Key Highlights of Companies Bill

The Lok Sabha passed the much awaited Companies Bill 2011. The Bill is all set to replace the 55 year old Act.

The promulgation of the new Act is a step towards globalization and is a successful attempt to meet the changing environment and is progressive and futuristic duly envisaging the technological and legal developments.

The new law surely promises investor democracy and addresses the public concern over corporate accountability and responsibility and alongside introduces some industry friendly provisions.

The top 50 key highlights of the new Companies Bill is summarized herein below:

The Companies Bill, 2011, is organized as 29 chapters, 470 sections and 7 scheduled. A substantial part of the law will be in form of Rules, to be prescribed separately. It has introduced 33 new definitions. Here's a look at some of its key highlights.

INCORPORATION & CAPITAL RAISING

• A private company can have a maximum of 200 members, up from 50 in the Companies Act, 1956.
• The concept of One Person Company introduced. It will be a private limited company.
• Concept of dormant companies introduced. It can be formed for a future project or to hold an asset or intellectual property.
• All companies to follow uniform financial year, running from April to March. Exceptions to be made only for certain companies with the approval of NCLT.
• All types of securities to be governed by the Bill.
• The Prospectus has to be more detailed.
• Money raised through a prospectus cannot be used for dealing in equity shares of another company. If a company changes terms of the prospectus or objects for which money is raised, it shall provide dissenting shareholders an exit opportunity.
• 'Private placement'defined, with detailed provisions for such placement.
• Apart from existing shareholders, if the Company having share capital at any time proposes to increase its subscribed capital by issue of further shares, such shares may also be offered to employees by way of ESOP, subject to the approval of shareholders by way of Special Resolution.
• NBFCs not covered by the provisions relating to acceptance of deposits. They will be governed by Reserve Bank of India Rules.
• Companies can accept deposits only from its members, that too after obtaining shareholders approval. Acceptance of deposit also subject to compliance with certain conditions.
• Public companies can accept deposit from public on complying certain conditions like credit rating.

MANAGEMENT & ADMINISTRATION

• Listed companies required to file a return in a prescribed form with the Registrar regarding any change in the number of shares held by promoters and top 10 shareholders of such company, within 15 days of such change.
• Postal Ballot to be applicable to all the companies, whether listed or unlisted.
• Interim dividend in a current financial cannot exceed the average rate of dividend of the preceding three years if a company has incurred loss up to the end of the quarter immediately preceding the declaration of such dividend.
• Financial statements include Balance Sheet, Profit & Loss Account and cash flow statements.
• Provisions for re-opening or re-casting of the books of accounts of a company provided.
• The National Advisory Committee on Accounting Standards renamed as The National Financial Reporting Authority.
• The authority to advise on Auditing Standards and Accounting Standards. 

AUDITORS & FINANCIAL STATEMENTS

• Every company is required at its first annual general meeting (AGM) to appoint an individual or a firm as an auditor. The auditor shall hold office from the conclusion of that meeting till the conclusion of its sixth AGM and thereafter till the conclusion of every sixth meeting. The appointment of the auditor is to be ratified at every AGM.
• Individual auditors are to be compulsorily rotated every 5 years and audit firm every 10 years in listed companies & certain other classes of companies, as may be prescribed.
• Auditors have to comply with Auditing Standards.
• A company's auditor shall not provide, directly or indirectly, the specified services to the company, its holding and subsidiary company.
• A partner or partners of the audit firm and the firm shall be jointly and severally responsible for the liability, whether civil or criminal, as provided in this Bill or in any other law for the time being in force. If it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, then such partner or partners of the firm shall also be punishable in the manner provided in clause 447.

DIRECTORS

• Prescribed class or classes of companies are required to appoint at least one woman director.
• At least one director should be a person who has stayed in India for a total period of not less than 182 days in the previous calendar year.
• At least one-third of the total number of directors of a listed public company should be independent directors. Existing companies to get a transition period of one year to comply.
• Liability of independent directors and non-executive directors not being promoter or key managerial personnel to be limited.
• A person can hold directorship of up to 20 companies, of which not more than 10 can be public companies.

GOVERNANCE

• Companies with more than 1,000 shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year to constitute a Stakeholders Relationship Committee, with a non-executive director as a chairperson and such other members as may be decided by the board.
• No permission of central government required to give a loan to a director.
• The provisions on inter-corporate loans and investment (372A of Companies Act 1956) extended to include loan and investment to any person.
• A company cannot, unless otherwise prescribed, make investment through more than 2 layers of investment companies.
• No central government approval required for entering into any related party transactions.
• No central government approval required for appointment of any director or any other person to any office or place of profit in the company or its subsidiary.
• Prohibition on forward dealings in securities of company by any director or key managerial personnel.
• Prohibiting insider trading in the company.
• No compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the Company's Auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme of compromise or arrangement is in conformity with the accounting standards prescribed under clause 133.
• Creation of treasury stock/trust shares is prohibited.
• Every listed company or such class or classes of companies, as may be prescribed, to establish a vigil mechanism.
• The Bill makes provision for cross border amalgamations between Indian Companies and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the Central Government.

MISCELLANEOUS

• The Bill provides provisions related to Corporate Social Responsibility (CSR).
• The Bill provides for class action suit by specified number of members or depositors against the company except the banking company, which is prevalent in developed countries.
• The Bill provides for specific provisions related to any act of fraud.
• The process for declaring a company sick and its revival and rehabilitation has been rationalized.
• The National Company Law Appellate Tribunal shall now consist of a combination of technical and judicial members not exceeding 11, instead of 2 as provided in the Companies Act 1956.
• The Central Government may establish as many special courts as may be necessary to provide speedy trial of offences.
• The Central Government may establish a mediation and conciliation panel.
• The Bill makes provision for cross border amalgamations between Indian companies and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the central government.
• Where any valuation is required to be made of any property, stocks, shares, debentures, securities or goodwill or any other assets or net worth of a company or its liabilities under the Act, it shall be valued by a registered valuer.

Fiscal Policy

Fiscal Policy is considered to be acts of a government to influence the direction of nation's economy by using its financial and regulatory powers. The two main important instruments of fiscal policy are government spending and taxation. These are also known as financial powers. By regulatory powers we mean the ability of government to influence or require its people to change their behavior. For example, Indian government might ask all the industries to conform to universal environmental standards to reduce global warming. Thus, we see fiscal policy is different from the other macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money.

Stances of Fiscal Policy
There are three possible stances of fiscal policy- Neutral, Expansionary and Contractionary.

A neutral stance of fiscal policy implies a balanced budget where Government spending (G) is equal to Tax revenue (T) i.e. G=T. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.

An expansionary stance of fiscal policy involves a net increase in government spending (G > T) through rises in government spending or a fall in taxation revenue or a combination of the two. This will lead to a larger budget deficit or a smaller budget surplus than the government previously had, or a deficit if the government previously had a balanced budget. Expansionary fiscal policy is usually associated with a budget deficit. Hence, when government decides to adopt expansionary fiscal policy, it actually decides to spend more than what it did earlier.

A contractionary fiscal policy occurs when net government spending is reduced either through higher taxation revenue or reduced government spending or a combination of the two i.e. G < T. This would lead to a lower budget deficit or a larger surplus than the government previously had, or a surplus if the government previously had a balanced budget. Contractionary fiscal policy is usually associated with a surplus.

Government Spending
One of the tools of fiscal policy is government spending. Government expenditure or spending can be categorized in three ways:

1. Spending on goods and service- Governments can buy planes and military equipments for its defense forces. They can also buy materials for constructing schools, colleges, hospitals, ports, airports, highways, factories etc. Governments can also buy consulting and banking services from consulting and banks to help them on specific projects. Thus, government can directly affect the aggregate demand (AD).
2. Transfer payments- It involves payments to individuals by the government under several welfare schemes such as unemployment benefits, elderly pensions, healthcare benefits or food coupons. Economists believe that changes in government transfer payments influence people's spending decisions. Higher transfer payments are similar to higher income. However, recipients for such payments may decide to either spend or save the amount.
3. Net interest payments- Most governments have debt which they raise by issuing bonds to banks or other brokers. Governments pay interest rates to people who hold these bonds or debt. Hence, any increase or decrease in the interest rate will directly affect the income from these bonds. If interest rates are increased, government will have to pay more interest payments to people who hold these debts. This would be considered as extra income and may influence spending.

By changing its spending, government can influence aggregate demand in the economy. For example- if government decides to spend more (as Indian government has decided to do now) on say infrastructure, there will be increased demand for different goods such as cements and steel and services such as manpower and consulting. This will increase aggregate demand in the economy.

Government Revenue
We discussed about government spending so much on building schools, hospitals and roads. Ever wondered how government generates revenue to spend on all these schemes. Do governments print new currencies to increase its spending? Not really. Government generates revenue by collecting taxes from its people and businesses. Across the globe, maximum tax is collected as payroll taxes i.e. income taxes, followed by corporate taxes. The next largest category is sales taxes and import duties.
By changing tax rates government can influence demand. For example – lowering of income tax rate will increase the disposable income of people. With more money in hand people will spend those money on goods and service; hence, creating a demand for the same.

Fiscal Deficits
Fiscal deficit is defined as the difference between government expenditure and its revenue i.e.
        Fiscal deficit = Government spending – Government revenue
It is expressed in terms of percentage of GDP. India's fiscal deficit was brought down to 3.17% (Rs 1,43,653 crore) of the gross domestic product in 2007-08 from 3.8% in 2006-07. The government had promised to cut the deficit further to 2.5% of GDP (Rs 1,33,287 crore) by the end of 2008-09,09-10,11-12 but it didn't happen. The Budget for 2012-13 pegged fiscal deficit at 5.1 per cent of GDP. However, in view of lower-than-expected revenue realisation and increased subsidy outgo, the Finance Ministry is expecting the fiscal deficit to go up to 5.3 per cent during 2012-13. In order to finance the 5.1 per cent deficit, the government had planned to borrow Rs 5.7 lakh crore. A higher fiscal deficit of 5.3 per cent translates into an additional market borrowing of Rs 20,000 crore. Thus, India's fiscal deficit continues to be among the highest in the world. The annual rate of inflation, based on monthly WPI, stood at 7.45% (Provisional) for the month of October, 2012 (over October, 2011) as compared to 7.81% (Provisional) for the previous month and 9.87% during the corresponding month of the previous year. Build up inflation in the financial year so far was 4.78% compared to a build up of 5.02% in the corresponding period of the previous year. 

When a government has a deficit it borrows money by issuing debt certificates. The value of the outstanding government debt is called National debt. The gross national debt of USA is eye-popping $16.28 Trillion which is almost 9 times of India's GDP. On 15 November 2012, debt held by the public was approximately $11.45 trillion or about 72% of GDP. Intra-governmental holdings stood at $4.83 trillion, giving a combined total public debt of $16.28 trillion. As of July 2012, $5.3 trillion or approximately 48% of the debt held by the public was owned by foreign investors, the largest of which were China and Japan at just over $1.1 trillion each.

Effects of fiscal policy
Changes in the level and composition of taxation and government spending can impact on the following variables in the economy:
• Aggregate demand and the level of economic activity
• The pattern of resource allocation
• The distribution of income

Fiscal policy is used by governments to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment and economic growth. This is generally done during recession to boost spending and demand. What we see across the globe these days is governments after governments are coming up with their own bailout plan for recession. They have announced trillions of dollars of economic package to boost growth and generate employment.

Fiscal policy in the short-run
The idea of fiscal policy in the short-run is very simple- if aggregate demand is too low, the government would:
• Buy more goods and service
• Increase transfer payments
• Reduce tax rates on income
• Reduce imports and excise duties

Once AD increases, firms would see an increased demand for their products and react by raising output and/or raising prices.

Buying more goods and services would:	Increase transfer payments would:	Reducing tax rates on household income would:	Reducing taxes or changing regulations that influence corporate income would:
Directly increase spending and AD	Increase disposable income and generally increased spending by households	Increase disposable income due to lower taxes would increase spending power of individuals and hence increase in AD	Increase business spending depending on the overall sentiments in economy

Fiscal policy in the long-run
In the long-run a poor and mismanaged fiscal policy might lead to persistent deficits and accumulating government debt. Let's start with debt. To find out the health of an economy, the size of national debt is measured w.r.t. it's GDP. If the national debt is equal to more than 60% of its GDP, the country is considered as a reasonable financial risk. Higher debt might bring up the issue of insolvency, which is inability of the country to meet its obligations. An insolvent government needs to reduce spending and raise tax revenues – but the internal politics and economics are such that it cannot.
 
Now coming back to government spending, if a government is not saving, it is basically spending whatever it is earning. The nation's savings is a very important source of investment because it is the nation's savings that ends up in banks and other financial institutions. This savings come from three main sources- households, retained earnings of business and government. When government is not saving, it will need money to reduce its deficits. The government will then issue bonds to the public to raise money. So governments with deficits are competing with private firms for the nation's savings. This not only leaves less for the firms but also drives up interest rates. Either way, the end result is that government deficits "crowd out" private investment spending.

Crowding out
Despite the importance of fiscal policy, a paradox exists. In the case of a government running a budget deficit, funds will need to come from public borrowing (the issue of government bonds), overseas borrowing or the printing of new money. When governments fund a deficit with the release of government bonds, an increase in interest rates across the market can occur. This is because government borrowing creates higher demand for credit in the financial markets, causing a lower aggregate demand (AD) due to the lack of disposable income, contrary to the objective of a budget deficit. This concept is called crowding out. Alternatively, governments may increase government spending by funding major construction projects. This can also cause crowding out because of the lost opportunity for a private investor to undertake the same project. Another problem is the time lag between the implementation of the policy and detectable effects in the economy. An expansionary fiscal policy (decreased taxes or increased government spending) is usually intended to produce an increase in aggregate demand; however, an unchecked spiral in aggregate demand will lead to inflation. Hence, checks need to be kept in place.

Gold does much more than glitter.

The story of gold is as rich and complex as the metal itself.

Wars have been fought for it; love has been declared with it. Ancient Egyptian hieroglyphs portray gold as the brilliance of the sun; modern astronomers use mirrors coated with gold to capture images of the heavens.

By 325 BC the Greeks had mined for gold from Gibraltar to Asia Minor. In 1848 AD James Marshall found flakes of gold whilst building a sawmill near Sacramento and so triggered the gold rush in California.

Held securely in national vaults as a reserve asset, gold has an irrefutable logic; released from the tombs of pharaohs and emperors alike, gold has an undeniable magic.

Gold is the oldest precious metal known to man and for thousands of years it has been valued as a global currency, a commodity, an investment and simply an object of beauty. Gold is rare. Today there are 165,000 metric tonnes of stocks in existence above ground. If every single ounce of this gold were placed next to each other, the resulting cube of pure gold would only measure 20 metres in any direction.

The demand for this precious and finite natural commodity occurs in many geographies and sectors. Around 60% of today's gold becomes jewellery, where India and China with their expanding economic power are at the forefront of consumption. In East Asia, India and the Middle East, gold has powerful cultural meaning, accounting for approximately 70% of the world's gold jewellery in 2009.

But jewellery creates just one source of demand; investment, central bank reserves and the technology sector are all significant. Each is driven by different dynamics, adding to gold's strength and independence.

In creating supply, gold mining companies operate on every continent of the globe. This broad geographical dispersal means that issues, political or otherwise, in any single region are unlikely to impact the supply of gold. Beyond mine production, recycling accounts for around a third of all current supply. In addition, central banks can also contribute to supply should they sell part of their gold reserves. It is worth noting that after 18 years as net sellers, collectively central banks are now effectively net buyers, causing not only a significant decrease in supply but a corresponding, simultaneous increase in demand.

Numbers and facts draws together some of the more extraordinary statistics which gold has accumulated across the centuries and around the world.

Major Characteristics

• Gold (Chemical Symbol-Au) is primarily a monetary asset and partly a commodity.
• Gold is the world's oldest international currency.
• Gold is an important element of global monetary reserves.
• With regards to investment value, more than two-thirds of gold's total accumulated holdings is with central banks' reserves, private players, and held in the form of high-karat jewellery.
• Less than one-third of gold's total accumulated holdings are used as "commodity" for jewellery in the western markets and industry.

Global Scenario London is the world's biggest clearing house. Mumbai is under India's liberalised gold regime. New York is the home of gold futures trading. Zurich is a physical turntable. Istanbul, Dubai, Singapore, and Hong Kong are doorways to important consuming regions. Tokyo, where TOCOM sets the mood of Japan. Factors Influencing the Market Above ground supply of gold from central bank's sale, reclaimed scrap, and official gold loans. Hedging interest of producers/miners. World macroeconomic factors such as the US Dollar and interest rate, and economic events. Commodity-specific events such as the construction of new production facilities or processes, unexpected mine or plant closures, or industry restructuring, all affect metal prices. In India, gold demand is also determined to a large extent by its price level and volatility.

Heritage Despite its unrivalled properties, gold is an inert material. It does nothing until man discovers it, mines and refines it and bends it to his will. So the history of gold is very much the history of civilisation. Here are some points in time where that history was made. 3600 BC First smelting of gold Egyptian goldsmiths carry out the first melting or fusing of ores in order to separate the metals inside. They use blowpipes made from fire-resistant clay to heat the smelting furnace.   2600 BC Early gold jewellery Goldsmiths of ancient Mesopotamia (modern-day Iraq) craft one of the earliest pieces of gold jewellery, a burial headdress of lapis and carnelian beads with willow leaf-shaped gold pendants. Image © Trustees of The British Museum   1200-1500 BC Advances in jewellery making Artisans develop the lost-wax jewellery casting technique. The process allows for improved hardness and colour variation which in turn broadens the market for gold products.

1223 BC Creation of Tutankhamun's funeral mask Instantly recognised the world over, the funeral mask of Tutankhamun is a triumph of gold craftsmanship from the ancient world. 950 BC Solomon builds gold temple The Queen of Sheba from Yemen presents King Solomon of Israel with 2,500 kilos of gold, bringing the contents of his treasury to 5,700 kilos. Solomon uses part of his holdings to construct his famed temple, allegedly overlaid with gold. © Nir Levy   600 BC First gold dentistry practiced The first use of gold in dentistry as the Etruscans begin securing substitute teeth with gold wire. Bio-compatibility, malleability and corrosion resistance still make gold valuable in dental applications.   564 BC First international gold currency created King Croesus develops improved gold refining techniques, permitting him to mint the world's first standardised gold currency. Their uniform gold content allows 'Croesids' to become universally recognised and traded with confidence.   300 First gold nanoparticles The Romans use gold to colour the Lycurgus Cup. Melting gold powder into glass diffuses gold nanoparticles throughout which then refract light, giving the glass a luminous red glow. Image © Trustees of The British Museum   1300 Hallmarking practice established The world's first hallmarking system, scrutinising and guaranteeing the quality of precious metal, is established at Goldsmith's Hall in London - where London's Assay Office is still located today. Image © The Assay office, Birmingham   1370 The Great Bullion Famine begins During the years 1370-1420, various major mines around Europe become completely exhausted. Mining and production of gold declines sharply throughout the region in a period known as 'The Great Bullion Famine'.   1422 Venice's record year The Venice Mint strikes a record 1.2 million gold ducats using 4.26 metric tonnes of gold from Africa and Central Asia. These small coins prove popular as they are easy to mint and carry plenty of value. Image © Classical Numismatic Group, Inc., CC-BY-SA-2.5, Wikimedia Commons   1511 Ferdinand unleashes invasion force King Ferdinand of Spain proclaims "Get gold, humanely if you can, but at all hazards, get gold!", launching unprecedented expeditions to the Americas. Within years, the Inca and Aztec civilisations would be virtually destroyed by Spanish conquerors. 1717 UK gold standard commences Britain moves onto a de facto pure gold standard, as the government links the currency to gold at a fixed rate (establishing a mint price of 77 shillings, ten and a half pennies per ounce of gold). 1803 First gold electroplating practiced The first recorded experiment in electroplating is carried out by Professor Luigi Brugnatelli at the University of Pavia. Gold electroplating ensures improved conductivity, now essential to many 21st century technologies. Image © Deep Blue, CC-BY-SA-3.0, Wikimedia Commons   1848 California Gold Rush begins John Marshall discovers gold flakes while building a sawmill near Sacramento, California. The greatest gold rush of all time follows as 40,000 diggers flock to California from around the World.   1885 South African Gold Rush begins While digging up stones to build a house, Australian miner George Harrison finds gold ore on Langlaagte farm near Johannesburg. Miners flock to the region. South Africa will go on to become the source of 40% of the world's gold. Image © Terry Davis   1885 First Faberge Easter egg crafted Carl Faberge makes his first gold Imperial Easter Egg for Tsar Alexander III. Named The Hen Egg, it was commissioned as a gift from the Tsar to his wife, the Empress Maria Fedorovna, beginning a tradition that lasts until 1917. Image © PetarM, CC-BY-SA-3.0, Wikimedia Commons,   1870-1900 Adoption of gold standard All major countries other than China switch to the gold standard, linking their currencies to gold. The practice of bimetallism is abandoned.   1925 Gold standard returns The UK returns to the gold standard at pre-war parity of $4.86=£1 with sterling convertible to gold at 77sh 10.5d per standard ounce. This follows the country's departure from the gold standard six years previously at the outbreak of World War I.   1933 Roosevelt suspends gold President Roosevelt suspends US dollar convertibility to gold (gold at US$20.67/oz). The export of all transactions in, and the holding of gold by private individuals, is forbidden. Presidential proclamation makes the dollar convertible again in January 1934 at a new price of $35 per troy ounce.   1939 World War II closes gold market The London gold market is closed on the outbreak of war, as at the beginning of World War II. The world will later return to a fixed system of exchange rates, this time with currencies fixed to the dollar and the dollar convertible into gold.   1944 Bretton Woods conference The Bretton Woods conference sets the basis of the post-war monetary system. The US dollar is set to maintain a $35=1 oz gold conversion rate. Other currencies are fixed in terms of US dollar, thus forming a Gold Exchange Standard.   1961 First gold bonded microchips Gold bonding wire is used in microchips engineered at Bell Labs in the US. Nowadays literally billions of chips are bonded this way every year, controlling all manner of indispensible electrical devices.   1961 First gold in space The first manned space flight uses gold to protect sensitive instruments from radiation. In 1980, 41kgs of gold is included in space shuttle construction through brazing alloys, fuel cell fabrication and electrical contacts.   1967 First South African Krugerrand The Krugerrand is introduced in 1967, as a vehicle for private ownership of gold. This iconic coin is actually intended for circulation as currency.   1971 Gold window closed The Bretton Woods system of fixed exchange rates comes to an end as President Nixon "closes the gold window", suspending US dollar convertibility to gold. The world enters its present day system of floating exchange rates.   1985 First gold-based arthritis treatment Pharmaceutical giant, SmithKline & French, develops Auranofin, a gold-based drug for the treatment of rheumatoid arthritis. The drug receives regulatory approval and goes on sale for the first time.   1999 First Central Bank Gold Agreement The First Central Bank Gold Agreement (CBGA) is agreed. 15 European central banks declare that gold will remain an important element of their reserves and collectively cap gold sales at 400 tonnes per year over next five years.   2001 First gold used in heart surgery Boston Scientific markets the first gold-plated stent (Niroyal) used in heart surgery. Inserted inside large arteries and veins, such stents act like scaffolding, propping open the blood vessels to allow adequate flow. Image © Richard Lee   2003 K-gold launched in China The World Gold Council creates an entirely new market segment with the launch of K-gold, the first 18k jewellery in China. The jewellery, in predominantly white and yellow gold, takes its inspiration from Italian design.   2004 Launch of SPDR® Gold Shares The market is transformed by an innovative, secure and easy way to access the gold market. Six years later SPDR® exceeds $55bn in assets under management.   2009 Central banks return to buying In the second quarter of the year, central banks collectively become net purchasers of gold for the first time in two decades. This reflects a combination of slowing sales from European banks and growing purchases by emerging market countries. Image © National Geographic   2010 Gold price sustains record highs Fiat currencies are undermined by inflation fears and successive financial crises. The London pm fix achieves 35 separate successive highs in the year to date.   2011 Gold in catalytic converters Gold used in catalytic convertors by a leading European diesel car manufacturer. The first use of gold in automotive emissions control.   2012 Olympic Gold The custom of awarding gold, silver, and bronze in sequence for the first three places dates back to the 1904 Summer Olympics in St. Louis, Missouri in the United States. At the 2012 games, the International Olympic Committee stipulates that each gold medal must have a minimum of at least six grams of gold. The London 2012 gold medals are the biggest and heaviest summer Olympic medals ever made.   Gold's contribution Gold powers the internet. It underpins our economy. It is the bedrock of a portfolio. It is the catalyst for future revolutions in science. It expresses love in many languages. And it carries memories across generations and cultures. Gold already underpins the world's major currency systems; today the G20 nations are debating an even greater role for gold in a new world financial architecture. Learn more about the proposed role for gold in the international currency basket. Gold has provided an important store of wealth to diverse investors, from individuals to institutions, for centuries. Gold is the metal of love. It owns the moment when "I will" becomes "I do". In jewellery form, it can quicken the heart-rate and grow in significance to become the most precious possession a woman will ever own. From space exploration, to nanoparticle technology, to the bonding wire at the heart of an iPhone, gold's extraordinary physical properties make it essential to a wide range of scientific applications. From local training and employment opportunities to the creation of infrastructure, from the generation of governmental revenues to the development of whole communities, gold mining makes a tangible and transformational contribution to entire countries around the world. Gold does much more than glitter.

On Dalio's Wisdom and the "China Study"!

Hi!,

 

Ray Dalio, who runs Bridgewater Associates (the world's largest -$130 billion -and one of the most successful hedge funds with a 37 year track-record), recently gave a fascinating and broad ranging talk  (link below) on the  current global financial and economic landscape, the deleveraging  process and its implications and what is the key risk factor for the global economy going forward. Dalio provides a unique and insightful perspective on the workings of the financial and economic system which clarifies some of the prevalent misconceptions on important topics such as austerity, fiscal and monetary policies and debt deleveraging. To summarise the key points:

 

-Financial crises repeat  themselves regularly, in a familiar pattern, over history and are a surprise to most people as they view them from a frame of reference which only extends only to their life-time experience rather than a serious study of history.

 

-The economic  machine, at its essence, comprises of transactions involving the purchase of goods, services and financial assets with money or credit. Demand should be measured in terms of money or credit used rather than good and services as economic theory suggests.

 

-Credit is created out of thin air, and credit cycles are key in understanding booms and busts and they tend to repeat themselves every 10 years or so.

 

-Borrowing is key to growth as goods purchased with credit creates income and leads to a positive cycle of increasing debt and economic activity.

 

-Lowering interest rates has a positive impact on the economy as it lowers the cost of servicing the debt, makes it less costly to purchase goods and services and boosts asset prices due to a positive present value impact. The increase in asset prices leads to increased wealth and therefore more borrowing and increased economic activity.

 

-However, eventually (and inevitably) debt begins to grow faster than income (i.e. increasing debt/income ratios) , making it difficult to service the debt with income which then forces debt growth to slow down leading to decreased economic activity and a negative cycle. This is a period of debt deleveraging.

 

-This can result in a depression which involves a combination of austerity, debt restructuring (i.e. debt write-down) and eventually the printing of money to  counter the negative wealth impact of the former activities. 

 

-The printing of money is key to dealing with a depression type scenario as it makes up for the shortfall in money created by the negative wealth impact of austerity and debt restructuring.

 

-During a period of deleveraging, balance between austerity, debt restructuring (which are both deflationary) and money printing (which is inflationary) is critical to avoid a depression.

 

-Debt to income ratios will gradually decline as long as nominal GDP is growing faster than the interest cost of servicing the debt. This has been borne out repeatedly over history – for example, UK after World War 11.

 

-The mistake of government policy is to target growth and inflation only – it should also target debt/income  growth as bubbles are more pernicious than inflation and much harder to correct – i.e. US in 1929, Japan in 1989.

 

-The 2008 financial crisis arose because investors and banks played the carry game (invest in high-yield assets and borrow at low interest cost)  with a backdrop of low volatility in markets. With mark-to-market accounting it was easy to see the impact of leverage in the financial markets, but regulators lacked awareness as their frame of reference was  only recent financial history.

 

-Europe has a Euro 2 trillion "hole" in terms of the amount of debt which needs to be written down (with bank assets of Euro 31 trillion and sovereign debt of Euro 3.5 trillion).  

 

-This can only be resolved by massive fiscal transfer from the north to the south  which is unlikely, leaving the alternative of austerity and debt restructuring leading to a depression and a "lost decade" with alternating bull and bear markets.

 

-The printing of money is the only way to make this process less painful – for example, the breaking of the dollar link to gold (i.e. printing of money) in March 1933 marked the bottom of the Great Depression in the US.

 

-With the ECB being subject  to a voting system, the southern countries effectively  influence  the decision on printing money – which they have recently exercised.

 

-The US and Japan  cannot support the amount of total debt in the system – but since they have the ability to print money they can keep interest rates very low and therefore keep the system going for a long time.

 

-The  debt issue will need to dealt with  when the buyers of government debt in the two countries choose to invest in inflation assets. This is unlikely to happen for  a while (about 5 years) as we are in a global deflationary environment with the US, Europe and Japan  deleveraging and China dealing with the aftermath of its real estate bubble.

 

-Money printing  almost always works – the two major surprises of his career were 1) the breaking of the dollar link with gold in August 1971  which lead to a 4% overnight jump in the stock market and an ensuing bull market, 2) the Latam debt crisis with overexposed US banks, culminating in the Mexican default in 1982, which lead to the printing of money and the bottom for the stock market (Dow at 777).

 

-Money printing does not necessarily give rise to inflation as the investors selling their treasury bonds to the Fed go out and buy other similar assets (i.e. agency bonds and high grade credit)  - it is  inflationary only when they buy goods and services. This is in contrast to fiscal policy where the government actually buys goods and services.

 

-The US has so far been able to achieve the right balance between austerity, debt restructuring and monetary and fiscal policy (a "beautiful deleveraging")  - but with growth likely to persist at 1.5-2% for a while it is vulnerable to hitting an "air-pocket" as the room for expansive fiscal and monetary policies is more limited making the balancing act difficult.

 

-China is likely to experience more normal business cycles as they deal with lower domestic demand, slowdown in exports and inefficient use of capital – however, downturns are likely to be temporary as they have the ability to act decisively on the fiscal and monetary front and are a surplus nation.

 

-Emerging markets should outperform developed economies as they are largely surplus producing economies and therefore are net creditors.

 

-There are four basic economic environments which govern the prices of all assets – lower inflation than expected (good for bonds) , higher inflation than expected (bad for bonds) , lower growth  than expected (bad for stocks) and higher growth than expected (good for stocks).

 

--Individual investors should  construct a well diversified asset portfolio  assuming they do not know what scenario is unlikely to unfold-i.e. include four pieces  which  perform well under all the above scenarios  - i.e. cash, stocks, long duration bonds and gold. The weighting of portfolio should be based on the risk of the assets rather than a simple dollar weighting.

 

-Stocks are likely to outperform bonds going forward, but the  age of high returns is over as the declining interest rate cycle (which led to higher stock and bond prices) has run its course with short-term rates at zero.

http://www.economist.com/blogs/freeexchange/2012/09/learn-macroeconomics-hour?fsrc=gn_ep

http://www.foreignaffairs.com/discussions/audio-video/foreign-affairs-focus-the-global-economy-with-ray-dalio#

 

Fascinating stuff – providing a simple yet powerful framework to analyse the critical issues the global economy and financial markets face today – deleveraging, austerity, money printing and fiscal policy. As I have noted before, there tends to be a lot of views being expressed in the media on these topics, based on ideological and personal preferences rather than an in-depth analysis of the issues involved. So the key variables to observe going forward is the ability of governments across the globe to maintain a judicious  mix of austerity, debt restructuring, money printing and fiscal expansion.  Countries which are unable to maintain this   balance are likely to underperform, while countries which are able to act decisively on this front are likely to outperform. Europe has crossed the inflection point with the ECB being able to print money  - while they still face "a lost decade" going forward, the tail risk event has been decisively taken out.  The US faces its biggest challenge in terms of the fiscal cliff and its political impasse vis-a-vis the  austerity versus spending debate.  

 

The China stock market offers a buying opportunity of the decade, being the worst performing major stock market this year  (-9%, Spain was at -8.7%!), historically low valuations (p/e dipping well below the previous historical  low of 15, government yields equalling stock dividend yields), extreme investor pessimism (new brokerage accounts falling below 100,000), global media bearishness ( books and articles titled "The End of the Chinese Dream" , "The Falling  Star"), and  perhaps most importantly –  decisive action on the fiscal policy front after the regime handover in October.

 

The key here is to construct a well diversified "all weather" portfolio which has something for the four scenarios described above – as noted previously on numerous occasions – EM equities, high quality multinationals, natural resource stocks, EM credit and high quality government bonds, US  high yield credit and private mortgages, cash and gold.