Glossary

ADR	American Depository Receipt. The shares of non-US companies trade on US exchanges as ADRs.
Advance / Decline Line	A chart showing the cumulative difference between the number of advancing stocks and the number of declining stocks. For example, if 1700 stocks rise on a given day and 800 stocks fall, the difference ( +900 ) would be added to the cumulative total from the previous day. The Advance / Decline Line is a measure of market breadth.
Backwardation	If the price of a commodity in the futures market is lower for the more distant contracts than it is for the nearer contracts, the commodity is said to be in backwardation. Backwardation is the opposite of contango. Oil is generally in backwardation whereas gold is generally in contango.
Balance Sheet	A schedule of assets and liabilities. A balance sheet must balance, that is, the assets must equal the liabilities.
Basis Point	0.01%. For example, if an interest rate rises from 6% to 6.5%, it is said to have increased by 50 basis points.
Bear Market	A market that consistently makes lower highs and lower lows, that is, a market where the primary price trend is down.
BoE	Bank of England — the British central bank.
BOJ	Bank of Japan — the Japanese central bank.
Bond	A long term debt instrument ( usually 10 years or longer ) issued by a government or a corporation.
Breadth	Refer to Advance / Decline Line.
Bubble	A thin film of liquid holding gas or air. Commonly used to refer to a market where prices have risen to unsustainable levels.
Bull Market	A market that consistently makes higher highs and higher lows.
Capital Account Balance	The difference between a country's net incoming investment and net outgoing investment.
Cash Cost	Direct mining expense and royalties per ounce of gold produced. Includes all mining, milling and administration expenditures incurred on site, including inventory changes and site-specific corporate charges. Excludes capitalised costs, depreciation, amortisation, and mine closure costs.
Cash Flow	The difference between the cash coming into an operation and the cash going out of an operation. Can be calculated by adding the non-cash expenses in the income statement ( amortisation, depreciation ) to the operating profit.
CB/ Central Bank	The bank, partly or wholly owned by the government, responsible for setting and maintaining monetary policy. A CB usually establishes the level of short term interest rates, buys and sells securities from the private banks in order to adjust bank reserves, supervises certain banking operations, intervenes in foreign exchange markets as deemed necessary, and acts as a lender of last resort for the banking system. Refer also to Fractional Reserve Banking.
CBOE	Chicago Board of Options Exchange
CIBCR	Columbia University Centre for International Business Cycle Research.
Contango	The positive difference, usually expressed as an interest rate, between the forward price of a commodity and the spot price. The larger the contango the more attractive forward selling becomes. Refer also to Backwardation.
Correction	A temporary movement in price in the opposite direction to the primary trend. Some analysts require a specific percentage movement prior to classifying a move as a correction. For example, a 10% pullback in the value of the Dow is often said to signify that the market has undergone a correction.
Coupon Pass	The purchase, by the Federal Reserve, of coupons ( debt instruments ) from private banks in order to add reserves to the banking system. Refer also to Fractional reserve Banking.
CPI / Consumer Price Index	The most popular means of indicating changes in the general level of prices. A basket of goods and services is used and adjustments are made to account for product changes and quality improvements. Often mistakenly used as a measure of inflation.
CRB Index	Commodities Research Bureau Index. Further details can be found here
Credit	When someone receives something today in exchange for a payment some time in the future, that person has received credit. An entity's credit worthiness is a measure of the faith in the ability of that entity to make good on a promise to pay.
Currency	The tool that facilitates the exchange of goods and services between participants in a market. It differs from money in that money is a tool of economic calculation. For example, gold no longer circulates as currency but is still widely considered to be money.
Current Account Balance	The difference between the income and the expenditure of a country's residents. It can be calculated as follows : CAB = total output ( GDP ) + net income from abroad – total consumption – investment. It can also be calculated as : CAB = trade balance + net income from abroad.
Deflation	A contraction in the total quantity of money within an economy. Note — deflation is not a decrease in the general level of prices, although a general fall in prices is usually a result of deflation.
Deposit Currency	Currency that exists as deposits in accounts at banks, but does not have any physical form. Deposit currency can be converted to cash currency when a withdrawal is made. Note — private banks are able to create deposit currency, but only the central bank can create cash ( paper ) currency.
Derivative	Something that gets ( derives ) its value from something else. For example, an option to buy a common stock derives its value from the price of the underlying stock and is hence a derivative.
Discount	Make allowance for the future in the current price. Buy or sell for less than face value.
Discount Rate	The interest rate at which banks are able to borrow money from the US Federal Reserve.
Dow Theory	Originally designed by Charles Dow as a means of forecasting the business cycle, this theory requires that a move in the Dow Jones Industrial Average be confirmed by a corresponding move in the Dow Jones Transportation Average, and vice versa. If one of the averages makes a new high or a new low, then that new high or low is suspect until the other average 'confirms' the move by also making a new high or low.
ECB	European Central Bank — Europe's equivalent to the US Federal Reserve.
ECRI	Economic Cycle Research Institute.
Eurodollar	US Dollars on deposit at European banks.
Fed Funds Rate	The cost of overnight loans between banks. The Fed pegs this rate by buying and selling US government securities, that is, through its Open Market Operations.
Federal Reserve / Fed	The US central bank.
Fiat Currency	Currency that is created out of nothing and without any work. It is not convertible into a physical quantity ( such as gold ) and is accepted as a medium of exchange due to government fiat ( decree ).
Flat	Having no position ( short or long ).
FOMC	Federal Open Market Committee — this committee is part of the Federal Reserve and is responsible for setting the Fed Funds Rate and Discount Rate.
Fractional Reserve Banking	In a system based on fractional reserve banking, the private banks and the central bank have the monopoly power to create currency. The total value of deposits at a bank, and therefore the total amount of currency that can be created by a bank, is limited to a multiple of the bank's reserves. For example if the reserve requirement is 10% (a typical value), then for every $100 of deposits at a bank the bank must have at least $10 of reserves (reserves being currency notes). The central bank supervises the private banks to ensure that reserves are maintained at or above the required level. In the US, the Fed adds reserves to the system by buying US Government debt instruments from the banks (called a 'coupon pass'). In rare cases it may also decide to drain reserves from the system by selling Government debt instruments to the banks. Also, if a bank is running short of reserves it can go to the Fed's 'discount window' and borrow additional reserves at the 'discount rate'.
Fundamental Analysis	An approach based on the analysis of income statements, balance sheets, growth prospects, industry trends, dividend yields, price / earnings ratios, etc. Fundamental analysis is used to determine an objective value for a company. If that value is greater than the current market price of the company, the fundamental analyst may decide to buy the company's stock. Refer also to Technical Analysis.
G7	Group of Seven. A group of nations consisting of US, UK, Canada, France, Japan, Germany and Italy. The G7 meets periodically to discuss global economic and financial issues.
GDP / Gross Domestic Product	The total value of a country's domestically produced goods and services.
GNP / Gross National Product	The total worldwide value of the goods and services produced by a country.
Gold Standard	A monetary system under which the paper currency notes are convertible into a fixed weight of gold. The system is disliked by governments because it restricts their ability to arbitrarily increase their indebtedness and expand the supply of currency.
Hedging	Minimising risk by being simultaneously long and short.
IMF / International Monetary Fund	An agency set up to supervise the Bretton Woods Agreement. The Bretton Woods Agreement, constructed shortly after the end of WW¢†, installed the US Dollar as the world's official reserve currency. The US Dollar was convertible into gold at a fixed rate and all other major currencies were linked to the US Dollar. When the US reneged on the Bretton Woods Agreement in 1971 by refusing to honour the commitment to exchange gold for US Dollars at the stipulated rate of $35 per ounce, the IMF became obsolete. Like most government-sponsored organisations, being obsolete has not stopped the IMF from absorbing substantial funds and involving itself in economic policy.
Inflation	An increase in the total quantity of money within an economy. Note — inflation is not an increase in the general level of prices, although a general rise in prices is usually a result of inflation.
Interest Rate	The cost ( or price ) of money.
Intrinsic Value	The intrinsic value of an option is the amount by which an option is 'in-the-money'. The intrinsic value of a company is the discounted value of the cash it will generate during its life. 'Value' is based on the subjective assessment of each person. As such, nothing can really be said to have 'intrinsic value'. However, the term 'intrinsic value' is often applied to things that have been created through physical and / or mental effort and are of use to, or are desired by, many people.
Lease Rate (Gold)	The cost of borrowing gold. The term 'lease rate' is often used instead of the term 'interest rate' with reference to precious metal loans.
Leverage	A way of increasing the potential gain ( or loss ) from an investment. Gold mining companies are said to be leveraged to the gold price because a certain percentage rise ( or fall ) in the gold price will cause a much greater percentage rise ( or fall ) in their profits.
LIBOR	London Inter-Bank Offer Rate.
Liquidity	Cash or something that is readily convertible into cash.
Long Position	Having bought, but not yet sold. A long position is entered with the aim of profiting from an increase in price. Refer also to Short Position.
M1	The most liquid forms of money, namely currency in circulation and checkable deposits.
M2	M1 plus savings deposits, small time deposits and retail money market mutual funds.
M3	M2 plus institutional money funds, large time deposits and Eurodollars.
Margin	Credit provided by a broker where stock is used to secure the loan. A broker will lend up to a certain percentage of a stock's market value ( usually 50% ), with the client providing the balance. This balance is called the 'margin', and the practice of buying stocks using money borrowed from a broker is called buying on margin. If a drop in the market price of the margined stock causes the amount of the broker's loan, as a percentage of the stock price, to exceed the maximum limit, then the client will receive a 'margin call'. Failure by the client to immediately provide additional funds will result in the forced sale of the underlying stock. This is called 'margin selling'.
Mark to Market	Adjust the value of an asset or liability to reflect the current market price.
Momentum	The ability of a price to continue moving in a particular direction. A stock with strong upside momentum will tend to close near its high each day and will have greater upside volume than downside volume.
Monetary Agents	The central bank and the private banks. The monetary agents have a legal monopoly in the creation of currency.
Monetary Aggregates	Refer to M1, M2 and M3 ( these are the monetary aggregates ). Refer to the Fed's H.6 Report for a more detailed description.
Monetise	Turn into currency. For example, when a bank makes a loan the amount of the loan is deposited into the account of the borrower. The debt, which becomes an asset of the bank, is said to have been 'monetised'.
Money	A tool of economic calculation. Refer to Currency.
Moving Average	An average over a fixed period of time. For example, a stock's 50 day moving average is calculated by summing the closing prices of the stock over the past 50 trading days and dividing the result by 50.
NAPM	National Association of Purchasing Managers. The Purchasing Management Index ( PMI ) and associated prices paid index are issued monthly by the NAPM and are used as indicators of economic strength and pricing pressures.
Nominal (Interest Rate)	Face value — not adjusted for inflation.
NPV	Net Present Value — the sum of the discounted values of future cash flows less the initial investment.
Overbought	A term used to describe a market or a stock that has appreciated so rapidly and has generated such excessively bullish sentiment that a near-term decline is highly likely.
Oversold	A term used to describe a market or a stock that has declined so rapidly and has generated such excessively bearish sentiment that a near-term rally is highly likely.
Ponzi Scheme	A scam in which high returns are promised and new investors must continue to be drawn in to pay off earlier investors.
PPI / Producer Price Index	A measure of the prices paid by producers. It is split into three components : crude goods, intermediate goods and finished goods. Often mistakenly used as a measure of inflation.
Production Cost	Cash Cost plus amortisation, depreciation and mine closure costs. Refer to Cash Cost.
Productivity	A measure of the amount of output that is produced by a certain amount of input. If there is no change in the size of the work force and the number of hours worked, then real economic growth can only be achieved by an increase in productivity.
Real (Interest Rate)	Adjusted for inflation. The real interest rate is calculated by subtracting the inflation rate from the corresponding nominal interest rate. Real interest rates are often thought to be higher than they actually are because the CPI is used in their calculation to represent the rate of inflation. The true picture can be seen by subtracting the rate of money supply growth from the nominal interest rate.
Resistance	The price at which a prior advance was terminated or a future advance is likely to terminate.
Short Position	Having sold, but not yet covered. A short position is entered with the aim of profiting from a price decline. When shares are sold short, the short seller borrows the stock in order to transact the sale. The position must eventually be covered by purchasing the stock in the market and returning it to the lender.
Stop Loss	A pre-determined price at which a position will be closed to protect against further loss. The use of 'stop losses' is the only inherently reliable way for a trader to manage risk.
Support	The price at which a prior decline was terminated or a future decline is likely to terminate.
Tape / Tape Action	The behaviour of price and volume for a market or an individual stock.
T-Bill	Treasury Bill — a debt instrument issued by the US government that has a maturity of less than 1 year. They are sold at a discount such that the percentage difference between the purchase price and the face ( par ) value is equal to the interest rate.
T-Bond	Treasury Bond — a bond issued by the US government. Refer to Bond.
Technical Analysis	The study of historical price and volume information to determine the likely future price direction. Refer also to Fundamental Analysis.
Technical Indicators	Tools used by a technical analyst to determine the likely future price direction. An extensive list of technical indicators, complete with descriptions, can be found here.
Trade Balance	The total market value of exports from a country less the total market value of imports into the country.
Wealth Effect	The tendency for people to spend more and save less when their investments ( stocks, real estate ) have risen substantially in value. The 'wealth effect' increases consumption and thus GDP during a prolonged period of rapidly rising asset prices. A 'negative wealth effect' occurs when asset prices fall over a prolonged period. During the 1990s, the US experienced a positive wealth effect whereas Japan experienced a negative wealth effect.
XAU	The Philadelphia Gold and Silver Mining Index.
Yield	The percentage return on an investment.