Thursday, March 31, 2011

Gold One International - Takeover offer on the way?

Gold One International (GDO) was issued with a 'Price and Volume' query (commonly referred to as a 'speeding ticket' on share trading forums) yesterday. Their response was posted this morning to the ASX and included some interesting information regarding a potential takeover offer. Bloomberg reports:
Gold One Mulls Acquisition; May Offer to Buy Out Minorities
March 31 (Bloomberg) -- Gold One International Ltd., the miner of the precious metal, said it’s assessing a possible acquisition and considering a transaction that could lead to an offer to buy out minority shareholders.

“No binding arrangements have been entered into in relation to the potential transactions” and no assurance can be given the deals will proceed, the Johannesburg-based company said in a statement today. The transactions, for which unidentified advisers have been appointed, don’t yet warrant disclosure as they are “incomplete” and confidential.

Gold One’s statement followed a query from ASX Ltd., the operator of Australia’s stock exchange, relating to a 31 percent surge in the company’s stock between March 16 and yesterday. Almost 8.6 million shares traded in Sydney today, the highest this year, and 7.9 million yesterday, compared with average daily trades over the past six months of 2.2 million.

The company cited a March 14 announcement that it will beat first-quarter output targets, and a good response to an international marketing campaign, among possible reasons for the gains. The creation of Goliath Gold Mining Ltd. and Gold One’s “low” valuation versus its peers may also have contributed, it said, adding the potential acquisition and minority buyout are examples of deals it evaluates from “time to time.”

Gold One’s stock traded on the Johannesburg exchange gained 14 percent to 2.90 rand in the three days to March 30.
GDO is listed on both the JSE (Johannesburg Stock Exchange) as well as the ASX. As per the Bloomberg article above GDO has seen some impressive gains over the past two week, but it is still undervalued against it's peers so not really surprising that an attempt to acquire the company has come about.

GDO has a market cap of approximately $343m at today's closing price of 42.5c on the ASX.

With plans for production in excess of 250k/oz pa (2011 target of 120k/oz pa) and a Gold resource over 20m oz it's going to take a larger offer to entice shareholders to offload their holdings. Of course at this stage there is still uncertainty about whether an official offer will be made.


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

Wednesday, March 30, 2011

First Home Buyers Strike Gains More Momentum...

First off I would like to make it clear that David Collyer of Prosper Australia started this strike, I have simply supported the strike by writing my own blog posts on the topic, spread the suggestion on forums and I also kicked off the campaign suggestion on GetUp! which has gone absolutely bananas (as of this evening there are over 1700 individuals supporting the campaign and that number is rising by hundreds daily). So the 'thanks for starting the strike' messages I am receiving in blog comments, emails and such are somewhat misdirected. I would like to extend my thanks to David (& Prosper Australia) for raising the important topic of housing affordability given the ridiculous prices that a First Home Buyer faces at the moment...

Today the strike/campaign reached even further than the brief mention in mainstream media yesterday. It was one of the lead articles on The Age, Sydney Morning Herald and WA Today! It also made headlines on Yahoo! 7 News & The Herald Sun.

This article has fueled hundreds of comments. I even get a mention in the article after Chris Zappone asked for my opinion on the status and speed at which the GetUp! campaign suggestion had grown:
Online support for the pledge began after a blogger from the site Bullion Baron added the suggestion to GetUp's campaign idea list. It has since shot up to the number one spot in two weeks, with 3728 votes as of this morning. The system allows users as many as three votes for the same cause.

“It has been very surprising,” said an Adelaide-based blogger running Bullion Baron, who gave his name only as Joseph. “I think the quick move highlights just how important the housing affordability issue is to young Australians.”
I feel I have missed the boat in replying to some of the comments (don't you hate it how work gets in the way of these things!) with the comments section now closed (almost 500 replies), but thought I would post a few up here:
People have to live somewhere, so don't buy and watch rents skyrocket! This is because there are simply not enough houses to support the population.....particularly in Sydney where almost 25% of the Australian population live! Supply and demand are a wonderful thing........
The Yub | Canberra - March 30, 2011, 11:37AM
I hear the "rents will skyrocket" saying quite regularly, one has to ask the question, how much have they moved over the last 24 months? According to RPData they grew very little over 2009 and slightly more than 4% in 2010... how much have the costs increased for the homeowners/investors over the same period? Without taking into account the increased cost of rates, fees and services that come with owning, interest costs alone have soared by around 40% (where variable interest rates were around 5% in early 2009, they are above 7% now). You have to wonder how the number of properties for sale and rent continue to increase on REFind if there are not enough houses to support the current population!
The only people making this "pledge" will be the ones that already can't afford to buy property and so wouldn't be in the market anyway. Real market effect = Zero.
ursulasays | Sydney - March 30, 2011, 12:03PM
I actually agree with this, I don't think the buyers strike is likely to have a large effect on the market, that said I think the correction has already started and will take place with or without First Home Buyers taking up this cause.
So what happens to all the people who have already purchased a house and are paying off the mortgage? Especially when they can't sell the property to cover any outstanding amount on the mortgage? Great way to hurt people who tried to be responsible at the expense of people who are often too lazy to save and go without to save for a house.
RobbyM | Sydney - March 30, 2011, 12:04PM
As I pointed out on my blog in a post the other day (Who will lose in Australia's house price correction?), the majority of home owners caught up in this price correction will not be worse off because if they are selling to buy another, they will receive less for theirs, they will also pay less for the one they intend on buying. It will hurt some owners who are selling to rent or for other circumstances, this is unfortunate, but what is the alternative? Bubble prices forever? Hopefully those who have bought in the last few years are happy with their choice for the foreseeable future and have no need to move.

I could go on and on replying to the comments, but I feel it would be fruitless. A lot of the comments expressed anger at the idea of a strike and resulted in Gen X/Y being stereotyped as they often are. I don't understand the anger towards the campaign, at the end of the day First Home Buyers, Gen X/Y and anyone else have the right to decide for themselves whether they buy, rent or live out of a box as a hobo.

Along with the anger in some comments came the sense of desperation/fear that some who are over leveraged/exposed to property might be feeling as they witness the correction play out.

The online poll that adjoined the above article (still live for the next few hours) has gathered over 18,000 votes with only 20% of voters that think the campaign is likely to have an effect on the market. Not really surprising that around 70% of voters thought that prices would rise regardless, I wonder if it's a coincidence that approximately 70% of Australians live in their own home while the other 30% rent.

I don't believe a strike is a long term solution.

I don't believe the strike will cause house prices to fall.

I do believe that the strike campaign will draw attention to the issue of affordability, to our housing bubble and probably save a few first home buyers from overextending themselves on buying a home today at the wrong time.

As David said in his interview with Red Symons on ABC today, "this is a call to arms for all the young people locked out of the market". This opportunity is yours to take, either step back and don't buy or step right up and join the madness at your own peril.

David Collyer said that the bursting of the housing bubble was imminent, personally I am of the opinion it is already in progress and has been for almost 12 months. RPData's figures show that the nation wide price peaked early in 2010, the 3 months to January 2011 showed a significant price fall Australia wide.

The bubble would have started deflating in 2008 if it weren't for:
- Relaxing of foreign buyer laws
- Increased stimulus measures (FHBB, FHSA)
- RBA dropping interest rates

Will the government try and ward off price falls again? Quite possibly, although hopefully they will think twice after seeing the results of the last attempt.

Without reflation of the bubble I suspect we will see price falls nation wide in the vicinity of 15-20% off nominal prices from the peak over the next couple of years, likely followed by a period of stagnation bringing the total real fall in prices to around 30%.

It's a pretty grim reality that we face, but similarly to Keating's comments about Australia's recession in the 1990s, I believe:

This is the house price correction we have to have!


Tuesday, March 29, 2011

"Home Buyers Strike" goes viral...

In a previous post I pointed out that Prosper Australia had announced a property buyers strike. Two weeks on and the campaign appears to be going viral!

I started a campaign suggestion (in support of the above proposal) on the site GetUp! which has shot up to first place (most popular campaign suggestion by votes), quite an achievement given other campaign suggestions have been running for up to 6 months in most cases. Another campaign to abolish negative gearing has also made it to the top five suggestions and will likely continue rising to second place.

Steve Keen picked up the cause on his blog (Steve Keen's Debtwatch) back on the 25th of March and then today blogged again in support of the negative gearing campaign on GetUp! He suggested the following reforms in today's post:

1. A petition to Parliament calling for the policy changes listed below; in addition,
2. A “First Home Buyers Strikers Pledge” to be signed by potential First Home Buyers who are abstaining from the market until the policies are implemented.
3. Policy points:
1. Abolition of the First Home Owners Grant (FHOG)  for the purchase of existing properties;
2. Abolition of Negative Gearing (NG) on existing properties and shares (coupled with grandfathering of existing Negative Gearing);
3. Restoring capital gains tax to the same rate as income tax;
4. 25% of the funds saved from these two programs over the next 3 years to go to the purchase of new properties to expand the supply of low-income public housing;
5. 5% to expand the funding of public housing;
6. 25%  to construct and administer new homeless shelters; and
7. 5%  to Swags for Homeless so that people who are still sleeping rough can do so in  better comfort.

Since the above from Steve Keen we've also seen mention of the strike and campaign to support it in the mainstream media, this today at the end of an article about negative sentiment in the market from Chris Vedelago @ Domain/SMH:
Social media networks have been buzzing about a call for a “buyers strike”, which was originally put out by Prosper Australia.

The goal is to cause a market correction that will see affordability improve and, in a related campaign, put an end to negative gearing policies.

Economist Steve Keen has come out in support and, to date, the strike call has attracted about 3179 votes on GetUp! (now ranked #1) and about 243 likes on Facebook, plus scores and scores of comments.

What do you think about the campaign?
It has also been picked up by on a popular Canadian housing blog, The Greater Fool where Garth Turner writes:
Imagine a place where housing’s hopelessly unaffordable. Where it takes six or nine times an annual income to get a home. Where young people, despite their inexperience and lack of money, are dangerously pushed into piles of debt. Where folks are told there’s a shortage of land, in a country that’s mostly empty. Where government has purposefully inflated real estate. Where anyone can flip on TV and see what housing excess did to the middle class in Britain or America. But where everything thinks it’s different.

And it ain’t Canada.

Two weeks ago a home buyers strike emerged in Australia.

Interesting, because the country of 22 million is in the throes of a housing bubble just like ours. Prices have raged higher since the economic crisis three years ago, fueled by low rates (now higher), easier credit and a real estate-horny government. Weeks ago The Economist figured Australian houses are overvalued by a withering 56%. And Demographia ranks Sydney among the most expensive cities in the world (9.6 times income), right ahead of Vancouver (9.5).

Speculation is rampant. Investors have snapped up properties, but (like here) market rent won’t even cover the cost of carrying them. And the MSM is filled with opinion pieces and quotes from politicians and experts saying there is no bubble – just a robust market based on economic fundamentals. Hic.
Further to the above mentions of the strike it is also being discussed on several economic/housing forums including Simple and Sustainable, Credit Crunch, Bubblepedia and even Somersoft Investment Forums as well as on multiple social media sites including Facebook and Twitter.

The latest Twitter update also points out that David Collyer (of Prosper Australia) will be hitting the airwaves tomorrow morning:

Red Symons ABC 774 Melbourne interviews David Collyer on the Buyers Strike 7.20 am Wedneday.

Certainly interesting times, I wasn't expecting this campaign to get the legs it has, so it's been a pleasant surprise.

You might be thinking, what can I do given the coverage this strike is already receiving... my suggestion would be to take 5 minutes to email the team at GetUp! to voice your support on having the housing issue turned into an official campaign... you can reach them at


Sunday, March 27, 2011

Melbourne REIV Figures Charted


I have been collating the REIV weekly auction statistics for the past 15 months. What I found interesting when charting the total volume and auction clearance rate was that during early 2010 the volume and clearance rates trended together (both dropped lower).

It seems that once again total volume could have put in the same topping pattern early on this year and could continue to head lower. Clearance rates are starting from a much lower point than last year, if they follow the same trend as last year then we could see clearance rates back under 60% in Melbourne very soon. As I mentioned in a previous post, it's been pointed out that already Real Estate Agents have been fudging figures so alternative to a falling clearance rate perhaps we just see the percentage of 'unreported' auctions sky rocket...

I expect we won't know for several months whether this years figures trend the same as last year as it's a slow process for the chart to play out. This weeks low clearance rate (61%) might also just be an anomaly. Clearance rates in 2010 didn't start falling sharply until the end of April/early May.


Friday, March 25, 2011

CME Hikes Silver Margin Requirements‏ (Again!)

Disclosure: I would like to point out to readers that I have never traded on the COMEX. This is more so a  generic discussion on how leveraged accounts work.  If I have anything wrong feel free to leave a comment (preferably with a link).

In what has become somewhat a regular occurrence CME once again stepped in last night (on Thursday in the US) to increase the Silver margin requirements

The initial margin requirement is a set number of dollars that a trader needs to put down to take control of 1 COMEX Silver contract. A COMEX Silver contract is 5000 ounces, so at current Silver pricing a single contract is worth approximately $185,000 (5000 ounces x $37 spot price). 

Based on the latest initial margin requirement if a trader had $50,000 capital then they could take control of 4 contracts (4 x $11,745 = $46,980) with some capital left spare ($3,020). With the 4 contracts they would have control of 20,000 ounces of Silver (4 x 5,000 ounce contracts) or around $740,000 worth total (20,000 x $37). If the margin requirement were to rise again to $12,000 the trader in this example would still be covered by his spare capital (4 x $12,000 = $48,000 required, so he can dip into his spare capital to 'top up'), but if the margin requirement were to rise to $13,000 (totaling $52,000) then he would either have to come up with $2000 more capital or sell one of the contracts to cover the difference. This is why the margin increases can cause some selling pressure; some traders may be forced to sell some of their positions if they are too highly leveraged to afford the extra needed.

If the CME did not increase margin requirements and the initial margin requirement was still $8,775 (as it was in November last year), then a trader with the same amount of capital ($50,000) could take control of 5 contracts instead of 4 (that may not sound like a big increase but remember every contract is 5000 ounces of Silver so the extra contract adds another $185,000 of exposure). The higher a traders leverages the larger effect swings in the price of Silver has on their account. This can be great if the trader is long and the price is rising, but can be devastating if they were long and Silver had one of it's typical sharp corrections. Allowing such highly leveraged positions is not responsible so it’s a good thing (in my opinion) that the CME raises margin requirements. 

These actions from CME are not a conspiracy as some would have you believe. It’s their way of reducing risk and volatility. It appears on some occasions they are introducing the increased margin requirements with a very short amount of time for traders to deliver the extra capital, this could be seen as irresponsible, but with Silver tearing higher by 3-5% during some sessions it’s no wonder they have to move quick!

Every time we see this margin raised I see precious metals enthusiasts across the blogosphere rage that CME is trying to manipulate the market. I decided to sit down and collate the examples I could find (they are being reported regularly on Zero Hedge) and try to workout what the effect of the margin hikes might be given the rising price of Silver.

Here are examples from Zero Hedge where the margins have been increased on Silver contracts (in some cases along with Gold and other commodities):

March 24th, 2011
In tried and true fashion, just as Silver was about to viciously destabilize the global capital markets as it surged to new 31 year highs, the CME stepped in and did its usual 3-6 half life intervention by hiking initial and maintenance margins on silver futures from $11,138 and $8,250 to $11,745 and $8,700 respectively. ZH

February 18th, 2011
Now that JPM is out of the picture, the last recourse of gold and silver price suppression is exchange margin hikes. Or was. The CME has announced, that as of close today, it will hike various gold and silver (and other metal) contract initial and maintenance margins by 50%.... And nobody cared. ZH

February 11th, 2011 (for February 12th increase)
The CME group announced that margins for metals futures contracts on the NYMEX and COMEX will rise beginning February 12 by approximately 25% across various classes.  The initial margin for 100-ounce COMEX gold futures will increase to $6,747 from $5,403, while the maintenance margin will rise to $4,998 from $4,002. For 5000-ounce COMEX silver futures, initial margins will increase slightly less: from $6,075 to $6,750 while the maintenance margin increases by $500 from $4,500 to $5,000. ZH

December 17th, 2010
CME Hikes Margins Across The Board: Copper, Palladium, Silver, And, Oddly, IR Swaps, Treasuries And Fed Funds. ZH

November 16th, 2010
If at first you don't succeed at killing the higher beta stock short hedge, try again. The CME has just raised its margin requirement on silver again, bringing maintenance margins up from $6,500 to $7,250, after hiking it less than a week ago for the first time and preventing silver from surpassing $30. ZH

November 9th, 2010 (for November 10th increase)
"CME confirmed silver margins raised from $5000 to $6500 (30%) effective 11/10 settl - no other metals affected." ZH

Here is a quick look at the initial margin requirement for spec traders (legitimate hedgers/members have a lower requirement) over several dates they were increased:

Date: November 10th, 2010
Spot Price: $27.18
Contract Value: $135,900 (5000 x $27.18)
Margin Requirement: $8,775
(6.5% of full contract value)
Resulting Leverage: 15:1

Date: November 16th, 2010
Spot Price: $25.40
Contract Value: $127,000
(5000 x $25.40)
Margin Requirement: $9,788 (7.7% of full contract value)
Resulting Leverage: 13:1

Date: December 17th, 2010
Spot Price: $29.15
Contract Value: $145,750
(5000 x $29.15)
Margin Requirement: $10,463 (7.2% of full contract value)
Resulting Leverage: 14:1

Date: January 21st, 2011
Spot Price: $27.45
Contract Value: $137,250
(5000 x $27.45)
Margin Requirement: $11,138 (8.1% of full contract value)
Resulting Leverage: 12:1

Date: March 24th, 2011
Spot Price: $37.26
Contract Value: $186,300
(5000 x $37.26)
Margin Requirement: $11,745 (6.3% of full contract value)
Resulting Leverage: 16:1

Note: These figures differ somewhat from the Zero Hedge article figures, it appears ZH was a little careless with the figures they used. They chopped and changed between initial margin requirement and account maintenance figures, I have taken my figures directly from CME so believe they are correct.

Notice how the leverage remains within a fairly small range?
As you can see while the margin requirements have increased quite significantly over the last 6 months the amount of leverage available is still relatively similar, it is only due to the rising cost of Silver that CME must continue raising these margins. 

The rising margins may be reducing the number of ounces a leveraged trader can take control of, but it would be exactly the same if buying physical. If you had $50,000 to buy in September you could have bought 2500 ounces ($50,000 / $20) where as today that same amount of capital will only buy around 1350 ounces ($50,000 / $37).

Here is a chart showing the point at which the above 5 margin increases occurred:

Does it look like the change in margin requirements is having a long term effect on the price of Silver? On the day of announcement most days closed in the red, but were often followed in the short term by another surge higher. As long as the fundamental drivers are in place Silver will continue to climb in price.

There is a lot of conspiracy talk around Silver and how it is manipulated. In my opinion there is no conspiracy to be found here.


For a brief run down on how the COMEX works I would recommend a visit to About.AG -> LINK

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

Wednesday, March 23, 2011

Gold: Global currencies and demand

An interesting article was posted on Mineweb earlier this week comparing the performance of Gold over several currencies. The 4 currencies it was compared in were the US Dollar, Renminbi, Indian Rupee and Euro. With the growth of three tied so closely it was almost just a comparison of the US Dollar and Euro pricing.

Here is a chart that provides a look at Gold pricing in a broader range of global currencies.


The index starting point is Gold's monthly low in USD as the price collapsed in late 2008. The monthly figures were downloaded from the World Gold Council.

There have been a few dips along the way but Gold has increased in all currencies over the past 2 years.

The largest rise has been in USD (this would be in part due to the starting point). The Gold price in Pounds and Euros has also seen comparitive growth, having overtaken the USD at one point as the GFC took it's toll on the Eurozone.

In Australian Dollars Gold has performed relatively poorly in comparison over the same time period; however the Australian Dollar had already started falling against the US Dollar when Gold put in the November low. Due to this the price of Gold in AUD had already put in a rise of $220 (using monthly averages) in the 6 months prior to the start date of the above index.

Over the last half of 2008 the AUD dropped from almost parity against the USD to a low of just above 60. It's back around parity now, short term, while commodities are performing well and the Australian economy is looking sound the AUD may remain high, but there are several scenarios that would see the AUD plunge again which could result in Australian priced Gold shooting to the upside (potentially a quick 20-40% gain). If we saw a deflationary collapse and a short term selloff in USD Gold there is still the potential for a higher gold price in Australia, for example Gold at US$1250 with the AUD at 70c against the USD would see Gold at almost AUD$1800 here.

Other “commodity currencies” such as the Canadian Dollar and the South African Rand which have strengthened against the USD over the past 2 years have also had seen a more reserved price of Gold locally with the increase in their rate against the USD having offset some gains in the metal.

Priced in Yen Gold is still slightly off recent bull market highs as the JPY has strengthened against the USD following the devastating earthquake/tsunami. The carry trade has been suggested by some as the reason, as investors sell off higher yielding assets or currencies to pay back loans in Yen it increases demand temporarily for the Japanese currency. A similar situation arose around the USD during the depths of the GFC as traders sold riskier assets to payback their USD loans.

Gold priced in Yen is still well below its all time highs. Gold reached almost JPY205000 in 1980 and is trading today at around JPY115000. Demand in Japan for Gold is currently strong with premiums increasing by several dollars over past weeks.

The large increase in the price of Gold has not been a deterrent to buyers, in fact if anything with every leg higher in price comes a new wave of buyers eager to snap up Gold in different forms for differing reasons (articles below all from last several days). 

Demand in India continues as jewelery and investment sales remain strong:
Gold imports by India, the largest consumer and importer of the yellow metal in the world, is going to touch a record high in 2011 despite the high prices of gold.

According to initial estimates by the Bombay Bullion Association (BBA), imports of gold by India is steady and strong and could hit a record of 800 tons this year.

“Gold import by India is going up every month despite the high gold prices. Strong jewelery sales and consumer investment demand for gold are the main drivers for the surge in gold imports,” a BBA official said. Commodity Online
Although the cable in this article is several years old, Iran also commented last year that they were looking to buy more Gold (and Euros) to diversify out of the USD:
Iran has bought large amounts of gold in the international market, according to a senior Bank of England official, in a sign of how growing political pressure has driven Tehran to reduce its exposure to the US dollar.

Andrew Bailey, head of banking at the Bank of England, told an American official that the central bank had observed “significant moves by Iran to purchase gold”, according to a US diplomatic cable obtained by WikiLeaks and seen by the Financial Times.

Mr Bailey said the gold buying “was an attempt by Iran to protect its reserves from risk of seizure”. Financial Times
The ATM glitches & electronic transfer issues which have plagued Mizuho Bank in Japan (following the earthquake, tsunami and economic uncertainty) have probably contributed to the demand for Gold in Japan which is pushing up premiums:
A scramble by Japanese investors for safe havens after a deadly earthquake has pushed physical gold premiums to three-year highs as buyers in less affected parts of the nation stretched supply, unleashing a trend that could give a lift to world prices.

Buying of the precious metal by investors and households in the west of Japan, combined with transport woes in the world's third largest economy, usually a net gold exporter, could dry up supplies elsewhere in Asia, and inevitably push up world prices. Reuters
Unrest in the Middle East continues to drive investors to Gold and Oil:
Gold climbed for a fourth straight session, touching the highest price in more than a week, after air strikes in Libya boosted investor demand for the precious metal as an investment haven.

Allied officials said two days of missile and aircraft strikes have effectively grounded Muammar Qaddafi’s air force. The Libyan leader denounced the coalition mounting the attacks, which includes the U.S., the U.K. and France, as “the party of Satan.” Yemen’s President Ali Abdullah Saleh fired his cabinet yesterday and faced a growing internal revolt.

“The gold market is reacting to the fact that Qaddafi hasn’t folded,” said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago. “He’s backed into a corner, and if he remains in power under a cease-fire, a significant amount of uncertainty will come out of that region.” Bloomberg
The issues in the Middle East look set to continue with escalating skirmishes between Israel and Palestine on the Gaza strip as Tuesday 8 Palestinians (4 civilians and 4 militants) were killed in retaliatory Israeli airstrikes.

There is also the potential for those that have had their assets frozen to use Gold as a source of funding (although similar rumours from Tunisia, where it was reported that the President had fled the country with 1.5 tonnes of Gold, were later said to be false):
The international community has hit Muammer Gaddafi with a raft of sanctions and asset freezes aimed at cutting off his funding. But the embattled Libyan leader is sitting on a pot of gold.

The Libyan central bank – which is under Colonel Gaddafi’s control – holds 143.8 tonnes of gold, according to the latest data from the International Monetary Fund, although some suspect the true amount could be several tonnes higher.

Those reserves, among the top 25 in the world, are worth more than $6.5bn at current prices, enough to pay a small army of mercenaries for months or even years. Financial Times
The demand from China also continues as both private investors and the central bank look to protect their assets and diversify:
Over in China meantime - where the World Bank now expects GDP growth of 9% this year - "Gold buying fever shows no sign of abating so far in 2011," says the latest monthly report from Japanese metals conglomerate Mitsui.

"Gold sales on the Shanghai Gold Exchange were strong again in February, both before and after the Chinese New Year holidays," says the report, noting that - by the end of last month - cumulative sales outpaced 2010 by one third, "running at double the pace of the early part of 2008 or 2009." IB Times
All around the world this "ancient relic" is really starting to shine, as an item of jewelery, as a central bank reserve asset, as a wealth protection tool, as an inflation hedge, as a crisis hedge and as a source of funds when other assets are frozen. Gold has always been a diverse tool, but you wouldn't have known it until recently.

Gold is bound to continue it's increases against all currencies while central banks follow their "print now, ask questions later" policy. That bodes well for the investor who can see the trend and has allocated a portion of their investment capital to Gold.


P.S. Thanks goes to The Prince for linking me the Mineweb article/topic suggestion.

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

Sunday, March 20, 2011

Who will lose in Australia's house price correction?

While following the updates of's buyers strike I noticed a comment on the site:
Don’t wish terrible financial ruin on the people who bought homes for their families in the last ten years. No one wins in that situation. LINK
I think saying those expecting a housing correction wish financial ruin on families is a very unfair suggestion. Like most people I have friends, family, colleagues and likely regular readers of my blog that have exposure to housing either through the purchase of their own home or as investments. I don't wish financial ruin on any of them or anyone else who has bought property in the last couple of years. That said it doesn't change the fact that house prices are high. 

Believing that housing is due for a correction and even writing about it is likely to make little difference in the outcome so it amazes me that some people (in blog comments, forums, etc) would take such offense to the suggestion that house prices could fall. Of course in many cases those that fire up have an emotional investment in the topic, so are possibly over exposed to property in one way or another. It's important to stay objective when it comes to ones investments, that might sound funny coming from someone who has almost their entire net worth tied up in one asset class, but reality is if the fundamental reasons I invest in Gold/Silver changed overnight I believe I am mentally prepared to sell the lot.

I also take issue with the suggestions that it will be families who bought housing for their families that suffer in a correction. Here are a couple of facts/figures:
The figures show that one in seven taxpayers now own at least one investment property, about 1.7 million taxpayers, and claimed $33 billion in tax deductions over the 2007-08 year. Negatively geared property resulted in losses of over $8.6 billion, representing an increase of 35%. Smart Company
An Australian Housing and Urban Research Institute report this month said 80 per cent of investors buy for long-term gain, but at least half sell within five years because of cashflow problems or disappointing capital growth. One in four investors sells within 12 months.
The above suggests that not only are there a large number of property investors, but that negative experiences with property and lower than expected returns are a major reason for investors selling up sooner than they expect. Given this information, in the event of a property price correction does it seem likely that the home buyer who bought for their family will be selling and realising the losses or will it predominantly be investors who clearly haven't done their research? 

Chances are that many families that have to sell and realise the loss will be moving into another purchased home at the same time, so if their own property has fallen 20% and so has the one they are buying, then there is little loss to them. The real loss will be to the investor that has purchased in the last year or three and has been paying money each week to hold the property only to sell it a little later down the track when prices have gone backwards and future gains are looking unlikely. Buying a property that is returning less than it costs to hold is only a worthwhile venture if the capital growth exceeds the losses being made...

No doubt as house prices fall the guns will come out blazing about how the bears spreading fear are to blame, other excuses for the fall will be made, such as blaming it on the Queensland floods, the global economy and other such nonsense. Anything to divert attention from the real reason:

Housing in Australia is too expensive!

It's not a secret and anyone who can objectively look at a set of data can work it out for themselves.

If there is a housing correction (posed as a possibility, but in reality the prices are already correcting) it shouldn't be those that saw and commented about the bubble that should be demonised, it should be those that encouraged buyers to get in at the peak with blatant disregard for that persons financial capacity to afford the purchase.

If you want to warn first home buyers about the potential bubble, then I would suggest taking 20 seconds to vote for the following campaign on GetUp:

The campaign suggestion has over 1250 votes and 450+ supporters. That's a pretty decent number given that the strike has only been linked off blogs and forums and has only been live for less than a week. Most of the other campaign suggestions on the site that have similar numbers have been active for months, so here's hoping the GetUp! staff take the suggestion seriously.


Following the Bullion Baron

A couple of months ago I added a shortcut to the panel on the right hand side of the blog (toward the bottom) to make RSS subscription easier. I'm relatively new to blogging so adding features such as this was an afterthought. Today I've added an email subscription service (also to the right, near the top). You can also use the Google "Followers" service to add my feed to your Google dashboard (Reading List), the link for this is just above the RSS subscription widget.

I've had a couple of comments that the light text on dark background is a little difficult on the eyes. If you find that is the case then this feedburner site (LINK) may help (which displays the blog as black text on white background).

Hopefully these features make it easier & more accessible to follow my blog. I welcome any other suggestions to improve the site.


Global Turmoil - Gold is a safe haven

Last week when I was writing my post on the potential of QE3 not immediately following QE2 the news from the Japanese earthquake was only just hitting the airwaves and it has been quite a week and a bit we've had since.

Equity markets were thrown into turmoil during the week as the risk of a nuclear meltdown plagued the Fukushima nuclear power plant. It certainly throws a spanner into the workings of a "global economic recovery", not that I thought this was likely beforehand, but it may open the eyes of some others.

A lot of uncertainty around what happens from here, there are rumours that Japan are not coming clean around the ongoing danger and radiation leaks from the Fukushima plant. I would say the crisis there is far from over.

Here are some headlines from the past couple of days:
- Coalition launches Libya attacks
- Gaza militants fire dozens of mortars into Israel
- Japan fights to stop meltdown
- Iran calls on Saudi Arabia, UAE to leave Bahrain "immediately"

Does this sound like a stable world where a return to normal is likely in the short term?

I took the opportunity during the week to reduce some positions in riskier junior Gold/Silver stocks and move some money into Gold via PMGOLD on the ASX. As I said last week I think AUD priced Gold has the potential to act as a hedge to protect against several scenarios:
If the AUD dropped sharply against the USD the AUD price of Gold may still rise even if the USD deominated price is falling, e.g. US$1250 Gold with AUD at 60c against USD would give us AUD$2100 Gold. This may make physical Gold in Australia a good buy/hedge regardless of the outcome. If we see the deflationary conditions then the falling AUD will hold up the local Gold price and if QE were to continue, fueling inflationary pressures, then Gold priced both in USD and AUD should continue to rise.
We've already seen the AUD drop below parity against the USD. In my opinion there is potential for further falls over the next 12 months. I don't think the Australian economy is as bullet proof as some local commentators would have you believe.

Even though I expect the AUD to drop against the USD later this year that doesn't mean the USDX is in for an easy ride over the next couple of months. I've been tracking the progress on this blog and noted as it looked imminent to fall below previous supports at 79 and 77. On Friday it broke below support at 76, where it's looking likely a fall to 74 and possibly lower is on the cards.

If we see the USDX fall below 74 it has the potential to create a panic out of the dollar and in the process may drive up Gold as the one true safe haven (see Silver in the last half of 2010 to see what sort of price appreciation is possible in the metals when a rush occurs).

I do think that Gold is a safe place to be right now (at least safer than just about any other asset out there), however there is still a risk that central banks pumping their printing presses won't be enough to stop a collapse if the markets were to roll over. This is why I've moved part of my portfolio out of riskier junior stocks and into the metal itself. Even if the metal does sell off with other assets it's likely to be a lot less severe than the Gold/Silver stocks themselves.


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

Wednesday, March 16, 2011 Don't Buy Now, Home Buyers Strike

Tax reform group Prosper Australia today called on first home buyers to delay buying real estate ahead of the flip into a falling market, which it described as ‘imminent’.

RP Data reports there are over 900 Melbourne auctions scheduled for the weekend and 2700 over the next three weeks. Prosper believes this enough to decisively tip the market into oversupply.

“When the Great Australian Land Bubble bursts – just as land bubbles all around the world have – the freshest buyers are totally exposed. They face financial ruin as house prices fall below their debt. The crippling mortgage repayments become pointless,” Prosper campaigner David Collyer said today.

“The bursting of the land bubble is signalled by simultaneous downturns in auction clearance rates, building approvals and housing finance. ABS data already shows the latter two elements in place (ABS 8731.0 Building Approvals; ABS 5609.0 Housing Finance).

“We cannot help those who have recently bought, but we can warn prospective buyers – particularly first-timers whose innocence and heavy borrowing leaves them uniquely exposed.

Australia’s housing market is widely regarded as being in a price bubble and ‘most severely unaffordable’. Warnings have been issued by a long list of agencies and experts, including the IMF, the OECD, The Economist newspaper, Jeremy Grantham and Steve Keen.

“Residential properties are trading at between six and nine times earnings – depending on assumptions. Historically, they have fluctuated between two and a half and three times earnings,” Collyer said.

The largest element buyers are paying for is the land, not the building.

“A buyers’ strike is the only rational response to current land prices. Frankly, prices are ridiculous. How anyone can pretend Australia has a land shortage beggars belief!

“Some argue prices have arrived at a new and permanently high plateau, but the historical record shows reversion to the long term average – in every case without exception.

The experience in the USA, Europe and the UK is for sudden, jagged falls in property prices. Sales volumes also shrink dramatically.

“I remind you there are 1.3 million Australians with negatively geared rental properties. They are diverting all rents and some personal income to meeting interest payment in the hope of capital gains. When only capital losses are expected, investors will flood the market and overwhelm demand. Buyers will step back, making it virtually impossible to sell at any price.

Do not underestimate the scale and significance of the transformation that is about to unfold. Price falls are imminent – protect yourself. Don’t Buy Now!” Collyer concluded.


The above article caught my eye yesterday and thought I would discuss the suggestion made that home buyers should strike and not buy property. I created a campaign on the Australian site 'GetUp!' (I just think it's a good idea so doing what I can to promote it, I'm not affiliated with, so if you think the idea has merit please take 20 seconds to vote here: LINK. You need only enter an email address/name and no confirmation is required, you can allocate up to 3 votes to the idea. Would be great to see GetUp! pickup the idea and run with it for one of their officially supported campaigns.

Let me start by saying that I don't personally see this campaign getting very far. Tens of thousands of first home buyers make the leap into property each year; this campaign/message is likely to reach only a few hundred potential buyers without mainstream media promotion and let's face it the mainstream media has a heavy bias to avoid covering such a campaign. Most mainstream media organisations derive a large portion of their advertising income from real estate advertising; they can hardly be considered independent or a source for unbiased real estate news with this dependence. That said as was mentioned on the Macro Business Blog, there is an increasing amount of fair coverage such as critical talk about negative gearing and the FHOG, so perhaps I will be proven wrong on this point and mainstream media will pickup on the strike.

Australians seem to have an unhealthy need to "own" rather than rent. I understand the benefits of owning one’s home, it provides security (no landlord to decide when you have to move out), you can make alterations to the house, you can have pets where most rentals do not allow it & it’s something you can call your own (even though in reality the bank owns the property). What I don’t understand is the desire to own no-matter what the cost or financial burden. As I discussed a few months ago (Rent vs Buy: A cost comparison) the cost to rent is approximately half the cost of buying in most situations with housing yields at around 4% and interest rates over 7%, if you are a disciplined saver there is definitely financial benefit in renting while saving or investing the difference.

Renting in Australia is looked down upon. Renters are often talked about as if a lower class of society. As an ex-home owner one of the questions I’m asked in many social situations is “So when are you buying again?” as if expected that renting is only a temporary situation while on the lookout for the next property to buy. Of course when friends and family ask I do the polite thing and say we’ll look in a couple of years. Talking about falling house prices is almost like taboo at the dinner table, some of those I have raised the subject with have dismissed it as “house prices never fall”, I’ve mostly just given up talking about it.

Some questions you should be thinking about when looking to buy:

What happens if I lose my job?
What happens if I get sick/injured?
What happens if interest rates increase?
What happens if prices drop in my area and I want to move?

In some ways property provides security, but there are still plenty of risks if the right precautions are not taken. If you are unable to make your repayments the bank that holds your mortgage is likely to be as unforgiving as a landlord.

Housing is overpriced on almost any metric you measure it:

Price/Income Ratio
Total Land Values/GDP Ratio
Price/Rent Ratio

In my opinion even without an "official" movement buyers are already sitting on the sidelines, the increasing inventory of housing stock, weak auction clearance rates and crashing volumes indicate this is the case. So regardless of whether the "Don't buy now" campaign goes viral I think price falls are already taking place and will continue. If this campaign only reaches a few people that would have otherwise bought and makes them seriously consider the financial consequences of buying then it has done it's job.

Renting is not only cheaper, but allows dwellers to live in a property without taking on the risk of price falls associated with owning.

Rent or Buy?

I know which makes sense to me at the moment.


Friday, March 11, 2011

If QE3 were not to immediately follow QE2 ...

There has been a possible scenario stewing in my head over the last few months after seeing some charts which showed the relationship between the US Fed QE programs/balance sheet and the rallying stock markets, commodities and other assets.

 The above from Free Gold Money Report - Link

  The above from Zero Hedge - Link

Many commentators in the precious metals sector write about the Fed printing to infinity, endless QE programs, Bernanke throwing money out of helicopters and so forth, but very few talk about the risks associated with a halt of the QE program (even if it were only temporary).

I recently read an article by Christ Martenson which discusses the possibility (worth following the link to read in it's entirety).
There's a scenario that could play out between May and September in which commodities (including my beloved silver) and the stock and bond markets could all sell off between 20% and 40%.  The trigger will be the cessation of QE II and a multi-month pause before QE III. 
This is a reversal in my thinking from the outright inflationary 'buy with both hands' bent that I have held for the past two years.  Even though it's quite a speculative analysis at this early stage, it is a possibility that we must consider. 
Important note: This is a short-term scenario that stems from my trading days, so if you are a long-term holder of a core position in gold and silver, as am I, nothing has changed in my extended outlook for these metals.  The fiscal and monetary path we are on has a very high likelihood of failure over the coming decade, and I see nothing that shakes that view.
But over the next 3-6 months, I have a few specific concerns. Read the rest of the article here.
I haven’t got a paid subscription to see more detail around where Chris sees markets, etc heading if this were to occur, but I thought I would draw up my own timetable to give an idea of how I think things could play out if QE3 weren’t to immediately follow QE2 at the end of June. Keep in mind these targets are simply guesstimates and the actual figures could vary wildly as could the outcomes.

March to April

Middle East/Northern Africa unrest continues to push oil price higher
(Oil Target $140-160)

Gold/Silver will rally with oil as a safe haven/speculative trade based on expected inflation
(Gold Target $1600, Silver Target $45, GSR of 35.5)

Rising inflation seen as a key risk, so US Dollar index (USDX) will fall
(USDX Target lower than 74)

Rising oil price puts dampener on further market rallies (e.g. DOW/S&P) - sideways action, maybe correction (but nothing of significance)
(Dow Jones Target 11,000, S&P 500 Target 1150)

May to June

Announcement: Halt in QE program or reduction in size 
De-leveraging/deflation takes hold
Pressure from high oil price has pierced hopes of US recovery

Markets roll over and start a sharp correction

Gold/Silver could also sell off (risk higher for Silver as more volatile metal)
Oil may not sell off too badly initially if Middle East/Africa troubles continue

July to December

Market continues to drop on it's way within next year or two to new lows (e.g. below March 2009 bottom) both here, US and elsewhere (including emerging markets)

Oil price will likely take a hit like it did in 2008 following reduced demand as recession/depression take hold (doubt we'll see it back at $40 again)

Commodities sell-off will cause Australian economy to tank (house price correction will accelerate, AUD could once again fall of a cliff)

Gold/Silver see continued falls and weakness (through seasonal middle of year)
(Gold Target $1250, Silver Target $25, GSR of 50)


If the scenario were to play out above with most assets being sold off in a deflationary spiral then Gold and Silver equities could potentially be smashed even if the price of the metals hold up. In a situation were margin calls are being made regularly investors may need to liquidate any assets they can get their hands on. Junior stocks who rely on a stable and liquid market for regular capital injections could be particularly badly affected. In the 2008 collapse there were some Gold/Silver equities that dropped 90% from their recent peaks.

If the AUD dropped sharply against the USD the AUD price of Gold may still rise even if the USD deominated price is falling, e.g. US$1250 Gold with AUD at 60c against USD would give us AUD$2100 Gold. This may make physical Gold in Australia a good buy/hedge regardless of the outcome. If we see the deflationary conditions then the falling AUD will hold up the local Gold price and if QE were to continue, fueling inflationary pressures, then Gold priced both in USD and AUD should continue to rise.

I am considering reducing my exposure to junior Gold and Silver mining stocks and will be looking at AUD Gold proxies such as PMGOLD and GOLD on the ASX to cover the above scenario.

I will be offline for the weekend, however will likely come back to this topic sometime next week to discuss it further.


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

Tuesday, March 8, 2011

eBay no playground for cheap Silver

The following are the results from a completed item search on eBay. The search term used was "1 kilo silver bar" (I have not cherry picked the results, this was every item that listed as sold in the search). Next to each completed auction figure I have entered the daily price for a PAMP Silver Kilo bar as priced by ABC Bullion on the day and the premium paid by the eBay buyer. Here is their live price link (Link), I was able to retrieve previous days pricing as I am on their daily price mailing list.

As can be seen consumers are paying big dollars for Silver on eBay.

Granted there might be some delays when buying from a dealer, but I would say chances are many of those paying ridiculous premiums on eBay simply don't know any better.

That said there is the odd bargain on eBay. In late January a Queensland dealer offloaded dozens of PAMP 1 kilo bars for less than spot including postage. These were all listed 'Buy it Now' with a very low price. Most of them literally sold within minutes of listing. I know because I was one of the buyers, refreshing the page for the next batch to list.

I know I'm very happy with my 1 kilo PAMPS which judging from the price above are worth around $400 each more than what I paid for them a short 6 weeks ago!

So there's a tip, keep your eye out for newly listed auction that are a fixed price, you never know when a good deal will come along. Just make sure you do your research before hitting the buy button and keep in mind that the deals are far and few between, usually a good dealer will beat the prices being paid on eBay.


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