Friday, December 31, 2010

Argent Minerals (ARD) to be 4th "pure" Silver play?

Argent Minerals Limited (ASX: ARD) is a company I have been keeping tabs on for sometime. In July this year Argent purchased the Bullant Goldmine from Barrick Gold Corp. While it seemed like a reasonable price paid, it turned me away from Argent as I had been considering them a company predominantly exposed to Silver. However after an unattractive takeover offer from US Nickel (USN) Argent has since agreed to sell the Bullant Goldmine in a deal that looks quite good for ARD shareholders. This will also put Argent back in the position of a company heavily exposed to the price of Silver and they even say as much themselves in one of their recent announcements:

"The new structure is intended to convert Argent into a pure silver “play.”"

In September I mentioned that there were 3 "pure" Silver plays; providing the sale of the Bullant mine goes to plan (still requires shareholder approval, but boards of both USN and ARD unanimously agree) Argent could very well end up being the 4th "pure" Silver play.

The 3 I've spoken of previously are:

Cobar Consolidated Resources Limited (CCU)
Silver Mines Limited (SVL)
Alcyone Resources Limited (AYN)

------------------------------------------------------

The structure of the Bullant Goldmine sale to USN looks like this:

- 44,000,000 USN Shares to be distributed to Argent Shareholders
- 19,500,000 ARD shares held by USN to be cancelled
- US Nickel to withdraw current takeover offer

Assuming the sale goes ahead as planned that would leave ARD with the following share structure:

101,891,251 Listed shares - 19,500,000 USN held shares
= 82,391,251 Shares

There are also 48,210,751 options (currently 20c strike, 30/06/11, ARDO), which the company has advised will have the exercise price reduced following the agreement:

"Argent will adjust the exercise price of its listed 20 cent options to reflect the capital reduction envisaged by the Agreement."

This likely means they will be reduced from a 20c exercise price to 16c (given the 20% reduction in shares, a 20% reduction in exercise price seems likely).

In theory this news should have pushed the price of the listed options higher as the capital to turn them into full shares has been reduced, no such increase has been seen and I suspect this is mainly due to this information having being missed by the market in general.

Following the sale of the mine there will be 44m USN shares distributed to ARD shareholders. I suspect option holders will convert to full shares to take advantage of this offer if given the opportunity, so assuming all convert (worst case) we will have 44m USN shares distributed amongst 130.6m ARD shares (or .34 of a USN share to be issued for each ARD share held). Potential for this fraction to be higher (for holders of ARD) if option holders don't convert or are not eligible. At USN's current share price (15c) this will add an additional 5.1c value (or more) to each ARD share and will allow ARD shareholders to maintain exposure to the Bullant Goldmine if they choose.

In April this year a scoping study on the Kempfield Silver project was completed, confirming potential for a profitable mining operation. Cash costs (net of Gold and base metal credits) were estimated at  AUD$10.27 (per ounce of Silver mined), however since that scoping study we have seen a significant rise in the price of Gold and the base metals which should allow for an even lower cash cost.

Further to this, an announcement in November confirmed that due to improved economics of the Kempfield project (due to rising Silver, Gold and base metal prices) the resource was to be upgraded following a change to the cutoff grades. The Kempfield project now has a reported resource of 31.6m ounces of Silver. With Argent's stake in the project soon to increase to 70% this means their share of the Silver resource is approximately 22m ounces.

The Kempfield Silver project has been very much overshadowed by the purchase and now sale of the Bullant Goldmine, but suspect as the sale is finalised early next year that both management and the market will be able to concentrate on the project which will make this company.

Further to Kempfield, Argent also has the right to earn a 70% interest in West Wyalong as well as Sunny Corner (Sunny Corner has a JORC Silver/base metals resource) with set expenditure needing to occur by June 2013. Also they hold 100% interest in phosphate and base metals exploration licenses at Louth (Wanaaring).

There are only a few stocks with serious exposure to the price of Silver on the ASX and even less that have a predominant focus on bringing a Silver mine to production. ARD will be one of the lucky few and that is bound to attract both investors and speculative traders in the short to medium term provided the price of Silver holds or continues to rise from here.





BB.

Disclosure: Position held in ARD. Not investment advice. Do your own research.

Thursday, December 23, 2010

IMF Concludes 403.3 ton Gold sale

The IMF has released a press statement concluding the finalisation of their Gold sales:
The International Monetary Fund (IMF) announced today the conclusion of the limited sales program covering 403.3 metric tons of gold that was approved by the Executive Board in September 2009 (see Press Release No. 09/310).

These sales are a central element of the new income model for the IMF that was endorsed by the Executive Board in April 2008. They will also increase the Fund’s capacity to support low-income countries under a strategy endorsed by the Board in July 2009 (Press Releases No. 08/74 and No. 09/268). The gold sales were conducted under modalities to safeguard against disruption of the gold market. All gold sales were at market prices, including direct sales to official holders.
IMF
The sale of the 403 tons was announced initially in late 2009. Shortly after this, following speculation that China would be a buyer, it was announced that India had bought 200 tons (this was when Gold was around $1050) and in my opinion was an important turning point, providing a base from which Gold has sprung 30%+ over the last 12 months.

Other known buyers of the IMF Gold have been:

* India - 200 tons (Announced November 2009, as mentioned above)
* Mauritius - 2 tons (Announced November 2009)
* Sri Lanka - 10 tons (Announced November 2009)
* Bangladesh - 10 tons (Announced September 2010)

The buyers of the remaining 181 tons have not been announced publicly to my knowledge. Although with Russia continuing to add frequently to their reserves over the last 12 months I would not be surprised to see some having ended up with them.

The sale has not been without it's controversies with some Gold market commentators claiming the sale was a tactic to keep a lid on the Gold price and others claiming that the IMF didn't have any real Gold to sell and that the sales were simply "paper promises".

Eric Sprott of Sprott Asset Management infact offered (although I have my doubts about the ability of Sprott to buy such a large amount) to buy 191 tons of Gold from the IMF provided they could supply the physical product. After the IMF refused the sale Business Insider spoke to the IMF about the reasoning and found they had very specific protocols they were following for the sale, namely that it was only through specific agents they were selling the Gold and only to central banks, sovereign nations, etc.

While some expected the IMF sales to have a heavy impact on the market, I certainly was not one of them given that the IMF sold a lot more (almost 4x the amount of the sale announced in 2009) Gold in the 1970's Gold bull market:
Auctions and "restitution" sales (1976–80). The IMF sold approximately one-third (50 million ounces) of its then-existing gold holdings following an agreement by its member countries to reduce the role of gold in the international monetary system. Half of this amount was sold in restitution to member countries at the then-official price of SDR 35 per ounce; the other half was auctioned to the market to finance the Trust Fund, which supported concessional lending by the IMF to low-income countries.
IMF
The sales in the last Gold bull market didn't seem to have any negative effect on the price appreciation.

With the sale concluded though it now leaves central banks to obtain their Gold from elsewhere which has the potential to add pressure to a market that is already showing signs of physical shortages with retail/intitutional buying alone. In my opinion the conclusion of these sales removes an overhang that has been in place for the last 12 months and when normal market trading resumes early next year I am expecting significant appreciation in the price of Gold.



BB.


Disclosure: Positions held in Gold. Not investment advice. Do your own research.


Sunday, December 19, 2010

Silver going to $6000? Not likely!

I get a little tired of the ridiculous price targets being spruiked for Gold & Silver by market commentators. A recent example of this was in an article from The Silver Bear Cafe. Here is a small piece from the article where the writer extracts the target price:
2) I, like many, estimate there is only about 1B ounces in above ground physical silver for investment purposes.

3) I, like many, estimate there is only 5B ounces of above ground physical gold for investment purposes.

4) If the price of gold is not manipulated, like the banks claim, then the price of silver should be 5x the price of gold due to its supply/demand fundamentals.
Silver Bear Cafe
So Silver should be priced 5x Gold simply because there is 1/5 the amount above ground that there is Gold? Using that logic, if there were only 5 Mercedes C-Class sedans produced and 15 S-Class sedans produced, then the C-Class should be 3x more expensive even though it was cheaper to produce, isn't as well liked or as luxurious as the S-Class. The fact is that an items rarity is only one part of the equation.

Even Max Keiser's recent prediction of $500 Silver is likely to be way over the peak price we will see in this bull market.

A recent article on the FOFOA blog poses the question, is Silver still money today? If the answer is "No" then there is one property that Gold has over Silver, what sort of premium should be reflected in Gold for this difference?

It's all well and good to dream about $6000 Silver, but the reality is that it's not making it to those sorts of prices anytime soon (unless we saw hyperinflation in the currency it's quoted in). Anyone waiting for these sorts of prices will be riding this bull market all the way to the top and all the way down the other side. 1980 and other recent spikes have shown us how savage Silver can sell off in some circumstances, so make sure that you have your exit strategy in place in preparation for the time to sell...


BB.

Disclosure: Positions held in Gold & Silver. Not investment advice. Do your own research.

Wednesday, December 15, 2010

Stewart Thompson on recent Gold action

It's that time of year where we all get a bit busy, so expect the posts to be a bit less frequent. It's been a great year for Gold and Silver, would like to see them finsih the year with new highs and to continue climbing in price early next year, but one step at a time...

Stewart Thompson is a weekly commentator on the precious metal markets and is well worth the read. I like the way he writes his articles with bullet points, clear, concise, to the point, a very easy read. Here are a couple of excerpts from his latest:
1. Gold war update from the front lines: The Gold Community retook $1400 last night. Silver is close to retaking $30. I won the battle as to whether gold would take out $1424 on the upside or $1315 on the downside. Most thought $1315 would fall.It didn`t. Gold soared to $1430 basis dec futures and many gold stocks continue to exhibit violent upsurges.
2. I don`t like losing. So I don`t. Don`t you throw your gold away either because of all the correction talk going around. Click here now to view this morning`s Gold Chart with the new range highlighted: Gold`s New Range Chart.
3. Gold is now trading between 1370 and 1430, and doing so after breaking out, upside, from the 1315-1424 range. The fact is…. gold is marching higher. An army of gold top callers are about to meet their maker. The Gold Punisher is in the technical analysis house, and he`s not taking prisoners.
4. There is no head and shoulders now, any more than there was one in the last 1315-1424 range.
5. There is no double top either. What there is, fellow gold fiends, is an upside superblast going on right now, climbing a classic wall of worry. I`ve bought US dollars into weakness in some size, from other paper currencies, not from gold sales, and if there is a significant gold correction, later, I`ll use those dollars to increase my gold stock position total size.

And finishes the article on a note about junior stocks:

24. Like bullion, the juniors are trending higher. The difference is that bullion is on the verge of a possible upside pop, while juniors are on the verge of an upside parabolic move! If gold gets taken down hard today, the question is, are you going top out, or top up? Let's do it!

You can read the rest of the article here. Like Thompson I am loaded up with  quality Gold/Silver juniors (although mine are ASX listed) and looking forward to the ride ahead!


BB.

Disclosure: Positions held in Gold & Silver. Not investment advice. Do your own research.

Tuesday, December 7, 2010

Silver Breakout?























Only a very short post tonight to share the above chart and a few words.

Silver has been trading under this overhead resistance for the last 7.5 years (essentially the entire bull market). There have been 3 previous spikes that have risen to the overhead resistance and then heavily retraced. I would want to see a couple of days trading and closes above $30 to confirm, but it's looking likely this is a breakout.

What does this mean for Silver prices? It probably means throw out any short term trading ideas and just hold on for the ride as things could get very volatile. Where does the price stop? All I know is that Silver's fundamentals support much higher prices. This leg higher might not slow down until we're coming close to record highs (around US$50).


BB.

Disclosure: Positions held in Gold & Silver. Not investment advice. Do your own research.

Sunday, December 5, 2010

Failed Head & Shoulders/Double Top (Gold/Silver)

In an update on November 27th I suggested that Silver might be forming a double top. It's a pattern that formed at the peak of both the 2006 and 2008 spike and I thought it could be the case it was going to form this year as well (based on timing and size of previous moves in the last two spikes). While I provided it as a possible scenario, I am of the belief that we are entering/have entered the 3rd phase of this bull market where previous rules don't apply and we are going to see a lot more volatility. It will be much more difficult to predict short term price movements.

On November 29th in the comments of the November 27th update I had this to say:
While I've pointed out that there is a potential double top forming on the Silver chart, it is actually my personal opinion that Silver's fundamentals will win this time around and that we will see higher prices by Christmas. If this did happen I think it would be an indication that we are at the business end of this bull market and a true parabolic move would not be far away.
The same day on Kitcomm (a discussion board) I said:
The potential for the double top though should keep buyers wary until the Silver price has clearly broken out one way or the other. A close above $28 IMO would mean the double top is unlikely to play out.
The day after these comments (November 30th) Silver closed at $28.02, this was the signal indicating the double top wouldn't play out and that we'd soon be looking at higher Silver prices.
































Some other commentators had been talking about the head and shoulders pattern forming in Gold. In my opinion the close on Friday at above $1410 was a confirmation the pattern has failed and that new record high prices are just around the corner.


























So with the breakouts we now wait and see what next week brings, I would suggest higher prices. I think record highs for Gold and 30 year record highs for Silver next week are very likely.

Lastly, here is part of an interview with Eric Sprott that I found worthwhile:
Why Eric Sprott sees silver as the next big investing windfall
You have been a bull on gold from the get-go. Is its price over $1,350 (U.S.) unfolding as you expected?
It’s been the investment of the decade. When I bought gold, I was buying gold to hold [as a long-term investment]. As it turned out, it quintupled. I didn’t think it would go that far because no none would have imagined that the central banks and governments would get themselves in a position where they are printing money.

The printing of money makes gold more valuable. You don’t have to be a genius to figure this out. The Johnny-come-latelies – the Paulsons, Einhorns and Soros – all figured out, when [the Fed announced the first round of quantitative easing], that they should own gold. It becomes more obvious every day as you see these financial challenges that we have in Europe.

How high will gold go?
I think gold is the reserve currency today. There is not a currency in the world that it hasn’t appreciated against by at least 300 per cent. And it has beaten every stock market. You can’t even rent a safety deposit box in Germany because they are all full of gold and silver … I am pretty convinced that gold will go a lot higher because it is under-owned as only 1 per cent of people’s money is in it. It could go to $2,000 an ounce. I could imagine it at $5,000. I am not giving a time frame on that, but I could certainly see that happening. But the real story now is silver.

Why are you more bullish on that metal?
Gold has traded at a ratio of 16-to-1 to silver in terms of price, but today it trades in the range of 50 to 1. I think the gold-to-silver ratio is going to go back to 16 to 1 given the passage of time, say three to five years. And I bet you that silver overshoots. The gold-to-silver ratio may even get down to 10 to 1. I believe that the price of silver has been suppressed.

How much of your wealth outside of Sprott Inc. shares are in bullion and precious metals stocks? 
I only own funds and gold and silver. I am probably 90 per cent in precious metals personally. And I don’t lose sleep over it.

BB.

Disclosure: Positions held in Gold & Silver. Not investment advice. Do your own research.

Thursday, December 2, 2010

China increases Gold imports

It's interesting, not only is China the worlds largest Gold producer, but they are also importing significant amounts of the metal. While China's official Gold holdings remain quite small in comparison the US, Germany and Italy, it appears obvious that they are stealthily acquiring a larger position. Of course they would not want it to appear that way or it could become very expensive for them to continue along this route.

China gold imports headed for big rise
China’s gold imports are on track for a sharp increase this year, with data for the first 10 months showing bullion shipments up more than four times amid rising interest among investors seeking out a hedge against inflation.

Bullion imported into China in the January-to-October period totaled 209.7 metric tons, compared to 45 metric tons in all of 2009, according to reports Thursday citing figures announced by Shanghai Gold Exchange Chairman Shen Xiangrong.

If current trends hold, China’s gold imports could rise nearly sixfold by the end of the year, according to calculations based on monthly averages.
Market Watch

China is somewhat a wild card in this precious metals bull market. It was only 2009 that it's citizens could start buying the physical metals, I think we are yet to see the real impact this could have on a market already short on physical product.

Sunday, November 28, 2010

Has Silver formed a double top?


The above are crops from a 2 year Silver charts which show the formation that Silver has seen at the peak of each of the last two spikes and appears might be forming at the peak of this one.

As pointed out in a previous blog entry, Silver has risen by a similar percentage to both of the last two spikes: 

$7.84 - December 28th, 2005 -> $16.68 - April 18th, 2006 -> 113% Rise
$11.04 - August 16th, 2007 -> $21.35 - March 17th, 2008 -> 93% Rise
$14.62 - February 5th, 2010 -> $29.33 - November 9th, 2010 -> 100% Rise

Not only are the spikes a similar percentage move to the last, but they are reasonably evenly spaced (every 2 years) and each of the peaks is approximately $7 higher than the last (approx $14, $21, $28) if measuring by the highest close (rather than intraday peaks).

In my opinion a break below the $25 mark would signal that the formation is complete and provide a downside target of $16.43 to $22 as I previously discussed. Even though I mention a $16.43 target I can't see the price falling back under the $19.50 to $21.50 level. This price area has provided a lot of resistance over the last 2.5 years and I could see it turning into a significant support area should the Silver price retrace.

Of course there is no guarantee the price of Silver will retrace or follow the same formations as in the previous spikes. There are other fundamental factors which might continue to drive the price higher.

American Silver Eagle 1oz Silver coin sales are going through the roof. In 2006 approximately 10m coins were sold, 20m in 2008, already in 2010 we have 32m sold with another month yet to go. We've seen a record month in November 2010 for ASE 1oz sales, surpassing the previous high set in 1986.

Another factor at play is that Chinese citizens are (legally) allowed to buy and own physical Gold & Silver, this was not possible in either of the 2 previous spikes.

Further to this we have an upcoming decision from the CFTC on metals positions limits which may have some bearing on the maximum positions the US Investment Banks can hold and also we have several lawsuits that have been lodged against JP Morgan & HSBC for manipulating the Silver price...

It will be interesting to see if the fundamentals or technicals win this battle.

Whether you are buying, selling or holding Silver at the moment will likely depend on your strategy. Personally I am holding, but have not bought any significant amounts while spot has been above $20.


BB.

Disclosure: Position held in Silver. Not investment advice. Do your own research.

Thursday, November 25, 2010

ABS House Price Index negative YOY in 2010?

In March this year (prior to the release of first quarter data) I made a bet on an internet forum I frequent. The outcome of the bet was based on whether the ABS House Price Index (weighted average) would finish positive or negative over the next 12 months (December 2009 to December 2010, with myself betting that we'd see it finish negative). $100 is to be paid by the loser to a charity of their choice, just a friendly bet, nothing too serious.

My opinion at the time I made the bet was that house prices would peak in first quarter 2010 and that this would be the "tipping point" for the correction to come (15-20% in nominal terms, higher in real terms) to play out over several years.

It must have only been a few weeks following the initial bet having been placed that the first quarter ABS data came out showing a 4.8% increase in the index over the first 3 months. It was that point that I realised I should have attempted to start the bet from the end of the first quarter data. I thought I'd already done my dough.

The second quarter data came out and my first observation was the headline 3.1% rise...prices were still going up! However at the same time it was this point that I noticed that ABS produces revised figures. The December 2009 figure had been revised slightly higher than when the initial bet was taken and the March 2010 quarter had dropped, even though prices were rising, the numbers weren't looking quite as bad as I thought.

Third quarter data hit the ABS site only a few weeks ago and it was just barely positive, the weighted index rose by only .1% for the quarter. Brilliant, things were finally turning, but fast enough to win the bet? Probably not, that said I wouldn't completely rule out the possibility.

As it stands the final revisions available are as follows:

December 2009 - 142.2 (up from 141.8)
March 2010 - 147.1 (down from 148.5)

June quarter has dropped from 152.8 to 150.1 after only the second estimate, with the final estimate still to come (which may be lower). The third quarter has a first estimate number of 150.3.

Some watching the ABS index are saying the third quarter was positive, but I think we will find this is definitely revised to a negative number come second and final revisions. If we said that the difference between first and final estimates in third quarter work out similar to the second then that would put the third quarter final revision at around 147.6.

To then drop fromn 147.6 to 142.2 we'd need to see a 3.6% drop in the final quarter...likely? Probably not. Possible? Definitely.

Even if we don't see a year on year fall December 2009 to December 2010, we will likely see it from March 2010 to March 2011.




BB.

Monday, November 22, 2010

Dr. Clive Roffey on Gold One International (GDO)

A Hot Copper poster recently linked to this article dating back to 1980 which indicates not only did Dr. Clive Roffey predict the rise of Gold to $800+, but also accurately called the top and wasn't far off with where Gold eventually settled as well.


It  has come to my attention that Dr. Roffey (some 30 years after the above prediction) is regularly commenting on the market, Gold and Gold shares in a show called "The Roffey Review". A show well worth watching if you appreciate technical analysis, although he predominantly comments on stocks listed on the Johannesburg Stock Exchange.

On November 1st Dr Roffey mentions Gold One as a potential 5 bagger  as it's preparing to break out of a multi-year consolidation pattern (on the JSE, only listed on the ASX in early 2009), he provides an update on November 8th explaining that it has broken out and he has a short term target of 450 (currently at 250). 450 is approximately AUD 66c (current GDO share price on the ASX is 36c), we'd need an 80% increase in the share price of GDO to reach this short term target or to meet the 5 bagger target the share price would have to rise to $1.46.

I will cover Gold One International in a more detailed post at a later stage, but suffice to say I think this Gold stock is being overlooked by many. In my opinion it represents excellent value at the current share price.

For the Gold One references check the videos on the following dates and times:

Nov 1: 4.40 to 5.05
Nov 8: 3.40 to 4.05

LINK

Dr Roffey continues to like Gold at these prices as mentioned in his latest clip on November 15th.

A detailed list of Dr Roffey's predictions can be found on charts.co.za here are those relating to Gold:
June 1979 when gold was trading around $300 he forecast in a major article in the Rand Daily Mail that it would hit $800 around the end of the year. It peaked at $850 on January 16th 1980.

November 1979 again reiterated the $800 target in the Rand Daily Mail, and in the same article. It peaked at $850 on January 16th 1980. 

November 1979 also forecast that after the $850 peak it would fall rapidly to at least $400. By June 1982 gold had fallen to $285.

January 1980 he publicly won a Kruger Rand from another highly respected analyst who insisted that bullion was on its way to $1000. Gold peaked at $850 on January 16th 1980.

July 1999 In Smart Investor, when gold hit $252, called this as the 1980 bear market low for bullion when most other analysts were calling for $200 and less. The gold price bottomed at $252 and has remained above that level ever since.

July 1999 in the same article called for a bullion rise to $325 by the end of the year. A completely opposite view to the prevailing sentiment. Bullion hit $334 in the September.

Of course this is just one man's opinion and I'm sure he has made incorrect calls as well as those he boasts above, but you can't help but sit up and take notice given his accuracy in the last Gold bull market.


BB.

Disclosure: Position held in GDO & GOLD. Not investment advice. Do your own research.

Sunday, November 21, 2010

REIV Auction Statistics & Property Update

Victoria 

I have been tracking the REIV auction statistics for the entire year and it has been interesting noting trends in the figures that are reported.

Of course the most obvious trend has been that of the clearance rate which have fallen from highs over 85% early in the year to 65%, they then stagnated through the middle of the year and have since continued their descent from late September. Where do they settle? I suspect with the large number of auctions over the next few weeks that we could see low 50's reported from the REIV, which would likely mean under 50% from other reporting bodies such as APM & RPData who also release auction statistics using more conservative methodologies.


Another interesting statistic to note has been the increase in auctions being reported as "no result". Essentially this means that at the time of print for the data, real estate agents were yet to report to the REIV the results of these auctions. As a percentage of auctions held on the weekend this number being left unreported is on the increase. Having hovered around the 7-9% throughout early and middle parts of the year it has now blown out to a regular 12-14% or higher. In my opinion this potentially points to Real Estate agents holding back from reporting those not sold to artificially boost the clearance rate.

Given that the past 2 weekends (6th/13th November) have both had their clearance rates revised lower by 2% (both revised down to 59% from 61%) following the official releases, it's not too hard to imagine that we'll see another revision (lower) with this weeks clearance rate of 59% & high % of those with no result.


We've already seen a couple of big weekends for Melbourne and it's set to continue with over 1000 auctions scheduled for the next 3 weekends (this weekend being the first of 4 mentioned in the article below).
Market pendulum starts swinging for buyers
A RECORD 4385 auctions will be held over the next four weeks, giving buyers the best opportunity to snap up a bargain in two years.
The Real Estate Institute of Victoria said this was buyers' best opportunity since the global financial crisis to snap up property for less than it was worth.
For the first time, there will be four consecutive weekends with more than 1000 auctions scheduled, which could force sellers to accept less than they hoped for.
Herald Sun
Melbourne and Sydney have really been the last two cities standing in the way of the RPData index showing drops in property prices across the nation, we've been in limbo as most cities stagnate or drop with Sydney and Melbourne standing firm and holding the numbers up. Will this continue? I doubt it. I think it will be obvious by the end of the year that prices are falling across the nation.

Auction clearance rates have been known to correlate strongly with price growth as indicated by the following chart produced by the RBA.


The chart indicates that when we get a national clearance rate (weighted) of lower than 50% then we see price falls. Given the high number of auctions held in Melbourne it tends to heavily influence the national clearance rate, so if Melbourne clearance rates fall further, then so will the national figure.

Adelaide

The Saturday Advertiser had an article about housing, "Housing glut a buyer's market" the title reads...on page 23. Of course if we were seeing a tight property market and price increases we would have housing as front page news, given the downturn they have to tuck it half way through and hope no one notices.

They provided a few statistics in the article mentioning that their lift out RE section contained 2649 open inspections, which is 200 more than last week and almost 1000 more than the same time last year. That's around a 60% increase in listings from the same time last year!

Nation Wide

The number of properties listed for sale continues to rise across the nation. I noted in an earlier blog on housing that REFind showed an increase from 284,000 homes for sale at the start of August to around 311,000 in early November. Today that number stands at around 323,000, a 14% increase from August and 4% increase over the last few weeks alone. With the seasonally slow property period leading up to Christmas and in the 2 months following it will be interesting to see how high the stock on market reaches, will we see a rush of sellers try to get their properties on the market now in advance of the slow down?


BB.

Note: Table and graph showing REIV data purposefully exclude weekends that don't reflect a normal weekend (long weekends, AFL grand final weekends, election weekend are all excluded from the data series).

Wednesday, November 17, 2010

Rent vs Buy: An Australian "Cost Comparison"

In late August there was a segment on the 7pm Project about property, it posed the question whether it is better to rent or buy (landlord vs mortgage). The show concentrated on the cost aspect and I found this interesting as it was some of these very calculations that influenced my decision to rent rather than buy again after selling a house in Adelaide around 10 months ago.

They honed in on what families with a tight budget/low income could do with the extra dollars saved by renting (e.g. like going on holidays, paying for private education for the kids), when ultimately it's probably these groups of people that would benefit most from the forced savings of a mortgage (assuming they pay the loan principal and interest). This was an irresponsible angle in my opinion.

They gave the example of a $500k property (rent versus buy) where they attributed a 5% cost of purchase price to rent ($25,000pa) or alternatively paying a 7% rate on a mortgage ($35,000pa). No mention was made of other expenses that one would incur when buying such as:

- Council/Water rates
- Building insurance
- Maintenance costs
- Stamp duty
- Buying & selling fees (bank, agent, etc)

Briefly mentioned was that some money managers rented, invested their saved money elsewhere (e.g. in the stock market), but they did not make this option (rent while saving the difference) look attractive.

Overall it was lacking substance, but no doubt it was produced for the mass consumption of the general public and the reality is that more detailed analysis of the subject wouldn't interest many.

Following on from the example provided in the show, here is a more realistic breakdown of what it would cost to rent vs buy:


Rent vs Buy - The Figures

Property: $500k House


Rent:
$25k pa / 52 = $480pw


Buy:
$500k + $24,000 (stamp duty & transfer fee#) x 7.25%* = $37,990
1% of property value for maintenance & insurance = $5000
Council & water rates = $2000
Total = $44,990 / 52 = $865pw (interest only)


# Adelaide based figures, this would differ between states
* Cash rate has increased since 7pm Project aired with 7% example

While more detailed than the 7pm Project example I'm still making some assumptions:

Obviously a first home buyer would have the benefit of the FHOG and possibly other state incentives and stamp duty discount depending on location and type of property.

A 100% loan on the property is used in the example. A more realistic LVR would be 95% with the buyer funding the 5% and purchase costs with a saved deposit, however if we used that in the example then we would need to add the benefit that the funds would have otherwise provided in a term deposit for the renter (which just gets too finicky).

It also does not take into account buying and selling costs, such as:
- Mortgage application fee (not always applicable)
- Real Estate Sale Commission (usually around 2% of the sale price)
- Advertising costs during sale
- Conveyancer (for both purchase and sale)
- LMI (if buyer is using a high LVR to purchase)

Further to this in many metropolitan areas a 5% yield would probably be considered fairly generous (across most metropolitan/capital cities houses are at a gross yield of less than 5%)

So potentially we're looking at housing being 80% more expensive if you buy (with a mortgage) over renting the equivalent. Of course this is only a look at the average situation, each property will slightly differ for better or worse.

This example also doesn't take into account the potential for positive or negative price growth of the property if purchased. The reality is that only 4% capital growth would be required for the owner to break even with the renter in the example provided (that's not high growth if inflation is running at 3%). Suffice to say if you think property prices will continue to see moderate or even high growth then buying still may be the better option financially (from your point of view). 

The question remains though, will vendors always be able to find the greater fool to purchase the house for a higher price? It's a vicious circle and if those that seek housing start to look for refuge from overwhelming mortgages by renting then we could just as easily see price declines which puts the renter in an even better position.

The way I see it the landlord is not only providing me a place to live comfortably (for a great price, much less than it would cost to buy), but they are also absorbing the price risk. Win-win for the renter who believes that property prices will correct, of course not everything plays out as we expect.

This is only the financial aspect. There are other differences which separate renting from buying. Obviously the stability that owning provides might be invaluable to some, such as those with a family.

I would be interested in hearing how the rent vs buy situation stacks up in your neck of the woods...


BB.

Tuesday, November 16, 2010

Silver retracement target and clarification

Just a short post on Silver to clarify a term I have been using and look at some retracement targets for the price.

"Parabolic spike" is a term I have used to describe the strong moves higher we've seen approximately every 2 years during the Silver bull market, so when I suggested the parabolic spike might be over (in a post last week), I was referring only to that particular strong move and not the entire bull market. I suspect we will see a Silver price multiples of the current price before this bull market is over.

Following the parabolic spike in 2006 and 2008 we saw large corrections after each move:

2006
$16.68 - April 18th, 2006 (peak)
$9.40 - June 14th, 2006 (trough)
44% drop

2008
$21.35 - March 17th, 2008 (peak)
$15.96 - May 1st, 2008 (trough)
25% drop

A 25-44% drop from the $29.33 peak a few days ago would take us back to: $16.43 - $22. I would suggest this is a possible target for the correction to bottom. There would be very strong technical support around the $19.50-$21.50 level if it corrected that far.

That said given the current fundamental demand for Silver I would not be surprised to see it find support at higher levels than seen in previous corrections or the spike may not be over at all and we are just in a period of consolidation before another sharp move higher.

It's worth checking out James Turk's commentary on Silver's price action, he believes that the chart is still looking bullish and that Silver will reach $30 within the next 7 days:

November 14, 2010 – Silver’s short-term uptrend remains intact, notwithstanding silver’s big price drop on Friday.  The fundamental factors driving silver higher have not changed.  The outlook for silver remains very bullish.
There has been no damage to silver’s technical condition.  For example, silver is above its 21-day moving average.  Also, silver remains well above $25, its last major resistance level.  More importantly, the price drop at the end of the week occurred with bullish sentiment taking a nosedive.  These conditions bode well for silver’s short-term outlook, as does the following chart.
The above chart will be familiar because it is the one I used on King World News on October 28 to forecast a $30 silver price in less than 18 trading days.  Silver closed that day at $23.871.  On November 9, only 8 trading days later, it reached $29.342 – nearly hitting my target.  The good news is that my reading of the above chart indicates that silver might yet reach $30 within my 18-day target, i.e, November 23.
Note the new pattern silver has formed.  It is a pennant, and these have the same features as the flag pattern upon which I based my $30 forecast.  Both are continuation patterns within uptrends.  They allow for a short-term consolidation, mainly to work-off some bullish sentiment, which accurately describes what happened in silver as this pennant formed over the past few days.  A pennant pattern typically ends with an upside breakout.
My expectation therefore, is that silver will break out of this pennant to the upside, and probably early this week.  The demand for physical silver remains very strong, and it is the demand for physical silver, and not paper-silver, that ultimately determines the silver price. 
Most trading in physical silver takes place in London and Zurich.  The weakness on Friday occurred after both of these centers had closed.  That means that prices were driven down in the paper market.  We have seen these late Friday raids to ‘paint the tape’ many times over the past decade, so this latest one should not be a surprise.  But what is indeed a surprise to me is that the silver shorts would try this gambit now when the physical market is so tight.  Lower prices will only heighten the demand for physical metal.  Thus, I expect the silver price to rebound sharply this week.
Free Gold Money Report

BB.
Disclosure: Position held in Silver. Not investment advice. Do your own research.

Friday, November 12, 2010

Crash JPMORGAN Buy SILVER

An interesting suggestion was made by Max Keiser on Info Wars (Alex Jones) just recently.

Watch from the 5 minute mark:


Max Keiser says: "If 100m people in america bought 1 silver coin, thats 100m ounces and take that off the market, it would crash JP Morgan and we would have a scalp, we would have a major victory."

He then goes onto suggest that users specifically do a Google search for the term "Crash JPMORGAN Buy SILVER" (to raise awareness). 

Asking listeners to search for particular terms has been a recent speciality of Alex Jones:
Radio talk-show host games Google Trends
A radio talk-show host urged his listeners Wednesday to search the Internet for two specific phrases in order to get those terms into Google's closely watched Google Trends list and promote a blog post implying President Obama will invite a terrorist attack on the U.S. to boost his popularity.

Alex Jones, who hosts The Alex Jones Show weekdays on around 60 radio stations, asked his listeners to conduct Internet searches with two specific queries: "save his presidency" and "Obama terror attack." They responded, driving those two terms briefly to the top of Google Trends with the goal of driving traffic to an article headlined "Will Obama Force America To 'Absorb A Terror Attack' To Save His Presidency?"
CNET

How much effect would the purchase of 100m ounces of Silver have on the physical market? It's difficult to say. Annual production was approximately 710m ounces in 2009, so potentially 100m ounces is only around 1/7th of annual Silver production. Of course the demand would likely add pressure to the market, but enough to sink one of the large US Investment Banks?

JP Morgan is said to have shorts in the vicinity of 30,000 Silver contracts, NIA recently estimated that $50 per ounce silver would mean approximately $4 billion in losses to JP Morgan. This only equates to around 1 quarters worth of profit for JP Morgan, hardly something that's likely to send them under.
JP Morgan quarterly profit up 23 percent
JP Morgan Chase on Wednesday reported its profits rose 23 percent in the third quarter on better performance by its retail banking arm.

Profits rose to 4.4 billion US dollars from July to September, an increase of 23 percent from the same period last year, the company said in a statement.

The Age

I suspect the Silver buying that sends the Investment Banks up the wall will not be from US citizens, but from Asian buyers. This was something recently discussed on King World News.
Asian Buyers Have Silver Shorts Checkmated
The contact out of London has updated King World News on the Asian buyers which have been squeezing the shorts in the silver market.  The London source stated, “There is an insatiable appetite for physical silver here and the shorts know that, the shorts know they are checkmated.  The Asian buyers are layering in bids

Asian buyers were able to pick up silver at a discount at the lows of yesterday.  They are continuing to buy today and tomorrow.  People have to remember that spot trades 24 hours a day, so as the shorts raid the market, physical buyers already have orders in to buy tonnage of silver at a time on that weakness.

As I said to you the other day, the locals which were short with the banks were overrun when the price of silver stabilized just above $25.50 for a few hours.  The local traders were margined out and silver moved over $1 higher later that same day.

In other words, the only entities that are left short here are the Fed backed banks.  Nobody in their right mind would be short here.

Spot has been trading in front of futures here in London all day.  We have been in backwardation all day long on the LBMA.”
 
BB.

Disclosure: Position held in Silver. Not investment advice. Do your own research.