Friday, October 2, 2015

Defining a Housing Bubble

When the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely - at which point the bubble "bursts". Financial Times
A spike in asset values within a particular industry, commodity, or asset class. A speculative bubble is usually caused by exaggerated expectations of future growth, price appreciation, or other events that could cause an increase in asset values. This drives trading volumes higher, and as more investors rally around the heightened expectation, buyers outnumber sellers, pushing prices beyond what an objective analysis of intrinsic value would suggest. The bubble is not completed until prices fall back down to normalized levels; this usually involves a period of steep decline in price during which most investors panic and sell out of their investments. - Investopedia
A bubble is an upward price movement over an extended period of fifteen to forty months that then implodes. - Charles Kindleberger

A lot of people have been using the term ‘bubble’ to describe the Australian housing market, others say we don’t have one and Former Treasury secretary Martin Parkinson recently suggested it was the wrong question to be asking (i.e. do we have a bubble?), a comment I recently agreed with.

The problem with debating whether or not we have a bubble is that, like the term affordability, it’s definition is subjective.

I provided a few definitions of an 'asset bubble' above, one thing they all have in common is the need for the eventual ‘pop’. So analysts, economists, bloggers, property commentators and perma-bears can rave on all they like about a housing bubble in Australia, but the proof of having had one will be when and if it bursts.

That leaves us with a question though, what size and speed of decline do we need to see in order to confirm the bubble? The above definitions use terms that indicate a quick outcome, 'sudden collapse', 'steep decline', 'panic' and 'implodes', these all indicate a fast and substantial decline. I think anyone arguing that the 'Australian housing bubble' will burst by a slow paced, long term decline in price (real or nominal) is not really describing the bursting of a bubble at all, but rather a slow revaluation of the asset based on the deteriorating fundamentals.

Here is a chart I posted on Twitter over the weekend (click to enlarge):

I would suggest one of these cities had an obviously bubble (Las Vegas) which was confirmed by the bursting price, but what of the other two cities? In my opinion Boston's price decline was not a bursting housing bubble (it's decline was not steep and sudden as it was in Las Vegas), but rather was impacted by the conditions caused by the GFC and credit conditions resulting form the bursting of housing bubbles elsewhere in the United States and was probably overdue some sort of correction. That might also be the case for Adelaide (included on the above chart) and some other Australian cities which aren't experiencing strong price growth.

At it's peak the United States had a bifurcated housing market just as we have in Australia now with unsustainable rates of annual price growth in Sydney and Melbourne, but only moderate growth (at best, if not negative) in most other locations. Cameron Kusher posted a great chart on Twitter recently which highlights differences in price growth since the GFC.

Capital city home value growth since GFC - Dec-08 to Sep-15

Is 10-15% growth over (almost) 7 years the sort of price increase you'd expect to see in an 'asset bubble'?

Now I'm not arguing that Australian property (anywhere) is cheap or affordable (see the first few charts in this post), there is no doubt in my mind that it's historically and globally expensive, but that doesn't mean that every Australian capital city is in a bubble (and going to pop), nor that the Australian housing market should be considered a bubble as a whole.

There's a good chance it will be years before we can confirm whether any Australian capitals are in a property bubble right now or simply expensive/somewhat overvalued. My best guess is that Sydney and Melbourne could be in bubbles and peak this year experiencing a steep decline in price over the years ahead, but some other Australian cities like Adelaide and Brisbane I expect may only experience modest declines. For example if Adelaide saw a 10% nominal decline into 2017 (which I think is a possibility given weak economic factors), then it would result in growth having been 0% over the previous 9 years.

Whatever lies ahead I wish more commentators would define what they consider a bubble to be, because it's become clear to me that some individuals have a completely different opinion of what the term means.
If you have a view on what differentiates expensive or overvalued property to an actual property bubble and what we will need to see from Australian property prices (or in one of the capitals) to confirm we've had one here then I'd be interested to hear your opinion in the comments below...


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Sunday, August 30, 2015

Australian Houses Priced in Gold / Silver Ounces (2015)

Every 12 months I have been updating the data I keep on Australian house prices measured in ounces of Gold and Silver. Here is the latest update which takes us through to July 2015 (inclusive).

Data for house prices is via Residex (median house price indices).

Data for Gold and Silver prices is via Perth Mint (bid average AUD).

I have added Perth and Adelaide house price charts to the mix this year, but note the time frame is different to Brisbane, Sydney and Melbourne (due to limitations on available Residex data).

Key Figures:

Adelaide (Ounces to buy a house) 
Housing Peak Against Gold (February 2005): 501oz Gold
Latest Figures (July 2015): 282oz Gold, 21,439oz Silver
Based on Current Spot Price: 271oz Gold, 21,375oz Silver

Brisbane (Ounces to buy a house)
Precious Metals Peak (January 1980): 62oz Gold, 1091oz Silver
Housing Peak Against Gold (February 2004): 600oz Gold
Latest Figures (July 2015): 321oz Gold, 24,448oz Silver
Based on Current Spot Price: 309oz Gold, 24,375oz Silver

Melbourne (Ounces to buy a house)
Precious Metals Peak (January 1980): 67oz Gold, 1181oz Silver
Housing Peak Against Gold (February 2004): 661oz Gold
Latest Figures (July 2015): 450oz Gold, 34,253oz Silver
Based on Current Spot Price: 432oz Gold, 34,150oz Silver

Perth (Ounces to buy a house)
Housing Peak Against Gold (July 2007): 642oz Gold
Latest Figures (July 2015): 342oz Gold, 26,078oz Silver
Based on Current Spot Price: 329oz Gold, 26,000oz Silver

Sydney (Ounces to buy a house)
Precious Metals Peak (January 1980): 103oz Gold, 1811oz Silver
Housing Peak Against Gold (February 2004): 1100oz Gold

Latest Figures (July 2015): 670oz Gold, 51,028oz Silver
Based on Current Spot Price: 644oz Gold, 50,875oz Silver
(Spot Price ratio calculated on A$20oz for Silver, A$1580oz for Gold and July house prices)

A point of interest, Gold has outperformed most capitals since the last update, rising from $1360 in June 2014 to $1518 in July 2015. This has resulted in most cities seeing the ratio fall. That is with the exception of Sydney where house prices have outperformed Gold and rose a blistering 21% YoY to July 2015.

It's also interesting how much later the peak for Perth property (to Gold) came as house prices boomed there into 2006/2007.

My view going forward has not really changed from my update last year: "Over the same period (next 3-5 years) I expect rising precious metal prices and a lower Australian Dollar, so do think investors stacking ounces for the eventual purchase of a house will be rewarded (even those in Sydney). Only time will tell if I'm right."

Here are the charts (click any to enlarge).


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Wednesday, August 26, 2015

The Religion of Gold Hating

A lot of finance commentators have poked fun at those who own Gold (aka 'Gold Bugs') over the years, likening them to members of a cult or religious group.

Articles such as '5 more reasons why investors shouldn’t worship gold right now' and 'Let’s Be Honest About Gold: It’s a Pet Rock' where the author concludes that owning Gold is "an act of faith", are recent examples of authors trying to portray Gold owners as devotees of the metal. This is nothing new though, one well known Gold hater, Joe Weisenthal, even wrote a post half a decade ago titled '9 Ways That Gold Is A Religion Masquerading As An Asset Class'.

One amusing aspect of all this Gold hating is that (when aggregated) much of it ironically resembles the same culture they are criticising. It has the same comradery, the same obsessiveness and the same unwavering faith (just in the opposite of what Gold stands for: fiat currencies, sensible government or other financial assets, with no allocation to those which are tangible).

Many Gold haters spend a great deal of time trying to convince anyone who will listen not to own Gold. They ridicule those who do own it and usually make no differentiation between those who allocate a small or large portion of their portfolio to Gold. They try and mold any argument for or against Gold to their own nonobjective viewpoint while claiming to be "asset agnostic" as if their view doesn't suffer from the same subjectivity as the rest of us.

Here are some recent examples of Gold hating from one of their favourite pulpits (Twitter).

Cullen Roche (speaks for itself):

Joe Weisenthal (retweeted this link to an August 6th article on the Gold crash costing Russia and China $5.4 Billion, when the price had already rebounded to around the pre-crash level.):

John Aziz (suggesting a price drop in Gold should result in investors who own the metal "rethinking the world", does that mean those who don't own Gold should have been rethinking the world when it was at US$1900?):

Stephen Koukoulas (whose Gold commentary over the years has lacked sense, see here and here):

Barry Ritholtz, is another prolific Gold hater who I've written about recently (here and here).

A lot of the Gold hating is less obvious than this (i.e. snarky tweets on Gold, that most would brush off as attempted humour, but a pattern can be identified when watching over time), but evidence of it exists across the feeds of many Twitter finance 'elites'. It also flooded the mainstream media over July and early August (marking a significant bottom?) until the price started to rise again.

I agree Gold is like a religion to some owners (but not all of them as the Gold haters would have you believe), but even though that's the case, wouldn't it be rational for investors (who recognise this fanatical group of Gold owners and buyers) to hold a position in the metal knowing of this devout participation in the market? Wouldn't it also be rational to own Gold knowing there are billions of people living in a society with deep cultural ties (many based around religion) to the metal and who are likely to be the same people whose wealth is set to increase the most over coming decades?

For me owning Gold is more of an atheistic position (for the most part, among other reasons). Disbelief (or lack of faith) in governments being capable of navigating the excessive debt that's built up in the financial system today to a growth model moving forward without a significant reset, mass default, global crash to restore some resemblance of sustainability. I think Gold will be one of few assets to benefit from such an event or environment so a healthy allocation is warranted.

Gold Bless,
Bullion Baron.


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Thursday, August 6, 2015

Is Property More Affordable Today Than 30 Years Ago?

This is a continuation (that I have written) of a conversation written by fellow Adelaidean Peter Koulizos, see here for the prologue.
[Son enters room]
Son: Hey dad, I just heard you spinning a whole lot of nonsense to sis about housing affordability.
Dad: What do you mean son? I was just telling her how it was back in my day.
Son: Well you know finance and history aren’t her strong points…
Dad: Speak nicely of your sister please.
Son: Ok, as I was saying, you claimed that it took mum and you longer to save a deposit, because a 25 per cent deposit was required to buy, but isn’t it true that some building societies loaned up to 95 per cent, meaning similar loan to value ratios were available even 30 years ago?
Dad: Well, yes, but the interest rates were often higher than the major banks...
Son: But isn’t it also typical today for the lenders offering the easiest credit conditions to have higher interest rates?
Dad: You have me there son.
Son: And isn’t it true that in the early to mid-1980s that the First Home Owners Scheme was far more generous paying up to $7000 in benefits, equalling more than 10% of the purchase price you mentioned?
Dad: That is true. Your mum and I took full advantage of that and the First Home Owners Grant isn’t nearly as generous today.
Son: You did pay 17% interest rates for a short period of time, but isn’t it true that the higher level of inflation at the time reduced the real value of the loan rather quickly with wages rising faster than they are today?
Dad: Yes, but it was tough for the first few years…
Son: Didn’t you brag to me one time that you paid off your first home in less than 10 years because interest rates fell in the years after you purchased allowing you to pay off the mortgage much faster? Do you think that it will be made so easy for sis who would be borrowing at historically low interest rates with rate rises more likely in the future?
Dad: I hadn’t considered that.
Son: You mentioned her trip to Bali, but you know she got those tickets for only $300 return and the accommodation, food and entertainment over there is far cheaper than in Australia. In real terms wouldn’t her week in Bali be cheaper than the long weekend holiday you told us you took to the Gold Coast in the early 1980s while saving for your first home?
Dad: You are probably right.
Son: It’s also the case that a median house in Adelaide today will be on a far smaller block than you got in 1985. In fact if I recall correctly you said your first home was on a subdivisible block once the council changed the zoning, do you think sis will be able to do that with the typical 375sqm blocks of today?
Dad: No, I suppose not.
Son: Look, I know you think you had it tough with the mortgage and for the first couple of years that may have been the case, but if sis takes a larger mortgage today, to buy a smaller block, in a lower wage growth environment, with the possibility that interest rates may rise making it difficult to make the repayments in the future, isn’t she taking a greater amount of risk?
Dad: If you look at it that way...
Son: And shouldn't being able to afford something take into account the level of risk associated with doing so?
Dad: I’ve had enough of this, I am going to watch some TV in the lounge.
Son: Weren’t you going to have some dessert?
Dad: I’m going to put it aside until your sister returns from her friends place so we can sit down and eat it together while I explain that I wasn’t as right as I thought.
Son: You don’t say.

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Thursday, July 30, 2015

Martin Armstrong: New Supply Could "Crush Gold"

I read Martin Armstrong's blog on a near daily basis (I have his site bookmarked in my Feedly reading list). Sometimes he has interesting predictions and theories to share, sometimes he adds some historical perspective, other times he pumps out some absolute garbage. Here is one example of the latter:
"Well, when it rains it pours. A new discovery of gold has been made and the quantity expected is up to 46,000 tons of gold, whose market value is estimated to 298 billion US dollars if the market stays the same. The entire USA gold reserve is 8,000 tons. So we are talking about a sizable discovery in the Sudan. From a supply-demand perspective, this could crush gold." - Martin Armstrong
Armstrong's source? Sputnik News, the BuzzFeed of Russian propaganda. Here are some key points from the Sputnik article and a couple more sites I found carrying the news (none of which I would have any confidence in).

- Feb 2014 Sudan grants 9 Russian companies permission to explore for minerals.
- Sudan's total Gold production during first half of this year reached 43 tons.
- Russian company Siberian for Mining discovers Gold reserves of 46,000 tonnes.
- The market value of this gold is U.S. $298 billion.
- Zhukov (CEO), plant will be €240M and have production capacity of 50t/pa.

A few things I see wrong with this picture.

It would not be possible to firm up 46,000 tonnes of (proven) Gold reserves in 18 months. The mobilisation of drill rigs, geological expertise and utilisation of laboratories for testing would have been breathtaking, like no other mining and exploration venture you had seen before. After all, 46,000 tonnes of Gold is roughly 25% of estimated above ground Gold that we've mined through all history and would almost double the proven Gold reserves we already have waiting to be extracted. Exploration for Gold reserves is an expensive and time consuming process, Gold mining and exploration companies often take years to firm up a 1-2 million ounce (30-60 tonnes) deposit, let alone something of this scale.

Furthermore 46,000 tonnes of Gold (in above ground form) is worth far more than US$298 billion at market value. Try $1.6 Trillion.

My initial though was that perhaps the 46,000 tonnes was a reference to the total volume of dirt containing the $298B in Gold, but that still doesn't make sense as Gold content of the earth would be way too high... maybe the figure was supposed to be $298M (not billion) worth of Gold, but even that by my calculation would have required Gold content of around 200g/t (not a chance, most miners these days operate on mining ore around 1-2g/t).

If anyone else can make sense of the figures or find another source with better information about the find, I'd welcome your input in the comments below.

But just for a moment lets imagine that Martin Armstrong wasn't spreading nonsense that has no basis in reality and that this company had proven up 46,000 of actual reserves ready to mine and "crush Gold" as Armstrong so eloquently puts it... I have had other commentators say "what if" about a massive Gold find in the past.

This company is spending €240M (US$263M) on a Gold plant with production capacity of 50t/pa. How fast are they going to bring that 46,000 tonnes of Gold to the surface and what would the cost be to do so? Even if they spent billions of dollars building new massive plants with the intention of bringing 1,000 tonnes of Gold to the surface each year from this one find (increasing current annual mine supply by around 35%) and assuming global Gold infrastructure expanded to process this additional capacity, it would only add a little over 0.5% to total above ground supply each year.

Meanwhile, global debt has increased by an astounding 40% since 2007, despite having a Global Financial Crisis during the same period.

Somehow I don't think Gold has much to worry about from the discovery of a massive new deposit. Of more concern is the supply / demand of and for existing above ground Gold.


Martin Armstrong has since edited his article. Google cache had most of that I quoted above so took a screenshot comparing old with new (though the old version I found was still missing some paragraphs from the end, so presumably has been edited a couple of times over the last day or two).

So it appears that Sudan will be mining only an additional 20 tonnes of Gold in 2016 (100 tonnes, versus 80 tonnes in 2015). Will that be enough to crush Gold (or "crush gold psychologically" as Armstrong rewrote)? Probably not if sold as mined, although Bron notes in a recent article that it only took 22 tonnes on the Futures market to knock $48 off spot price in the recent price smash.


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Sunday, July 26, 2015

Who's to Blame for Australia's Expensive Property?

Picture a science lab with a square metal table in the centre. On top of the table lies an intricate wooden maze. The maze itself is completely enclosed. In the middle of the maze, at the end of the one way walled passage, is a block of cheese. In a small cage not far from the maze is a rat, who hasn't been fed for a day and whose nose is going haywire smelling the nearby cheese. The three researchers (who were responsible for building the maze) are standing nearby, one of them removes the rodent from the cage and places it into the maze, soon after which the rat finds it's way to the cheese and consumes it.

I would liken this scenario to the Australian property market, where the researchers represent the three levels of government (federal, state and local), the maze walls are policies they've introduced, cheese symbolises investment properties and for the purpose of this exercise the rat is us, investors (though it could also represent other home buyers who are also herded by government policy).

Now you may think human investors are smarter than a rat, but history shows us that time and time again we will rush toward the cheese (investment returns) often foregoing rational thought in order to do so. Just take the recent bubble and crash in the Chinese stock market (Shanghai Stock Exchange Composite Index pictured below), which was largely driven by retail investors and fuelled by margin lending.

Shanghai Stock Exchange Composite Index
If you spoke to the rat, told it not to eat the cheese from the maze, you are about as likely to receive a positive response as if you told investors (as a group, there are some investors who do act rationally as individuals) to only bid the price of an asset to a sensible valuation before stopping.

Historically (at least since the 1960's) home ownership rates have been fairly stable at around 70%, but this has since declined slightly to 68% in the 2011 ABS census and recent investor lending statistics indicate that it's probably getting worse with investor finance overtaking that of owner occupiers (lacking the balance of historical ratios).

The argument over whether Australian property is in a bubble is beside the point, as Former Treasury secretary Martin Parkinson said"Do we have a bubble? I think that's the wrong question to be asking. The real question is why are house prices so high?" 

There's no denying that Australian property is expensive, so who do we hold accountable?

I hold no animosity toward investors who buy property. Sure there are landlords who do the wrong thing from time to time, but as a group they are just acting in unison because it makes sense to them, in an effort to better their personal situation and largely due to the policies implemented by government. Blaming them for making home prices expensive is a bit like getting angry at a rat for navigating the maze and eating the cheese. The stage has been set, barriers and incentives have been put in place for investors to take advantage of the situation, why wouldn’t we expect them to do so?

The invisible influence of government policy, at least much less obvious than solid walls, is controlling almost every aspect of the property market, on both the supply and demand sides. 

On the demand side they influence the cost of servicing a mortgage using the Reserve Bank of Australia (RBA) Cash Rate Target, regulate bank lending through the Australian Prudential Regulation Authority (APRA), encourage specific segments of the market to participate in transactions by using incentives (such as the First Home Owners & Downsizing Grants) and set the rules that allow foreign investors to buy our homes.

Tax policy can also contribute to demand, a strong rise in property prices followed the introduction of the 50 per cent capital gains tax discount (having held an asset for 12 months) suggests it was an inflection point for an increase in investor interest in property, also illustrated by the flood of investor finance that followed the change in 2000.

Negative gearing, whilst also available for other assets, further exacerbates demand for property, making it cheaper to service the negative cash flow of a mortgage, allowing investors to pay higher prices, buy sooner than they may have otherwise and carry a larger portfolio of properties.

It’s not only the demand side that government policy affects, supply too is impacted as government controls what land is available to build on, the building types that are allowed on that land, they set the fees and taxes associated with building, as well as on the sale of a newly constructed home and ensure the undertaking meets strict standards and a lengthy application process, all of which can contribute to increasing the cost of and deter bringing new supply to market.

On top of policies they implemented prior, since the Global Finance Crisis (GFC) the government has also intervened at times in ways that have both indirectly and directly boosted the property market. Examples include guarantees that were introduced to protect our banks (e.g. wholesale funding and deposits), the RBA taking on tranches of mortgage backed securities to support lending and the introduction of a temporary First Home Owners Boost which according to Treasury Executive Minutes, “was designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market.”

I've seen investors who've benefited from this generous environment complain that no changes should be made to the status quo, the "free market", the suggestion of which is laughable. 

The government can and should act to reduce speculative demand and increase supply (if warranted) in the Australian property market, with a view to lower prices and improving affordability. Even the Liberal Party of Australia's Federal Constitution in Part II (Objectives, section n) says:

" which family life is seen as fundamental to the well-being of society, and in which every family is enabled to live in and preferably to own a comfortable home at reasonable cost, and with adequate community amenities."

Not that this objective is embraced by senior members of the Liberal Party such as Prime Minister (Tony Abbott) or Treasurer (Joe Hockey). Joe Hockey recently said “If housing was unaffordable in Sydney no one would be buying it, but people are still purchasing housing,” and Tony Abbott welcomed rising prices, clearly not seeing the contradiction with affordability, "I want housing to be affordable but nevertheless, I also want house prices to be modestly increasing." Neither seem to have a solid grasp of what constitutes 'reasonable cost'.

If you want someone to blame for Australia's expensive property, turn your eye away from the property investor / speculator, they are just another rat in the same maze as the rest of us. It's government policy at fault and that is what needs to change. With change of policy will come a change in investor behaviour.

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Thursday, July 23, 2015

How About Fair GST Treatment For Bullion?

In an article I was reading yesterday about the GST-free threshold for imported goods, which postured support for a lowering the cap from $1000 to $20, there was a video containing this message from Craig James (CommSec's Chief Economist):
"Certainly we believe this is a fair tax because if it is the case that people are traveling overseas and over the net to buy goods, bypassing Australian goods. Well really the same goods should be charged the same price whether you're buying overseas or getting it domestically."
There has also been recent talk of raising the GST in Australia from 10 to 15%.

As a proponent for small(er) government and less taxes I'm not particularly fond of the latter suggestion, but I do concur with James' view that a fair tax should see comparable goods charged the same amount of tax. Not only for consumer goods, but also for investment assets. This is one area that bullion (as an investment asset) is short changed.

A guide I wrote on buying Gold and Silver in Australia describes when bullion is GST free:
GST (Goods & Services Tax): Investment grade Gold (99.5%+ fine) and Silver (99.9%+ fine) bullion is not subject to GST. Bullion products of a lesser grade (for example 22k Gold coins like Sovereigns & Krugerrands or 92.5% sterling Silver coins) do attract GST when sold by a bullion dealer.
That results in some of the most commonly purchased bullion investment coins being burdened with GST as they don't meet the minimum finesse (Gold sovereigns and the 1966 Australian fifty-cent piece are just two examples).

1966 Australian fifty-cent pieces, only have 80% Silver content
This unfair addition of GST to an investment asset is something I would like to see changed as I wrote  2 years ago:
Increase the scope of the definitions "precious metal" & "investment grade bullion" for taxation purposes to include coins containing Gold, Silver, Platinum or Palladium (any finesse) which are now or once were legal tender of Australia or any other nation and which trade as a function of the spot price.

Precious metals are often traded in widely recognised investment forms which don't meet the strict scope defined by the Australian Taxation Office. Investment grade bullion below 99% for Platinum, 99.5% for Gold and 99.9% for Silver is subject to Goods and Services Tax (GST). This means dealers are required to charge GST on coins which many hold for investment purposes, but aren't exempt from GST, for example American Gold Eagles (91.6% Gold), Gold Sovereigns (91.6% Gold) and Round Australian 1966 50 Cent Pieces (80% Silver). Such legal tender coins which trade as a function of spot price (consistently trade at spot + x% premium) would be made exempt from GST.
I was also recently made aware (thanks Bron!) that there are other limitations to the GST free status of bullion (that I wasn't familiar with), such as a requirement for the metal to have been refined by a refiner:
"To have this GST-free status one of the requirements is that the metal has been refined by a refiner of precious metal. To be a refiner of precious metal, an entity has to satisfy the Commissioner that the entity regularly converts or refines precious metal in carrying on its enterprise." ATO (What is 'precious metal' for the purposes of GST?)
That means despite the hallmarking of these hand poured Silver bars I recently purchased, if they'd been sold in Australia by a dealer they may have needed GST applied (I bought them direct from the overseas producer in a package that was lower than the current $1000 GST-free threshold).

Home Made Redwood Poured Silver Bars
I think it would be fair to see GST removed from all bullion that is bought for the purpose of investment and where it trades as a function of spot price as I wrote last year:
Perhaps the exemption could be expanded to cover any precious metal which trades as a function of spot price, so that tax fraud is no longer as simple as defacing investment grade bullion, changing it into a form which can suddenly benefit from input tax credits.
That would put the precious metal asset class on a level playing field with others (such as shares), surely that's something that even Craig James could get behind!


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Friday, July 17, 2015

China Updates Gold Reserves, First Time in 6 Years

I won't leave you hanging:
"China increased its gold reserves by 57 percent as it disclosed official holdings for the first time in six years.

The country boosted bullion assets to 53.31 million fine troy ounces (1,658 metric tons), the People’s Bank of China said in a statement Friday. That’s an increase from 33.89 million fine troy ounces (1,054 tons) in 2009, when it last updated the figures." - Bloomberg
An additional 604 tonnes accrued over 6 years, call it 100t/pa, which was added to official reserves. Of course this was in addition to substantial demand from elsewhere in China with local "consumers" of the metal (those investing, saving in and wearing Gold) increasing their buying substantially in recent years. 

Here's how the number compares with Russia's increase over the same period:

April 2009 to July 2015 (Official Gold Reserves)

China: 1054 to 1658 (+604 tonnes)
Russia: 532 to 1250 (+718 tonnes)

This update will disappoint many who were expecting that the update on Chinese reserves may be a catalyst to reignite some interest in the metal, I suspect this number won't be enough to do anything of the sort as it comes in lower than even some of the most conservative estimates. Of course China could be holding back (and it is likely they own Gold in other state controlled institutions), only announcing what they want the world to believe they have... I'm sure this will be the narrative that will be driven hard by those who were hoping for a more substantial number.

Here's a few earlier guesses, estimates and commentary from around the internet (can you find a closer estimate than Bron's? Post it in the comments if you do):

"Assets were probably about 2,710 metric tons, compared with the last reported holdings of 1,054 tons in April 2009, according to the report." - Kenneth W Hoffman,  Bloomberg Industries (January 2014).

"The People’s Bank of China may have tripled holdings of bullion since it last updated them in April 2009, to 3,510 metric tons..." Bloomberg Intelligence (April 2015).

"With last reported gold reserves of 1054.1 tonnes, we therefore suggest that a reasonable estimation of China’s current gold reserves would be 1,560 tonnes." - Bron Suchecki, Perth Mint (September 2012).

"My estimate of 4,500 tonnes of current gold reserves might be high, but it may also be much less than whatever may ultimately satisfy China’s ambitions." - Jeff Clark, Casey Research (July 2014).

"The Chinese state has probably accumulated between 20,000 and 30,000 tonnes since 1983..." - Alasdair Macleod (Late 2014).

Settle down Baron!


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Sunday, July 5, 2015

Barry Ritholtz: 2% Decline in US Stocks is Armageddon

Look out, old mate Barry Ritholtz has launched another tirade against Gold and Gold Bugs. His Bloomberg article discusses why Gold did not perform well "during Armageddon" as he described a 2% swing in the (US) stock market...
"This was the week Greece inched closest to chaos, as a bank holiday and a technical default caused markets around the world to erupt in turmoil. They recovered somewhat Tuesday, and futures looked stronger Wednesday morning, but on Monday, the NASDAQ Composite Index lost 2.4 percent, the Standard & Poor's 500 Index lost 2.09 percent and the Dow Jones Industrial Average fell 1.95 percent. Volatility exploded, as the Chicago Board Options Exchange Volatility Index surged 35 percent, its biggest increase in two years, to 18.85.

One would imagine that such a scenario might be constructive for gold. It has been called the best measure of fear, the only real currency, a refuge for those who plan for panic. So how is it doing these days? Spot prices were soft on Monday, despite the wild volatility in equities, drifting down a few bucks from about $1,180 an ounce to about $1,176. They fell a few dollars more yesterday, and are soft Wednesday.

I thought gold was an investor’s best friend during Armageddon."
Here is the move in the S&P 500.

Barry Ritholtz says equities have experienced wild volatility and Armageddon this week.

Even the 35% surge in the VIX is tame compared with recent spikes.

Chicago Board Options Exchange Volatility Index (VIX)

But what relevance is the US stock market to the citizens of Greece, ground zero of the current standoff between the Greek government and the rest of the Eurogroup (the chaos Ritholtz refers to)? The real measure of Gold's usefulness and performance should be in comparison to the market local to the crisis, surely?

So how is physical Gold performing when compared with the Greek stock market (using the Athens Stock Exchange General Index as a measure)? The ASE is down 54% from the early 2011 peak (in early 2012 was down as much as 72%) and is 35% lower Year on Year.

Athens Stock Exchange General Index

Gold priced in Euros (yes Barry, Gold is purchased in currencies other than the US Dollar around the globe) does not compete with the euphoric mania seen in US stocks over the past 5 years, but it has held up much better than the Greek stock market. It's currently down 24% from the 2011 peak and 9% higher Year on Year.

Gold price in Euros

Though how important is price when the problem for citizens of Greece this week has been their inability to sell (or buy) in the stock market while it was closed? We don't even know what Greek stocks will open at next week (assuming the market reopens by then) after this weekends referendum on the Eurogroup proposals.

Greek banks have also been closed with ATM withdrawal limits imposed.

Framing a 2% fall in the US stock market as Armageddon is a disturbingly offensive narrative for Ritholtz to be carving out from half way around the globe in his comfortable Wall Street office while Greek citizens struggle with drawing life savings out of their bank accounts to spend on food, medical supplies and other goods they may need to get by in an uncertain future. 

In a situation like this physical Gold (and cash) has performed exactly as you might expect, acting as a store of wealth which could be used immediately as a medium of exchange, something frozen or inaccessible stocks and deposits are unable to do. How do you put a price or value on that?

At the moment Greece's currency (Euro) remains a safe asset to hold when kept in cash (bank deposits may get a haircut at some point), the Euro is not at risk in the immediate future as it's not unique to the country facing the escalating financial, banking and debt crisis.

If you want to analyse the performance of Gold in a real Armageddon scenario then you could look to the north east of Greece. Ukraine, whose financial and geopolitical woes are not cushioned by the use of a shared currency, has seen it's currency (Ukrainian Hryvnia) decimated. Here is the performance of Gold:

Gold price in Ukrainian Hryvnia

If I was a citizen of Ukraine I would feel much more comfortable owning physical Gold rather than shares in the local stock market, local currency (stored physically or in a bank) or real estate.

Perhaps Ritholtz fails to understand physical Gold ownership, after all his description of the metal in an article last year only mentioned contractual representation:
"Like all commodities, gold is purchased via futures contracts."
If the US faced a real Armageddon, it's unlikely that Ritholtz's version of Gold would act as a safe haven, it could very well be suspended (just like the Greek stock market last week), while physical Gold remained accessible and tradable (at which point the [over]hyped paper/physical price disconnect would likely occur).

One sentiment I do share with Ritholtz is a surprise at the lack of interest in Gold from US investors (even if the Greek crisis isn't having any impact on them presently). Ritholtz shrugs this off as either a failed narrative for Gold or an improving US economy and performance of other assets. It could also be that:

A) After 4+ years of talk, Grexit has become the boy who cried wolf and the market now doesn't pay the situation the attention it deserves.

B) The market (rightly or wrongly) thinks the Greece crisis no longer matters and will resolve itself without impacting global markets regardless of referendum or agreement outcomes.

C) The Elite with the help of their bullion banker friends at the Crimex are suppressing the price of Gold during these turbulent times in order to maintain the US Dollar hegemony.*

Like Ritholtz I think the Gold blogosphere produces a lot of dishonest narratives (which I regularly write about), but that doesn't justify his attempt to carve out his own, trying to use short term price movements in one country to show that Gold no longer has relevance, when it's clear that it still does for people who are potentially facing or genuinely experiencing financial catastrophe.


* Hopefully an obvious joke.

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