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Thursday, July 30, 2015

Martin Armstrong: New Supply Could "Crush Gold"

I read Martin Armstrong's blog on a near daily basis (I have his site bookmarked in my Feedly reading list). Sometimes he has interesting predictions and theories to share, sometimes he adds some historical perspective, other times he pumps out some absolute garbage. Here is one example of the latter:
"Well, when it rains it pours. A new discovery of gold has been made and the quantity expected is up to 46,000 tons of gold, whose market value is estimated to 298 billion US dollars if the market stays the same. The entire USA gold reserve is 8,000 tons. So we are talking about a sizable discovery in the Sudan. From a supply-demand perspective, this could crush gold." - Martin Armstrong
Armstrong's source? Sputnik News, the BuzzFeed of Russian propaganda. Here are some key points from the Sputnik article and a couple more sites I found carrying the news (none of which I would have any confidence in).

- Feb 2014 Sudan grants 9 Russian companies permission to explore for minerals.
- Sudan's total Gold production during first half of this year reached 43 tons.
- Russian company Siberian for Mining discovers Gold reserves of 46,000 tonnes.
- The market value of this gold is U.S. $298 billion.
- Zhukov (CEO), plant will be €240M and have production capacity of 50t/pa.

A few things I see wrong with this picture.

It would not be possible to firm up 46,000 tonnes of (proven) Gold reserves in 18 months. The mobilisation of drill rigs, geological expertise and utilisation of laboratories for testing would have been breathtaking, like no other mining and exploration venture you had seen before. After all, 46,000 tonnes of Gold is roughly 25% of estimated above ground Gold that we've mined through all history and would almost double the proven Gold reserves we already have waiting to be extracted. Exploration for Gold reserves is an expensive and time consuming process, Gold mining and exploration companies often take years to firm up a 1-2 million ounce (30-60 tonnes) deposit, let alone something of this scale.

Furthermore 46,000 tonnes of Gold (in above ground form) is worth far more than US$298 billion at market value. Try $1.6 Trillion.

My initial though was that perhaps the 46,000 tonnes was a reference to the total volume of dirt containing the $298B in Gold, but that still doesn't make sense as Gold content of the earth would be way too high... maybe the figure was supposed to be $298M (not billion) worth of Gold, but even that by my calculation would have required Gold content of around 200g/t (not a chance, most miners these days operate on mining ore around 1-2g/t).

If anyone else can make sense of the figures or find another source with better information about the find, I'd welcome your input in the comments below.

But just for a moment lets imagine that Martin Armstrong wasn't spreading nonsense that has no basis in reality and that this company had proven up 46,000 of actual reserves ready to mine and "crush Gold" as Armstrong so eloquently puts it... I have had other commentators say "what if" about a massive Gold find in the past.

This company is spending €240M (US$263M) on a Gold plant with production capacity of 50t/pa. How fast are they going to bring that 46,000 tonnes of Gold to the surface and what would the cost be to do so? Even if they spent billions of dollars building new massive plants with the intention of bringing 1,000 tonnes of Gold to the surface each year from this one find (increasing current annual mine supply by around 35%) and assuming global Gold infrastructure expanded to process this additional capacity, it would only add a little over 0.5% to total above ground supply each year.

Meanwhile, global debt has increased by an astounding 40% since 2007, despite having a Global Financial Crisis during the same period.


Somehow I don't think Gold has much to worry about from the discovery of a massive new deposit. Of more concern is the supply / demand of and for existing above ground Gold.


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Sunday, July 26, 2015

Who's to Blame for Australia's Expensive Property?

Picture a science lab with a square metal table in the centre. On top of the table lies an intricate wooden maze. The maze itself is completely enclosed. In the middle of the maze, at the end of the one way walled passage, is a block of cheese. In a small cage not far from the maze is a rat, who hasn't been fed for a day and whose nose is going haywire smelling the nearby cheese. The three researchers (who were responsible for building the maze) are standing nearby, one of them removes the rodent from the cage and places it into the maze, soon after which the rat finds it's way to the cheese and consumes it.

I would liken this scenario to the Australian property market, where the researchers represent the three levels of government (federal, state and local), the maze walls are policies they've introduced, cheese symbolises investment properties and for the purpose of this exercise the rat is us, investors (though it could also represent other home buyers who are also herded by government policy).

Now you may think human investors are smarter than a rat, but history shows us that time and time again we will rush toward the cheese (investment returns) often foregoing rational thought in order to do so. Just take the recent bubble and crash in the Chinese stock market (Shanghai Stock Exchange Composite Index pictured below), which was largely driven by retail investors and fuelled by margin lending.

Shanghai Stock Exchange Composite Index
If you spoke to the rat, told it not to eat the cheese from the maze, you are about as likely to receive a positive response as if you told investors (as a group, there are some investors who do act rationally as individuals) to only bid the price of an asset to a sensible valuation before stopping.

Historically (at least since the 1960's) home ownership rates have been fairly stable at around 70%, but this has since declined slightly to 68% in the 2011 ABS census and recent investor lending statistics indicate that it's probably getting worse with investor finance overtaking that of owner occupiers (lacking the balance of historical ratios).


The argument over whether Australian property is in a bubble is beside the point, as Former Treasury secretary Martin Parkinson said"Do we have a bubble? I think that's the wrong question to be asking. The real question is why are house prices so high?" 

There's no denying that Australian property is expensive, so who do we hold accountable?

I hold no animosity toward investors who buy property. Sure there are landlords who do the wrong thing from time to time, but as a group they are just acting in unison because it makes sense to them, in an effort to better their personal situation and largely due to the policies implemented by government. Blaming them for making home prices expensive is a bit like getting angry at a rat for navigating the maze and eating the cheese. The stage has been set, barriers and incentives have been put in place for investors to take advantage of the situation, why wouldn’t we expect them to do so?

The invisible influence of government policy, at least much less obvious than solid walls, is controlling almost every aspect of the property market, on both the supply and demand sides. 

On the demand side they influence the cost of servicing a mortgage using the Reserve Bank of Australia (RBA) Cash Rate Target, regulate bank lending through the Australian Prudential Regulation Authority (APRA), encourage specific segments of the market to participate in transactions by using incentives (such as the First Home Owners & Downsizing Grants) and set the rules that allow foreign investors to buy our homes.

Tax policy can also contribute to demand, a strong rise in property prices followed the introduction of the 50 per cent capital gains tax discount (having held an asset for 12 months) suggests it was an inflection point for an increase in investor interest in property, also illustrated by the flood of investor finance that followed the change in 2000.


Negative gearing, whilst also available for other assets, further exacerbates demand for property, making it cheaper to service the negative cash flow of a mortgage, allowing investors to pay higher prices, buy sooner than they may have otherwise and carry a larger portfolio of properties.

It’s not only the demand side that government policy affects, supply too is impacted as government controls what land is available to build on, the building types that are allowed on that land, they set the fees and taxes associated with building, as well as on the sale of a newly constructed home and ensure the undertaking meets strict standards and a lengthy application process, all of which can contribute to increasing the cost of and deter bringing new supply to market.

On top of policies they implemented prior, since the Global Finance Crisis (GFC) the government has also intervened at times in ways that have both indirectly and directly boosted the property market. Examples include guarantees that were introduced to protect our banks (e.g. wholesale funding and deposits), the RBA taking on tranches of mortgage backed securities to support lending and the introduction of a temporary First Home Owners Boost which according to Treasury Executive Minutes, “was designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market.”

I've seen investors who've benefited from this generous environment complain that no changes should be made to the status quo, the "free market", the suggestion of which is laughable. 

The government can and should act to reduce speculative demand and increase supply (if warranted) in the Australian property market, with a view to lower prices and improving affordability. Even the Liberal Party of Australia's Federal Constitution in Part II (Objectives, section n) says:

"...in which family life is seen as fundamental to the well-being of society, and in which every family is enabled to live in and preferably to own a comfortable home at reasonable cost, and with adequate community amenities."

Not that this objective is embraced by senior members of the Liberal Party such as Prime Minister (Tony Abbott) or Treasurer (Joe Hockey). Joe Hockey recently said “If housing was unaffordable in Sydney no one would be buying it, but people are still purchasing housing,” and Tony Abbott welcomed rising prices, clearly not seeing the contradiction with affordability, "I want housing to be affordable but nevertheless, I also want house prices to be modestly increasing." Neither seem to have a solid grasp of what constitutes 'reasonable cost'.

If you want someone to blame for Australia's expensive property, turn your eye away from the property investor / speculator, they are just another rat in the same maze as the rest of us. It's government policy at fault and that is what needs to change. With change of policy will come a change in investor behaviour.


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Thursday, July 23, 2015

How About Fair GST Treatment For Bullion?

In an article I was reading yesterday about the GST-free threshold for imported goods, which postured support for a lowering the cap from $1000 to $20, there was a video containing this message from Craig James (CommSec's Chief Economist):
"Certainly we believe this is a fair tax because if it is the case that people are traveling overseas and over the net to buy goods, bypassing Australian goods. Well really the same goods should be charged the same price whether you're buying overseas or getting it domestically."
There has also been recent talk of raising the GST in Australia from 10 to 15%.

As a proponent for small(er) government and less taxes I'm not particularly fond of the latter suggestion, but I do concur with James' view that a fair tax should see comparable goods charged the same amount of tax. Not only for consumer goods, but also for investment assets. This is one area that bullion (as an investment asset) is short changed.

A guide I wrote on buying Gold and Silver in Australia describes when bullion is GST free:
GST (Goods & Services Tax): Investment grade Gold (99.5%+ fine) and Silver (99.9%+ fine) bullion is not subject to GST. Bullion products of a lesser grade (for example 22k Gold coins like Sovereigns & Krugerrands or 92.5% sterling Silver coins) do attract GST when sold by a bullion dealer.
That results in some of the most commonly purchased bullion investment coins being burdened with GST as they don't meet the minimum finesse (Gold sovereigns and the 1966 Australian fifty-cent piece are just two examples).

1966 Australian fifty-cent pieces, only have 80% Silver content
This unfair addition of GST to an investment asset is something I would like to see changed as I wrote  2 years ago:
Increase the scope of the definitions "precious metal" & "investment grade bullion" for taxation purposes to include coins containing Gold, Silver, Platinum or Palladium (any finesse) which are now or once were legal tender of Australia or any other nation and which trade as a function of the spot price.

Precious metals are often traded in widely recognised investment forms which don't meet the strict scope defined by the Australian Taxation Office. Investment grade bullion below 99% for Platinum, 99.5% for Gold and 99.9% for Silver is subject to Goods and Services Tax (GST). This means dealers are required to charge GST on coins which many hold for investment purposes, but aren't exempt from GST, for example American Gold Eagles (91.6% Gold), Gold Sovereigns (91.6% Gold) and Round Australian 1966 50 Cent Pieces (80% Silver). Such legal tender coins which trade as a function of spot price (consistently trade at spot + x% premium) would be made exempt from GST.
I was also recently made aware (thanks Bron!) that there are other limitations to the GST free status of bullion (that I wasn't familiar with), such as a requirement for the metal to have been refined by a refiner:
"To have this GST-free status one of the requirements is that the metal has been refined by a refiner of precious metal. To be a refiner of precious metal, an entity has to satisfy the Commissioner that the entity regularly converts or refines precious metal in carrying on its enterprise." ATO (What is 'precious metal' for the purposes of GST?)
That means despite the hallmarking of these hand poured Silver bars I recently purchased, if they'd been sold in Australia by a dealer they may have needed GST applied (I bought them direct from the overseas producer in a package that was lower than the current $1000 GST-free threshold).

Home Made Redwood Poured Silver Bars
I think it would be fair to see GST removed from all bullion that is bought for the purpose of investment and where it trades as a function of spot price as I wrote last year:
Perhaps the exemption could be expanded to cover any precious metal which trades as a function of spot price, so that tax fraud is no longer as simple as defacing investment grade bullion, changing it into a form which can suddenly benefit from input tax credits.
That would put the precious metal asset class on a level playing field with others (such as shares), surely that's something that even Craig James could get behind!

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Friday, July 17, 2015

China Updates Gold Reserves, First Time in 6 Years

I won't leave you hanging:
"China increased its gold reserves by 57 percent as it disclosed official holdings for the first time in six years.

The country boosted bullion assets to 53.31 million fine troy ounces (1,658 metric tons), the People’s Bank of China said in a statement Friday. That’s an increase from 33.89 million fine troy ounces (1,054 tons) in 2009, when it last updated the figures." - Bloomberg
An additional 604 tonnes accrued over 6 years, call it 100t/pa, which was added to official reserves. Of course this was in addition to substantial demand from elsewhere in China with local "consumers" of the metal (those investing, saving in and wearing Gold) increasing their buying substantially in recent years. 

Here's how the number compares with Russia's increase over the same period:

April 2009 to July 2015 (Official Gold Reserves)

China: 1054 to 1658 (+604 tonnes)
Russia: 532 to 1250 (+718 tonnes)

This update will disappoint many who were expecting that the update on Chinese reserves may be a catalyst to reignite some interest in the metal, I suspect this number won't be enough to do anything of the sort as it comes in lower than even some of the most conservative estimates. Of course China could be holding back (and it is likely they own Gold in other state controlled institutions), only announcing what they want the world to believe they have... I'm sure this will be the narrative that will be driven hard by those who were hoping for a more substantial number.

Here's a few earlier guesses, estimates and commentary from around the internet (can you find a closer estimate than Bron's? Post it in the comments if you do):

"Assets were probably about 2,710 metric tons, compared with the last reported holdings of 1,054 tons in April 2009, according to the report." - Kenneth W Hoffman,  Bloomberg Industries (January 2014).

"The People’s Bank of China may have tripled holdings of bullion since it last updated them in April 2009, to 3,510 metric tons..." Bloomberg Intelligence (April 2015).

"With last reported gold reserves of 1054.1 tonnes, we therefore suggest that a reasonable estimation of China’s current gold reserves would be 1,560 tonnes." - Bron Suchecki, Perth Mint (September 2012).

"My estimate of 4,500 tonnes of current gold reserves might be high, but it may also be much less than whatever may ultimately satisfy China’s ambitions." - Jeff Clark, Casey Research (July 2014).

"The Chinese state has probably accumulated between 20,000 and 30,000 tonnes since 1983..." - Alasdair Macleod (Late 2014).

Settle down Baron!

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Sunday, July 5, 2015

Barry Ritholtz: 2% Decline in US Stocks is Armageddon

Look out, old mate Barry Ritholtz has launched another tirade against Gold and Gold Bugs. His Bloomberg article discusses why Gold did not perform well "during Armageddon" as he described a 2% swing in the (US) stock market...
"This was the week Greece inched closest to chaos, as a bank holiday and a technical default caused markets around the world to erupt in turmoil. They recovered somewhat Tuesday, and futures looked stronger Wednesday morning, but on Monday, the NASDAQ Composite Index lost 2.4 percent, the Standard & Poor's 500 Index lost 2.09 percent and the Dow Jones Industrial Average fell 1.95 percent. Volatility exploded, as the Chicago Board Options Exchange Volatility Index surged 35 percent, its biggest increase in two years, to 18.85.

One would imagine that such a scenario might be constructive for gold. It has been called the best measure of fear, the only real currency, a refuge for those who plan for panic. So how is it doing these days? Spot prices were soft on Monday, despite the wild volatility in equities, drifting down a few bucks from about $1,180 an ounce to about $1,176. They fell a few dollars more yesterday, and are soft Wednesday.

I thought gold was an investor’s best friend during Armageddon."
Here is the move in the S&P 500.

Barry Ritholtz says equities have experienced wild volatility and Armageddon this week.

Even the 35% surge in the VIX is tame compared with recent spikes.

Chicago Board Options Exchange Volatility Index (VIX)

But what relevance is the US stock market to the citizens of Greece, ground zero of the current standoff between the Greek government and the rest of the Eurogroup (the chaos Ritholtz refers to)? The real measure of Gold's usefulness and performance should be in comparison to the market local to the crisis, surely?

So how is physical Gold performing when compared with the Greek stock market (using the Athens Stock Exchange General Index as a measure)? The ASE is down 54% from the early 2011 peak (in early 2012 was down as much as 72%) and is 35% lower Year on Year.

Athens Stock Exchange General Index

Gold priced in Euros (yes Barry, Gold is purchased in currencies other than the US Dollar around the globe) does not compete with the euphoric mania seen in US stocks over the past 5 years, but it has held up much better than the Greek stock market. It's currently down 24% from the 2011 peak and 9% higher Year on Year.

Gold price in Euros

Though how important is price when the problem for citizens of Greece this week has been their inability to sell (or buy) in the stock market while it was closed? We don't even know what Greek stocks will open at next week (assuming the market reopens by then) after this weekends referendum on the Eurogroup proposals.

Greek banks have also been closed with ATM withdrawal limits imposed.

Framing a 2% fall in the US stock market as Armageddon is a disturbingly offensive narrative for Ritholtz to be carving out from half way around the globe in his comfortable Wall Street office while Greek citizens struggle with drawing life savings out of their bank accounts to spend on food, medical supplies and other goods they may need to get by in an uncertain future. 

In a situation like this physical Gold (and cash) has performed exactly as you might expect, acting as a store of wealth which could be used immediately as a medium of exchange, something frozen or inaccessible stocks and deposits are unable to do. How do you put a price or value on that?

At the moment Greece's currency (Euro) remains a safe asset to hold when kept in cash (bank deposits may get a haircut at some point), the Euro is not at risk in the immediate future as it's not unique to the country facing the escalating financial, banking and debt crisis.

If you want to analyse the performance of Gold in a real Armageddon scenario then you could look to the north east of Greece. Ukraine, whose financial and geopolitical woes are not cushioned by the use of a shared currency, has seen it's currency (Ukrainian Hryvnia) decimated. Here is the performance of Gold:

Gold price in Ukrainian Hryvnia

If I was a citizen of Ukraine I would feel much more comfortable owning physical Gold rather than shares in the local stock market, local currency (stored physically or in a bank) or real estate.

Perhaps Ritholtz fails to understand physical Gold ownership, after all his description of the metal in an article last year only mentioned contractual representation:
"Like all commodities, gold is purchased via futures contracts."
If the US faced a real Armageddon, it's unlikely that Ritholtz's version of Gold would act as a safe haven, it could very well be suspended (just like the Greek stock market last week), while physical Gold remained accessible and tradable (at which point the [over]hyped paper/physical price disconnect would likely occur).

One sentiment I do share with Ritholtz is a surprise at the lack of interest in Gold from US investors (even if the Greek crisis isn't having any impact on them presently). Ritholtz shrugs this off as either a failed narrative for Gold or an improving US economy and performance of other assets. It could also be that:

A) After 4+ years of talk, Grexit has become the boy who cried wolf and the market now doesn't pay the situation the attention it deserves.

B) The market (rightly or wrongly) thinks the Greece crisis no longer matters and will resolve itself without impacting global markets regardless of referendum or agreement outcomes.

C) The Elite with the help of their bullion banker friends at the Crimex are suppressing the price of Gold during these turbulent times in order to maintain the US Dollar hegemony.*

Like Ritholtz I think the Gold blogosphere produces a lot of dishonest narratives (which I regularly write about), but that doesn't justify his attempt to carve out his own, trying to use short term price movements in one country to show that Gold no longer has relevance, when it's clear that it still does for people who are potentially facing or genuinely experiencing financial catastrophe.

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* Hopefully an obvious joke.

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