Sunday, July 24, 2011

Silver bullion coins - Which should you buy?

You can now buy Perth Mint 2012 Lunar Year of the Dragon Silver & Gold Coins at Bullion Money:

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A new sub-forum (Panda Forum) on Silver Stackers has sparked some worthwhile debate on which Silver coins investors should be buying. The debate is generally around 1oz Silver bullion coins, some of which come with a mintage limit and others without (although those without usually cease production at the end of the issued year).

First up I would like to point out that I do not consider myself a numismatic coin collector. However I am happy to pay a small premium to purchase bullion grade coins that have an obvious advantage over their peers. I look for those that might bring a numismatic premium in the future to amplify gains on top of that achieved from an increasing Silver price.

I think it's worth noting that while numismatic coins performed well during the last precious metals bull market, the real bull run gone bubble actually came several years after the peak in metals (which is illustrated in the below chart from PCGS). The Professional Coin Grading Service produces a long-term rare coin index, the PCGS 3000 Index:

There is no guarantee that the numismatic bull run will once again follow the precious metals peak, but I think it's important to identify in your own mind when buying metals whether you are a 'coin investor' or a 'precious metals investor'. Note: I will be using the term 'investor' throughout this post, but ultimately buying coins based on an outlook that the underlying metal or demand for a specific coin will push the price higher is speculation, not investing.

A precious metals investor might be buying metals for several different reasons or suspected economic/monetary outcomes, but they should always be following one of the fundamental rules to investing:

"Don't fall in love with your investments"

A coin investor may do so for the love of the coins themselves in which case the monetary value of the coins (or the price they pay for them) may not matter so much. They might also be buying to speculate on the demand for a specific coin pushing the price higher.

Now there is no reason that you can't be both a coin investor and a precious metals investor, but if that's the case then you need to be brutally honest with each purchase and label each buy as either part of your collection or an investment. Mix these two together and you are walking a dangerous line which will likely result with you being unable to sell the metals when you should be doing so.

An example of someone who is both a coin and precious metal investor might be someone who buys some rolls of a bullion coin for a few dollars over spot as well as some proof versions of the same coin for twice spot price or maybe they buy some of last years version of the series for 50% over spot.

With that out of the way I would like to take a look at the options that investors have for purchasing 1oz Silver bullion coins.

One of the options that will soon be available (likely only for a very limited time) is the 2012 Perth Mint Lunar Dragon, which I previously discussed on my blog around a month ago (LINK).

Note: Mock-up design. Official pictures yet to be released.

Some of the most heated debate on Silver Stackers has been comparisons between the Perth Mint Lunar series and the PBoC Panda series.

The coins in these two series:

- Both have Chinese influence to their designs
- Both are well recognised world wide
- Both have aesthetically pleasing designs

The Lunar coin has a set mintage of 300,000 (which will be in place until Series 2 concludes) whereas the Panda mintage is increasing (900k in 2009, 1.5m in 2010, 6m in 2011, how many in 2012?).

It seems the PBoC is happy to increase mintages of the Panda mid year to meet demand (which they have done in both 2010/2011), which means you can't be sure of the final mintage until the next years design is being sold. In my opinion this is a huge disadvantage for those who are buying the coins for their rarity.

The Lunar is more readily available in Australia from a greater number of dealers.

The Lunar coins come in a much more convenient form from the mint, in rolls of 20, whereas the Panda comes in hard to stack plastic sheets.

The Lunar can be bought at a lower premium to the Panda on release (before they sell out at the Perth Mint), which means more Silver for your dollar and you are better exposed the the price movement in the underlying metal.

Fake Panda's are common and the counterfeits are becoming increasingly harder to spot. As someone who has been caught out buying fake Panda's in the past this is probably somewhat influencing on my personal decision to avoid them. I have never seen (or heard of) a fake Perth Mint Lunar series coin.

It has been identified by members on Silver Stackers (as well as by Peter Anthony, Panda Collector) that there are several varieties (e.g. slight differences in coin by coin comparison) of some Panda designs (up to 5 in 2003!), making it even more difficult to identify genuine Pandas over counterfeits.

Some Panda enthusiasts argue that although the mintage on the Panda is higher there is a much larger local population to support this, however I would argue that Australians have much higher salaries and net worth than the Chinese which might also be taken into account in such an argument. Further to this with eBay and other ways of selling coins around the world I think the local population of the coins 'country of origin' is largely irrelevant.

Another argument put forward for the Panda is the performance of the previous years coins which have risen much higher than the price of Silver and many other coins, however over the last several years we have seen the mintages of the Silver Panda series increase almost exponentially:

2008 - 600,000
2009 - 600,000 (+ 300,000 commemorative coins)
2010 - 1,500,000
2011 - 6,000,000

So we have seen it increase by a factor of 10 over the past few years, whereas the Lunar series (Silver BU) is fixed at a guaranteed 300,000 maximum (although this doesn't stop the Perth Mint from producing a much larger number in alternative sizes and designs some of which don't have limits).

The new Panda coins now have a larger mintage than some other series, such as the Canadian Wildlife series which has a mintage limit of 1,000,000 per coin with two released so far (Timberwolf and Grizzly), although the Panda still has a smaller mintage than other coins such as the American Silver Eagle and Canadian Maple.

Earlier Pandas (especially those with small mintages) have performed extremely well over the last few years as Gold and Silver investment increases in China, however it remains to be seen whether the later years (2010 onwards) with much larger mintages will see the same performance. As it stands today the 2010 Panda vs the 2010 Lunar (Tiger) has the two coins priced pretty much neck and neck (Panda slightly higher, but the Lunar coin was generally slightly cheaper to buy for us in Australia to begin with). That was when the Panda had a 1.5m mintage (vs the Lunar 300k), what bearing will the quadrupling to 6m Pandas in 2011 have? How many more millions will the 2012 mintage be?

Of course the coin mintage isn't the only factor weighing in on future price. The design has some bearing (as well as popularity of the specific animal portrayed in the case of the Lunar coin which changes every year). The 2010 Lunar Tiger has outperformed the 2009 Series 2 Ox for example. The Tiger proving to be a much more favorable design.

In my opinion the 2012 Perth Mint Lunar Dragon (Silver 1oz BU coin) will be the pick (over Panda or any other bullion prices 1oz variety) if you can get your hands on any this coming September. However a mix can never hurt and if you have a sharp eye (to avoid fake coins) and can obtain the 2011/2012 Panda for a reasonable premium to the price of Silver then it's also probably not a bad coin to buy as well.

While other coins (Maples, ASEs and others) might come with a slightly lower premium to the Lunars and Pandas, I believe it is worth the extra couple of dollars per ounce to purchase the coins that have the potential for numismatic premiums in the future.


Buy 2012 Perth Mint Lunar Dragon Coins at Bullion Money.

Wednesday, July 20, 2011

Wage/Gold Ounce Ratio - Australia

In the comments section on Macro Business earlier today there was a suggestion to draw a chart showing the price of Gold relative to wages in Australia (after Macro Business published my charts showing Australian houses priced in Gold/Silver). With some time on my hands this evening I decided to see what the results were.

I couldn’t find a single data set which provided Australian wage data that extended over more than around 20 years, so I have spliced together two different sets of data before graphing them (they were relatively in sync). From 1972 to 1994 I have used the total (weekly) full time average earnings (for an adult) from the RBA (LINK, see item 4.18) and for the period 1995 to 2010 I have used the total (weekly) earnings for a full time adult from the ABS (LINK, see Table 3).

The AUD price of Gold was achieved by averaging monthly figures (to get an average price for the year) provided in a spreadsheet by the World Gold Council (LINK).

The chart simply shows the number of Gold ounces the average weekly wage would buy (technically it would be a fair bit less after tax and living expenses!):


This chart shows the last 40 years, but how expensive was Gold relative to wages before that?

Here is some information from the ABS on wages and the Gold price in 1901:

In 1901, the average weekly wage for an adult male was about $4.35 for a working week of almost 50 hours, which after inflation equates to $217.50. However, wages have grown much faster than inflation, with the average weekly ordinary time earnings for adult males in May 2000 being about $830.00 for around 37 hours work, in far better conditions.

The price of gold has often been used as a measure of inflation. At Federation, the price of gold was $8.50 an ounce, or $425.00 in today's money. The actual price of gold in 1999-2000 averaged about $460.00 an ounce, showing that it has generally maintained pace with inflation. ABS

While the ABS has shown that Gold has kept up with the pace of inflation, it’s not necessarily a good tool to use as an inflation hedge unless held over very long periods of time. The 30 year bear market after the last nominal peak in 1980 to 2000 is proof of that.

Based on the above figures from the ABS the Wage/Ounce ratio was around .51 ($4.35 wage / $8.50 oz) in 1901.

20 years later and the ratio had changed quite significantly.
In 1919, Billy Hughes appointed a commission to reconsider the basic wage of the worker - a family with three children needed £5 16s which was 30s more than the current minimum wage. For most of the 1920s, the average wage for an Australian worker was £9 30s. Skwirk
At this time the price of Gold was fixed in USD at $20.67 an ounce. In 1920 the Pound was valued at USD$3.66, so in USD an Australian weekly wage was around $38.43 and bought 1.86 ounces of Gold.

To get back to the .42 ratio seen in 1980 (remembering that is with the price of Gold averaged over the year) we would have to see Gold at AUD$3200 and obviously even higher assuming wages rose while Gold climbed to that level.

Will we see the ratio fall back to the level seen in 1980? What are your thoughts?


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