January 8th, 2016
The past few years have been interesting and challenging times for the coin and precious metals industry. The U.S. dollar price of gold has been in retreat since 2011, but we should focus on the big picture. Let’s review why gold, silver and rare coins still resonate with my clients.
For many, it acts as a hedge against future economic disarray. For others, purchases are made as an investment or speculation for profit. Many of my clients intend for their purchases to become part of their family estate. For them, rare coins and historic collectibles become sentimental heirlooms. For most everyone, gold and silver bullion, and rare coins act as an insurance policy, in case other assets fall. I am a firm believer in hard assets/money and am passionate about it.
- Some investors have been expecting gold to “take off.” However, government and financial institutions seem to have a vested interest in keeping the debt based currency where it is. They legislate and lobby to keep the markets at a certain level. Their perspective is that it benefits the majority of society. Some believe that this managing of the market pricing is the “new normal” and will be with us for long time. Others call it “rigging.”
- I am not in the “gold is finished” camp. However, it is apparent to me that political financial power is currently the driving force behind what used to be free, marketplace pricing. This recent influence is attempting to support the stock, bond, & real estate markets.
- America has historically been the world’s innovation and technology exporter. With our Silicon Valley mindset, it is easy to turn a blind eye to what is actually going on. Urban real estate has soared, big businesses are prospering, many stocks have made new highs, and bond prices have risen with falling interest rates. Technology has been profitable directly and indirectly for most of us, but that will not solve the monetary situation and cultural disintegration that the industry has created. This recent technology party appears to be benefiting corporate and political entities of the United States for now, but at what cost? Perhaps at the long-term expense of the overall economy for future generations. Is it a ticking time bomb?
- No one knows when a turning point will begin. Perhaps it be in 2016, or maybe it is still years away. None of us know if it will turn quietly, with large assets moving in new and different directions, or if it will be sudden and volatile – the result of critical mass, as in 2008. What I see is pessimism amongst precious metals owners and non-owners, along with giddiness by owners of financial paper assets. This formula has usually preceded a major turn in the market.
- Something new and unusual is happening. Retail speculators are taking net short paper gold positions on the exchanges. Money professionals and bankers are taking the other side of that trade. It might not be long before the same people that were caught with long gold and silver positions at the 2012 highs will be caught short as the trend changes.
- The same retail public looks now to be long in the U.S. dollar versus major foreign currencies. One could argue that the dollar is the best of the debt currencies and may be the last to deteriorate, but I believe it is a real gamble to be betting on the long-term growth of the dollar at this time (as opposed to an inflationary time) in the U.S. economy.
- I am confident that we will live to see a resolution of the debt house of cards, and that we will see new highs in gold. The US government debt, still expanding despite truly low interest rates, should eventually result in resold, inflated away, or reneged upon debt. Almost zero to negative real interest rates and an impending monetary crisis have already crushed the market for bonds. The Federal Reserve might be the only real buyer remaining. The debt load of the typical American household prevents any significant interest rate hike. Such a hike could start an intense economic breakdown.
My recommendations for this new year are:
- Maintain economic discipline.
- Continue to grow your gold and silver holdings.
- Live just a bit under your means.
- Pursue career and personal fulfillment.
- Live life to its fullest rather than obsess over the daily price of gold.
- Avoid speculation.
- Educate your children. Teach them to save in real assets – gold, silver & real estate!
I appreciate your business and friendship, both past and present, and look to 2016 to be a year of health, happiness and prosperity for all.
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December 21st, 2015
21-Dec (WSJ) — Gold prices were higher on the London spot market Monday, as a flat dollar and thinner seasonal volumes allowed market bulls to propel prices higher following recent sell-offs in the wake of a U.S. rate rise.
Spot gold was up 0.6% at $1,072.12 a troy ounce in morning European trade, having hit a three-day high earlier in the session at $1,074.11 an ounce.
Prices fell towards near six-year lows last Thursday, after the Federal Reserve raised rates for the first time in nearly a decade.
The move by the U.S. central bank caused the dollar to firm, which put pressure on the dollar-denominated commodity. Additionally, gold offers no yield and finds it more difficult to compete with yield-bearing assets when rates rise.
With rates still ridiculously low, there’s still not much competition there. However, yield is compensation for risk and since gold — in its physical form in the investors possession — carries no risk, of course it carries no yield. And that is actually quite an appealing attribute.
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November 11th, 2015
Gold bars in Fort Knox, many chose the GLD ETF as an alternative to physical gold
In 2004, the launch of the SPDR Gold Trust exchange-traded fund, under ticker symbol GLD, leveled the playing field of gold investing by allowing for a less expensive option than buying the physical metal. Ever since, many have come to equate GLD with actually owning gold, but the reality is a bit more nuanced.
GLD has grown to become the second-largest exchange-traded fund by assets, valued at $72.4 billion and backed by 40.8 million ounces of physical gold. The subject of much fascination, GLD has also been targeted by skeptics who question the ETF’s secretive methods and even doubt it holds all the gold in HSBC’s vault in London. Jason Toussaint, the managing director and principal executive officer of World Gold Trust Services, spoke to Forbes and sought to dispel rumors by explaining how GLD works.
Since GLD debuted on Nov. 12, 2004, it has risen more than 280% to over $170 a share. “The whole thesis [behind GLD] was creating an efficient market for gold trading,” explained Toussaint. The price discovery mechanism wasn’t working effectively: storage, insurance, and transport costs and logistics problems prevented efficient markets. “The analog [to GLD] is that to buy one share of GE I don’t have to go to their sales guy, I press a button on my computer and I own it,” Toussaint said.
Investors, then, are drawn to GLD because it allows them to “own” physical metal. Suzanne Hutchins, for example, Newton’s investment manager for global funds and head of their real return investment team (which is part of BNY Mellon), said they like gold as an inflation hedge in the face of currency debasement. She sees GLD as one of the ways to gain exposure to the yellow metal and likes it because it is physically backed. She said that her team’s been to the vault and seen the actual bars.
But how does GLD work? It’s actually a lot more complicated than simply allowing investors to “own” gold. GLD is a trust, sponsored by the World Gold Council (through World Gold Trust Services), which oversees the performance of the trustee, which is Bank of New York Mellon (note Hutchins works for the trustee).
The trust seeks to reflect the price performance of gold bullion by holding gold bars and issuing shares backed by their holdings of physical metal. The gold bars are held in HSBC’s vault in London, and shares are sold in baskets of 100,000. The ETF is marketed by State Street. Where most investors are confused about GLD, though, is about redemption.
Even though GLD is “physically backed,” ordinary investors can’t just go to London and redeem their bullion. Only “authorized participants” are allowed to create or redeem shares. Authorized participants are registered broker-dealers or other securities market participants which have entered into agreements with the trustee and sponsor (these include major Wall Street names like Citi, Goldman Sachs, Morgan Stanley, JPMorgan Chase, and Merrill Lynch-Bank of America, among others), allowing them to deposit either gold or shares in exchange for the other at unallocated accounts until the operation is completed.
Regular shareholders have no rights of redemption and the gold is not required to be insured by the Trust, which is not liable for loss, damage, theft, nor fraud. Shares are bought in the open market, only after Authorized Participants decide to place or sell them. Therefore a retail investors doesn’t actually “own” gold, but an asset that is backed by gold and represents a certain quantity of the yellow metal.
Skeptics have raised doubts over the trust’s management of its physical gold, with questions over how much is actually held. HSBC, the custodian, is very secretive regarding its vault. Earlier this year, CNBC’s Bob Pisani was allowed to see the vault only after surrendering his cell phone and taken in a van with blacked out windows to an undisclosed location. Once in the vault, Pisani held up a gold bar and explained they were all numbered and registered. Astutely, ZeroHedge noted the bar Pisani held up was missing from the current bar list, fueling further speculation and skepticism.
Toussaint defends GLD by noting they are regulated by the SEC. “We are filing 10-Qs [quarterly reports with the SEC], on a regular basis,” he said, then added “I also think the world’s largest hedge fund managers take their due diligence seriously,” referring to investments in GLD by world-renowned hedge fund managers like John Paulson and George Soros, among others.
Another major criticism of GLD, which pertains to the whole ETF industry, is that it distorts prices in underlying markets by offering “on-demand liquidity to investors while they are in some cases based on much less liquid underlying assets,” according to a report by the Financial Stability Board.
“GLD has professionalized gold investment and positioned gold within the menu of viable asset classes,” responds Toussaint. “Gold ETFs have expanded the investor base and the overall market,” explained Toussaint, “but they still represent less than 10% of total demand for gold, I don’t think it has affected price in the market.”
Bob Pisani at HSBC’s gold vault where GLD’s metal is kept – goldsilver.com
Global gold markets are now “extremely price effective” and “hugely diversified,” as the market feeds on several sources of demand, not just speculative investment demand. Not only is gold a financial asset, it is also decorative, which becomes all the more important as discretionary incomes rise in India, China, and elsewhere in the developing world, where physical demand runs rampant. “How many people buy a convertible bond and wear it around their neck, or use a stock certificate as adornment? There is no other asset class like gold,” says Toussaint. Central bank diversification, another major source of demand, has taken a new role as central banks become net buyers of the yellow metal, according to a study by the World Gold Council.
It is difficult to pin down the exact reasons behind gold’s 10-year bull run, but the reality is that interest in gold is as old as money itself. Be it an inflation hedge, a bet on an alternate monetary asset, or a move into a safe haven, GLD is one of the most popular ways to gain exposure to the yellow metal.
Owning GLD is clearly not the same as owning physical gold, it just serves different purposes. GLD allows investors to play the physical metal without facing the underlying costs and logistical problems, but it doesn’t entitle one to an actual amount of gold. GLD helped make the market more democratic, to a certain extent, but also injected liquidity, thus fueling further price volatility. No matter what Toussaint or anyone else says, there will always be skeptics, but as long as gold maintains its trajectory, GLD will continue to thrive.
Original article found on Forbes.com
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October 28th, 2015
Gold prices should appreciate after the Fed meeting this week. Gold prices have been burdened by the strengthening dollar for the past couple of years. The dollar strengthened again last week thanks to extraordinary language from the European Central Bank (ECB), but gold hardly budged while oil prices plunged. Gold’s strength appeared to be due to expectations about the Fed policy decision this week, or rather its likely indecision. The Fed will probably not raise interest rates this week, given recently soft U.S. economic indications and the strong position of the ECB in the opposite direction (expansionary policy). If I am correct about the Fed, gold prices should be cleared to appreciate further near term. As time progresses and the economic recovery solidifies in Europe and China growth stabilizes, dollar strength should fade. As a result, gold gains a solid footing for the long term as well.
Gold prices have come down from their heights reached during the financial crisis and the Great Recession. Economic and financial market recovery in the U.S., especially against relative weakness overseas, allowed for dollar strengthening and the beginning of gold’s downturn even despite easy money policy at the Fed. More recently over the past two years, the Fed’s plans to normalize monetary policy against the backdrop of still looser-for-longer policy overseas has given the dollar even more relative strength, and priced down gold in dollar terms. But the perspective of investors could change today when the Federal Open Market Committee (FOMC) issues its October decision.
If, as I anticipate, the Fed refrains from raising interest rates, it will signal to investors that its hands are tied. Recent volatility in U.S. securities markets has illustrated popular concerns about the risk of economic contagion from China’s slowdown, and now also from the impact of new obstacles to Europe’s recovery. It’s also notable that U.S. energy sector contraction due to depressed energy prices has seriously infected the U.S. manufacturing sector. The latest Employment Situation Report showing slower job growth, supported by the latest bad news about manufacturing in yesterday’s Durable Goods Orders, and even the new home market earlier this week, gives the Fed good reason to wait a while longer.
And the European Central Bank’s (ECB) strongly worded statements last week served to remind the Fed how its divergence would impact the U.S. dollar given its nascent gains. Further dollar strength would do more harm to commodity prices and the business of a great many American multinationals and energy miners.
The Fed made certain to keep investors at the ready for its first rate hike at its heralded September call. But this week’s meeting may show investors the Fed is not in a position to act on its warning yet. The tone of Fed member discussion has changed as well since the press conference of the Fed Chair post the last monetary policy decision. After the jobs report falloff, Fed members stuck to their indications about a potential action this year, but emphasized “later” this year. That would include the Fed’s December meeting, after which it will provide a press conference. The Fed indicated it could act in October and schedule an impromptu press conference to discuss its actions, but that extra effort seems unlikely now. Still, the uncertainty about the possibility has likely held gold back until now.
I anticipate the dollar will give back much if not all of its latest gains when/if the Fed does not act to begin monetary tightening this week. Even if the Fed continues to emphasize the possibility of a December action, its actions will speak louder than its words on Wednesday. Take note that the longer the Fed’s inaction continues, the more likely Europe and China are to stabilize and no longer require extraordinary monetary policy support from their central banks. At that point, the dollar’s muscle flexing should end, and gold finds a surer long-term footing.
The value of the dollar is critical to the price of gold, just as it is to all commodities, which are also currently seeing depressed pricing. Gold differs from commodities like oil, though, because it has significantly fewer industrial uses and because it is seen by many as a currency in times of global distress, or for Americans, dollar concerns (inflation, domestic catastrophe etc.). Gold is impacted by other factors, including supply and cost of production, but currently, the fluctuating and in my opinion extreme upswing in the dollar is weighing more heavily than other factors.
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October 20th, 2015
by Alan Greenspan
[written in 1966]
This article originally appeared in a newsletter: The Objectivist published in 1966 and was reprinted in Ayn Rand’s Capitalism: The Unknown Ideal
An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense – perhaps more clearly and subtly than many consistent defenders of laissez-faire – that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.
Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.
The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.
What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term “luxury good” implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.
In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.
Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society’s divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.
A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.
When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one-so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the “easy money” country, inducing tighter credit standards and a return to competitively higher interest rates again.
A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.
But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks (“paper reserves”) could serve as legal tender to pay depositors.
When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates. The “Fed” succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930’s.
With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain’s abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed “a mixed gold standard”; yet it is gold that took the blame.) But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.
Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.
[written in 1966]
This article originally appeared in a newsletter called The Objectivist published in 1966 and was reprinted in Ayn Rand’s Capitalism: The Unknown Ideal
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August 29th, 2015
These are astonishing times for precious metals. Not just because of price
volatility. Underlying developments in the supply-and-demand fundamentals for
physical gold and silver are currently extraordinary.
On one hand, the paper market (futures contracts, etc.) continues to be heavily
pressured in a bearish direction by institutional short-selling. On the other, the
physical market has heated up with investor buying and increasingly bullish long-
term supply/demand prospects.
It’s been difficult for some investors to keep their conviction and hold on to real
value while paper markets relentlessly discount it. But most bullion investors
recognize the buying opportunity at hand. That’s evidenced by the fact they are
looking to buy, not sell, precious metal bullion products at lower level prices.
1. Investment Demand for Gold and Silver Coins Surges
The first development now taking place in precious metals markets is a surge in
demand for bullion coins, bars, and rounds.
The U.S. Mint suspended sales of Silver Eagles for most of July because it
couldn’t keep up with the demand. The U.S. Mint’s sales of Gold Eagles in July
reached their highest monthly total in more than two years.
Australia’s Mint reports its inventories are also being cleared out by demand,
especially from Asia. “Everything we get in is going straight out the door as soon
as we refine it,” said Perth Mint Treasurer Nigel Moffatt in a Bloomberg interview.
Private mints are overwhelmed as well, pushing out delivery for weeks while
scrambling to obtain raw silver for production.
2. Supply Tightness Drives Rising Premiums
When demand for refined precious metals far exceeds available supply, the
result is rising premiums. The premium over silver spot price for Silver Eagles hit
multiyear highs in July.
Premiums on pre-1965 U.S. 90% silver coins and other popular bullion products
are also on the rise. Privately minted rounds and bars that are normally plentiful
in the marketplace are now backordered.
3. Bearish Sentiment Toward Spot Prices
The paper market for precious metals has been subjected to relentless selling
pressure from exchange-traded fund liquidations and futures traders who are
betting on lower prices. Hedge funds appear heavily committed to the short side
of the market.
Meanwhile, newsletter writers and analysts in the financial media are also
bearish on precious metals in anticipation of lower prices. What investors might
focus on is that consensus opinion is usually wrong at major turning points.
Market highs are most often characterized by overzealous optimism, and
bottoms by overabundant pessimism.
Best not to succumb to the herd mentality when making investment decisions.
4. Leverage Ratios Raise Odds of Short Squeeze
Traders are selling an ever-increasing quantity of gold ounces that physically do
not exist. Record amounts of leverage are being applied to the gold market.
This increases the possibility of a physical default (in which holders of long
contracts who want to take delivery of physical metal are offered only cash
instead). It also sets up the potential for a short squeeze (in which short sellers
are forced to “cover” their positions by placing buy orders).
Holders of physical precious metals fully paid for are able to take comfort in
knowing they will never face the prospect of any contract default, margin calls, or
any of the other risks inherent in paper markets.
5. Shrinking Mining Industry Points Toward Supply Shortfall
Things are particularly bad for the base metals and precious metals mining
industry. There are a number of reasons for the industry’s troubles, as most
mines simply struggle to make money selling their mined products at today’s
lower spot market prices.
Mining for precious metals has always been a difficult business and now mining
companies must shrink dramatically in order to survive. Fewer mines, smaller
work force, less capital investment, and limited exploration. That usually
translates into fewer ounces being discovered and mined going forward.
If supply contracts and demand holds steady, then prices will ultimately have to
rise. It’s basic Economics.
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February 16th, 2015
For several years there has been talk of a financial and economic “re-set” coming, this is no longer speculation as the reset has already begun! The Swiss have suppressed the price of their currency, the franc, since late 2011. They pegged the franc versus the euro with a “floor” versus the euro at 1.20. After confirming this floor publicly on Monday, they abandoned it Thursday only to see the euro depreciate through the par level. What you saw on Thursday and Friday was the work of Mother Nature as the Swiss decided they would be better served by no longer battling her.
The ramifications of this move by the Swiss are almost infinite when you consider the chain reactions they have now started. Several large FOREX firms including the largest retail firm in the U.S., FXCM, were rendered bankrupt overnight. Even Goldman Sachs and Citi admitted to being offside and sustained large losses. As of right now, we have no idea who “won” and who “lost”, nor do we know “how much?”. We heard almost nothing from Swiss or European banks on Friday, “who what and how much?” will begin to surface this coming week. As I have written for years now, if the loser goes bankrupt, the winner does not get paid…thus turning the winner into a loser. This is a very big problem the markets ignored on Friday but will not be able to ignore as the dead bodies begin to surface.
Think about this point very seriously, many investors (and firms) went to bed Wednesday evening with no stress at all on their portfolios (or their business), in just five minutes Thursday morning they were insolvent. Just FIVE MINUTES! We are only talking about “investments” here, how many other real businesses in the import and export area are now broke? Broke because they hold euros but need francs or they export from Switzerland or import to Europe and now their business model makes no sense? How is this even possible in just five minutes time?
Another aspect to what and how the Swiss moved on Thursday is that of “central banks” themselves. Did the Swiss not know they were going to float the franc on Monday when they confirmed the peg publicly? Did they or did they not inform the IMF prior their actions? What about the BIS which is headquartered within their borders in Basel, surely they tipped them off? Christine LaGarde claimed in an interview with CNBC that she had no prior notice, really? If this is true then it shows the Swiss central bank has moved in an “every man for himself” type of action. It also shows the “united front” of central banks is not so “united” anymore! If Ms. LaGarde is not telling the truth and in fact the IMF did have prior knowledge, what would this mean? It would mean the central banks are finally losing control of the rig. It would also mean the central banks have distorted currencies, interest rates etc. so badly that once Mother Nature takes over, we can expect repeat performances all over the world and amongst all assets and currencies. How can I say this? I would simply ask if it is “normal” for two trading currencies to revalue 30% in five minutes or if it is not normal, what was the cause? We of course know, the cause was the actions of the ECB and SNB over these last three+ years.
We have already speculated the Swiss made this move for one of two reasons. First, they may have decided the amount of euros necessary to purchase (and thus the amount of francs created) will go exponential this coming week when the ECB goes full on QE (printing). We also know that euros already make up more than half of their balance sheet. The other possibility is they know the Greek election is coming up, (the Greek banks are already experiencing bank runs) and they see the very real possibility of the Eurozone fracturing or even dissolving. Another possibility is maybe they just decided “their first loss is their best loss?” Maybe they have watched as the core of Europe has asked for their gold back and understand that “trust” amongst central bankers is waning? Maybe they simply decided to front run the obvious and necessary re set and do it on their own terms? It is very hard to say what exactly the motivation was, the important thing to understand is their action has started a re-set in motion which will not be stopped! In plain English, the Swiss just yelled FIRE …while standing in the exit!
I have several other questions but first I want to point out the obvious. Oil was cut in more than half in dollars over 6 months, could you say the price of oil was “re-set?” How about copper? How about other foreign currencies? Could the huge moves in so many assets qualify as being “re-set?” The collapse in oil and copper prices are black swans pointing to a rapidly slowing global economy. The Swiss removing their currency peg is another black swan event and in reaction to the ECB moving toward hyper-inflating their currency.
My biggest question now is this, what will happen when China allows their currency to float? The Swiss are one thing, China is whole different story! Think of the ramifications when it comes to trade? Another, maybe even more important question is what will happen when the Chinese “force” the price of gold and silver to trade freely? Let me explain this further. The Chinese know full well that gold IS money, otherwise they would not have spent the last several years buying almost every single ounce that came from the ground. They know it is artificially priced by New York and London. They can “float” gold in several manners. First, they can simply bust the COMEX and LBMA by bidding for and purchasing both their entire inventories within a 24 hour window. Another possibility would be to simply put out a “global bid” and state some price (much higher than current) they are willing to buy any and all gold, presto, COMEX and LBMA would be busted without them doing it directly!
I recently wrote of a “Global Margin Call” where because oil and other assets, currencies, etc. have moved so rapidly, many derivatives traders have surely been thrown “offside”. This move by the Swiss is nothing different except it was done “officially.” Actually, the funny thing is they moved to suspend what they were “officially” (and artificially!) doing. The move by the Swiss has only made the global margin call that much bigger! The global re set which was already in the works is now publicly and officially happening before your very eyes. You can close your eyes or not believe this fact, it will not make it go away, nor will it insulate you financially from what is coming.
To finish, and I plan to follow up maybe even tomorrow, the most important re set will be that of gold and silver prices. I say “most important” because these are the only “tools” available to you as an individual to protect your wealth. If the Swiss franc and the euro can change in value by 30% within five minutes, what do you think the revaluation of gold and silver will be when the 100 ounces of “paper metal” come looking for the real thing? At what price will the market clear? Add a zero? Two zeros? Please understand this, when the margin call is issued worldwide, there is only one money where the call will work in reverse, precious metals. The “call” will be for real, yet non-existent metal. Gold had already sniffed this margin call and re set out a couple of months ago. No matter how much paper was thrown at it, it simply stopped going down. Even while the dollar strengthened synthetically, gold went higher versus the dollar. Gold has clearly been THE best money, what do you think will happen to real metal when it turns out that 99% of the supposed global supply is proven as counterfeit?
We will soon witness the greatest margin call in all of history. We will also witness the greatest transfer of wealth and re set in all of history! My only question is whether what so far has been “rolling re sets” becomes an official market/bank/finance closure and announced …or, do the markets continue to trade and force re sets in market after market.
As an additional note, we have one last question to ponder which may or may not be connected. Koos Jansen put forth a “mystery guest’s” theory that the Swiss went short gold in Sept. 2011 which marked the top in gold. He asks in the following link, “did Switzerland just cover their short“?
I believe there may be some credence to this theory but would go one step further. Zerohedge asks the question and speculates Japan may be the next “Switzerland” and pull the plug on Abenomics. Personally I see it a little differently, more importantly, what if the Chinese were to react to the coming QE4 by doing two things? What if China just walked away and sold their dollar holdings …and at the same time revoked their current peg of the yuan to the dollar? Will China someday ratio back their yuan with gold? I think this is likely. Would the dollar collapse 30% like the euro just did versus the franc or will the re set be much larger? Of course the next question would be “how high would gold be marked up”? An unpegging of the yuan by China would be more important and (current) system ending than nearly anything else I can imagine. For China to break their peg, the paper short positions in gold and silver would finally be exposed for what they are, counterfeits!
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February 16th, 2015
It is a little-known fact that gold outperformed all currencies in 2014, except for the US dollar. In dollar terms gold declined 1.7 percent, but as the table below shows, it posted solid gains against all other currencies. While the dollar price of gold was essentially flat in 2014, highly negative media coverage created the impression that gold was a disaster. Negative sentiment weighed heavily on the performance of gold-mining shares, with our benchmark XAU index down 17.3 percent. Meanwhile, dollar bulls appear dangerously overcommitted to the greenback, with open interest at an all-time high. The dollar’s strength relative to other currencies has camouflaged the strength of gold. Both dollar and gold strength in our opinion portend trouble ahead for financial assets (click here). It seems to us that with financial assets at all-time highs and red flags proliferating, this is an opportune moment to acquire cheap wealth insurance in the form of physical metal and precious-metal mining shares.
We share the view of many contrarians that the six-year bull market in equities has been powered in large part by the Fed’s policy of zero-interest rates and quantitative easing, which has driven investors into risky assets. As noted by Fred Hickey in his January 4, 2015, newsletter (High Tech Strategist), “The market’s price to sales ratio is at an all-time high, the market capitalization to GDP ratio (Warren Buffett’s favorite indicator) is the second highest in history…. The Shiller Cyclically Adjusted P/E Ratio for the S&P is 27. That level has been exceeded only two times before – in 1929 and 2000.”
It seems to be the consensus view, and it is certainly the party line of the Fed, that the money printing of the past six years is history. As Hickey points out, if the fuel for the market advance has been spent, what is there left to support lofty equity valuations? Numerous factors point to spreading economic weakness for the global economy. These include the weakness of foreign currencies relative to the US dollar (which increases the debt load of dollar-denominated debt, fueling the growth of emerging market economies), falling commodity prices, widening credit spreads, and a broad assortment of feeble economic reports that market bulls choose to ignore. If we are correct in our view, corporate earnings are set to decline, undercutting a key pillar of the bullish case for equities.
We believe that a serious market correction, or the onset of a bear market, would exert extreme pressure on the Fed to reverse course and resume money printing. The Fed, most likely aware that their credibility is at stake, would probably resist this option at all costs. Capitulation to market weakness by the Fed at this juncture would in our opinion lead to the evaporation of confidence in all central banks, since investors would be forced to accept the proposition that money printing, once started, can never be stopped.
A return to quantitative easing would be transformational for the perception of gold. We believe the transformation would happen suddenly. As noted by investment luminary Paul Singer in a letter to his clients, confidence, especially when it is not deserved, is a thin veneer. When confidence falls apart, the consequences can be quite severe. In a recent interview, Jeffrey Gundlach, CEO of investment giant DoubleLine, commented, “It is interesting how you have been beginning to see signs of investor concern around the edges about the health of the economy and about the financial system. Historically, when junk bonds give up the ghost and treasuries remain firm, it is a signal that something is not right.” In our view, the hidden strength of gold during 2014 is another sign that investors are starting to sense that something is not right.
We believe that capital is beginning to scramble towards higher ground in anticipation of a monetary crisis. To us, this explains the relative strength of the US dollar. The same concern is reflected in the less obvious strength of gold. As of this writing, the euro price of gold has surpassed the 1,000 level. The downtrend of the past three years seems to have been broken in euro terms. Investment flows from Asia continue strong. China and India now buy as much gold as the mining industry produces. While the Chinese central bank remains secretive, not having updated gold reserves reporting since 2009, the sharp decline in purchases of US Treasuries (see below) implies a step up in gold purchases.
Central bank buying, led by Russia, is robust; central banks have added gold bullion to reserves for 14 straight quarters. Political pressure to repatriate gold bullion has also been on the rise. Countries considering or successfully repatriating gold include the Netherlands, France, Belgium, Austria, and Germany. As noted by Casey Research, repatriation has led to the biggest drawdown in gold held at the NY Fed in more than 100 years.
We believe that a breakdown of trust in financial intermediaries – including bullion banks, “synthetic” gold substitutes such as ETFs, and derivatives, as well as the integrity of central-bank custodial relationships – is behind the growing clamor to repatriate physical gold bars owned by sovereign states. Ebbing confidence is not limited to the official sector. Gunvor, the world’s fifth-largest commodity trader, decided to discontinue gold trading in part “because of difficulties in finding steady supplies of gold where the origin could be well documented” (Bloomberg, 12/12/14). Grant Williams, of Vulpes Investment Management, explains, “Because of the mass leasing and rehypothecation programs [the use by financial institutions of clients’ assets, posted as collateral] by central banks, there are multiple claims on thousands of bars of gold. The movement to repatriate gold supplies runs the risk of causing a panic by central banks.”
Loss of trust is the genesis of bank runs. Bullion banking is a fractional reserve system in which large amounts of credit are extended based on a relatively small quantity of physical metal. Sovereign gold bars are a major component of the credit base. We believe this is a story to watch very closely in the coming year.
It seems to us that that the circle of those disparaging gold has dwindled to a rear guard of hard-core, dollar-centric addicts still hooked on a monetary policy designed to herd investors into risky assets. In a truly Orwellian transposition, gold, the safest asset in history, is maligned by the financial media as risky, while financial assets at near-record valuations are viewed as compelling. In the simplistic logic that passes for financial wisdom, if equities are good, then gold must be bad. If there has been a Greenspan/Bernanke put for equities, why not a Yellen cap for gold?
Such a notion might explain the fearless manner in which gold has been periodically trashed. A skidding $US gold price confirms that all is well. “Synthetic” gold, created by bullion banks for propriety-trading desks, high-frequency traders, and commodity traders, is dumped (often following Fed policy pronouncements) onto thin markets during non-trading hours to trigger stops and spread panic. No physical gold changes hands during such raids. Sellers abandon any pretext of “best execution,” the usual standard for discrete distribution of positions. Instead, the raids are crafted to smash the price with as much noise as possible.
We believe that the gold market has been manipulated, which to us is no surprise. Rigging has become a central feature of financial markets since the onset of quantitative easing. Too-big-to-fail banks, US and European, have admitted to manipulating Libor, energy, and currencies. Zero-interest rates and quantitative easing are to us blatant manipulations of bonds, interest rates, and equities. Why should gold be exempt? On December 15, 2014, a class-action lawsuit filed in the United States District Court, Southern District of New York (In Re: Commodity Exchange, Inc., Gold Futures and Options Trading Litigation) named the Bank of Nova Scotia, Barclays plc, Deutsche Bank AG, HSBC plc, and Société Générale SA as defendants on allegations of price fixing in the gold market. The various allegations in the Complaint include the following:
The PM Fixing aligns with the opening of the New York market, and specifically the Commodity Exchange, Inc. (COMEX) market on which gold futures and other derivative contracts are traded…. The economic and other evidence overwhelmingly shows that Defendants sought to avoid the uncertainties and risks associated with the gold derivatives market – i.e., that the market would move against a Defendant’s short position – by agreeing to manipulate the PM Fixing through repeated conduct to artificially suppress the price of gold.
The Complaint is now in the hands of the district judge. The allegations are supported by exhaustive statistical data, similar to those produced in the previous successful action against Libor manipulation. The defendants have filed a motion to dismiss; the judge will decide in the coming months whether to allow the case to proceed. If the case proceeds, we would hope it results in placing important participants on the witness stand. However, should it get to that point, there is a possibility that the defendants could propose a settlement to avoid discovery, which in our opinion would be disappointing.
Regardless of how the litigation is resolved, we believe that the scrutiny from regulators in Germany, Switzerland, and the UK (FCA), along with these legal actions, has already caused a change in behavior by bullion banks and other institutions involved in price manipulation. Deutsche Bank, for example, has withdrawn from precious-metals trading. In other cases, internal and external legal scrutiny of precious-metals trading activity will most likely lead to reduced participation by many of these institutions.
For investors, the overriding question is what these changes might imply for future gold prices. In the short run, we believe that price raids mounted by synthetic supply will become less frequent and less intense. We believe that in time, should our expectation prove correct, the gold market may come to seem less dangerous and perhaps less mysterious to those who wish to initiate long exposure. Over the longer term, we believe that the diminished presence of Western institutions in precious metals markets, and the supplies of synthetic gold in which they specialize, will allow the very bullish supply and demand equation for physical metal to be reflected in the price. Should this shift occur in concert with a diminished role for the US dollar as a reserve currency – a prospect most certainly desired by the BRICs and other developing economies – gold will play an expanded role and the dollar gold price will benefit. The perfect storm for gold would be for these structural changes in the gold market to occur in conjunction with a loss of confidence in central bankers.
While gold held its own during 2014, mining stocks did not. Even though our benchmark XAU index rose 20.60 percent through the first half of the year, those gains were more than erased during the second half; on the year the index declined 17.29 percent. However, the index does not tell the entire story. Many of our holdings showed decent gains during the year, and on the whole our clients’ portfolios outperformed the index by a substantial amount.
Positive factors for the mining industry include declining costs (oil being a major input) and better discipline applied to capital allocations. Scotiabank estimates that each $1/barrel decline in the oil price translates into a $1/ounce reduction in cash costs. The impact of oil alone therefore would amount to a roughly 7-percent reduction in production costs globally. In addition, the strength of the US dollar also impacts costs favorably, as most of the world’s gold is produced outside the US. These two factors alone, in our estimation, would result in a 10-percent decline in global cash costs for the coming year. The benefits of cost-cutting initiatives, including significant workforce reductions launched in 2013 and 2014, are likely to become more visible in 2015 and beyond.
For the intermediate term, mine supply seems likely to decline (assuming flat gold prices), which should ultimately be constructive for gold prices. The industry is in the midst of a period of reassessment and restructuring that began at the end of 2013. There are many new CEOs whose principal mandate is to improve returns on capital. Obviously, some companies will be more successful than others in achieving those returns. Overall, we expect to see divestitures, balance-sheet improvement, and M&As.
A good part of our success last year arose from our exposure to the royalty companies. Their business thrives during periods of capital scarcity for gold miners. In addition, several of our important holdings were able to add value through the advancement of mine construction or astute acquisitions. Lastly, one of our largest holdings, Osisko Mining, was taken over by Agnico Eagle and Yamana. The residual piece of the original company has been reconfigured as a royalty company and remains an important holding.
It is essential to remember that the gold-mining industry is not monolithic. There are some companies that are well managed and are able to create value despite the difficult gold market of the past few years. Of course, there are other companies that seem to destroy value year in and year out. Clearly, our strategy is to concentrate our holdings in those companies that add value for shareholders during difficult periods, independent of the gold price. When the gold market improves, we believe that our core holdings will perform consistent with the gold price and our relevant benchmarks.
Tocqueville Gold Strategy Monitor [PDF]
With all best wishes for a prosperous 2015!
Senior Portfolio Manager
© Tocqueville Asset Management L.P.
January 15, 2015
This article reflects the views of the author as of the date or dates cited and may change at any time. The information should not be construed as investment advice. No representation is made concerning the accuracy of cited data, nor is there any guarantee that any projection, forecast or opinion will be realized.
References to stocks, securities or investments should not be considered recommendations to buy or sell. Past performance is not a guide to future performance. Securities that are referenced may be held in portfolios managed by Tocqueville or by principals, employees and associates of Tocqueville, and such references should not be deemed as an understanding of any future position, buying or selling, that may be taken by Tocqueville. We will periodically reprint charts or quote extensively from articles published by other sources. When we do, we will provide appropriate source information. The quotes and material that we reproduce are selected because, in our view, they provide an interesting, provocative or enlightening perspective on current events. Their reproduction in no way implies that we endorse any part of the material or investment recommendations published on those sites.
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February 16th, 2015
Let us go straight to the key message. The long term gold chart is flashing a “buy” signal based on the technical indicator “MACD.” The chart below says it all. Mind that this is a monthly chart, which means it looks at gold from a long term perspective. This chart is courtesy of Dominic Frisby, author of Life After The State and Bitcoin: the Future of Money, and it appeared on MoneyWeek.com.
The MACD is the trend indicator which is displayed in the bottom half of the chart. It is a technical signal which measures momentum. It is useful in combination with a signal line crossover: when the MACD line (in blue) crosses the signal line (in red), it means upside momentum is increasing. A bullish crossover occurs when the MACD turns up and crosses above the signal line.
Dominic Frisby has looked into signal line crossovers on the MACD indicator since the last 10 years, as evidenced by the red and green arrows on the chart. The red arrows represent sell signals while the green arrows represent buy signals.
- The bullish signal line crossovers, indicated with the green arrow, occured in late 2005, mid-2007, mid-2009, as well as now.
- The bearish signal line crossovers, indicated with the red arrow, occured in 2007, 2008 and in early 2012.
The chart shows that those signals have been quite accurate in the last 10 years. Only the bearish signal in 2007 did not really result in a meaningful correction. On the other hand, the bullish signals marked the start of a strong uptrend.
So far, we have had 3 bullish signals in the last 10 years, and so the current one is the fourth one. Whether this means that gold is up and away, as of the coming days/weeks, is very doubtful given the sharp correction of the last 3+ years. Also, it is a long term signal (monthly chart), so it could be that the gold price will continue a sideways or even bearish path in the coming weeks and months before starting a meaningful rally.
Mind that this signal can also be invalidated in the coming months. If the price starts falling, we will see a bearish crossover.
Everything is possible. One technical indicator is not sufficient as a reliable confirmation. But it surely is a very healthy sign from a chart perspective, and it increases the odds of better times to come for gold bulls.
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