Saturday, October 27, 2012

Precious Metals (Gold/Silver) in Australia Exposed!

"Planning to invest in gold? This is what you need to know" was the title of a recent article from Channel 7's David Koch aka Kochie (a well known Australian financial commentator). One thing I found particularly amusing in Kochie's article was the disclaimer at the bottom:
"As always consult your financial advisor before galloping into any gold rush."
How many financial advisors would include self stored (e.g. personal safety deposit box) physical Gold or Silver in their suggested plan for you when they don't receive a commission from the purchase? If you plan to see a financial advisor about purchasing precious metals, find one who charges an hourly rate for his services rather than one who works on commission and make sure it's someone who is familiar with the different ways of getting exposure to Gold and Silver.

The last time I was reviewing my income protection (around 18 months ago now) I asked the financial planner about exposure to precious metals through their boutique firm and got a blank look. The closest they had was a mixed commodities fund.

While Kochie's article did go over a few key points, it was not really helpful for the novice at all (and was more or less a rehash of a very similar article 2 years ago). A much more in-depth guide I wrote last year for buying physical Gold and Silver can be found here (Gold and Silver Buyers Guide), but even this guide has it's limitations, it already assumes that the reader wants to take on the risks and responsibilities associated with owning physical.

The problem with either of the above linked guides (Kochie's brief overview or my guide to buying physical) is that they attempt to put the cart before the horse. Before buying precious metals you really need to have an idea of why you are buying and this will guide you toward the most suitable form of precious metals exposure.

What many people fail to realise is that there is a huge variety of different ways to gain exposure to Gold and Silver, just like property (residential, commercial, buy and hold, renovate, develop, real estate investment trusts, local or overseas purchase) or shares (technical trading, dividend investing, fundamental company analysis or buying an index). The variations are almost limitless when you consider that some people may choose to gain exposure in multiple ways and for multiple reasons.

Here are some questions you may need to ask yourself before jumping into precious metals:

Are you buying to preserve wealth or create it?
Do you consider Gold and Silver to be money or an asset?
Do you have a short or long time frame?
How often will you want to change your position?
How involved do you want to be in managing your exposure to precious metals?
What are your expectations on the value of the AUD relative to the USD?
What level of counter-party risk are you comfortable with?

And here are some of the aims of those who currently hold:

Used for wealth preservation over the long term (savings)
Tool to increase wealth relative to other assets (speculate on changing ratios)
Tool to increase wealth in ounces by trading the Gold:Silver Ratio (GSR)
Trading short term momentum or technical chart patterns for profit
An investment via purchase of profitable mining companies
Insurance to protect from complete currency collapse
A hedge against falling AUD (protect against systematic risk/shocks)

Below is a brief flow chart showing a majority of the ways that you can gain exposure to the precious metals bull market (in Australia). You can't rely on this chart alone to make a decision on which type of exposure is right for you, but hopefully it highlights the diversity of options available:

Precious metals are used by many different types of people, with different views, investing over different time frames and for different reasons, so trying to make a decision on which exposure is best for you can be difficult.

For someone who wants to trade the bull market purely on a technical basis and take short term profits, purchasing physical bullion is probably not the smartest move. In much the same way someone who is buying Gold and Silver in the expectation that they will replace fiat currency following the collapse of the current financial/monetary system is not going to be buying CFDs. Once you've given thought to your reasons and goals for buying precious metal, it usually becomes much easier to decide on the form you buy.

Some precious metal advocates will tell you physical is the only way to go, "If you don't hold it, you don't own it", to which there are varying degrees. For example some feel that physical is best kept in your personal possession, either stored at home or buried on your property. Others who advocate physical think that holding it in a personally organised safety deposit box poses a lesser risk than storing at home. Neither method it without it's risks (for example precious metals stored at home are are at risk of theft or could get damaged in a fire). It's a pretty disturbing thought, but if someone knows you store valuables at home they could threaten you or someone in your family with a weapon to get you to tell them where your stack is, even if buried).

It's not really a surprise that we see opinions like this:
Today gold is traded like a volatile commodity by gamblers who like to call themselves traders. Or else it is held as a small percentage of one's wealth for the expressed purpose of "insurance." Gold is actually a pretty poor inflation hedge as long as it is under external influences such as the inflatable supply of paper gold BB liabilities. So the only way it can even hope to perform as prescribed is as insurance in physical form only. Yet so many investors still hold "paper gold" as the insurance portion of their portfolio. This alone really highlights the confusion in Western "professional" investment thought.

Most people are savers, not investors or traders. Yet today we are all forced to be investors chasing a yield because there is no such thing as a perfect inflation hedge. If there were such a thing, a large portion of the "investing public" would not be anywhere near stocks and bonds. Even the most "risk free" bonds, US Treasuries, have the greatest risk of all, currency risk. And in the case of the dollar, this is exposure to a risk that, today, is well out of the hands of the currency manager thanks to seven decades of functioning as the global reserve standard. FOFOA
When we've seen events in recent history that look like this:
It's one thing for $1.2 billion to vanish into thin air through a series of complex trades, the well-publicized phenomenon at bankrupt MF Global. It's something else for a bar of silver stashed in a vault to instantly shrink in size by more than 25%.

That, in essence, is what's happening to investors whose bars of silver and gold were held through accounts with MF Global.

The trustee overseeing the liquidation of the failed brokerage has proposed dumping all remaining customer assets—gold, silver, cash, options, futures and commodities—into a single pool that would pay customers only 72% of the value of their holdings. In other words, while traders already may have paid the full price for delivery of specific bars of gold or silver—and hold "warehouse receipts" to prove it—they'll have to forfeit 28% of the value. Barrons
The problem today is that any investment or form of savings has an element of risk. In a recent thread on Silver Stackers there was discussion around the difference between gambling and speculation and the following was an interesting take:
Gambling has a crucial difference with speculation: with gambling, there was no risk prior to the act of gambling, with speculation, there was. On the moment someone buys silver, he reacts on the risk of inflation. On the moment someone pulls the lever of a casino slot machine, he just created the risk. He can decide to not pull the lever, and just go away. Speculation is reacting and thus requires insight, gambling is just a random choice, and requires nothing. Pirocco on Silver Stackers
Someone who thinks their cash sitting in a bank account is safe might want to consider the fact they are at risk of their purchasing power diminishing as tax on interest and inflation resuts in a negative real return in some cases. Not to mention the risk of their bank going insolvent. 

While today Australian ADI's are protected by a limited government guarantee, there are still many places that people can park their cash not realising the risk they assume by putting their money in these funds (some perhaps not realising they are not covered by the government guarantee):
The collapse of major mortgage fund Banksia Securities was exacerbated by an apparent failure to adequately account for almost $200 million in overdue loans and repossessed properties.

Banksia, based in Bendigo, was swept into receivership on Thursday night holding $650m on behalf of about 3000 investors, many of them retirees.

The fund operated by raising money from ordinary investors and then lending money to property developers and other businesses at higher rates.

Four weeks ago, auditors for the company approved the group's accounts and raised no concerns about its financial viability. The Australian
For those who have already decided on physical precious metals and are wondering what form to buy it in, checkout this (somewhat tongue in cheek) flowchart from Jislizard on Silver Stackers:

For a more serious breakdown (which includes Gold) you might like to take a look at the section in my guide called "What to Buy" which briefly describes the main physical options available (in Australia) including: coins, rounds, bars and more.

One thing I would implore, if you are going to use "paper" forms of Gold and Silver, make sure you read the fine print. Many of the clauses and risks listed in the terms and conditions booklet can be an eye opener.

This post is not intended as a be all and end all on investing in Gold/Silver in Australia, but hopefully it will get you thinking before making a purchase and reduce the number of people blindly following the advice of others who may not have your best interests in mind and while I can appreciate the irony of having just said that while displaying affiliate links on this blog to purchase physical bullion, I can honestly say that I think it's a good idea for all investors to have at least some of their precious metals exposure in physical.

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Sunday, October 21, 2012

Resource Companies Print Shares Like Bernanke!

In a post the other day I put up a competition after charting some data which I found particularly interesting (guess the mystery chart). The competition was won by euphoria who guessed correctly that it was Gold Anomaly Limited shares issued (with Beer Holiday deserving special mention for initially guessing what it was, but not the company).

Here is the chart again:

Following the IPO, the first quarterly (Q4, 2002) showed the number of shares on issue as 20,590,454 and following a recent 2:3 rights issue this number now stands 182 times higher at 3,745,558,220. To put this in perspective if you'd owned a stake of 1,000,000 shares in the company in late 2002, you owned 4.85% of the company, if you hadn't bought any since and simply held this parcel over the 10 years you would own 0.0267% of the company today. You would have paid 25c each for your shares ($250,000 total) and today they are trading at less than a cent (closed Friday at .004, though have traded lower) and your 1,000,000 shares are now worth $4,000.

Here is a weekly chart of the share price over the last decade:

Unfortunately GOA's story is not an uncommon one in the small cap exploration and mining sector. 

Many exploration companies have struggled to issue capital since the GFC and are preyed upon by financiers which ultimately destroy value for shareholders by issuing new capital well below the current share price.
Juniors have been making big mistakes too

This failure to read the gold market extends across the junior sector too. From 2001 to 2007, it was easy to raise money. Exploration companies would issue shares, raise capital, go out and drill, hopefully declare something half decent, then go and raise some more money at a higher price.

Then we got the credit crunch, and funding dried up. Yet so many companies are still trying to follow this broken business model. They have been decimated this year. The only ones that have done well in 2011 are those that have mined metal at a low price, and sold it at a higher one. It really isn’t rocket science. That’s what gold miners are supposed to do. But often they don’t.

I have long railed about this. The gold price is high, and the credit markets are dead. Gold won’t be this high forever – so mine the easy-to-get stuff and sell it while you can. Forget expanding the resource, or doing anything else – just get mining. This market isn’t interested in blue-sky stuff – it isn’t interested in dreams, it wants hard cash. Money Week
Some of these junior companies make promises of self funding future expansion through start-up of small scale Gold production (something GOA has been suggesting there is the potential for since 2009 or earlier), however there have been many speculators/investors (including yours truly) burned by such empty promises.

It's not only explorers which can be hit by these problems. Even producers with high cash costs (cash cost may be below spot price, but administration, development and exploration costs soak up profit and require the company to continue raising capital) can experience similar issues. Apex Minerals (AXM) is a marginal Gold producer that comes to mind and has been hit hard over recent years. Trading well over $1 in 2008 they fell to less than 1c and then earlier this year had a 100:1 consolidation following which the share price continued to fall. Such consolidations often hide the true extent to which a company has been allowed to print shares in order to continue trading.
Hedge fund boss John Paulson has often made the conventional wisdom case for owning gold shares - that mining companies enjoy superior leverage to gold prices, perhaps rising as much as 2-3 times as much as the gold price. As noted recently in the Wall Street Journal, he’s backed up his thesis with big slugs of gold equities.

Color us skeptical.

We mean no disrespect to the likes of Paulson. But the case for equity leverage to gold is diminishing and will continue to do so until mining company executives and their bankers stop the addiction to deal-making. Until then, non-insider investors in precious metal equities will continue to bear the brunt of the penchant for financial engineering that is based on a permissive attitude to the stock register.

We’re not naive about the temptations and opportunities for stuffing scrip down the market’s throat. When you own a money printing press you tend to use it, especially when your performance is incentivized primarily through near-term movements in stock prices.

Yet who cannot be galled to hear precious metal miners cooing and tut-tutting about profligate central bankers and leveraged sovereigns even as they issue stock at rates to make even Ben Bernanke blush, make high risk bets on the far distant future, and spend more on fees and commissions than dividends. Mine Fund
At times I've heard from various readers (either through comments on the blog and forums, emails or in person) that they miss the stock profiles that I have written in the past, but this has come from an inclination to move more of my capital from stocks into physical. With less capital available for stocks this has meant less time allocated to research and keeping up to date with progress of mining companies. While I do still keep an eye on those companies I hold in my Super, the mismanagement of many junior companies balance sheets and capital structure over the last 12-24 months in particular has kept me wary of re-entering this sector with any significant positions.

I'm not saying that there aren't exceptions. There are exceptional junior exploration companies who have managed their finances and capital structure, some of them covered on this blog in the past, such as Cobar Consolidated who raised capital above the share price on multiple occasions & Royalco Resources who have a unique royalty focus which allows them to avoid dilution and even pay shareholders a good dividend. It's not an easy process to pick the right mining companies and even when you have the right company you might be holding at the wrong time or hold them for too long.

The good thing about holding physical is that while it's not without its risks, you have a much greater level of control over that risk (for example you can secure your physical in a safety deposit box facility). Holding physical you are not at the mercy of central bankers or resource companies (who can evidently be as bad, if not worse) who can print their scrip at will.

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Thursday, October 18, 2012

Mystery Chart: Guess what it is, win free Silver!

I have constructed the below chart with some data I collected this evening.

I am putting out a challenge to any readers who are interested in winning some free Silver. Guess what this chart is (answer has to be specific) and I will post you a free ounce of Silver (you will get a choice from a few nice coins). Only the first person to guess will win the Silver. Will post worldwide. No maximum number of entries so you can keep guessing, but only 1 guess allowed per comment (so if you want to make 3 guesses then they need to be in 3 separate comments). Only entries in comments section of this blog will be accepted.

Important: You need to post your entry to the blog with an account (leave an email address in the comment or use a username that you use on a forum like Silver Stackers or Kitcomm) or I will not be able to contact the winner.

I will give out some clues over the next couple of days (will update the post) and probably close this off Sunday afternoon/evening if no one has guessed correctly (and I will keep my ounce of Silver). I will tweet any new clues (once posted on the blog) so follow me on Twitter (@bullionbaron) for notification of updates.

The first clue: I am finance/market related. Just because the number rises doesn't mean my owners wealth increases.

Friday Morning Clues: I've had a couple of suggestions that it could be the Fed or another central bank balance sheet. While that fits the theme of the first clue it's not a central bank balance sheet. The number set that is charted starts around 20 million and recently almost doubled to a little under 4 billion.

Question: Is it precious metals related?
Answer: A good question to narrow it down. Yes it is precious metals related (more info in afternoon clue).

There has been a break in the mystery... from Beer Holiday:

Number of gold mining co shares issued. On the ASX I guess. I don't follow the penny stocks, hopefully they had lots of placements this year.

As per above, I need specifics (company name)... but the above should help considerably to final answer.

The answer was guessed correctly by euphoria, it is the issued shares over a 10 year period for Gold Anomaly Limited (GOA) on the ASX. I will put up a post later tonight or over the weekend with more information.

But it's something to think about in the meantime. Some of these small cap mining stocks are better scrip printers than Bernanke himself.

You can also ask questions in the comments section to try and narrow down where to look for the answer. It's very unlikely you've seen this exact data charted before.

So put your thinking cap on and start guessing below!

Monday, October 8, 2012

Tungsten Filled Gold Bars - Not A New Scam

Just a quick post tonight...

Tungsten filled Gold bars have made the Zero Hedge feed a few times, most recently around 3 weeks ago (Tungsten-Filled 10 Oz Gold Bar Found In The Middle Of Manhattan's Jewelry District):
It is one thing for tungsten-filled gold bars to appear in the UK, or in Germany: after all out of sight, and across the Atlantic, certainly must mean out of mind, and out of the safe. However, when a 10 ounce 999.9 gold bar bearing the stamp of the reputable Swiss Produits Artistiques Métaux Précieux (PAMP, with owner MTP) and a serial number (serial #038892, likely rehypothecated in at least 10 gold ETFs across the world but that's a different story), mysteriously emerges in the heart of the world's jewerly district located on 47th street in Manhattan, things get real quick. Moments ago, Myfoxny reported that a 10-ounce gold bar costing nearly $18,000 turned out to be a counterfeit. The discovery was made by the dealer Ibrahim Fadl, who bought the PAMP bar in question from a merchant who has sold him real gold before. "But he heard counterfeit gold bars were going around, so he drilled into several of his gold bars worth $100,000 and saw gray tungsten -- not gold. The bar was filled with tungsten, which weighs nearly the same as gold but costs just over a dollar an ounce."
Something that readers may not be aware of is that Tungsten filled Gold bars are far from a new scam. I was reading back through some old articles on Gold today and spotted two different scares, in January 1975 and June/July 1982. Below are two of the articles I found (click article to enlarge) and may be of interest:

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