The ultimate dollar hedge investment will always be gold. Investing in gold through ownership of the metal itself, mutual funds, or gold mining stock provides the most direct counter to the dollar. As the dollar falls, gold will inevitably rise. In a moment, we’ll provide you with many ways for positioning your portfolio to profit from a bull market in gold. For now, we emphasize the high probability of gold’s future. The real potential for profits in the coming years and decades is not going to be found in the traditional American blue chip industry. That is a financial dinosaur that can no longer compete in the world market.
The future growth is going to be seen in gold. The world economy may remain off the gold standard, but ultimately the tangible value of gold as the basis for real value-whether acknowledged by central banks or not-will never change. Historically, this has always been the case, and it always will be. In other words, we are on a “gold standard” in spite of the popularity of fiat.
You have many choices.
In the following paragraphs, you’ll discover five ways to invest in gold. Based on your level of market experience and familiarity with products, one of these will be appropriate for you.
1. Direct ownership. There is nothing like gold bullion, the ultimate expression of pure value. Historically, many civilizations have recognized the permanence of gold’s value. For example, Egyptian civilizations buried vast amounts of gold with deceased pharaohs in the belief that they would be able to use it in the afterlife. Great wars were fought, among other reasons, to pillage stores of gold. Why the allure? The answer: Gold is the only real money, and its value cannot be changed or controlled by government fiat-the underlying reason for governments to go off the gold standard, unfortunately.Gold’s value will rise based on the pure forces of supply and demand, no matter what Mr. Greenspan decrees regarding interest rates or greenbacks in circulation. The big disadvantage to owning gold is that it tends to trade with a wide spread between bid and ask prices. So don’t expect to turn a fast profit. You’ll buy at retail and sell at wholesale, so you’ll need a big price jump just to break even. However, you should not view gold as a speculative asset, but a defensive asset for holding value. Since your dollars are going to fall in value, gold is the best place to preserve value. The best forms for gold ownership are through minted coins: one-ounce South African Krugerrands, Canadian Maple Leafs, or American Eagles.
2. Gold exchange-traded funds. The recent explosion in exchange traded funds (ETFs) presents an even more interesting way to invest in gold. An ETF is a type of mutual fund that trades on a stock exchange like an ordinary stock. The ETF’s exact portfolio is fixed in advance and does not change. Thus, the two gold ETFs that trade in the United States both hold gold bullion as their one and only asset. You can locate these two ETFs under the symbol “GLD” (for the streetTRACKS Gold Trust) and “IAU” (for the iShares COMEX Gold Trust). Either ETF offers a practical way to hold gold in an investment portfolio.
3. Gold mutual funds. For people who are hesitant to invest in physical gold, but still desire some exposure to the precious metal, gold mutual funds provide a helpful alternative. These funds hold portfolios of gold stocks-that is, the stocks of companies like Newmont Mining that mine for gold. Newmont is an example of a senior gold stock. A senior is a large, well-capitalized company that has been around several years and has a profitable track record. They tend to own established mines that produce known quantities of gold each year. For many investors, selection of such a company is a more moderate or conservative play (versus picking up cheap shares in fairly young companies).
4. Junior gold stocks. This level of stock is more speculative. Junior stocks are less likely to own productive mines, and may be exploration plays-with higher potential profits but also with greater risk of loss. Capitalization is likely to be smaller than capitalization of the senior gold stocks. This range of investments is for investors whose risk tolerance is broader, and who accept the possibility of gold-based losses in exchange for the potential for triple-digit gains.
5. Gold options and futures. For the more sophisticated and experienced investor, options allow you to speculate in gold prices. But in the options market, you can speculate on price movements in either direction. If you buy a call, you are hoping prices will rise. A call fixes the purchase price so the higher that price goes, the greater the margin between your fixed option price and current market price. When you buy a put, you expect the price to fall. Buying options is risky, and more people lose than win. In fact, about three-fourths of all options bought expire worthless. The options market is complex and requires experience and understanding. To generalize, options possess two key traits-one bad and one good. The good trait is that they enable an investor to control a large investment with a small, and limited, amount of money. The bad trait is that options expire within a fixed period of time. Thus, for the buyer time is the enemy because as the expiration date gets closer, an option’s “time value” disappears. Anyone investing in options needs to understand all of the risks before they spend money. The futures market is far too complex for the vast majority of investors. Even experienced options investors recognize the high risk nature of the futures market. Considering the range of ways to get into the gold market, futures trading is the most complex and, while big fortunes could be made, they can also be lost in an instant.
We cannot know, predict, or even guess, when the demise of the dollar is going to occur, or how quickly it will take place. But we do know it is going to occur. The tragic mismanagement of monetary policy by the Fed over many years has made this inevitable.
Removing the U.S. monetary system from the gold standard was not merely a decision of short-term effect. Nixon may have seen the move as a means for solving current economic problems, but it had long-lasting impacts: trade deficits, growing federal debt, and the ability to print money endlessly and build a new credit-based economy. Internationally, the decision by the United States virtually forced all other major currencies to also go off the gold standard.
Any investor who views the economic situation broadly-both domestically and internationally-can see that trouble lies ahead. We have delayed the inevitable because China is a partner in our monetary woes.
The Chinese are building their own debt on the dubious foundation of the U.S. dollar, and other Asian economies have been forced to go along for the ride. When the dollar falls, many other countries will suffer as well. The offset, logically, is found in commodities. Investing in oil stocks makes sense, for example, because the price of oil is rising and as it becomes more difficult to drill oil those companies that own drilling and exploration operations will benefit. It makes sense to invest in other commodities as well.
The tangible asset play is clearly where future value is going to lie. With China’s never-ending need for coal, iron ore, tungsten, copper, oil, and other metals, the future of tangible markets is the bright spot in the gloomy financially based economics of the world.
Leading the charge is gold. It is ironic that monetary policy follows a predictable pattern.
Governments overprint money and their currency crashes. Inevitably, they always return to gold, but often at great expense and with considerable suffering. We find ourselves in another one of those moments in time where irresponsible monetary policy has put us at risk. But we don’t have to simply hold on and wait for the demise of the dollar; we can take action now because that demise is great for your portfolio-if you position yourself in tangible assets rather than in empty fiat promises and the bizarre economic premise of U.S. monetary policy.
Goods and services can be paid for only with goods and services. Currency is nothing but an IOU, a promissory note that is not backed up with any tangible value. Once we reach our national credit limit, monetary policy will be forced to retreat. When that happens, traditional investors and their savings accounts are going to be hit hard. The beneficiary of the falling dollar will be the investor whose holdings emphasize tangible value of goods: resources and precious metals.
Every danger to one group of people is invariably an opportunity to another. It all depends on where you position yourself. Those investors positioned in dollar-based investments are going to suffer the loss of purchasing power when the dollar’s value disappears. Those who have moved their investments to higher ground will benefit from the change.
There are two basic categories of futures participants: hedgers and speculators.
In general, hedgers use futures for protection against adverse future price movements in the underlying cash commodity. The rationale of hedging is based upon the demonstrated tendency of cash prices and futures values to move in tandem.
Hedgers are very often businesses, or individuals, who at one point or another deal in the underlying cash commodity. Take, for instance, a major food processor who cans corn. If corn prices go up. he must pay the farmer or corn dealer more. For protection against higher corn prices, the processor can "hedge" his risk exposure by buying enough corn futures contracts to cover the amount of corn he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if corn prices rise enough to offset cash corn losses.
Speculators are the second major group of futures players. These participants include independent floor traders and investors. Independent floor traders, also called "locals", trade for their own accounts. Floor brokers handle trades for their personal clients or brokerage firms.
For speculators, futures have important advantages over other investments:
If the trader's judgement is good. he can make more money in the futures market faster because futures prices tend, on average, to change more quickly than real estate or stock prices, for example. On the other hand, bad trading judgement in futures markets can cause greater losses than might be the case with other investments.
Futures are highly leveraged investments. The trader puts up a small fraction of the value of the underlying contract (usually 10%-15% and sometimes less) as margin, yet he can ride on the full value of the contract as it moves up and down. The money he puts up is not a down payment on the underlying contract, but a performance bond. The actual value of the contract is only exchanged on those rare occasions when delivery takes place. (Compare this to the stock investor who generally has to put up at least 50% of the value of his stocks.) Moreover the commodity futures investor is not charged interest on the difference between the margin and the full contract value.
In general, futures are harder to trade on inside information. After all, who can have the inside scoop on the weather or the Chairman of the Federal Reserve's next proclamation on the money supply? The open outcry method of trading - as opposed to a specialist system - insures a very public, fair and efficient market.
Commission charges on futures trades are small compared to other investments, and the investor pays them after the position is liquidated.
Most commodity markets are very broad and liquid. Transactions can be completed quickly, lowering the risk of adverse market moves between the time of the decision to trade and the trade's execution.
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One of the advantages of our No Dealing Desk execution is that we make money on a per trade basis, so we benefit from successful traders. Therefore, we focus heavily on providing educational services to help you become better traders. Through www.gcminternationalinc.com, we offer free news and market research, on-demand educational videos, live instructor sessions, and ongoing trading support by the course instructors.
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Savings accounts such as money market accounts and CD's (certificate of deposit) are a great way for people to put money away and also earn a modest return on their money, without the risks associated with the stock market or other similar investments. Although technically money market investing isn't actually investing, it is a form of savings.
Money market accounts are good for people who want the security of having their money in cash, knowing it will not lose value at any time. Additionally, money market accounts offered by banks and other financial institutions in the United States are insured by the federal government through the FDIC (Federal Deposit Insurance Corporation), up to $100,000. So, you can sleep easy at night knowing your money is safe.
Although I am an avid stock market investor, I always keep a percentage of my assets in an interest bearing money market account because I want to know I have a cushion if I ever need it. Whether I need money for unexpected expenses or some other reason, I want to know I can count on that money if the time comes.
There are three main types of savings accounts, detailed here:
Basic or Traditional Savings
This type of account often comes with no minimum balance requirement and pays a modest rate of interest. Money can be withdrawn without penalty.
Money Market Accounts
A money market account is similar to a passbook savings account, but likely has a minimum balance requirement, which can range from a few hundred dollars to several thousand. Money market accounts also tend to pay out a higher rate of interest than basic savings. Fees may be charged if your balance falls below a minimum.
CD (Certificate of Deposit)
A CD is like a basic savings account, but it is at a fixed interest rate for a fixed term of time. It could be 6 months, 1 year, or more. There may or may not be a balance requirement, and your interest rate is determined by the amount of your deposit, and the term. A typical CD term might be if you deposit $10,000 for 1 year, your bank agrees to pay you a fixed interest rate, almost always much higher than a money market account. The beneift of this type of account is that if interest rates fall, you are still guaranteed the higher interest rate. The drawback is that if you need to withdrawl your money for some reason, you can incur a penalty.
Who pays the best rates?
Online banks often pay better savings rates than banks with branches. Why is this? Because maintaining a branch network costs money, which is overhead, which is always passed on to you, the customer - either in the form of higher fees or reduced interest earnings on your savings accounts.
I have found a way around this by opening a free checking account at a bank with branches, and then opening a money market account with an online bank, which pays me a high interest rate. My checking account and online savings account are linked, so when I need to access my savings account all I do is transfer money to my checking account - which is all 100% free!
I highly recommend this type of setup if you hate paying fees as much as I do, but also want a good rate of return on your savings. You can shop around to find the best savings rates and check with different banks to find out if they have free checking, or if you want to save time I have created links to the banks I use in the Open An Account tab on the menu. Opening one or both accounts online only takes a few minutes, and you'll be good to go!
If you are a long-term investor, you need to analyse companies in your short list in much more detail.
You will be less concerned with news that might move a company's share price over the short or medium term – for example, a single earnings release or change to its full-year outlook – but are more concerned with the overall financial health of the company.
You are essentially looking to see whether the fundamentals of each company are able to sustain a rise in its share price over a long period of time.
To help you decide which shares to invest in, work through the following steps:
Step 1: determine your stocks' real value
The first step in deciding which company to invest in for the long term is to work out which shares are currently undervalued or overvalued. You can then make a decision on them eventually returning to a price that reflects their true value.
To do this, look at each company's earnings report and calculate the following ratios:
Financial health ratios
Using financial health ratios will tell you if a company has ample money to pay its costs or is in danger of going bankrupt. Start with the following financial health ratios, using data from the past two to five years: Current ratio, quick ratio and 'debt to equity ratio'.
Performance/efficiency ratios
A company's financial performance ratios will give you an idea of how efficient its management is at making the most of the capital and assets at hand. Start by analysing the following: 'Return on equity' and 'return on capital employed'.
Evaluation ratios
Evaluation ratios tell you if a company appears to be undervalued or overvalued. Start by analysing the 'price to earnings' ratio.
Step 2: record your data
Record all this information, creating a detailed file on each company.
Because ratios give you a concrete number to work with, they are also a simple way of comparing different companies in the same sector.
For this reason, you might want to create a spreadsheet containing key ratios for a number of companies, all in one place.
Step 3: analyse your data
To decide whether the shortlist of companies you are interested in represent a good investment prospect, work through the following checklist:
- Look at each company's share price performance compared with that of the index it trades on and also its sector – this will tell you whether the company seems to be underperforming or overperforming its peers.
- If it appears to have been underperforming other companies in its sector or market, ask yourself why – look again at its financial ratios to try and decide whether it is undervalued (and therefore might see its price rise) or simply inefficient.
- Look at changes in each company's financial, performance and evaluation ratios over the past two to five years – look for trends that show you its financial health or performance is improving or worsening.
- Compare evaluation data with what you can find out from each company's balance sheet and in the news. If, for example, evaluation methods suggest that it is overvalued, worsening earnings or a weak take-up of its products might confirm this.
- Consider each company's performance ratios in context of its current plans – if its management is actively working to cut costs and seems to have made some headway, for example, you might choose to be less deterred by a low return on capital or equity.
- Use financial health to categorise companies you are interested in as high risk, moderate risk or low risk – this will provide you with some context to view other ratios in.
- If, for example, a company's financial health ratio suggests it is high risk, its performance ratio is also weak and evaluation methods suggest it is overvalued, this might be a stock to avoid.
Another way of refining your list is to grade companies using a system – for example 1 to 5, with 1 meaning strong potential and 5 meaning low potential.
Step 4: choose your stocks
Once you have taken all the above into account and applied it to your shortlist of stocks, you should have identified two or three stocks that you want to go ahead and invest in.
Remember however that as with any form of fundamental analysis, every stage in the above process involves a level of subjectivity.
There is no 'one size fits all' method for choosing which stocks to invest in, but as you gain in experience you will find through trial and error which ways work best for you.
Once have decided how you want to balance your stock portfolio in terms of business sectors and classes of stock, it is time to start start picking potential stocks that you want to include in your portfolio.
You do not need to keep to 15 stocks at this stage – feel free to pick as many as you would like, because in this lesson we will show you how to refine your list – you can of course pick and refine your list as you go along at the same time. We will show you how to do a more detailed analysis in order pick a selection of stocks suitable for the portfolio you want to build.
If, for example, you have decided that you want to have at least one large-cap, utility company in your portfolio, you now have to look at a range of utility stocks and decide which you think has the best long-term prospects.
There are a number of ways that you can compare one stock with each other. Fortunately, this is most straightforward when they are in the same sector as each other.
The following checklist will help you work through the process:
Performance
A company's historical share-price performance can help you predict how much the value of its shares might rise or fall in the future. This is also true of sectors overall.
Look at how the overall sector has performed over the past 12 months to 5 years compared with the stock market. Ideally it will have at least matched the growth of the index and preferably outperformed it.
Now examine how the share price of the specific utility stock you are interested in has performed over the past 12 months to 5 years and compare it to other stocks in that sector. Ideally it will have experienced a bigger than average increase but with as little volatility as possible.
Dividends
A company's dividends payments can compensate you for the slower price growth of less risky companies, so this is very important to you. Again, use the past to predict the future.
Look at the company's dividend payouts over the past 12 months to 5 years and compare them with other companies in the sector.
Look out for any increases or decreases in the size of dividends paid. You want to choose a company whose dividends are stable or growing in size.
Analyst expectations
Professional analysts are a useful resource for the individual investor – they have the time and expertise to study companies in probably greater depth than you can.
Look at analyst buy/sell recommendations and make sure you read any accompanying commentary to better understand the analyst's rationale. Even if you choose not to follow the recommendation it might improve your insight into the company and sector.
Fundamental research
A company's quarterly or annual financial statement is an excellent resource for you – it will help you build a more intimate picture of a company's strength, performance and management.
- Examine key ratios – for example price to earnings or debt to equity – of the company you are interested in and compare them with companies in the same sector. Re-read the company valuation module for a detailed breakdown of which numbers are optimal for each.
- Look at the company's cash flow – you want this to be big, stable and growing.
- Look at the company's debt – you want a company that can comfortably afford to pay its borrowing costs and which has used any money that it has borrowed to generate higher sales and earnings.
- Look at the company's own forecasts – you want a company that expects solid sales and earnings growth.
- Look at the company's strategy – you want a company that has solid plans for the future and has concrete ideas about how to improve its growth, efficiency and performance.
Technical analysis
Technical analysis can help you identify historical patterns in a company's share price and use them to compare it with others and predict future moves.
- Look for key patterns – for example trends, reversals, volatility – that have formed in a company's stock over the past 12 months to 5 years.
- Look for key price levels – are there any resistance levels that a share price has struggled to break above? These might suggest an upper limit for the value of your investment so should be as high as possible.
Stock screener
Use a stock screener to find a company that is currently undervalued compared with its sector peers and which is likely to achieve your investment target.
A free, online stock screener will allow you to compare companies in an entire sector at the click of a button, using a mix of fundamental and technical criteria that you can tailor to your suit your own investment goals.
One example of a free stock screener is YCharts, that is available for English speaking countries. Alternatively, you can simple enter "free stock screener" into Google.com.
- Use this to look at how undervalued or overvalued the company you are interested in is compared to others in the sector.
- Use it to identify companies whose share price has the kind of growth and steady upward trend that meets your investment target.
News
News coverage can help you stay abreast of a company's performance, plans and any negative developments that could hurt its share price.
- Read the financial press daily and set up email alerts to receive any news about the company you are interested in as soon as it is released.
- Do an internet news search on the company you are interested in, searching back as far as five years. An indepth interview with a CEO, for example, can be useful even if it is old – you can check how well the company has achieved its goals since then.
Remember it's subjective
Following each of the above steps should help you filter out the companies in a sector that are likely to perform best and that will satisfy your risk appetite.
Remember though that stock picking is subjective and there is no 'one size fits all' method that will ensure you make the right choice.
Even a computerised stock screener will rely on you to tell it which criteria to apply. And whether you place more importance on, for example, a company's price to earnings or its debt to equity ratio, is a personal choice that may also change over time.
So how much risk is actually involved in trading Forex? Is it any riskier than engaging in any other kind of business?
Let us first look at the hypothetical case of John and Mary. Each of them opened a forex trading account and funded it with $50,000. Both of them operated on a margin set at 100:1
John traded very conservatively using one regular lot per trade and applying reasonable money management principals. Unfortunately, John was a poor decision maker and did little to improve his trading skills. Over a period of time, John lost his entire investment.
Mary had no intention of being shackled by the constraints of money management and traded to the maximum of her account margin, each trade carrying the maximum lot size permitted. After a few spectacular gains, Mary's luck ran out and her account was wiped out. Despite being in profit to the tune of $2,500,000 she had lost it all and her original investment was gone too.
So who took the most risk?
If you answered Mary - you are wrong!
Mary is a multi-millionaire. She has several mansions two yachts and a private jet. Her main income is from oil and her company owns some of the largest oil reserves in the world. The possibility of losing $50,000 for Mary is a very small risk. It is similar for her to that of anyone purchasing a lottery ticket - nice if it gives you a few million dollars, but no big deal if it doesn't.
John on the other hand was in a very different situation. John had taken a mortgage on his house to fund his trading account. He had no savings and had even given up his job to start full time trading.
As you can see from the two tales above, risk is about more than what percentage of your account you put at risk.
In our next example, Mike and Sarah both open mini accounts with $5,000. Both are using a margin of 100:1. Neither Mike nor Sarah are independently wealthy but each can easily afford to lose their $5000 without it adversely affecting their lives.
Both start trading and due to lack of experience do not fare very well. After a short time Mike stops live trading and starts to practice in a demo account. Mike seeks help and knowledge and then practices in his demo account to hone those new found skills.
When Mike starts to trade his live account again he uses very strict money management and a well developed trading system. Mike has not yet made a fortune, but he is starting to recover some of the investment that he lost.
Sarah continued to trade without any help. She is still managing to stay afloat.
So who was at the most risk in this example? I would suggest that it was Sarah. Her luck is still holding but if your trading style is built upon luck. You are at great risk.
Trading the forex market requires that you develop a style of risk management. It is necessary to understand the true risk of each trade as it applies to both the market in general and to you in particular.
If you always trade with money that you can afford to lose, your total risk is reduced. If you learn how to trade effectively, then your risk is further reduced and likewise if you adopt a strict regime of money management your risk is again reduced.
Trading will always carry a level of risk. If you intend to adopt trading as a career or investment vehicle, it is up to you to do everything in your power to learn how to properly assess and manage the risk.
