Sunday, September 25, 2011

Preparing for Collapse

A quick reminder that this blog is written from an Australian perspective. Suggestions I make or preparations I am taking may not be suitable in countries where the situation has degraded further and more precautions are necessary.

My coverage of the precious metals bull market has predominantly been about taking advantage of the speculative opportunities that present themselves as a result of appreciating metal prices. Generally this has consisted of reviewing well positioned mining companies, looking at prices or ratios for medium term targets as the metals head into the parabolic/public phase of the bull market, looking at what the spot price might do short term (which I get wrong as often as I do right!) and even some posts on specific coins.

While I have at times traded Gold/Silver proxies on the ASX (PMGOLD and ETPMAG) and even sold some of my physical Silver position between $35 and $50 (after going large on Silver when it was under $20), my core physical Gold position has remained largely untouched and I even added to it over the middle months of the year (when Gold was around $1500).

As much as I see opportunity to increase wealth in this bull market, I also understand there is a dark side to some reasons for the precious metals moving higher. Gold isn't just rising because that's been the trend for the last 10 years, there's also a growing mistrust in governments and regulatory authorities which has led to questioning the worth of monetary units and assets (currencies, shares, housing, bonds, etc). 

There may come an inflection point where the public has had enough and turns away from regulated markets and look to store their wealth where there is no counterparty risk. Such a change in perception could bring around many devastating consequences. A meltdown of the banking system. Collapse of currencies (hyperinflation). Failure of government (sovereign default). Breakup of political/economic unions (such as the European Union). Many of these monetary and political systems are intertwined, so their breakdown could occur in tandem or one could lead to the other.

Four years ago this would have all sounded like nonsense. Come another four years I suspect that some events like this could have played out. Of course the effects on you personally will likely vary hugely based on where you live, how you live and whether or not you are prepared for such events.

Regardless of whether you think a collapse is likely or not, it doesn't hurt to be prepared. The most basic of decision matrices provides an overview of consequences from being prepared or not (your matrix may differ, I suggest drawing one up and listing the consequences of each scenario as they apply to you):

To be prepared costs little. You may lose a little interest on cash stored outside of the banking system. You could buy some Gold and it falls in value. You could buy long life food and some of it goes to waste (obviously some of these costs could be reduced, such as rotating large stores of food so that it gets used).

To be unprepared could have dire consequences. For example if you have large loans for assets that fall significantly in value and you are forced to liquidate (from job loss, lack of liquid assets to get by, etc) then you may find yourself with outstanding debt and no assets to show for it. You might struggle to provide for yourself and family.

The preparations I have taken to date are fairly basic:

- Reduced debt to virtually nothing
- Obtained & safely stored (deposit box) physical metals & cash

I think keeping some physical cash out of the banking system could be a good move, as if we saw collapse or even measures are implemented to protect the banking system (such as limiting account withdrawals) the use of cash would still be widespread, I don't think a change to physical metals would happen overnight.

Some others advocate further preparation such as food storage. I don't believe we are at the stage that such preparations are necessary (in Australia). Not to say that we couldn't see food shortages like anywhere else, but a quote from Michael Ruppert's movie 'Collapse' comes to mind:
"If you are in a camp and a bear attacks, you don't have to be faster than the bear, you only have to be faster than the slowest camper." - Michael Ruppert, Collapse
Some may prefer to prepare for any situation. I would like to think that I had enough foresight to see the need for storing food as the situation developed.

There is a common misconception that Australia's banks sailed through the GFC with barely a scratch, some even going so far as to say that they didn't receive government bailouts:
John Taylor, founder of FX Concepts LLC, the world’s largest currency-hedge fund, says Australia’s banks, which remained profitable throughout the financial crisis without government bailouts, are now overextended and will cut back on credit, helping spark a recession. Bloomberg
What they often fail to mention in such comments is that:

- Australian banks tapped the US Fed for billions in emergency funding
- Australian banks were extended deposit and wholesale funding guarantees
- Australian banks benefited from increased lending stemming from the FHOB
- Australian banks were supported by the RBA (who bought RMBS)
- Australian banks were protected by ASIC with a ban on short-selling shares

So while our banks didn't receive a direct capital injection similar to that seen in the US, I think suggesting they weren't bailed out is just ridiculous.

It's interesting to note that in the case of recent stimulus, insider documents point to the stimulus being designed to prevent the collapse of the housing market:
The short term stimulus was designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market. FHSA FOI Doc
In my opinion this initiative (and others aimed at first home buyers) was not introduced to 'help' first home buyers, but rather to protect the Australian housing market and all the leeches that hang off it (banks, construction, retail).

While our banking system in Australia appeared strong during the last financial crisis, it is clear that it was propped up.

The stop gap measures were not limited to Australia. As we all know, banks in many counties were and still are being propped up in a non sustainable fashion.

This weekend there is further talk of a Greek default. If allowed to occur, we then face the unintended consequences. What will they be? Are global governments prepared to bring the banking system back from the brink like they did after the chain of events leading on from the bankruptcy of Lehman Brothers? I don't have confidence in their ability to do so. Collapse may be years away or it may just be around the corner...


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Saturday, September 10, 2011

Pascoe (Gold) Indicator - Update

Earlier this year I posted a chart showing how Michael Pascoe's articles on Gold could be seen as a contrarian indicator (h/t SaturnV on HC for the idea) with many of them bearish on the metal yet appearing at lows or lulls in the price before a large spike higher.

Here is the previous post (LINK) and below is a summary of Pascoe's Gold commentary over the last several years:

1. On September 27th, 2007, Pascoe had the following to say about Gold:
Gold bugs losing their bite

The more reliable truth is that gold is really just another commodity, albeit one with a rich history. The good news is that demand for gold continues to rise and production doesn't keep up – but there's still a big overhang, thanks mainly to European central banks that still want to sell down their holdings. Super Living
2. This was followed by the below, 2 years later on September 14th, 2009:
Gold drops 25%!

As gold sceptics know, the yellow stuff occasionally has a day in the sun when there's fear and loathing in the financial system or when the herd decides to make gold the next candidate for a speculative bubble, but its price is mainly a reflex currency play for the US dollar. The Age
3. Pascoe was still talking Gold down 10 months later on July 28th, 2010:
Time for gold bulls to feel a little fear

But there are signs that the tide of fear might be about to turn – an event that would be precipitous for the gold price and all who ride on her. It could be the gold bulls' turn to feel fear as pain instead of pleasure. The Age
 4. New year, another negative Gold articlefrom Pascoe. March 18th, 2011:
Buy iodine, sell gold and forget the Aussie

I have been wrong about the gold price for the past several years [At least he's honest! BB], but that still remains more a matter of timing than fundamentals. The major leg of the gold rally was based on a reasonable reason – the need for those with US dollars to get out of them as the American economy and the greenback plunged.

Since that first leg, gold has risen primarily because gold had risen. The momentum trade kicked in, the exchange traded funds (ETFs) took off to capitalise on that and the great gold bubble bubbled on. The Age
5. Only a month later and Pascoe is again laying in the boot. April 27th, 2011:
Rich rust beats dull old gold

The uninvolved might be under the impression that the price of gold has been soaring to record highs lately, some using that as an excuse to bid up the price of shares in Australian gold miners in the hope that higher gold price might flow through to them.

Wrong. Gold actually has been doing nothing much for the best part of a year and remains well below its record high. That's gold in Australian dollars, of course – the only measurement that means something if you're wealth is in Australian dollars to start with. SMH
 6. Then again on May 24th, 2011: 
No silver lining in this cloud
Gold in US dollars is up 28 per cent over the past year, but it's done nothing for Australian investors. As I write, it's trading at $A1,441.03 an ounce – within a few cents of what it was worth this time last year. It's still roughly doubled since the start of 2006 with 2008 the star year as the GFC had its full impact.

Where the speculation in precious metals goes to next is as much a matter of faith as fundamentals, or perhaps fundamentalist faith for the harder core gold bugs, but it has currency plays going for it as long as US economic policy remains an afterthought of a political standoff and Europe fails to face up to its sovereign debt inevitabilities. SMH
7. Finally only a few days ago (September 7th, 2011) Pascoe had more to say on Gold (LINK). His latest commentary comes following a $300-400 spike higher in the metal, so at this point it's difficult to gauge whether the "Pascoe Indicator" has broken or whether we are perhaps at the base of another solid move higher.
Gold bubbling higher is still a bubble
But the fact that the gold price has gone up doesn’t mean that it’s not a bubble. To rephrase that and take out the double negative, the gold price going up is part and parcel of it being a bubble.

In the 1630s when the price of tulips rose from 1000 florins to 2000 florins – several years’ average wages – it just confirmed there was a bubble, not that tulips enjoyed any particularly intrinsic value or that tulips would continue to rise indefinitely and/or hold their value.
Pascoe has been calling the rise in Gold a bubble for years, but for something to be in a bubble that would indicate it is overvalued. I have yet to find any analysis from Pascoe as to what he considers it overvalued against. If Gold rises to nominal peak of $3000 and then following falls back to a low of $2000, was it still a bubble when Pascoe called it one at $1250 and lower?

He suggests the bubble is similar to the tulip mania... does he understand that Gold's rise from undervalued to overvalued is a move that is cyclical in nature? He seems unable to comprehend the difference between a one time speculative mania and the cyclical nature of investment/monetary assets.

He goes on:
Gold’s true believers think gold is different, that it does have some mysterious intrinsic value, rather than its price just reflecting the interaction of speculative supply and demand, with some physical jewellery demand on the side.
I have no doubt that there is speculative buying in Gold driving the price at times, but given that some of the largest demand over the last couple of years has been Central Bank buying, does Pascoe also consider this to be speculative buying? Or does this demand fall on the jewellery side whereby Central Bank officials are turning the Gold bars into bling and wearing it around town?

Pascoe claims that the intrinsic value of Gold is a mystery, but it's really not all that difficult to work out where Gold's intrinsic value comes from. Probably one the best explanations I've seen is in the first minute of this clip from movie "The Treasure of the Sierra Madre" in which a prospector provides the example of 1000 men that go looking for Gold. After 6 months only 1 of them is lucky. The value of the Gold not only represents the value from the labor of the one man, but also that of the 999 others that didn’t find anything (total 6000 months, 500 years worth of labor).

We do things a little differently these days, but the principle remains the same. We have Gold miners today digging up 5-10 tonnes of earth (sometimes more) to retrieve an ounce worth of Gold let alone all the processing and refining that follows. For each company that succeeds there are thousands that fail (as pointed out in this post of mine two weeks ago).

Later in the article Pascoe says:
Aside from those hording physical gold, the latest figures from Standard Bank show 14,450 tonnes of gold are now held by exchange traded funds. That’s an extraordinarily large of amount that would weigh more heavily than its physical weight on the gold market if the metal started to lose its shine. Yahoo Finance
Now wait just a minute here... that number sounds a little high given that GLD (the world’s largest gold exchange traded fund) hold only 1240 tonnes. Wikipedia suggests that "As of 25 June 2010, physically backed funds held 2,062.6 tonnes of gold in total for private and institutional investors". I think Pascoe better check his sources more carefully!

Toward the end of the article Pascoe suggests that an "outbreak of rational economic management in the US and Europe" will see to the end of the Gold bubble, which he says will come about with US spending cuts and increased taxation as well as a bailout in Europe. Wow, it all sounds so simple, I wonder why they haven't thought of that already and implemented the changes to resolve the western debt bubble which has caused all this global instability...

Here's the chart with the articles numbered at the time of the above articles:



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