Saturday, March 28, 2015

Cash Is A Store of Value If Interest Rates Are Negative

Here is what happens when you take a quote out of context... Rick Santelli (CNBC), Zero Hedge and no doubt many others by now have honed in a line from Federal Reserve Chairwoman Janet Yellen. Zero Hedge has shortened the quote for their headline which reads: Santelli Stunned As Janet Yellen Admits "Cash Is Not A Store Of Value", this would suggest Yellen had been critical of holding cash for that purpose (as a store of value), however watching the clip reveals a very different message.


Yellen does say "cash is not a very convenient store of value", but she says so immediately following a comment that she's surprised there hasn't been a larger pickup in demand for cash (in the Eurozone areas where interest rates are negative).

What Yellen is actually implying in her response is that holding (physical) cash IS a good store of value when interest rates are negative, the reference to it being an inconvenience is presumably about having to deal with it physically. Like precious metals, holding assets physically comes with a different set of risks to owning them digitally in an account.

In fact I recently commented on the blog of JP Koning about holding cash as a store of value, pointing out there may be an opportunity for new services in the secure storage of cash (not unlike an allocated bullion account):


Physical cash acts as a store of value (or potentially even rises in value if the area is experiencing deflation) when interest rates are negative because the nominal amount you own doesn't change, where as if you hold a deposit in a bank account you may be charged a negative rate.

Of course over the long term, assuming a successful return to inflation and positive rates, cash is not a good store of value, but there are periods such as now, in countries where interest rates are negative, that holding cash as a store of value makes sense.

The deceptive way in which Zero Hedge and others have framed this quote by Yellen is why you need to be careful about the narrative and agendas that others drive as I have pointed out several times in the past.


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Tuesday, March 10, 2015

Self-Confessed Gold Bug

Some time ago I added the self-confessed label of ‘gold bug’ to my Twitter profile. Typically the term has been used by the mainstream media or those who own no Gold in a derogatory way as a weapon to feed a narrative that the metal is not worth owning and those who do so are irrational.

I decided to take ownership of the label for two reasons. The first was to reclaim the word so that it’s use against me has no impact. The second was to try and change the perception that a ‘gold bug’ must have a particular view. I am attempting to highlight that we are not all defined by the way someone else means the term.

Many try and characterise gold bugs as holding a very narrow set of views (such as Barry Ritholtz), but ironically in their race to pigeon hole those they berate, often they overlook their own lack of objectivity.


A quick glance at my website or Twitter feed will see many judging the book by its cover, but those who've taken the time to stay and read on will find that many of my views differ to the gold bug caricature that is often assumed. I try and cut through the unfounded conspiracy theories that permeate much of the Gold blogosphere, at times I've owned 'paper gold' and I've even warned investors to be cautious when the sector is overheated, for example in August 2011 (3 weeks before the peak in Gold) I wrote:

"...investors (specifically in the US) may want to consider moving some of their assets back into real estate (even if simply to purchase their own home to live in) as the ratio (HOME:GOLD) is currently the lowest it's been since the 1980 peak in Gold."

The reality is that gold bugs have a wide range of views, reasons for owning Gold and ways of maintaining exposure. Some of them may be ‘gun toting, government hating, hyperinflation expecting, only physical owning, all conspiracy believing’ gold bugs who expect a SHTF scenario in the near future where we return to using it as a means of exchange. Others may have a less extreme view, maintaining a small position in Gold to hedge against the unlikely event of disaster. Of course this is a very westernised depiction of a gold bug, there are billions of people for whom saving in & owning the metal is just a way of life.

So the next time someone uses the term gold bug against you, stand up proudly and own the title. You can explain that it simply means you think it’s worth having exposure to Gold (which is perhaps the only shared view that any gold bug must have) and that your stance is shared by central banks and many of the world’s wealthiest individuals alike.

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Wednesday, February 11, 2015

Storing Gold & Silver: Safe Deposit Box In Australia

Information is Australian specific for those interested in the use of a Safe Deposit Box (SDB) to store precious metals. Not investment advice, draw your own conclusions about the risks and how to best store your physical assets.


Regular readers would know that while I prefer physical ownership of precious metals, I'm no stranger to highlighting the risks associated with doing so. As I wrote recently (If You Don't Hold It, You Don't Own It):
There is no risk free way of owning precious metals (or any asset for that matter) and safe storage is the key factor when dealing with physical.
I've mentioned my preference for Safe Deposit Boxes (SDBs) in an earlier article (7 Ways To Keep Your Gold And Silver Safe):
Get a Safe Deposit Box
This is a personal favourite of mine. If there is anywhere that's likely to be safe for your Gold and Silver it's in a facility that is built for that very purpose. Just remember that not all safe deposit box facilities are created equally. Many large banks will offer safe deposit box services, make sure you shop around for the mix of safety and price that best fits your situation as in my experience both of these factors can vary substantially between providers. While I expect it's far less likely today than in times past, you should consider that keeping precious metals in a safe deposit box does make it an easy target for any government crackdown and confiscation should it occur.
SDBs offer the safety of a secure storage facility, while leaving the physical handling of precious metals or other valuables to the individual. This avails the owner with a level of privacy and independence that allocated or unallocated accounts don't, even if stored in a similarly secure premises (see my article 'How Safe Are Unallocated Bullion Accounts?' for more information about the risks that this type of precious metal ownership entails).

You can't choose to store your bullion in a SDB facility and expect that all service providers will offer the same level of protection. Several years ago I wrote about a Kennards facility which was broken into with SDBs emptied after the criminals (who were eventually caught and jailed) scoped the warehouse by hiring their own SDB with a stolen credit card. While the Kennards facility provided privacy (no 100 point ID check) and accessibility (24/7 access), it was these same features which put a hole in their security.

If we look to the more secure SDB services in Australia (those housed in a vault) then we still have a choice to make between independent private vaults and those provided by banks, though not everyone has the luxury of choice between these two varieties if they want to keep their metal stored locally. When an individual is considering a choice of facilities it's important they compare each specifically on it's own merits (not something I can do in detail here), the below is mostly a general comparison and anecdotal observations.

The eastern states have the widest selection of private vaults with well recognised names such as Reserve Vault (RV, Brisbane), Custodian Vaults (CV, Sydney) and Guardian Vaults (GV, Melbourne and Sydney).

All three of these vaulted SDB providers offer insurance options that are underwritten by Lloyds of London (CV and GV offer $10,000 complimentary cover). All three are privately owned and proudly state their independence (of banks and government) and while the vault operators may not be covered by all banking regulations they they are considered a financial service and governed by some of the same rules as the banks (for example the AML/CTF Act).

The private vault facilities are eager to differentiate themselves from the SDBs offered by banks. CV has a handy little table outlining the differences between their service and those of the banks.


Let's tackle these line by line. Some of my points will reflect personal experience, not all bank SDB facilities are identical.

Insurance: The complimentary ($10,000) insurance is a nice bonus, but if that's enough to cover your stack then a SDB is an expensive option anyway (e.g. $300/pa for the SDB is a 3% annual storage cost on $10k in metals). Having the vault provider streamline insurance options is convenient, but you can always organise your insurance independently through a broker.

Key Ownership: At the bank SDB facility I use each box is dual key, one held by the customer and they retain the second for opening in tandem. They do also keep a copy of my key, in a locked box with my signature over a seal. In my opinion the fact that you receive both copies of the key from CV is a false sense of security. As their terms and conditions state, if the Government has legal authority to access your box CV will provide it (with or without your permission and key) and if you terminate the agreement (not paying storage fees) then they reserve the right to open the box and sell the contents to recoup their loss. The bottom line here is that not having a copy of your key doesn't stop CV from accessing your SDB contents under the terms of your agreement with them.

Accessibility: I can't speak to an unlimited quantity, but at the bank SDB facility I use I was able to add a second operator with no extra charge. I also have unlimited access to the facility, though do know of some banks who limit the number of free visits during the year before additional fees start to be incurred.

Long Term Storage Discounts: This may be a unique attribute, though don't see the discounts listed on the Custodian Vault website, so they may be trivial.

Security: Ok, they've got the banks there. I don't have biometric entry to the vault and would be surprised if any other bank SDP facilities in Australia do either.

Storage Restrictions: This would vary between bank providers, but in my case I was not an existing client of the bank and was still able to open a SDB.

Regulations: It's true the banks are covered by a greater level of regulation ("Banking Law"), I will discuss this in more detail below, but while some may see this as a con, I see the tighter scrutiny and greater accountability for banks as a positive.

While each bank SDB facility will differ and need to be judged on their individual merits compared with CV, I don't think a strong case was made from the table for avoiding bank SDBs.

GV and RV embedded videos on their site outlining risks of the banking system such as excessive leverage, derivatives, monetary system change, bank holidays and bail-in risks. I would posit that 90%+ of the content was not relevant to the safety of your assets stored in a bank SDB. That said let's look at some scenarios where your precious metals might be at risk in a safe deposit box.

Gold Confiscation: In the past when discussing the merits of bank vs private SDBs, some have pointed to Part IV of the Banking Act 1959 (suspended) which can be paraphrased as being unable to "buy, hold or sell gold unless it is a legitimate part of your trade or in the form of jewellery" (via Bron Suchecki at Gold Chat). These restrictions were applicable across the board (until 1976) and while I think it's unlikely they are reinstated in their current form, I'd expect even if they are or new confiscation laws were introduced that any crackdown on SDBs would be across the board with both bank and private facilities affected in the same way. Private SDB facilities will be compliant with any government request to refuse customer access or seize contents as required by law just as their terms and conditions state. Those who think they will avoid confiscation by using a private facility because it's "out of the banking system" are being lulled into a false sense of security. In any event I think Gold confiscation is highly unlikely in Australia and if a trend emerges globally of governments doing so then we should have enough notice to change views on the risk of it occurring and act if necessary.

Internal Theft: While theft by an employee is an unlikely event, it could arguably be made easier if the SDB facility has a copy of both keys to your box. Furthermore I have seen some bank facilities where they retrieve the box for you from the vault (so your only key is to a padlock attached to the metal storage box). It may not be the case that every private facility gives you both keys or that every bank facility keeps a copy, but in my experience the risk of internal theft from an SDB is potentially higher at a bank facility (if ease of doing so is the only consideration).

The Canberra Times, 25th April 1991
External Theft: The risk of this occurring comes down to the security of each facility. I'd expect that some bank facilities exceed the security of some private vaults and vice versa. Reading through Guardian Vaults list of security measures leaves me impressed, but whether this is a significant step up from other facilities I can't be sure. While listing security specifics may help clients feel good about their choice, marketing in this way also puts more information into the hands of those who may want to get around it.

The Canberra Times, 10th October 1984
Insolvency: In the event of insolvency of any facility the contents of your SDB should be owned free and clear. The biggest risk here is if you want access to your SDB contents while the administration processes takes place (the facility may be closed for regular access while that occurs). Here is where a bank facility might be safer than a private facility. We have a greater insight into the solvency of the banks who are open to scrutiny from the public due to their annual reports and other financial transparency. Even if you don't personally understand how to read the financial position of the bank you have your SDB with, it's likely their share price will be an indicator of health and financial news outlets will be quick to report on any trouble. Furthermore it's a fair assumption that a bank insolvency would result in government support. Contrast that to private SDB facilities, we don't know their financial position and you're not likely to have any warning of their insolvency until the day they shut their doors.

Bank Holiday: In the case we see events unfold where there are wide spread bank failures then there's a chance we see bank holidays. Like insolvencies described above this should only result in a temporary lack of access to the contents of your SDB. Some have suggested that bail-ins may extend to SDBs, but I see that as a highly unlikely. I haven't seen any evidence to suggest that SDBs in Cyprus were seized as part of their recent bail-in measures.

Bank SDB facilities get characterised as unsafe due to their connection to the banking system, but in my opinion there are some pros and some cons that result from this association and on the whole I don't see bank SDBs as less safe than their private counterparts. 

The banks are written off by precious metal holders as shady, but if the last 12 months has taught us anything it's that the bullion industry has it's flaws too (ATO and AFP Investigate Australian Gold Industry Fraud). In fact one of the aforementioned private SDB providers (CV) has management ties to the refiner implicated in the GST fraud story from Vedelago.

As it stands there is no private vault SDB facility in Adelaide so my only option for local storage is with a bank, but I feel comfortable doing so and would only consider moving to a newly available private vault if there were measurable benefits in doing so.

Whichever you choose I think both private and bank (vaulted) safe deposit box services are a smart option and in most cases much safer than keeping your precious metals at home.

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Monday, February 2, 2015

Reserve Bank of Australia & The Missing Bar Numbers

Early in 2014 I lodged a Freedom of Information (FOI) Request with the Reserve Bank of Australia (RBA) to release the list of Gold bars that make up Australia's official reserves. After initial rejection, an appeal with The Office of the Australian Information Commissioner resulted in the RBA providing the list (melter/assayer, gross weight, assay and fine weight), but without revealing the serial numbers.

With 99.9% of Australia's Gold reserves being stored with the Bank of England (BoE) it pleased me to see that in 2014 the RBA had performed an audit on Australia's Gold reserves. I wrote another FOI Request to gather more information on the audit as the single line of text in the Annual Report was lacking in detail, "During the year in review, the Bank audited its gold holdings, including that portion held in safe custody at the Bank of England."

The result of the second FOI Request was a small cache of emails including communications with the BoE prior to the audit.

Something I had read, but overlooked the importance of, when the Gold bar list was originally provided was the difference between the BoE's bar number and the refiner bar number (I'd initially assumed that they were one and the same).
"The only information we will withhold from release are the individual bar numbers, as this information remains confidential (in the opinion of both the Bank of England and the Reserve Bank of Australia). The Bank of England (as our custodian) use their own numbering system to uniquely identify each bar and have reaffirmed to us that these numbers should not be disclosed to third parties as the information is confidential." RBA
Though an anonymous comment on my post had picked up on the difference.
"What a joke from BoE and RBA re serial numbers. Each bar has it own number from the refiner, that is what should have been disclosed and could have without any confidentiality breach. The BoE special internal numbers did not have to be disclosed and are useless anyway in terms of ensuring the validity of the bar list.
Is the RBA saying that it and the BoE do not know the refiner bar numbers or have never recorded it? I find that hard to believe and if true is damning on their vault management."
Warren James at Screwtape Files followed up with an article on the emails from the audit. Amongst the humour (audio conversation between the RBA & BoE is a must listen) he highlights that the email communication mentions the BoE number.
"Each bar is marked with a unique BoE number" Maybe that was what BoE & RBA got confused with and why they didn't supply the serial numbers. If that were the case then the mixup would be gross incompetence in the whole matter. Definitely the BoE should not disclose their own internal tracking number since it would reveal detail about how the bank functions.
To clarify there was a difference between the two numbers (and if so to question why the refiner number couldn't be released) I wrote to the RBA again. If the BoE catalogues and tracks their Gold bars using an internal number, then what legitimate reason does the RBA have for withholding the refiner bar number following the original FOI Request? I received a response to my questions last week (questions in bold, RBA response in italics):

Is the unique Bank of England bar number different to the refiner bar number? It is our understanding that the Bank of England bar numbers are different to any markings that are placed on bars by the bar manufacturers. All bar lists relating to the RBA’s gold holdings show only one serial number per bar, the BoE serial number.

If so, why was the refiner bar number withheld from publication (oversight, on purpose or not present on the bar list)? N/A, for the reason detailed in answer to question 1.

If so and the refiner bar number is not used internally by the BoE (as a unique identifier, which their internal bar number acts as), can these be released as an extension of RBAFOI-131418 or would I need to submit a new request?  This question is based on the assumption that there are two unique numbers on each bar, being the Bank of England bar number and a ‘refiner bar number’. As noted above, all documentation provided to the RBA has only one unique serial number per bar, which we understand to be the Bank of England’s own numbering system.

When I discussed the above response with Warren James via email he suggested that it could be seen as the BoE intentionally withholding key information. I disagreed at the time, pointing out that there are benefits to having a unique BoE number such as no chance of duplicating serial numbers (something Warren highlighted occurs with some refiners restarting a number sequence) and providing multiple bar numbers may result in confusion or errors. At my request Warren provided some interesting stats from his bullion bars database indicating that for 248,063 Gold bars, there was only 206,403 unique serial numbers, so it can be estimated that roughly one in five bars could share a serial number with another. In my eyes this highlights the need for a BoE internal number that can be unique to each bar they manage, but Warren wrote further:
"The serial number is specifically named by LBMA as one of the marks required to be London Good Delivery, so I had always counted it as part of the 'standard' - at least it has been since year 2000 (ref. p44 of 'The London Good Delivery List, building a global brand 1750-2010 by Timothy Green').. it's just one of those key bits of metadata which cannot not be casually discounted. 
From a data design perspective ... 
•Even for their own internal systems they would still be capturing every marking on the bar, and for most London Good Delivery bars it will be there. 
•Bar Serial number is definitely stored in their database (or spreadsheet?), because it's a part of the LGD System they would need it on their inter-transfers. 
•In terms of data extraction, it's a trivial matter to include an extra column of data. 
•They weren't just culling redundant information > otherwise it is possible to remove GrossWeight or FineWeight, since Assay can be used to determine one or the other.
The absence of the serial number is deliberate, the only question is why? There shouldn't be an issue if it is actually allocated.
I think the BoE just decided they didn't want the detail out in the wild, because it allows the bars to be traced with high accuracy."
In a comment on Screwtape Files he concludes:
"So the industry standard for LBMA good delivery is Serial+Refiner+Weight+Assay, and the BoE leave out the serial number. Not only that, but the RBA don't question the omission. Without that key bit of differentiating information it isn't possible to track or trace the bars in any meaningful way. This appears to be the intent of BoE.
Definitely they store the information > Serial Number is always present in any other industry 'weight list'. Makes you wonder about the quality of the audit which was conducted - open for abuse since the key information is controlled by Bank Of England."
I think Warren raises some solid points and after giving it further thought I do agree that the refiner bar number should be provided to the RBA (and any other central bank or party that the BoE is custodian for) and don't see why it shouldn't also be available to the public given that it differs to the unique internal number that BoE uses to identify and manage each of the bars they store.

It does cast doubt on the veracity of the RBA's audit of Australia's Gold. Can you think of any other audit scenario where an internal reference number is accepted (by an external auditor) in place of the manufacturers own (which doesn't get checked at all)? One might hope that if they take the opportunity to audit Australia's Gold again (something they were invited to do), that they do so more thoroughly. I think the likelihood of them finding a discrepancy (such as a missing bar) is slim, but a half-baked audit negates the rationale for performing one in the first place.

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Saturday, January 24, 2015

John Rubino (Dollar Collapse) Confused on Gold Price

An article by John Rubino on Dollar Collapse (cross posted on Zero Hedge) leaves me wondering how much he knows about the pricing of Gold (and questioning why Zero Hedge would perpetuate misleading information, yet again).

He highlights a chart which shows the spot price of Gold in Euros soaring over the last month and then claims:
"Yesterday the European Central Bank acknowledged that the currency it manages is being sucked into a deflationary vortex. It responded in the usual way with, in effect, a massive devaluation. Eurozone citizens have also responded predictably, by converting their unbacked, make-believe, soon-to-be-worth-a-lot-less paper money into something tangible. They’re bidding gold up dramatically."
He implies that the rising Gold price in Euros is directly a result of Eurozone citizens rushing for the metal and bidding the price up. At first I thought it was a slip, but he then repeats his sentiment later in the piece:
"Right now, the fear is country-specific. Europeans start to distrust their government and shift to gold, without necessarily questioning foundational concepts like big, activist government and central bank management of fiat currencies. They still assume that the euro would be fine if managed correctly."
The problem with these comments is that the spot price of Gold in Euros is not directly determined by citizens of the Eurozone. While there is no single market for pricing Gold (either in physical or "paper" form), the spot price is typically determined from the exchange of US Dollar denominated contracts on futures exchanges (there are some exceptions such as recent introduction of yuan-denominated Gold futures contracts, but even Gold futures on the Eurex are priced in USD). So the Euro price of Gold is determined by the price of Gold in US Dollars divided by the EUR/USD exchange rate.

To give you a calculation as an example...

US$1294oz / 1.1252 (EUR/USD) = €1155oz.

So the soaring price of Gold in Euros (that John Rubino focuses on) is not a result of Eurozone citizens in a Gold buying frenzy stocking up on the shiny metal (though traders in Europe could could contribute by buying Gold contracts or selling Euros), but rather was caused by Gold strength in US Dollars and Euro weakness relative to the US Dollar.


Much the same as Gold strength in US Dollars and Australian Dollar weakness relative to the US Dollar has resulted in a nice price surge locally (definitely not a result of Australians rushing to buy Gold):


On a side note, it's time to don your Gold A$1600 hat!

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