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:

CLICK IMAGE FOR FULL SIZE
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:

CLICK IMAGE FOR FULL SIZE
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.

You can follow me on Twitter. I'm usually sharing links and opinions daily (@BullionBaron). You can also CLICK HERE to signup for free email updates.

BB.

 Buy bullion online - quickly, safely and at low prices

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:

CLICK CHART TO ENLARGE
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:

CLICK CHART TO ENLARGE
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.

You can follow me on Twitter. I'm usually sharing links and opinions daily (@BullionBaron). You can also CLICK HERE to signup for free email updates.

BB.

 Buy bullion online - quickly, safely and at low prices

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.

CLICK CHART TO ENLARGE
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!

Wednesday, October 17, 2012

Property newbie to property "investor" in 2 weeks!

You can read my thoughts on the Melbourne property market in this earlier post on my blog (June 2012):

Melbourne Property Crash

Note that since that writeup, although prices have bounced a few percent higher over the last 3 months (according to RP Data Daily Index), the fundamental situation is unchanged, as is my opinion on price direction over the next few years (Melbourne likely to see around 30% fall in nominal prices from the peak).

Some recent updates include: Stocklands Managing Director said today that this was the worst new housing market he has seen in 20 years, new blocks are selling at roughly 1/3 of the volume seen over 2009-2011, stock on market remains well elevated, rental vacancy rates are still higher than other capitals & mortgages are still being discharged faster than new loans being created resulting in the total number of loans in Victoria falling...

Further to that, these figures from RP Data's last monthly update continue to paint a grim picture:

- Yields remain very poor at 3.6% for houses and 4.4% for units
- Although prices have seen a bounce they are still -3.8% YOY
- Time on market similar to same time last year when prices were falling
- Vendor discounting (from advertised price) at -7.6%


So it made me wonder... just who would be buying in the Victorian market given the poor fundamentals and further correction that's likely over the coming years?

I stumbled across a thread on a popular Australian property investing forum and thought I would share some quotes from it (a couple are shortened, skip to the "TL;DR?" heading down the page if you want the cliff notes).  My emphasis in the quotes.

The user who starts the thread lists the following in his signature on the site:
"26 years old. Debt free. Earning $63k a year. $60K in savings. Buying in Vic."
He starts a thread on October 1st, 2012. The start of his property investment journey...
This thread will be departing shortly. Stopping at all stations and then terminating at my first Investment Property.
That's the plan anyway...

I'm going to use this thread to keep track of each step I take in buying my first investment property (fingers crossed).
Hopefully you can help keep me on the right course, as this will be my first property and it's all very foreign to me.

Maybe this will come in handy one day to someone else looking to buy their first property. At the very least it should keep me accountable and on the right track.

Sooo, please come along for the ride! I'm going to need all the instruction I can get.
A few days later (October 4th) and he is taking his first steps to becoming a property "investor":
Meeting with the broker today and will keep this thread updated as I go along.

On the flip side though, I could go with my gut against what the experienced investors advise and fail miserably. That would probably be considerably more painful!

Either way I'll be sure to do all my homework before making any serious decisions!
Next day (October 5th) he reports in:
Anyways... I met with Peter yesterday and left feeling pretty comfortable with the whole process. He walked me through, step by step, the entire process from borrowing to settlement.
My situation is pretty straight forward. Peter doesn't think there will be any issues when it comes to borrowing. A quick appraisal had some banks willing to lend up to $500k, which is a pretty scary thought.

I was thinking around $300k would be a comfortable loan for my first property. Even without tenants I could make the repayments, though obviously not ideal.

(I'm still tossing up what sort of loan structure to use though. But that's something I need to figure out)


Now it's a matter of researching areas and getting out and seeing what is available!

Next stop... realestate.com.au
Buckle up. 
A loan for $500k would be almost 8x the yearly income this individual brings in. I thought lenders were more prudent these days?

Same day another user asks how he is going to pick the areas he is investigating, the response:
I've devised a system which I think will work. It involves a map of melbourne and a dart...

Really though, I'm not sure.

I'm thinking of 2 bedroom units/townhouses at $300k. Something with a bit of land but hopefully not too far from the city.
To be honest, I have no idea yet. Lots of time on real-estate.com and researching/reading around here.
Little did we know that his idea of "lots of time" was just another 1.5 weeks.

Another 4 days pass (October 9th):
After a few recommendations and some more research I have been looking at Bendigo a little closer.

Some points I've either read or been told:

The vacancy rates are reportedly extremely low.
The railway and highway construction/improvement in past years has made commuting more efficient.
Construction on the new hospital is a good sign. $600+million over the next 4 years .
Has shown good growth over the last 3 years.
Melbourne's high property prices are driving more people to look elsewhere.
The available rental properties are no where near enough to meet demand (read 10:1).

I spoke to Ben (Belu) earlier today and he was extremely helpful.
I also called a number of local Property Managers to see if they could offer any insight on the area, as I'm not from around there.
They all seemed to have similar opinions. The general consensus being that demand is very high and that it's difficult to really pick a bad area. Anything close to the CBD was recommended. Golden Square and Kangaroo Flats were both popular choices, as were a few areas near the university as well as up north near the hospital.

I guess the next step is probably to arrange a trip to Bendigo and have a look around with one of the real estate agents at what's available?


So far things seem to moving smoothly, albeit slowly.
From knowing practically nothing about property to hunting for one in a little over a week and this guy thinks this journey is progressing slowly?

Note the property managers response: "Demand is high, no bad areas, BUY BUY BUY", seems like a fair and unbiased opinion he would be getting here...

Almost a week passes with no update, then (October 15th):
Took a trip up to Bendigo on Friday. I hadn't been there since I was a kid, so really had no idea what to expect of the place.

I was pleasantly surprised. I thought the city had a really good 'vibe', the people were all very friendly and there were good signs of growth and plenty of money being spent.

I met up with Ben who spent his whole morning driving me around and inspecting different properties/areas. Ben is a top bloke and I would definitely recommend anyone considering investing (or living) in Bendigo should give him a call.


We looked at 5 or 6 properties, all in my price range and all in different areas so I could get a feel for what was available.

I have a meeting booked with my accountant before I make any decisions/offers. But I feel I'm definitely getting closer!
Note that Ben is a real estate agent, not a buyers agent, so all the properties will of course be on their books.

And then just today (October 17th):
I made an offer on a property yesterday. 3br 1bath house in Quarry Hill, Bendigo.

My offer was not accepted, but some negotiations done by the agent and we came to a deal. $272k, 45day settlement, and 5% deposit. Subject to finance, building/pest inspection and access for letting prior to settlement.

The wheels are in motion!

Was all very surreal, but it's settling in. I felt like I didn't have a clue what I was doing, which was (is) probably true.


But, I didn't want to sit on the sidelines any longer. Plus I was pretty happy with the property/location and general outlook of Bendigo.

So I met with Peter (Sage Lending) to get the finance underway a few hours ago.
Still wrapping my head around everything. I was after a guarantor loan. Peter recommended Bank Of Melbourne. We're looking at a $286k borrow, split into 2 loans 80/20. Both interest only, 30years, variable (5.75%).

I have the 20% in savings already, so I can release my parents from liability at any stage.

Ummm, now I'm just getting the paperwork sorted. Then getting a look at the contract before it becomes unconditional I guess.


It all seems fairly simple, but also very complicated at the same time...
Why the parents as guarantor when he has the cash buffer? Don't rope them into your mistakes!

Running the numbers, $272k purchase price (only 1% off asking price), $11,390 would be payable in stamp duty, but if a 5% deposit is being paid then I'm not sure how the loan comes out to $286k? I imagine there is a fat lump of Lenders Mortgage Insurance (LMI) being borrowed in there somewhere...

When queried on the rental return:
Rental is estimated at $280 - $295/week.

Which, if my calculations are correct*, should be 5.3% yield at the lower end and 5.6% at the upper range.


*there's a good chance they are not correct
Let's hope his concern about the calculations is only a joke (worriedface.jpg). If we base the return on his loan amount (instead of purchase price) then he will only be returning 5-5.3%. Given that his loan is 5.75% before taking into account property management fees, untenanted periods, landlord insurance, council rates and more, he is likely to be a fair whack out of pocket each week. Not to worry though, because he HOPES he can claim depreciation on the renovations:
It's a low entry price for the area because the land has been divided with plans to build 1 unit out back.

So I'm not getting the full block, but hope this wont effect capital gains too significantly.

I'm also hoping the renovations will mean I can claim a decent amount of depreciation.
TL;DR?

October 1st - Complete property investment newbie
October 4th - Meets with broker and offered up to half a million dollars
October 9th - Resorts to looking in Bendigo because Melbourne prices too high
October 15th - Travels to Bendigo and looks at 5-6 properties
October 17th - Offer accepted on property 1% under asking price ($272k)

Zero to property investing hero in a little over 2 weeks!

Sometimes the property investment forums have level headed users advising those new to the game, but it seems in this case they are going to let this guy forge ahead with a lot of back patting, rather than suggesting that he give a little more thought to his plan, region of purchase and specific property purchased... I will be sending this individual a private message shortly with some thoughts on his decision to purchase.

Any thoughts? Throw them in the comment section below.

You can follow me on Twitter. I'm usually sharing links and opinions daily (@BullionBaron). You can also CLICK HERE to signup for free email updates.

BB.

 Buy bullion online - quickly, safely and at low prices

Wednesday, October 10, 2012

Silver Price Driver: Industrial vs Monetary Demand

An article written recently by Jeff Clark on industrial Silver demand caught my eye today:
The Solar Silver Thrust
Conclusions:
1.The solar industry has great potential to become one of the more important sources of silver demand. This will lend strong support to prices. This industry had zero impact on silver ten years ago; it now represents 10% of total industrial demand. 
And it's not just Japan. According to a news report, 102 countries are now installing solar panels – from just 18 two years ago. Heavy and/or growing usage is reported in Germany, Italy, Japan, France, Belgium, Portugal, Spain, US, Australia, and Asia, including China and India. 
2.It appears that the development of the solar industry didn't occur as a result of natural forces, since to a large degree it was initiated by government subsidies that supported the industry (and indirectly the silver price). You may like or not like these market interventions, but as investors, it's important to recognize these trends regardless of whether we agree with them. It's particularly important to keep an eye on these subsidies, as they could vanish if cash-strapped governments change their priorities. That won't happen overnight, however, so we should have ample warning. 
3.Due to its unique properties, the number of applications for silver continues to grow. Researchers at the Silver Institute are upbeat about the future for silver industrial demand. That's no surprise, but it doesn't make them wrong; the implication here is that only the worst type of economy would have a negative impact on demand. 
4.If demand grows fast enough, it could impact not only the price but the availability of the metal, in spite of rising mine production. If that happens, bullion purchase premiums will rise as supply becomes tighter. 
The bottom line on the above is that the growing number of industrial applications for silver represents a long-term shift in this market. Increasingly diverse usage is not only here to stay but will continue to grow, supporting the price and impacting the balance of supply and demand. 
For investors, the thing to keep in mind is that while long-term prospects for silver prices are extremely bullish, to the degree prices are driven by this increased industrial demand, they are vulnerable to economic correction/contraction in the short term.
Around 6 months ago I wrote a post about Silver inventories and demand/supply factors:
At the moment the pricing mechanism for Silver is positioned somewhere between Gold and Oil. It is both a consumable and an asset hoarded by those who think the price is set to rise.

A chart graphing data from CPM group shows that Silver inventories have been rising for the past 7 years:

Silver Inventories (above ground supply)

It's currently around a level which would provide 20 months supply for industrial purposes, which is significantly more reserves than 2 months worth of oil supply. 
Most commentators have been fairly critical of this rising Silver inventory, but the truth is this overhang could push Silver toward a pricing system which is less reliant on consumption/industrial demand and would rather allow speculators and hoarders to control the price based on the price point they are prepared to sell at. Bullion Baron
Industrial demand for Silver is an important part of the market and helps to take up the slack in supply, however for investors looking to use Silver as a store of wealth, there needs to be a stable above ground supply available for investment demand (e.g. coins/bars).

While industrial demand alone isn't yet high enough to exceed available supply and cut into investment inventories, there's a real risk of this happening in the future (for the reasons outlined in the article by Jeff Clark). For this reason those looking to buy Silver as a long term store of value should be wary, as if Silver inventories start to deplete again it may drive away the investors buying Silver for it's monetary properties and return Silver to a pricing mechanism primarily dominated by industrial demand vs mining supply.

One of the features that makes Gold attractive as a store of value (and as a monetary unit) is that it's above ground inventory is relatively stable (steadily increasing over time, with most Gold ever mined still in an easily recoverable form). The high level of inventory relative to industrial/consumable demand means that we will never run short of the metal. Gold will always be available, it's just a matter of the price at which it changes hands.

Stock-to-flow ratios (courtesy of Erste report "In Gold e Trust")
Gold’s stock or total volume ever produced is roughly 170,000 tonnes  (5.4655 billion ounces) according to World Gold Council, 2010 (however, I am aware there are reasonable arguments to support a much higher number).

US Geological Society puts the increase of above ground supply (world production - apparent consumption) at 122,000 tonnes over the past 110 years (1900 - 2010), meaning there was roughly 48,000 tonnes (1.5432 billion ounces) above ground in 1900.

Using the above figures we can calculate a Gold ounces per capita over the past century (global population source: Wikipedia).

1900:

1.65 billion people / 1.5432 billion ounces = 0.935 oz Gold per capita

2010:

6.972 billion people / 5.4655 billion ounces = 0.783 oz Gold per capita

The above results show amazing stability over a long period of time. Is it any wonder that Gold has retained it's value over the long term (relative to other assets and wages). It has earned it's place as wealth preserver & the people's money of choice for good reason.

The above situation for Gold varies greatly to that of Silver:
In 1900 there were 12 billion ounces of silver in the world. By 1990, that figure had been reduced to around 2.2 billion ounces," and now "today, there are less than 1 billion ounces in above-ground refined silver. Daily Reckoning
So one precious metal has seen a steady increase in above ground inventory, the other a precarious fall. Those who gloss over the situation without giving it deeper thought might say "Isn't it a good thing there is less Silver? This will push up the price", but this doesn't take into account the two very different types of demand in play (industrial vs monetary/speculative/investment demand) and the influences they have on price depending on various other considerations.

If someone was to take the stance that Silver is priced solely on strong demand while there are low inventories then why wasn't Silver priced higher in the early 2000's when demand was as strong, while inventories were at record lows? Yet today as inventories increase (investors stockpiling) the price of the metal is at much higher levels than 10 years ago...

As I pointed out in a post 12 months ago (in this post: Silver price tug-o-war), the pricing of this metal is a combination of both industrial & monetary demand.

The industrial demand is a much simpler calculation, if demand exceeds supply and excess inventory is low then price should rise as a result. However the monetary (and or speculative investment) demand for Silver is a different beast all together, a higher inventory allows more investors into the metal, making it more liquid and suitable to hold as a store of value (hence why I speculated that rising Silver inventory could lead to higher prices).

These above facts, figures and opinion don't change my expectations for Silver in the short term. In my opinion Silver will outperform Gold from trough to peak in this bull market and the bubble phase is likely to see extraordinary gains as it did in the rise to January 1980. However, as a long term store of value Silver is a much riskier proposition than Gold (in my opinion). So when I see investors talking (on forums that I frequent) about a 10 - 20 year buy and hold strategy for Silver it worries me that they could miss out on a great opportunity to sell the metal as it peaks in a speculative blow-off.

Of course I can't predict a future outcome with any certainty, but in my eyes it's a big risk to be holding Silver as a large percentage of your portfolio without having a strategy to sell into the next speculative frenzy (similar to that which we saw in 2011, but in my opinion the next move will be much more frantic and to much higher prices).

If you're going to count on ounces of metal to preserve your wealth over the long term, then make sure you are doing it with the safer monetary metal, Gold.

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BB.

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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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Friday, October 5, 2012

Gold Bubble, Toil & Trouble

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I haven't seen so much talk about whether Gold is a bubble or since around 12 months ago when Gold peaked at a record high above US$1900.

After writing my piece on Gold/Silver (and my expectation they will head into a bubble) nearly 3 weeks ago:


I have seen several pieces since discussing whether or not Gold is already in a bubble or heading into one... including a video from Santiago Capital, posted on Zero Hedge which outline several reasons Gold is not a bubble (reasoning included not having reached inflation adjusted peak from 1980 and being under owned by investors). There has been recent discussion on CNBC about whether Gold is in a bubble or heading into a bubble. There was this piece from The Daily Gold which included a chart showing Gold's share of global allocations (relative to the 1980 peak):


And then there was this article yesterday from David Llewellyn-Smith (of Macro Business / Macro Investor) aptly titled "Gold is not a bubble".

I agree with the ultimate conclusion, however disagree with some of the statements made in the article, for example:
When thinking about gold, the frame of reference is entirely different to that used for other investment classes. Gold is not an asset you can assess in terms of yield. Its “dividend” derives from something else entirely. It is a pure currency hedge. And not against just any old peso, rial or dong. Gold is the undollar, the US dollar’s shadow, and on that basis it is not in a bubble at all.
The suggestion here that Gold is only a hedge against the US Dollar (and not against other fiat currencies) is deeply flawed. In fact a chart used in the article a little further down from the above text shows how little truth there is to the statement:
Blue & green lines added to highlight USDX tracking sideways as Gold rose
The majority of Gold's bull market (from a price just over US$400) has played out as the US Dollar Index tracked sideways. Granted some of the euphoric Gold spikes have been driven by the troughs in the US Dollar, but ultimately the rise has not played out in the shadows of a falling USD.

Another way that we can show Gold's rise has been far from just an "antidollar" is to measure it in the same basket of currencies (EUR, JPY, GBP, CAD, SEK, CHF) which make up the US Dollar Index. Kitco already does this with a price index they call the KGX (Kitco Gold Index). A chart of the past 5 years shows an almost identical performance of Gold in USD as in the basket of currencies (heavily represented by the Euro):
KGX shows performance of Gold almost identical in USD vs basket of currencies
Gold may have started the bull market as an unDOLLAR, but it has clearly morphed into an unFIAT (currencies not the car manufacturer!) over the business end of the bull market (past 5-7 years).

Further on in the article David lists 4 environments where Gold might begin to struggle:
First, a shift in Washington towards genuinely addressing its fiscal problems would hurt the gold price. If the Republicans were to win office, the fiscal conservatism of the Tea Party and the leap off the fiscal cliff may cause markets to conclude the US was serious about budget repair and, most likely as well, was headed into recession. That is two reasons to buy the US dollar in a panic.

Second, if the US housing recovery and manufacturing onshoring were to gather real momentum then we might see the prospect of no more quantitative easing, and even rising interest rates. In the near term, that seems to me even less likely than a Republican win in the election.

Third, a serious outbreak of global inflation might also – counter intuitively – be a problem for gold, compounded again if it caused a rise in US interest rates. But it would likely also bring with it a blow-off in the gold price first. So, not something to really worry about.

The fourth possibly is the spontaneous outbreak of global peace. Here’s hoping.
The only example above I can take seriously as a risk to the price of Gold would be the Republicans winning office and trying to return the United States to a fiscally responsible state. That said there has been talk of the Republicans launching a Gold commission which would consider a return to the Gold standard. If this were the case Republicans returning to fiscal prudence could bring about a higher Gold price, although it's my suspicion the talk was only in aid of gaining the support of Ron Paul (wasn't successful!) and his supporters.

I do strongly agree with the final points made in David's article though, namely that the Australian Dollar is likely to weaken making the shiny metal even more favourable for local holders (though I have been expecting the AUD to fall for sometime, it has proven more resilient than I could have imagined):
For Australians, there is an additional attraction to the shiny metal. As the commodities boom ends, the Australian dollar is going to fall (as our own monetary and fiscal conditions fray). The price of gold in Australian dollars is already close to record highs and if it breaks through $1800 per ounce, may run handsomely:

Conversely, if the Australian dollar does not fall, it can only be because the US dollar is so weak. Therefore, gold will rise anyway and likely faster than the local dollar. It is a natural hedge for the transition ahead.

Gold is not a bubble. Not yet, anyway. It is a prudent position for any Australian investor.
Another interesting observation about the article was that it was written as if Gold will always remain but a simple "hedge", it will rise or fall in dollar/fiat currency terms (within the monetary/financial system which we have today), but The Burbwatcher left a comment following the article which leads into another possible scenario...
I would also add my 2c, that PMs (precious metals) are “non-system”, in that they are not just “undollar” but a place where Faith/Trust can run to when the system itself (being inherently US fiat) is failing….an “out”, if you will…

In this environment, IMO, PMs will do well as a preferred store of wealth – a currency – as Faith reluctantly but gradually net transfers from the Fiat System to the Un-System (whatever that might be); PMs as a “last resort”, as the system is failing people’s expectations. It is not so much that PMs are “the obvious way to go”, it is just that they are “not the System”, an “out”, which is what many may look for. 
If the public starts exiting fiat currencies to store their wealth/labour out of an obviously corrupt and failing system, what exactly will it take to bring that wealth back? The Burbwatcher speculates later in the comments:
More likely route ahead is increasing government decree to “make sure….so that the ‘Greater Good’” is preserved/prioritised.

Enforcing certain systems of trading is such an example of a more likely path, IMHO. eg. banning PM trade, price setting, increased protectionism, etc.
Such tactics may be used, but if the wealth transfer into Gold has already taken place and spot price is multiples of the price today then the US Government (and others) may be in a position to return to a system where Gold becomes an important reference point in our monetary system (whether that be a traditional Gold standard or something else). Should that happen then Gold might be held in orbit at much higher prices, the bubble to end all bubbles where the "new paradigm" really becomes so.

There are so many ways this could all play out, but almost any scenario should see Gold (& Silver!) perform favourably. 

The problem can be summed up in only a few words "too much debt". Whether this is resolved via pegging currencies to Gold at a much higher price, inflation, hyperinflation, default, a debt jubilee or something else, we can be sure that the trust/faith in the system will continue to erode pushing people into ways to "opt out", looking for non-system ways to store their wealth.

Personally I will continue monitoring Gold's valuation versus other assets (Oil, Houses, Stocks) or labour/wages:


If Gold reaches an overvalued level which I consider to be bubble territory then I will start transferring a majority of my precious metals into more productive assets. That said my trust in Governments and Central Banks has eroded to practically zero over the past 5 years, there is no way I would sell all my metal until such a time that we can see fiscal/monetary responsibility has returned to those in power.

BB.

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