing for SYNGENE INTERNATIONAL LTD IPO, the company has fixed the price band at Rs. 240-250 per share. Based on FY15 annual EPS of Rs. 8.80, SYGENE is offered at P/E range of 27.27x on price of Rs. 240 and at a PE of 28.40x on price of Rs. 250. This Ipo is fairly valued given its operational scale. Extrapolating FY15's earnings growth rates of 30 % to FY16, company is estimated to clock net profit of Rs. 228 crore for FY16 translating into EPS of Rs. 11.45 , which indicates a PE multiple of 21 times, at upper price band. PE multiple of 22 times, based on current year earnings, is attractive for a high-growth pharma stock clocking healthy margins, with a sound balance sheet, backed by strong management team and pedigree. Since Sun Pharma Advanced Research is loss making and there are no other pure-play CRAMs players listed on Indian bourses, no listed peer is ideal for comparison. Thus, with attractive pricing & strong fundamentals with good institutional holdings the Long term investors should look into subscribing the IPO for good opportunity. Short term investor can subscribe for listing gains.

    As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

    *As the author of this blog I disclose that I do have applied for the IPO.

    READ FULL REPORT & ECONOMIC DATA REGULARLY UPDATED HERE - visit here Click

    Reader Friends, grab a fresh hot cup of coffee, turn on your net & browse on to bhavikkshah.blogspot.in & take out few minutes to get to know the most interesting world of investment... Till then HAPPY INVESTING, don't forget to Share !!

    *Dear Reader friend, if you enjoyed this article, please do share it with your Friends and Colleagues through Facebook and Twitter, and drop in your valuable thoughts in comment box..

    READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

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    Jul 27 7:42 AM | Link | Comment!
  • TATA MOTORS DVR LTD: A BEST DIVIDEND YIELD STOCK , A MUST BUY !!!

    Scrip Code: 570001 / TATAMTRDVR

    CMP: Rs. 135.10; Buy at current levels.
    Short term Target: Rs. 151, 6 month Target - Rs. 177;
    STOP LOSS - Rs. 124.30; Market Cap: Rs. 6,510.91 Cr; 52 Week High/Low: Rs. 189.90 / Rs. 79.40

    Total Shares: 48,19,33,115 shares(17.90% of Sh Capital); Promoters : 1,86,00,448 shares -3.86 %; Total Public holding : 46,33,32,667 shares - 96.14 %; Book Value: Rs. 62.74*; Face Value: Rs. 2.00; EPS: Rs. 3.89*; Div: 205 %* ; P/E: 57.71* times; Ind. P/E: 38.45*; EV/EBITDA: 18.27*.

    Total Debt: 2,845.87 Cr; Enterprise Value: Rs. 9,356.77 Cr.

    *Being DVR a class of equity capital, Tata Motors financials are used.

    TATA MOTORS LIMITED: Tata Motors was founded in 1945 and was formerly known as Tata Engineering and Locomotive Company Limited (TELCO) and changed its name to Tata Motors Limited in 2003. The company is leading manufacturer of commercial & passenger vehicles in India and is among the top 3 passenger car manufacturers in India and the world's fourth largest truck manufacturer & world's Second largest bus manufacturer. Through its subsidiaries, the company is engaged in engineering and automotive solutions, construction equipment manufacturing, automotive vehicle components manufacturing and supply chain activities, machine tools & factory automation solutions. The company's Automotive operations include all activities relating to development, design; manufacture, assembly and sale of vehicles including all financing thereof, as well as sale of related parts and accessories. Tata Motors has operations in UK, South Korea, Thailand & Spain. The company has many subsidiaries but the most prominent among these is Jaguar-Land Rover (JLR) (a British car manufacturing company) which it acquired in 2008 at $230 Cr and turned it from a loss making company to a profit making company. JLR contributes 54 % to the company's revenues. The company's product portfolio ranges from the ultra low cost car Nano to the luxurious cars from JLR, from its ground breaking invention of the light commercial vehicle (LCV) the Ace to the international Prima Truck range. TATA MOTORS is compared to Mazda Motor Corporation, Suzuki Motor Corporation and Mitsubishi Corporation.

    Investment Rationale:

    Tata Motors is India's largest automobile company, last quarter JLR reported all-time high monthly volumes with both Land Rover and Jaguar rising 54 % and 9 %, respectively. This was been due to geographical demand fuelled by emerging markets like China, Brazil along with the developed markets of the US. In this fourth quarter, Tata Motors posted 16.7 % YoY growth in revenue in the automotive segment, whereas JLR reported a top-line growth of 65.7 % YoY. This led to an overall 44.3 % YoY growth in the company's consolidated top-line to Rs. 50,900 Cr, EBITDA margin at JLR were at 14.6 %, the consolidated EBITDA margin improved by 30 basis points YoY to 14.1 %. EBITDA grew at Rs. 7,170 Cr. TATA MOTOR was accounted for a tax credit of Rs. 1,820 Cr on account of credit for carry forward of losses from JLR account. Profit After Tax grew by 86.1 % YoY to Rs. 4590 Cr. On Standalone basis, Tata Motors posted 14.4 % YoY growth in its top-line at Rs. 16,390 Cr. Its overall volumes grew by 18.4 % YoY, whereas average realization/vehicle declined by 3.3 % YoY on account inferior product mix skewed towards passenger cars. EBITDA margins on standalone basis improved by 0.60 % YoY to 9.6 % on account of tight control over other expenditure. As a result, EBITDA grew to Rs. 1560 Cr YoY. Profit After Tax on standalone basis grew by 22.8 % YoY at Rs. 780 Cr. The higher than expected standalone profit partially compensated for the disappointment at JLR. JLR reported 51.5 % YoY growth in revenue at ₤414.4 Cr, mainly led by a 48.2 % YoY improvement in volumes. Average realisation/vehicle declined by 2.3 % QoQ on account of inferior product mix skewed towards 'Evoque'. Other expenses increased by ₤9 Cr on account of investment in new capacities. As an result, EBITDA margins declined by 2.40 % QoQ at 14.6 %. JLR PAT stood at ₤42.2 Cr as against ₤44 Cr in Q3FY12. This, in experts view, a big disappointment given that the volumes for the quarter were up by 11 % QoQ and currency impact was minimal. Management expects JLR volumes to be driven by launch of new Evoque in new markets, demand for newly launch Jaguar's Model Year (NYSE:MY) 2012 XF and ramp up operations in China. In Q2 FY12, Evoque was only launch in UK, Europe and US. Evoque has received buoyant response and has an order book of around 20,000 units after catering 8,000 units in Q2 FY12. It is in midst of launching Evoque in China and other developing markets, thus resulting in incremental Evoque volumes in H2 FY12. The company has started to ramp up the distribution network in China to 100 dealers by FY12E and is in advance talks with local partner for production in China. The company has largely resolved issues related to engine constraints with Ford. JLR is setting up a new engine manufacturing facility in UK, which entails an investment of £35.5 Cr. Net Automotive debt to equity stands at 0.3:1. JLR is likely to come up with two new launches i.e. Jaguar XF station wagon in Q3FY13E and new Range Rover platform in Q4FY13E. The company increased its guidance for a capex and R&D spends at JLR to ₤200 Cr as against the earlier guidance of ₤150 Cr. JLR completed an unsecured Revolving Facility totaling ₤71 Cr for 3-5 years thereby strengthening its liquidity position. Management sounded cautiously optimistic regarding volume growth at JLR in Europe and UK.

    Outlook and Valuation:

    The long term investors can buy the TATAMTRDVR in view of attractive valuation. The long term holders of ordinary shares of Tata Motor can switch to TATAMTRDVR. The Tata Motors DVR shares carry 1/10th of voting rights and shareholders are entitled to a 5 % higher dividend than ordinary shares in lieu of surrendering voting rights. Tata Motors DVR trades at a discount of 45.2 %. The average discount for the DVR to Tata Motors ordinary share was 36.7 % since inception. The average discount for the DVR share over the last two years has been 40.5 %. At the Current Market Price of Rs. 135.10, the DVR is trading at a 40 % discount to Tata Motors' ordinary share which is at Rs. 224.55. At the current levels, the probability of the discount narrowing is higher. On Some Of The Parts basis the value of standalone business comes at 9x FY13 adjusted EPS of Rs. 5 to arrive at Rs. 45 and for JLR it comes at 5x EV/EBITDA to arrive at Rs. 183 and the valued of the investment book of the company comes at 0.2x BV for unquoted investments and market value of quoted investments to reach Rs. 9/share and arrived at our target price ofRs. 275. One can BUY TATA MOTOR DVR at all lower levels for better returns. It has outperformed the broader market by 6 % on an annual basis.Globally DVRs trends to trade between 10 % - 15 % discounts to its Equity shares, TTM DVR currently trades at 40 % discount to its Equity shares. One should buy TTM DVR at 40 % - 45 % discount to its EQ SH & Sell when DVR arrives at 10 % - 15 % discount to its EQ SH. TTM DVR can be a good 'BUY' with a target price of Rs.151 for the short term. Expect discount to the Equity shares reduce to at least 30 % over next one year given the attractive valuations and increasing free float. For the shorter term it can be a good BUY, with a price target of Rs. 151.

    SOTP valuation (FY2013E)

    BUSINESS SUBSIDIARYValue per Share(Rs.)
    Core Business (9x FY13E Stand.EPS)45
    JLR (5.0x FY13E EV/EBITDA)183.00
    Tata Daewoo2.00
    Tata Motor Finance3.00
    Tata Technologies4.00
    TML Drivelines4.00
    Value of Other Subsidiaries14.00
    Value Post Discount (20 % Holding discount)11.00
    Value of Investments (0.2 x BV of Investments)9.00
    TOTAL VALUE PER SHARE275.00
     

     

    KEY FINANCIALSFY11FY12EFY13EFY14E
    SALES (Rs. Crs)1,22,127.901,65,654.501,89,786.002,07,532.00
    NET PROFIT (Rs. Crs)9,042.5012,522.4013,811.7014,699.00
    EPS (Rs.)28.4037.5041.1044.10
    PE (x)9.707.306.706.30
    P/BV (x)4.602.802.802.70
    EV/EBITDA (x)6.204.304.203.70
    ROE (%)66.1047.9041.8043.80
    ROCE (%)22.1023.5021.4022.50

    I would buy TATA MOTOR LTD DVR with a price target of Rs. 151 for Medium to Long term and Rs. 177 for the Short term players. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 124.30 on every purchase.

    READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

    Disclosure: I am long TTM.

    Jun 03 6:07 AM | Link | Comment!
  • IS THE EVOLUTION OF MONEY HURTING US !!!

    IS THE EVOLUTION OF MONEY HURTING US !!!


    It all started with "BARTER TRADE SYSTEM": Long time ago the first trade was conducted via Barter. All goods were directly exchanged for all other goods. But this method had its own problems. If you want to swap your chicken for a loaf of bread, but baker happened to want firewood, you had a task to find someone with firewood who wanted to have chicken.

    Then came the medium of gold exchange, under which everyone agreed to accept gold in return for whatever they were selling. This transition allowed the swapping of chickens for gold and then gold for anything else. The thing with gold was that it was indestructible and could be stored for the future. As gold also become the "Store Of Value" - if you had lots of chickens you could swap all of chickens for gold, spend only part of the gold on bread and keep a few gold for a rainy day.

    Gold as a mode of money, created its own set of problems - Governments in financial troubles, would call back their gold coins, then melt it down and reform the same metal into more coins with lower gold content in it or mixing any other metal in it. For government, it generated a nice new stock of gold for conversion into coins. This is what called "Debasement of Currency".

    But debasement of currency became a huge problem and led to the development of certificates of gold deposits. Debasement & the larger monetary transaction required that the coins to be counted weighed and checked for its purity & authenticity. In addition to which there was constant problem of security, so this led to the development of the Gold Depository Banks whereby a group of merchants come together and formed Merchant Banks that would hold their gold securely at a central location. The quality of coin was checked, the depositor was issued with paper certificate of deposit. The certificate of deposit represented his holding of gold within the banks & the holder of this certificate was entitled to present the certificate back to the bank, who would on demand, exchange it for the same amount of gold coin originally deposited.

    These banks soon realized that the owners of the gold rarely come back to collect it. As a result gold was lying idle with them most of the time. So, these bankers come up with a money making scheme of their own. These banker's started issuing their own certificates of gold deposit and would lend those certificates to merchants. These merchants would use these new certificates to buy goods, which they would then sell on at a profit provided everything went well, the merchant could borrow the certificate, buy & sell the goods to make profit and repay the bank before anyone realized that the gold had left the vault which of course it never had.

    Now, what this did was there were always more certificates of deposits in circulation than the gold in the vaults of banks. This in turn led to crisis situation during which individuals with these certificates landed up at the bank asking for their gold back. The trouble was that the bank did not have enough gold to make good against all the certificates it had issued. As this news spread, more people landed up leading to bank running, this soon led to a situation whereby a central bank was created which would fight financial instability. In return for the backing of the central bank, the commercial banks gave up their rights to issue their own gold depository certificates. From now on there would only be one type of depository certificates and these would be printed by the government, and be distributed through the central bank to the commercial banks. In addition, gold reserves of the commercial banks would be collected together at the central bank.

    This created the concept of Currency Notes issued by the government. But what this also did was that it gave the government a monopoly on printing money. And unlike the kings of the earlier age, who had to call their gold coin back to debase them, now government could simply print more and more paper money as & when they deemed fit. And this right as we know has more or less been responsible for the current financial crisis.

    IMPACT OF THE EVOLUTION OF MONEY: Let's say US government prints $1 trillion and keeps it in its vaults, so then what would be the impact of this printing of money will be on the Inflation? The answer would be ZERO impact? Correct, simply because all the printed money is in the vault and does not enter into the economic systems…It is when the money enters the economic system which leads to a situation wherein more money chase the same or even fewer goods leading to price rise. At same time it is important how fast does money changes hands, meaning how fast people receive and then go out and spend this money. The faster they spend this money, more velocity money has and that in turn leads to a faster increase in prices & thus an increase in inflation.

    SAFEGUARD FROM THE FINANCIAL CRISIS : When markets are erratic & at times unpredictable, then the wise thing to do is to step up exposure to an asset that would infuse a semblance of stability and strength to the portfolio. And the cleanest, simplest & most efficient way to do is to invest in GOLD ETF. Not to mention the fact that the rampant way in which countries are debasing their currencies, one cannot help feel that at the end of the day, bullion will be more valuable than billions.

    BUY GOLD ETF: There are new alternatives to invest in GOLD, It is GOLD ETF - known as GOLD Exchange traded Funds which are listed on NSE. ETF just like any other mutual funds collects money and invest into the market. GOLD ETF's collects funds and invests in GOLD. They buy gold physically - so the units are backed by 0.995 finesse gold. When you invest in GOLD ETF you are allotted a unit same as in mutual fund, here 1 unit of GOLD ETF can be 1 gm or 1/2 gm of gold depending on the funds - So Gold ETF are affordable. GOLD ETF trades like normal equity share on exchanges whose prices are in tandem with domestic gold price. If you dint have Demat account you still can invest in GOLD FUNDS like SBI GOLD FUND, Quantum Gold Saving Fund. You can also invest in these ETF in a Systematic Investment way (SIP) with as low as Rs. 500. JUST call your broker to buy GOLD ETF's (List of listed ETF are mentioned below) or just visit your nearest bank and ask for GOLD FUND (if you don't have trading account)

    Listed GOLD ETF

    AXIS GOLD SHARE ; GOLDMAN SACHS BeES ; HDFC GOLD ETF ; KOTAK GOLD ETF ; RELIANCE GOLD ETF ; RELIGARE GOLD ETF ; SBI GOLD ETF

    Before the great depression most of the world used gold as a currency. Of course that did mean every time someone purchased something they paid for it in gold. Governments maintained a certain amount of gold in their vaults & paper currency was issued against the value of that gold. (In INDIA, the minimum reserve worth Rs.200 cr should be maintained at any point of time, out of these reserves Gold reserves should be worth Rs.115 cr @ Rs.94/10 grams & Forex reserve of Rs 85 cr at current market price. If actual reserve are more than minimum reserve RBI may prints new currency notes & issues them to deficit banks in form of loans against gold, foreign exchange, promissory notes & treasury notes) So every time you pay paper money you effectively using gold. This system was "Gold Standard". Citizens also had freedom to exchange these currency notes for gold, as and when they deemed fit.

    Government ensured that no more notes are printed. The reason was simple if they had to print more money they needed more gold in their vaults, because every paper currency note out there was essentially gold. And if citizens got slightest hint that the government is printing currency, they would all land up at the bank to exchange their paper currency for gold. So even if government were tempted to print money they would think twice before doing it.

    Now, during the time of great depression, growth was a problem, unemployment was at its peak. Firms were shutting down. One way to create growth was the government printing notes & giving it to people in various ways to spend. Once the citizen got some money in their hands, they would go out and spend it. This ensures that they buy goods & services. And one man's spending is other man's income and so the cycle would continue and this would create some growth. And that's what government did; they moved out of Gold Standard and went into FIAT Currency i.e. a currency that does not have anything backing it but basically the fiat of government. This gave them the free way to print any amount of money they want to.

    In fact, in the year 1933, US government confiscated all the gold that its citizens had through Executive Order 6102 signed by the then President Mr. Franklin D Roosevelt, forbidding the hording of gold coins, gold bullion & gold certificates by US citizens. They were off course compensated for their gold at the rate of $20.67 per troy ounce (1 troy ounce=31.1grams). So because of this the government across the world had freedom to print currency whenever the economy was in trouble. And as per basics of economics, an increase in supply leads to decrease in purchasing power. That's why economists who follow the Austrian school of economics, say that all paper currencies over a period of time go back to their intrinsic value i.e. zero.

    So that is why when ever there is a hint of major financial crisis, people figure out that almost any solution that the governments might come up with will ultimately ends up to printing more & more money (which US is doing to solve its financial problem, and Europe cant due to its structure). This means decreasing purchasing power. Smart money in this situation always moves to gold. As it is now, people end up treating gold as nothing but what it was always used as i.e. CURRENCY. One should always have at least 25 % of its portfolio in Gold in order to hedge inflation .

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: economy
    May 15 12:28 AM | Link | Comment!
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