Wednesday, February 29, 2012

Christopher Joye Manipulates $100M Bet Conditions

You may recall that a little over 12 months ago Christopher Joye proposed a bet with legendary fund manager Jeremy Grantham after Grantham spoke of the bubble in Australian property. I covered it on the blog here.

The conditions of the bet as explained in articles covering the bet (including the one posted on Joye's blog) was that the rise or fall would be based on the Australian Capital City Dwelling Price Index:
He challenged Mr Grantham to bet the $100m over a three-year term, basing the outcome of the bet on movements in the RP Data-Rismark Australian Capital Cities Dwelling Price Index.
For every 1 per cent rise in the index, Mr Grantham would pay $1m, Mr Joye said. But for every 1 per cent decline in the index, Mr Grantham would receive $1m. The Australian
16 months on and this index is down around 5%. The conditions of the bet would have cost the counterparty Joye was going to find around $5 million (so far, likely another $5-10 million by the end of the 3 year term). 

Rather than concede it would have been a losing bet for his mysterious counterparties and a cool $5 million for Grantham, Joye is now (posted today) claiming that the counterparty would have chosen an index which included rents:
How would Grantham have fared had he backed his own rhetoric? The indices that RP Data and Rismark produce for trading purposes are “total return” benchmarks, much like the ASX All Ordinaries Accumulation index, which tracks changes in capital values and dividends.
Since the end of October 2010, when we first outlined this idea, RP Data-Rismark’s capital city accumulation index has risen by about 0.2%.
So using this benchmark, which is the most likely index that a counterparty would wish to trade against (given they’d be expecting the capital gains and rental income realized from Aussie housing), Grantham would be down around $200,000. Call it evens.
If, on the other hand, he wanted to use the RP Data-Rismark index that follows changes in capital values, Grantham would be up about 5% assuming we could have found a counterparty willing to ignore incomes (or rents).  Property Observer
The RP Data-Rismark’s capital city accumulation index?

I posted about it previously on this blog when it was introduced to the public RP Data press releases almost 12 months after the initial bet was proposed (the accumulation index was available previously to RP Data subscribers).

Christopher Joye is then so cheeky as to suggest that Grantham could still take up the bet if he so wished.
Nevertheless, in the event that Grantham still believes shorting Aussie housing is one of the best investments of all time, we would love to hear from him…
I'm sure Grantham would know better than to take a bet from someone who is prepared to manipulate the bet conditions in this way to favour their outcome (in reality or perceived).

The sad reality for most Australians who have bought an investment property in the last couple of years (gone long) is that the rents don't cover their interest and other property outgoings so they are being drained in two ways, through cash out of their pocket just to hold the property and through the erosion of equity (or fall into negative equity) as house prices fall.

I don't need to short property. I rent to avoid the price risk and invest in assets which are appreciating faster than property prices are falling.

[UPDATE 01/03/2012: Morning After Above Post]

Christopher Joye posted late last night about a "Punk Blogger" who got his facts wrong:

I updated the original post to include the information (that the accumulation index precedes it's addition to the public RP Data press releases), I got it wrong apparently. No problems taking that on the chin here (unlike Joye who seems unable to admit he is wrong on anything). In my defense the RP Data release does make it sound like a new index (this from the September 30th release):

"This month RP Data-Rismark will commence publishing a “total return” series, which was always available in the underlying data as an “accumulation index” (the ASX also publishes accumulation indices that include dividends)."

I have to wonder whether the user who commented on the blog last night "Johnny" pointing out the same is in fact Christopher Joye himself?!

Regardless the issue does not detract from the fact that Joye's proposed bet has been manipulated so that he can "call it evens" when clearly the bet would be millions in Grantham's favour.

I will wear my new description like a badge of honour.

Punk Blogger signing out.


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Thursday, February 23, 2012

Increase Your Property Purchasing Power With Gold

Disclosure: This post should not be considered financial advice. Examples are based on predicted variables which may differ to real life outcome.


A recent quote I read on the Bubblepedia forums “Rent is the fee you pay for the owner to take the property price risk” rings true when prices are falling. When there is such a large disparity between renting and buying and prices are falling you are saving two fold by choosing to rent.

I have been publishing a series of Gold/Silver charts for the past 18 months showing Australian houses priced in Gold and Silver ounces (here is a link to the most recent). And here is the chart for Sydney showing the current trend (a trend which is evident in all Australian cities):

Some might consider such a measurement as useless, however Gold tends to run in cycles against other assets and if one can harness the cycle there is the potential to make it work in your financial favour.

I suspect there is still room in this cycle to improve affordability of property through the use of Gold (and/or Silver) as a saving tool to increase your purchasing power. I will use some practical examples below to show how this can be done and how the numbers stack up using this methodology.


In the post below I will outline 3 scenarios which detail the potential results of a First Home Buyer:

    Buying in June 2012 & how they fared by mid 2014
    Buying in mid 2014 after saving in cash
    Buying in mid 2014 after saving in Gold

To put numbers to these scenarios I have to fix or predict a number of variables. Many of these variables could change or be predicted incorrectly resulting in a real life outcome that differs greatly from those I've posted below. Furthermore some variables could significantly differ between states with some states still offering increased incentives for First Home Buyers (over and above the national First Home Owners Grant). The example I will be basing the numbers on will be Adelaide (my hometown).

The example will be based on a working couple living in Adelaide who both earn $50,000 per year ($82,800 combined after tax, $1592 per week). They currently pay $300 per week in rent for a 2 bedroom unit. Normally we would probably see rents increase over a 2 year period, but for simplicity sake I will be fixing the rent at $300pw for the last two scenarios where the couple rents through to 2014. It won't make a large difference to the results and my suspicion is that as the economy deteriorates in Australia we are unlikely to see rents increase by much anyway.

The couple lives frugally resulting in living expenses (other than rent) totaling $700 per week for the two of them. This allows them to save $592 per week toward their future goal, owning their own home. As of June 2012 (when our scenarios start) they have already put away $30,000 in savings towards a future property.


Interest Rate on First Home Savers Account: 5% (Member’s Equity)
Interest on Savings Account: 5.4% (Online Account)
Interest on Mortgage: 6.5% (Variable)
Price of Gold as of June 2012: AUD$1700
Price of Gold as of July 2014: AUD$4200 ($100 per month rise)
House Prices: Down 7.2% pa over 2012/2013, down 3% first 6 months of 2014
House Price as of June 2012: $356,680
House  Price as of July 2014: $309,078

The $370,000 starting price used for Adelaide is the RP Data "dwelling price" as outlined in their January 2012 report. The word house will be used in place of dwelling (whether it's a unit, courtyard home or house they've purchased is of little consequence).

House price correction rate of 7.2% per annum over 2012/2013 based on a report by S&P based on a moderate landing for China (as reported by Macro Business):
This scenario for Australia is allied with our “medium” landing scenario for China, which features 7% growth in GDP and a one-in-four likelihood of that occurring. Under that China scenario, there is a deep weakening in prices  for Australia’s resources exports, accompanied by weak volumes of exports.

Business confidence and spending weakens below trend, and there is a deferral of capital expenditure in areas relating to economic infrastructure. Consumer sentiment weakens in line with softening employment conditions,  which see the unemployment rate rising to 6.5% in the second half of 2012. Without the support of higher  commodity prices and interest rates, the Australian dollar depreciates, allowing other export sectors (such as  education and tourism) to become more competitive.

Despite lower borrowing costs and rising affordability and household savings, the Australian housing market weakens further, with nominal house prices falling annually by 7.2% over 2012 and 2013.
Gold price based on my expectations of a strong performing Gold price over the next 2-3 years as we enter the public mania phase of the bull market.

The interest rates will almost definitely fluctuate in real life over the term of the scenario, but having seen the dismal performance of most economists & commentators on predicting rate changes more than a month or two in advance I will refrain from guessing and leave them where they are now.

Buy in June 2012 (Scenario 1)

Based on prices falling 7.2% over the year (down 3.6% from $370,000), the purchase price of their property is $356,680. Stamp duty and transfer fees on the property total $16,681. LMI would vary slightly between lenders, but likely to be at least $8000 which is the amount we’ll use for the example. Deposit $30,000 + $7,000 FHOG.

$356,680 + $16,681 + $8000 = $381,361 (total purchase cost)
- $37,000 deposit = $344,361 (mortgage amount)

Resulting LVR is approximately 96.5%, which should be fine as I believe some lenders will still allow the borrower to cap the LMI on top of a 95% lend.

We are going to assume that the couple live frugally and put any extra money that would have been saved into extra repayments on the mortgage. However they will have some extra costs associated with owning rather than renting (for this example we are going to use a very conservative .5% maintenance rate equaling $1,780, and $1,500 per year for Council Rates, Water and Levies).

$1592 per week (combined income after tax) - $700pw living expenses - $63pw (maintenance/rates) = $829 per week they can pump into the mortgage ($3592pm). The speed at which these extra repayments will pay down the home loan will benefit them hugely over the long term (it would cut a 30 year mortgage to around 11.5 years), but how are they faring by July 2014?

By the 26th month of the mortgage they have paid down the loan to $296,274, reducing their loan by $48,087 over around 2 years, impressive!

However, with house prices falling their property is now only worth $309,078 (with prices having fallen 7.2% over 2012 and 2013 and another 3% over the first 6 months of 2014). The resulting LVR is still 96%, even they’ve paid a substantial amount off the loan, they have gone no where when it comes to building equity and this will really limit their choices in the case they need to upgrade to a larger house or something affects their ability to repay the mortgage.

If at the end of the 2 years they decided they wanted to sell the resulting sale costs would leave them no more than a few thousand dollars change, even after tipping in a $37,000 deposit and having paid $48,087 off the principle. Not a good place to be financially.

Save in Cash, buy July 2014 (Scenario 2)

The First Home Savers Account (FHSA) is probably one of the most underrated and poorly utilised measures that the Government has implemented for First Home Buyers. I prefer it over a cash boost from a sustainability perspective as it provides incentive to save over a long term period (rather putting a lump sum into the hands of inexperienced buyers).

The low uptake on the account probably stems from savers looking at the 4 year term and cringing, but the reality is that deposits for full government contribution only have to be made over 4 financial years, so as per this example someone could make the maximum beneficial deposit in June of one year (in this example 2012) and a final full payment in July of the 4th financial year (in this example 2014) and then shortly after be able to withdraw the lot, resulting in a savings period of just over 2 years.

As well as a reduced taxation rate (15%) the FHSA also sees Government contribute a 17% bonus payment (up to $935, $5,500 deposit per financial year required). Some financial institutions are offering an attractive interest rate as well, not quite as high as the dedicated online savings accounts, but not far off.

For the example used the savers put $5,500 from their initial deposit into their FHSA account (earning 5%) and put the rest ($24,500) and ongoing deposits into a higher interest bearing online account (5.4%). Their ongoing savings amount is $592 per week as they continue renting their $300pw unit.

Come July 2014 they have $27,163 in their FHSA account ($22,000 of their own contribution) after Government contributions, interest and minus 15% tax. A good return for just over 2 years.

Their $24,500 put into the online savings account along with regular contributions of $2108 per month (which is a reduced amount to account for FHSA $5500 deposited each year) amounts to $79,308. The interest earned at 5.4% is $6329 + roughly $230 earned on the amounts being saved for the FHSA annual $5500 deposit = $6559, but tax of around 30% will be payable resulting in $4591 net interest to add to their deposit.

The total from the FHSA account ($27,163) and online account ($83,899) results in a total deposit they’ve saved of $111,383. Wow!

Given they’ve waited until mid 2014 and house prices have fallen substantially they are now in a great position to buy. Their large deposit means they will not have to pay LMI (an $8000 saving) and the reduced purchase price means almost $3,000 less in stamp duty and transfer costs.

$309,078 + $13,956 = $323,034 (total purchase cost)
- $118,383 deposit (inc FHOG) = $204,651 (mortgage amount)

They are almost $92,000 better off having rented and saved rather than bought, with only $48,000 of that resulting from the price fall and the rest from the extra amount saved by renting, interest earned and avoiding LMI/reduced purchase costs.

Save in Gold, buy July 2014 (Scenario 3)

Rather than the savers putting their money into a savings account, this example will see them purchasing Gold with all their savings. Their initial deposit will be used to purchase a lump amount and then they will dollar cost average by buying Gold every month.

The starting price used for Gold is AUD$1700 (as I write this it’s AUD$1670), it may be higher or lower come June 2012, but for the sake of the example we will predict a $1700 price and it will rise by $100 every month between June 2012 and July 2014. Of course it’s extremely unlikely that such a balanced rise occurs, more likely the move higher will be much more volatile.

As Gold increases in price it reduces the number of ounces they are able to purchase with their monthly savings, so while they start being able to purchase 1.5 ounces per month, by July 2014 their savings are only buying .6 ounces with the Gold price at AUD$4200.

They start off with 17.64 ounces having purchased this with the $30,000 deposit they have saved and over the course of the next 26 months they are able to purchase an additional 24.28 ounces of Gold resulting in a total of 41.93 ounces. They’ve paid $96,733 accumulating the ounces and final value of the Gold at new spot price is $176,097, resulting in a capital gain of $79,364. They will be eligible for the 50% CGT discount on some of the Gold purchased as they’ve held it for over 12 months. My rough estimate puts tax on the capital gains at around $18,000, so following the sale of the Gold they have $158,097 to put toward their deposit.

Ounces of Gold Accumulated Over 26 Months
In this example they will also enjoy the reduced costs to purchase and no LMI.

$309,078 + $13,956 = $323,034 (total purchase cost)
- $165,097 deposit (inc FHOG) = $157,937 (mortgage amount)

They are over $138,000 better off than if they’d purchased in June 2012 and almost $47,000 better off having put their savings into an appreciating hard asset (Gold) instead of saving in an interest and government bonus paying accounts.

Something worth noting is that a $4200 Gold price and $310,000 median Adelaide house price would result in a ratio of 74oz Gold per median house, this is pretty close to the monthly average peak we saw in this ratio in January 1980. For example in my latest charts and data you can see that Brisbane houses fell to a low of 62oz Gold and Melbourne to 67oz Gold. To catch a ratio around this level you only had around a 2-3 month window to scale out. That said given some of the key differences in the current bull market versus the last one we may see Gold outperform expectations.

A recent article written by FOFOA pointed out some past quotes of his which ring very true:
“Gold would not be valuable if one person owned all of it. It is most valuable in its widest distribution possible, the wealth reserve, which requires a much higher valuation than it has right now. A higher valuation denominated in hard assets, not just fiat currencies!”

“Just look at the BIS’ own gold actions. Their owned gold hoard has shrunk from 194 tonnes to 120 tonnes over the last 6 years, as has the entire Eurosystem’s hoard over the last decade (from 12,576 tonnes down to 10,833 tonnes). Most gold movements in Europe have either been lateral reshuffling or dishoarding and encouraging citizens and other entities to start hoarding physical gold themselves.

I have written this before… if you were King of the World with 35,000 tonnes of gold in a world of 160,000 tonnes, you would gladly – happily – reduce your “stash” to 10,000 tonnes if that reduction came with a 50x revaluation. Trying to get ALL the gold into your hoard is a fool’s strategy. FOFOA
Heavy demand from the east is a very positive development in the market as they have the (population) numbers to send Gold/Silver to astronomical heights.

China has been encouraging its own citizens to buy Gold/Silver, a market which as I understand it was untapped during the 1970s bull market with private ownership of physical Gold banned (until 2003).

We’ve seen what the Chinese can do with a property market when speculation pushes prices higher… can’t wait to see what they can do with the Gold and Silver markets…

Ultimately while I think $4000 Gold is a reasonable target, there is definitely the potential for it to move a lot higher in a parabolic blow off. As I've pointed out previously, in the last 2 years of the last Gold bull market the price Quintupled ($169 to $850, doubling from $400 in last 2 months) and I suspect this bull market will end with a similarly impressive move.

As an alternative to Gold the couple could have split some of their savings into Silver as well. If Silver performs similarly to the last parabolic move into the January 1980 peak then it could perform 3x better than Gold (e.g. Gold at $4200 with the Gold:Silver Ratio at 1:15 would give a Silver price of $280, an 8x rise in price where Gold from $1700 to $4200 is only a 2.5x rise).

Final Term & Interest Reductions

As well as reducing the obvious purchase costs, saving the larger deposit and having a smaller mortgage will also result in a reduced loan term. If the couple are able to continue repaying at the $3592 calculated per month in the first scenario this is the length of time to payout the loan and interest paid (from July 2014):

Scenario 1: 9 Years, 2 Months - $97,757 Interest Paid
Scenario 2: 5 Years, 8 Months - $40,546 Interest Paid
Scenario 3: 4 Years, 2 Months - $22,776 Interest Paid

So as you can see there are less obvious benefits to reducing the size of the mortgage if you keep your repayments at the fixed higher amount (as opposed to sticking with minimum repayments.


LVR that results from 3 scenarios
Mortgage that results from 3 scenarios
Final Word

I have no doubt that the actual outcome over the next couple of years will be noticeably different from the scenarios I’ve laid out above, but I do think the major themes will be evident, namely:

- House prices will continue to fall
- Gold and Silver will continue to rise in price

This will result in an environment where First Home Buyers (or any other buyer for that matter) will likely be better off renting, saving (in cash or metals) and buying in the future rather than now (from a financial perspective, as I've pointed out in the past for some buyers the stability that owning offers is priceless). 

As pointed out in the scenarios they are better off not only due to buying the house cheaper, but they also avoid LMI (due to increasing their deposit above 20%), pay a lower amount of stamp duty/transfer fees and reduce the term and interest they pay on the remaining mortgage.

This extra deposit saved could translate into a smaller mortgage on the property purchased or the buyer could decide to make the move to a larger and more expensive home saving the costs of churning their first home to buy their second.

In May last year I wrote a short piece detailing 5 reasons that First Home Buyers should reconsider buying now. The 5 reasons were:

1. Renting is around half the cost of buying
2. Falling prices will continue
3. You may quickly outgrow your first home
4. Ownership isn't all it's cracked up to be
5. Living at home/renting = Freedom

As it stands right now all these reasons still stand for putting off the purchase of your first home. While interest rates falling have reduced the gap we had between renting and buying it’s still significantly more expensive to buy. Falling prices which we saw in 2011 will in my opinion continue through 2012. Saving a larger deposit now means you may be able to skip the first step on the property ladder and buy a larger home in a couple of years instead of buying the smaller one now and churning later (which saves on selling/buying costs).

It was shortly after the “Don’t Buy Now” campaign was kicked off by Prosper that I wrote the "5 Reasons" post and today their message is still as strong and important as it was 12 months ago. Their latest article suggests price falls in 2012 could be as large as 15-20%:
“We expect property prices to wilt under these combined pressures, with prices at end December 2012 between 15 and 20 per cent less than today. We renew and repeat our warning to potential home buyers to stay out of the property market. Falling prices erase equity while buyers’ mortgage liabilities remain payable in full.

“Don’t Buy Now!” Collyer concluded.
While I think such a large fall this year is unlikely, there is definitely a risk of it happening if we were to see a shock to the market (e.g. another 2008 credit event, hard landing in China, etc)

Right now we are seeing a lot of talk in the media about a bottom being in for property, but there are no substantial trends in place to suggest that the tables have turned. As Prosper pointed out in their article (and the Macro Business bloggers have covered countless times recently):

First Home Buyers are wary of commitment
Volume of housing stock still elevated (but lower than 2011 peak)
Consumers are dis-leveraging
Banks are not lending like they have in the past

Make your own mind up, but having sold my house to rent in late 2009 it’s not something I regret doing. Prices in the suburb are slightly lower than when I sold and I have increased my property buying power by renting and placing the released equity/capital into better performing assets (Gold and Silver). I suspect my property buying power will only increase over the medium term as I continue to stack metals and pay a small amount of rent while my landlord takes the property price risk.


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Sunday, February 19, 2012

Are Perth Mint damaging their reputation?

Those of you who follow my posts on bullion forums that I frequent might have picked up that I'm not a huge fan of purchasing bullion Chinese Panda coins. This has nothing to do with their designs. Having seen several in the flesh I would agree with many of the enthusiasts that they are a stunning coin. 

The main reasons I avoid Pandas are:

- They have a reputation of many fake coins circulating and I think this will make them difficult to resell.

- The mintage has been announced and then increased part way through their production year (they did this in 2010 and 2011).

- Slight variations in many of the designs due to being minted across multiple locations each with their own set of dies (although to be fair this has actually increased the value of some anomalies).

- There are lower mintage coins available (such as those from Perth Mint).

So two of the key things I am looking for when choosing bullion Silver coins to buy is a consistent product and a mintage number that can be trusted.

Are Perth Mint keeping to their previously high standard in these areas or are they releasing opportunistic products which harm existing collectors and investors who hold their products?

The Russian Red Back Spider

Most collectors who are familiar with high value modern numismatic coins would know of the Perth Mint Red Back Spider from the Deadly & Dangerous coin series. It was a 1oz Proof coin released as the first in the series. The price soared with some paying in excess of $1500 for the coin and prices now are still well elevated at around $1000 for a coin which contains $31 worth of Silver. The coin was released in 2006 with a 5000 coin mintage:

Original Red Back Spider Coin, 1oz Silver Proof, 5000 Coin Mintage

What you may not be aware of is that the Perth Mint produced a "copy" coin especially for the Russian market 5 years later in 2011 (2000 coin mintage):

Russian Red Back Spider Coin, 1oz Silver Proof, 2000 Coin Mintage

So they've slapped an extra ring around the existing design, imprinted some Russian text and then they are flogging this off as a new coin? In my opinion this sort of activity reeks of a Mint who do not have respect for their collector coin customer base.

But are such tactics only a problem for their numismatic coin releases?

The Privy Mark Dragon

The Perth Mint has had strict mintage limits on their bullion coins over both 1st and 2nd Lunar Series coins. The limits having been set at 30,000 coins for 1oz Gold and 300,000 coin for 1oz Silver. These (previously strict) limits have made them a popular choice for both collectors and investors given that most other bullion series coins have much higher limits (which in most cases range from 1 million to tens of millions).

A couple of weeks ago I wrote about the forthcoming Privy Dragon design (on, little did I know at the time that this was to be a bullion release rather than a low mintage premium coin. As pointed out by a user on Silver Stackers and later blogged on at Silver Lunar this coin is being produced with a 200,000 mintage limit and is being sold for bullion prices. Assuming that these coins sell out (or have already been minted in full), it will result in a 1oz Silver bullion coin mintage of 500,000 rather than the 300,000 of previous years, with only a small lion privy separating the two.

Spot the difference: 2012 Perth Mint Bullion Silver Lunar Dragon vs Privy Mark Lunar Dragon

In March 2011 Stephen Ward of the Perth Mint blog had this to say in relation to the 1oz bullion coins:
"For investors, we offer bullion quality versions in capsules. These coins are made in much larger quantities, enabling us to keep the sales premium to a minimum. Even though Lunar bullion coins are made for investors, we do acknowledge that they attract significant collector interest in many quarters.

1oz Lunar silver bullion coins have a maximum mintage of 300,000 each." Perth Mint Blog
This statement is now void as there will be 500,000 Silver bullion coins.

Then in September last year Ron Currie said this:
"Throughout the course of the first 12-year Australian Lunar bullion coin series and also during the second 12-year series, 1oz releases have been limited by mintage: 30,000 gold and 300,000 silver. As well as investors, these mintage quotas have also attracted collectors to the series.

To increase mintages of 1oz coins during a particularly popular year could be interpreted as opportunistic and possibly damage our credibility as a Mint." Perth Mint Blog
While the bullion Privy Dragon is technically a different design to the standard bullion coin, it is obvious to investors and collectors that the Perth Mint has used a backdoor technicality to workaround their own mintage limits and this is (as Ron Currie hints above) an opportunistic action which has the potential to damage the Mint's credibility.

As I pointed out in a recent blog post on Silver Lunar it appears that this Privy Mark coin will continue in the Year of the Snake (2013), so assuming the sale of these coins goes well we can expect the mintage of bullion 1oz coins to be permanently increased for the rest of the second series (and maybe the Perth Mint will even work on getting the previous Series 2 releases, Mouse, Ox, Tiger and Rabbit also minted with the Privy)...

There are other examples of opportunistic behavior from the Perth Mint, but to list/describe them all now would take more time than I have available to write this post.

It seems to me that of late the Perth Mint strategy is to squeeze every dollar they can out of their customer base, releasing as many designs as the market will soak up with little regard for those who have already purchased based on expectations previously set by the Perth Mint and it's representatives. 

While pumping out these releases might improve their bottom line in the short term, it's more than likely going to make buyers a lot more wary about purchasing their releases in the future and in my opinion has the potential to devastate a well established reputation which the Perth Mint has spent a long time building. Here's hoping they can get things back on track.


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Thursday, February 9, 2012

NZ Co "Bullion Buyer" (Dealer/Trader) Goes Bust

The New Zealand Herald reports this morning that a bullion dealer and trading company in New Zealand has gone bust, with investor funds lost:
A family with more than $340,000 invested with a gold bullion trader say they have been told by its owner they won't be getting it back.
The Serious Fraud Office received two calls about Bullion Buyer website yesterday and SFO chief executive Adam Feeley said the complaints were "being looked into as a matter of priority".
The bullion investment company has an office in the Vero building in downtown Auckland and is run by Grace Holdings NZ Ltd, whose sole director is Robert Kairua. NZ Herald
The company "Bullion Buyer" (aka Grace Holdings NZ Ltd) already hit the news last September when it was identified that their head trader and indirect owner lost investor money in a similar Gold trading related incident:
His initial impression was that Geldman was "a lovely guy", and Fuller agreed to give him more than US$180,000. But only a short time later, Geldman called him to say there had been a problem with the investment, and Fuller was likely to make a significant loss. "He said: 'Look, the wheels have fallen off things' or something to that effect.
He said the company we were invested through had over-leveraged and the authorities had struck them off the list of certified operators because they were no longer solvent." NZ Herald
Although given that one of the victims in todays article has been waiting months for his Silver bullion to arrive it seems possible the two incidents were related and that Geldman may have been responsible for the demise of Bullion Buyer.

The story should act as a timely reminder of the dangers that lurk in the Gold and Silver investment (and bullion buying) market. Don't put all your eggs in the one basket.


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Tuesday, February 7, 2012

Debunking Shadow: Property Margin Calls

Unfortunately the best of us get things wrong at times. On this occasion we will look at the suggestion from long term Bulltroll Shadow, that banks can't margin call residential property. Recently on the APF troll nest Shadow posted the following:
Just clearing up a bear myth here for once and for all. Banks can't 'margin call', or repossess, or force the sale of a residential property unless the borrower has defaulted on repayments and subsequently failed to comply with a request to remedy that default.

National Consumer Credit Protection Act 2009

Note that these provisions did also apply prior to 2009, under the Uniform Consumer Credit Code (UCCC).

So bad luck bears... banks will not be calling in these loans even if there is a huge crash and prices fall 60% as predicted by some US 'analysts'.

You will also note that despite the 40% crashes in the USA and Ireland, banks didn't force sales for borrowers who are not in default.

Even if they were allowed to, it wouldn't be in their interests to do so.
He quoted the following from the NCCP as evidence that the banks can't recall a loan:
Division 2—Enforcement of credit contracts, mortgages and guarantees

88 Requirements to be met before credit provider can enforce credit contract or mortgage against defaulting debtor or mortgagor

Enforcement of credit contract

(1) A credit provider must not begin enforcement proceedings against a debtor in relation to a credit contract unless the debtor is in default under the credit contract and:

(a) the credit provider has given the debtor, and any guarantor, a default notice, complying with this section, allowing the debtor a period of at least 30 days from the date of the notice to remedy the default; and

(b) the default has not been remedied within that period.

Criminal penalty: 50 penalty units.

Enforcement of mortgage

(2) A credit provider must not begin enforcement proceedings against a mortgagor to recover payment of money due or take possession of, sell, appoint a receiver for or foreclose in relation to property subject to a mortgage, unless the mortgagor is in default under the mortgage and:

(a) the credit provider has given the mortgagor a default notice, complying with this section, allowing the mortgagor a period of at least 30 days from the date of the notice to remedy the default; and

(b) the default has not been remedied within that period.

92 Acceleration clauses

(1) For the purposes of this Part, an acceleration clause is a term of a credit contract or mortgage providing that:

(a) on the occurrence or non-occurrence of a particular event, the credit provider becomes entitled to immediate payment of all, or a part, of an amount under the contract that would not otherwise have been immediately payable; or

(b) whether or not on the occurrence or non-occurrence of a particular event, the credit provider has a discretion to require repayment of the amount of credit otherwise than by repayments fixed, or determined on a basis stated, in the contract;

but does not include any such term in a credit contract or mortgage that is an on demand facility.

(2) An on demand facility is a credit contract or mortgage under which:

(a) the total amount outstanding under the contract or mortgage is repayable at any time on demand by the credit provider; and

(b) there is no agreement, arrangement or understanding between the credit provider and the debtor or mortgagor that repayment will only be demanded on the occurrence or non-occurrence of a particular event.

93 Requirements to be met before credit provider can enforce an acceleration clause

(1) An acceleration clause is to operate only if the debtor or mortgagor is in default under the credit contract or mortgage and:

(a) the credit provider has given to the debtor and any guarantor, or to the mortgagor, a default notice under section 88; and

(b) the default notice contains an additional statement of the manner in which the liabilities of the debtor or mortgagor under the contract or mortgage would be affected by the operation of the acceleration clause and also of the amount required to pay out the contract (as accelerated); and

(c) the default has not been remedied within the period specified in the default notice (unless the credit provider believes on reasonable grounds that the default is not capable of being remedied).

(2) However, a credit provider is not required to give a default notice under section 88 or to wait until the period specified in the default notice has elapsed before bringing an acceleration clause into operation, if:

(a) the credit provider believes on reasonable grounds that it was induced by fraud on the part of the debtor or mortgagor to enter into the contract or mortgage; or

(b) the credit provider has made reasonable attempts to locate the debtor or mortgagor but without success; or

(c) the court authorises the credit provider not to do so; or

(d) the credit provider believes on reasonable grounds that the debtor or mortgagor has removed or disposed of mortgaged goods under a mortgage related to the credit contract or the mortgage concerned, or intends to remove or dispose of mortgaged goods, without the credit provider's permission or that urgent action is necessary to protect the goods.

(3) This section is in addition to any provision of any other law relating to the enforcement of real property mortgages and does not prevent the issue of notices to defaulting mortgagors under other legislation.
What Shadow doesn't seem to realise is that a borrower can be in default on their loan without being behind on their repayments. Where Shadow says "the banks can't margin call unless the borrower has defaulted on repayments", the reality is the borrower only has to be "in default under their credit contract". So what constitutes default on a (mortgage) credit contract?

I covered this over 12 months ago on Somersoft Property Forums (Link). The pages have changed a little from when I posted, but here is a link to the relevant CBA Mortgage T&C Document (Australia's largest home lender):

From page 28 (section 3.5):
What we require from you for the loan to operate
3.5 Value of the Security
The value of and title to the Security Property must be to out reasonable satisfaction at all times during the term of the Contract. We may obtain a new valuation of any Security Property.
From page 34 (section 9.1):
9.1 When you could be in default
You are under default under the Contract if any of the following conditions apply:
(a) Overdue amount: You do not pay on time any amount payable under the contract
(b) Breach of contract: You do not keep to the other terms of the Contract or the terms of any Security
(c) Value or title unsatisfactory: We are not reasonably satisfied with the value of or the title to the Security Property or the Security over it will be inadequate security for the Loan in accordance with our usual prudent credit standards
Continues up to (h)
So (in simpler terms) to be in default under the conditions of a CBA mortgage the value of your property only has to fall to a value that the CBA deems unsatisfactory relative to your loan. Furthermore the CBA can at anytime request a valuation of your property to ensure it meets their requirements. If they find you in default (property value insufficient) they can provide notification and request that you fix the default (in this example request you make a payment to reduce the size of the mortgage aka MARGIN CALL). You will be provided with at least 30 days to fix the default.

I'm not expecting a crash of the magnitude that Shadow outlines in his post (40-60%), I do agree with him that it would not be in the interests of the bank (in most situations) to foreclose on a property where a borrower is keeping up with repayments, however the fact remains that mortgage contracts do contain the terms required to facilitate a property margin call.

All the above is my own understanding (from reading the relevant documentation). It would be quite ironic if I was wrong, but happy to hear from those with opposing views (with evidence which contradicts the above).


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Sunday, February 5, 2012

Short term Gold action - Retrace to breakout?

A little over a week ago I pointed out Gold had broken out of it's downtrend. The heavier selling and large price drop on Friday suggests a short term top might be in (after a very strong move over the past 5 weeks from $1520 to $1760). 

Gold has a habit of retracing to test breakouts, so a dip back to around US$1680 seems likely short term (perhaps even trade below this level for a short period to clear out some stops before reversing and heading higher). If it drops below the breakout then there's still the 50 and 200 Daily Moving Averages to provide support.



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Thursday, February 2, 2012

Aussie Houses Priced in Silver and Gold

With Residex property indices having just been updated for end of year 2011 I thought it would be worthwhile re-charting the series I have been publishing here for the past 18 months.

Data source for below charts:

Key Figures:

Sydney (Ounces to buy a house)
Precious Metals Peak (January 1980): 103oz Gold, 1811oz Silver
Housing Peak (February 2004): 1100oz Gold, 69,143oz Silver
Start of 2011 (January 2011): 491oz Gold, 23,515oz Silver
End of 2011(December 2011): 403oz Gold, 22,019oz Silver

Melbourne (Ounces to buy a house)
Precious Metals Peak (January 1980): 67oz Gold, 1181oz Silver
Housing Peak (February 2004): 661oz Gold, 41,538oz Silver
Start of 2011 (January 2011): 434oz Gold, 20,777oz Silver
End of 2011 (December 2011): 353oz Gold, 19,264oz Silver

Brisbane (Ounces to buy a house)
Precious Metals Peak (January 1980): 62oz Gold, 1091oz Silver 
Housing Peak (February 2004): 600oz Gold, 37,696oz Silver
Start of 2011 (January 2011): 331oz Gold, 15,833oz Silver
End of 2011(December 2011): 263oz Gold, 14,336oz Silver

The cost of housing dropped roughly 18% in Sydney, 18.6% in Melbourne and 20.5% in Brisbane over 2011 when priced in ounces of Gold (due to a combination of both falling house prices and a rising Gold price). The cost also dropped when priced in Silver, but by more subdued levels (6-10%) given Silvers larger fall from the peak price earlier in the year. In fact housing priced in Silver between April 2011 (Silvers peak price) and the end of the year rose considerably, for example a Sydney house was 16,864 ounces in April and as per above 22,019 ounces in December, an increase of over 5000 ounces or around 30.5% more expensive (even though it dropped YOY).

Will Gold and Silver continue to climb against property? I suspect so. With Australians continuing to save and taking on credit at historically low levels, house prices will likely be able to do little more than continue their slow downward melt (with risk of a sharp downward move with any significant shocks to our banking system or economy). This was well explained by Leith Van Onselen in this recent article. Complimenting this for the benefit of the precious metals we have the Fed suggesting a longer ZIRP policy and hinting at further easing.

Will house prices hit the lows in Gold and Silver that they did in 1980 where punters could have traded around 1100-1800 ounces of Silver or 60-100 ounces of Gold for a median house? We'll have to wait and see. I think we'll find out one way or another within the next 2-3 years.

Here are the charts (click on the chart to enlarge):


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Wednesday, February 1, 2012

What about Silver? - Alf Field - February 1st, 2012

Some readers may recall that I saw Alf Field come out of retirement to present at the Gold Symposium in Sydney several months ago, as I posted about here.

Alf Field posted a follow up article to the $4500 Gold prediction in mid January suggesting the Gold correction is over and Gold would start heading toward his target (and given the recent price breakout this looks to be the case):
There is a strong probability that the correction in the price of gold has been completed. This article has four separate sections. They are:
1. The Elliott Wave (EW) justification for thinking that the correction in gold is over.
2. Why corrections happen in gold from a fundamental viewpoint.
3. The extent to which manipulation affects the gold price.
4. A possible “black swan” event that could trigger a gold price surge.

Now today (h/t Pete) Alf Field has covered the Silver rally that may come from his Elliott Wave predictions. You can read the entire article here or this is the section that most want to see (but warning it's like skipping to the end of a good book!):
We can now attempt to make some price forecasts. Silver, as with gold, is starting intermediate wave 3 of Major THREE, which should be the longest and strongest wave in the bull market. It should certainly be longer than intermediate wave 1 which was the gain from $8.77 to $49.52, or +464%, as shown above.

Thus the gain in wave 3 of Major THREE should be larger than +464%. It should be a gain of at least 500%. Starting from the $26.39 low, a gain of 500% would produce a target price of $158.34 for silver. That is the number which equates with the $4500 price forecast for gold and produces a silver to gold ratio of 28.4 ($4500 divided by 158.34).

The gain in gold was forecast to be 200% for this move while the forecast rise in the silver price is 500%. Silver is again predicted to perform better than gold based on these EW calculations.

A word of caution is appropriate at this stage. All EW studies are based on probabilities. While the wave counts may provide a high degree of confidence in the forecasts, one cannot be 100% certain of any forecast. It is necessary to have a point at which it is obvious that the forecasts are wrong. In the case of this silver study, the line in the sand is at $26.00. If the silver price drops below $26.00 the odds are that the above calculations will not work out.

A further word of caution: silver is not for the faint hearted. Silver is considerably more volatile than gold and the corrections are much larger. Silver corrections can and do happen quickly. They are emotionally gut-wrenching and it is easy to get shaken out of one’s position near the bottom of a large correction.
While I don't personally subscribe to such charting predictions, it's still an interesting read and triple digit Silver is in my opinion very likely toward the business end of this bull market as the public become more heavily involved.

While we don't have the Hunt Brothers cornering the Silver market this time around I think there will be enough interest and speculation in hard assets to drive a similar super spike to that which we saw in 1979/1980.


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