My favorite/funny quote from this "collapse-preparedness" presentation:
Reliance on doomed institutions is harmful. Government is already useless. Commerical sector will become useless quickly. Since they will be useless to you, you can start being useless to them ahead of time.
Spoke to my brother today who recounted this joke: "This financial collapse has been worse than a divorce - I've lost half my money but still got my wife."
If you've got time, this Chris Martenson presentation is also worth a view but it is about 3 hours in total. Jump to section 19 for a summary/bringing together of his ideas, the sections on money are also good.
السبت، 25 أكتوبر 2008
الخميس، 23 أكتوبر 2008
Unallocated vs Allocated
On this Kitco forum thread, a question was asked about whether one should be converting from unallocated to allocated. Many years ago I wrote up the following text on this page of the Perth Mint website:
The Perth Mint maintains finished goods inventory of its coins and bars at all times to meet normal demand from its distributors and Depository clients. Accordingly, unallocated clients will usually be able to convert their metal within a few days of giving notice.
However, it is important to note that if you request a physical product that is not in stock, or a very large quantity, the Mint may need to manufacture it. The lead times for manufacture will depend upon the size of the order, current demand and production capacity. It is because of this uncertainty that some clients choose allocated storage - as their metal has already been fabricated it is ready for collection at short notice.
Clients worried about potential delays in collecting metal in extreme circumstances, but with concerns about the cost of allocated storage, usually take a staged approach:
1. While the world environment is benign, they hold unallocated. They do not incur ongoing storage costs and fabrication charges.
2. When the environment becomes uncertain and risky, they convert to allocated.
3. When the world is at a crisis point, they take delivery of their physical metal.
This approach can save clients significant amounts of money as it may be some time between stage 1 and 2. Clients who do not feel they can judge the shift from stage 1 to 2, or feel it may be sudden and unpredictable, opt for allocated as they are using precious metals as "insurance" and see the storage fees as the cost of that insurance.
Each person will have a different assessment of what stage we are at. One thing to note is that the Perth Mint has a legal obligation to do conversions/collections, so those orders will always take priority over any other orders in the system, which gives some people comfort.
There were a few other questions raised that may be of interest.
"If the demand continues to be high then production capacity will rise and premiums will fall in the end. But will this coin/bar demand ever be big enough to influence the spot more than marginally?"
I have speculated in this blog that the industry will eventually respond, but it won't be quick as two things need to happen: 1 bosses in refineries and mints "get it" that the demand is staying high; 2 takes months to buy and commission equipment. High premiums are here to stay for at least 6 months if demand continues.
I think if the current demand was able to be filled then it would have an impact on the spot price because it would take physical off the market. Coin and bar demand is somewhat sticky. The fact that demand has not be able to be met has resulted in buying power being "wasted" on high premiums instead of on buying more ounces.
There is also no doubt in my mind that the US ETF has also impacted on the price by providing an easy way for the average person to buy gold. That was the whole reason the World Gold Council (run by miners) paid to get it set up - they wanted a easy way for physical to get taken off the market. Problem is that it is also easy to sell, and i think that is what is causing the volatility in the gold price. Compared to coin and bar buyers, ETF investors are more fickle in my opinion. The World Gold Council would have been better off ensuring the industry was ready to meet retail demand for coins and bars, because that also takes physical off the market, but for a much longer time.
"when do you think the paper spot price may be reconciled with the physical spot price + premium? Do you think there is an intentional cornering of retail market by big players, or is it just a priority of serving wholesale customers first. If there is a real shortage, why not charge wholesale customers more?"
In my experience, and this may just reflect the type of clients I've dealt with, but new highs in the gold price drive new account openings so the price drop will cool things a bit, but just a bit as the key driver now is still uncertainty about the financial markets and banks.
There isn't any cornering of the retail market by big players - all "wholesale" deals for coins and bars are to dealer who resell to the public. If a mint is at capacity selling product to a wholesaler or retail customer doesn't actually change anything really, because it all ends up with retail customers in the end. The big private clients I know who go allocated may well buy some smaller coins and bars, but the bulk of their metal is in 400oz and 1000oz bars as they are the cheapest.
The Perth Mint maintains finished goods inventory of its coins and bars at all times to meet normal demand from its distributors and Depository clients. Accordingly, unallocated clients will usually be able to convert their metal within a few days of giving notice.
However, it is important to note that if you request a physical product that is not in stock, or a very large quantity, the Mint may need to manufacture it. The lead times for manufacture will depend upon the size of the order, current demand and production capacity. It is because of this uncertainty that some clients choose allocated storage - as their metal has already been fabricated it is ready for collection at short notice.
Clients worried about potential delays in collecting metal in extreme circumstances, but with concerns about the cost of allocated storage, usually take a staged approach:
1. While the world environment is benign, they hold unallocated. They do not incur ongoing storage costs and fabrication charges.
2. When the environment becomes uncertain and risky, they convert to allocated.
3. When the world is at a crisis point, they take delivery of their physical metal.
This approach can save clients significant amounts of money as it may be some time between stage 1 and 2. Clients who do not feel they can judge the shift from stage 1 to 2, or feel it may be sudden and unpredictable, opt for allocated as they are using precious metals as "insurance" and see the storage fees as the cost of that insurance.
Each person will have a different assessment of what stage we are at. One thing to note is that the Perth Mint has a legal obligation to do conversions/collections, so those orders will always take priority over any other orders in the system, which gives some people comfort.
There were a few other questions raised that may be of interest.
"If the demand continues to be high then production capacity will rise and premiums will fall in the end. But will this coin/bar demand ever be big enough to influence the spot more than marginally?"
I have speculated in this blog that the industry will eventually respond, but it won't be quick as two things need to happen: 1 bosses in refineries and mints "get it" that the demand is staying high; 2 takes months to buy and commission equipment. High premiums are here to stay for at least 6 months if demand continues.
I think if the current demand was able to be filled then it would have an impact on the spot price because it would take physical off the market. Coin and bar demand is somewhat sticky. The fact that demand has not be able to be met has resulted in buying power being "wasted" on high premiums instead of on buying more ounces.
There is also no doubt in my mind that the US ETF has also impacted on the price by providing an easy way for the average person to buy gold. That was the whole reason the World Gold Council (run by miners) paid to get it set up - they wanted a easy way for physical to get taken off the market. Problem is that it is also easy to sell, and i think that is what is causing the volatility in the gold price. Compared to coin and bar buyers, ETF investors are more fickle in my opinion. The World Gold Council would have been better off ensuring the industry was ready to meet retail demand for coins and bars, because that also takes physical off the market, but for a much longer time.
"when do you think the paper spot price may be reconciled with the physical spot price + premium? Do you think there is an intentional cornering of retail market by big players, or is it just a priority of serving wholesale customers first. If there is a real shortage, why not charge wholesale customers more?"
In my experience, and this may just reflect the type of clients I've dealt with, but new highs in the gold price drive new account openings so the price drop will cool things a bit, but just a bit as the key driver now is still uncertainty about the financial markets and banks.
There isn't any cornering of the retail market by big players - all "wholesale" deals for coins and bars are to dealer who resell to the public. If a mint is at capacity selling product to a wholesaler or retail customer doesn't actually change anything really, because it all ends up with retail customers in the end. The big private clients I know who go allocated may well buy some smaller coins and bars, but the bulk of their metal is in 400oz and 1000oz bars as they are the cheapest.
الأربعاء، 22 أكتوبر 2008
Misinterpretation of Gold Lease Rates
Brian Kelly (founder and CEO of Kanundrum Inc, a private investment firm and research boutique) recently posted an article on Seeking Alpha called Misinterpretation of Gold Lease Rates and Why Gold Could Rise. In the article he says that “lease rates reported in the press are a derived rate and actually represent the amount that can be earned from the gold carry trade” and goes on to posit a relationship between lease rates and gold prices. Unfortunately it is Brian who has misinterpreted lease rates, and has done so quite badly.
The gold carry trade involves borrowing gold at, say 1%, selling the gold, and then investing the cash at, say 3%. If the gold price doesn’t change, you earn a net 2%. The bigger the net difference the more carry trade return you can earn (assuming a stable price) and therefore more attractive short selling of gold should be – as long as there is an expectation that the gold price won’t rise too far to wipe out the profit from the interest rate differential.
The point of a carry trade is, therefore to “capture the difference between the rates” (see Currency Carry Trade for a further explanation). The question then is what are the two “rates” and what represents the net difference. The formula Brian mentions in his article is Lease Rate = LIBOR – GOFO. He therefore assumes that the net difference is the lease rate. However, that same formula can be restated as GOFO = LIBOR – Lease Rate. Which is the net difference?
Regrettably for Brian, it is GOFO, not the Lease Rate. How can I be so sure? Well when I worked in the Perth Mint’s Treasury and we borrowed gold, we were charged the Lease Rate, not GOFO. But don’t take my word for it. I quote from a booklet titled “A Guide to the London Bullion Market” issued by the London Bullion Market Association (who you would think would know what they are talking about): “Forward rate = Dollar interest rate – metal lease rate”
Therefore the fact is that it is GOFO which represents the “amount that can be earned from the gold carry trade”. GOFO is the measure of the net difference, “the amount that can be earned from the gold carry trade”, not the Lease Rate.
As a result not much store should be put to Brian’s subsequent analysis about the relationship lease rates and the gold price. The chart below shows the relationship between the real “carry trade” indicator (I’ve chosen the 6 month GOFO rate) and the spot price. I take a more longer-term strategic view and looking at the chart there is no clear relationship or correlation that I can work with. For example, in 2002-2003 GOFO was low and the gold price rising. But 2004-2006 GOFO was rising but the price also went up. I don’t see any tradable signals one can rely on.
Brian has also developed what he calls the Kanundrum Model of Markets, which explains the way people and markets behave. Below is a summary of his key “stages”:
Discovery – Stage 1
Stage 1 of any emerging trend is first characterized by a change in direction. It is usually preceded by a surge in volume as the asset makes a new low. This is the stage where major investors are establishing new positions.
Disbelief/Confusion – Stage 2
Price retreats after the initial surge and often the retreat is significant. Investors who did not buy when they heard that Stage 1 investors were buying believe that this is the time the Stage 1 investors are going to be wrong.
Belief and Proof – Stage 3
In this stage the asset makes its largest price move. It is by far the most important part of the trend for an investor to be a part of. Volume is huge and price moves are beyond what anyone expects. This part of the trend usually lasts much longer than anyone expects. This is also where almost every type of investor has a reason to be involved in the trade.
Complacency – Stage 4
Price begins to retreat from the unbelievable prices achieved during Stage 3. However few participants are concerned. Market participants are accustomed to the asset price and many investors use the pullback to add to or establish new positions.
Mom and Pop – Stage 5
The price begins to move back up and individual investors invest. The price moves may be less than during Stage 3 primarily because individuals do not have the buying power that larger professional investors have. As well, Stage 1 and Stage 3 investors are taking profits.
In this blog post dated 13 October, Brian believes that gold is currently in Stage 2: Disbelief/Confusion. Now I’m not so sure about his model and the stages one has to choose from but it is an interesting and fun way to view the market. Using his model, I would suggest we are in the middle of Stage 4 (see chart below). What stage do you think we are at?
The gold carry trade involves borrowing gold at, say 1%, selling the gold, and then investing the cash at, say 3%. If the gold price doesn’t change, you earn a net 2%. The bigger the net difference the more carry trade return you can earn (assuming a stable price) and therefore more attractive short selling of gold should be – as long as there is an expectation that the gold price won’t rise too far to wipe out the profit from the interest rate differential.
The point of a carry trade is, therefore to “capture the difference between the rates” (see Currency Carry Trade for a further explanation). The question then is what are the two “rates” and what represents the net difference. The formula Brian mentions in his article is Lease Rate = LIBOR – GOFO. He therefore assumes that the net difference is the lease rate. However, that same formula can be restated as GOFO = LIBOR – Lease Rate. Which is the net difference?
Regrettably for Brian, it is GOFO, not the Lease Rate. How can I be so sure? Well when I worked in the Perth Mint’s Treasury and we borrowed gold, we were charged the Lease Rate, not GOFO. But don’t take my word for it. I quote from a booklet titled “A Guide to the London Bullion Market” issued by the London Bullion Market Association (who you would think would know what they are talking about): “Forward rate = Dollar interest rate – metal lease rate”
Therefore the fact is that it is GOFO which represents the “amount that can be earned from the gold carry trade”. GOFO is the measure of the net difference, “the amount that can be earned from the gold carry trade”, not the Lease Rate.
As a result not much store should be put to Brian’s subsequent analysis about the relationship lease rates and the gold price. The chart below shows the relationship between the real “carry trade” indicator (I’ve chosen the 6 month GOFO rate) and the spot price. I take a more longer-term strategic view and looking at the chart there is no clear relationship or correlation that I can work with. For example, in 2002-2003 GOFO was low and the gold price rising. But 2004-2006 GOFO was rising but the price also went up. I don’t see any tradable signals one can rely on.
Brian has also developed what he calls the Kanundrum Model of Markets, which explains the way people and markets behave. Below is a summary of his key “stages”:
Discovery – Stage 1
Stage 1 of any emerging trend is first characterized by a change in direction. It is usually preceded by a surge in volume as the asset makes a new low. This is the stage where major investors are establishing new positions.
Disbelief/Confusion – Stage 2
Price retreats after the initial surge and often the retreat is significant. Investors who did not buy when they heard that Stage 1 investors were buying believe that this is the time the Stage 1 investors are going to be wrong.
Belief and Proof – Stage 3
In this stage the asset makes its largest price move. It is by far the most important part of the trend for an investor to be a part of. Volume is huge and price moves are beyond what anyone expects. This part of the trend usually lasts much longer than anyone expects. This is also where almost every type of investor has a reason to be involved in the trade.
Complacency – Stage 4
Price begins to retreat from the unbelievable prices achieved during Stage 3. However few participants are concerned. Market participants are accustomed to the asset price and many investors use the pullback to add to or establish new positions.
Mom and Pop – Stage 5
The price begins to move back up and individual investors invest. The price moves may be less than during Stage 3 primarily because individuals do not have the buying power that larger professional investors have. As well, Stage 1 and Stage 3 investors are taking profits.
In this blog post dated 13 October, Brian believes that gold is currently in Stage 2: Disbelief/Confusion. Now I’m not so sure about his model and the stages one has to choose from but it is an interesting and fun way to view the market. Using his model, I would suggest we are in the middle of Stage 4 (see chart below). What stage do you think we are at?
الاثنين، 13 أكتوبر 2008
Bank Runs
I find the recent Australian Government guarantee of banking deposits (and the Treasury briefing of the leader of the opposition) very interesting. Briefing opposition leaders does not occur very often and I would assume was done because they wanted the opposition leader to know that the problem was serious and not to be used for political point scoring. The problem, then, must have been the real chance of a bank run developing.
Speaking to the Perth Mint's Depository and Shop staff about the reasons why people were buying gold and silver and how they were doing it leads me to believe that Australian banks were seeing the beginnings of a bank run developing. Stories of people not wanting to wait for cheques to clear and going to the bank to withdraw cash so they can get immediate delivery of metal may be reflective of wider cash withdrawals from Australian banks.
This report on ninemsn.com.au certainly would scare your average central banker: "according to Officeworks, the retailer has noticed a 'significant' increase in the sale of personal safes in recent times ... a number of people who feel nervous and consequently are pulling their money out" (see also this report from The Times)
I doubt the cash withdrawals would have posed a significant risk at this time, but I suspect that the banks were seeing abnormally high cash withdrawals and/or a trend developing and wanted the Government to stop it. It is interesting that this was necessary considering that "depositors in authorised deposit‑taking institutions (ADIs) already receive preference in any liquidation" (2 June 2008 press release by Treasurer).
Speaking to the Perth Mint's Depository and Shop staff about the reasons why people were buying gold and silver and how they were doing it leads me to believe that Australian banks were seeing the beginnings of a bank run developing. Stories of people not wanting to wait for cheques to clear and going to the bank to withdraw cash so they can get immediate delivery of metal may be reflective of wider cash withdrawals from Australian banks.
This report on ninemsn.com.au certainly would scare your average central banker: "according to Officeworks, the retailer has noticed a 'significant' increase in the sale of personal safes in recent times ... a number of people who feel nervous and consequently are pulling their money out" (see also this report from The Times)
I doubt the cash withdrawals would have posed a significant risk at this time, but I suspect that the banks were seeing abnormally high cash withdrawals and/or a trend developing and wanted the Government to stop it. It is interesting that this was necessary considering that "depositors in authorised deposit‑taking institutions (ADIs) already receive preference in any liquidation" (2 June 2008 press release by Treasurer).
الأحد، 12 أكتوبر 2008
Maturity Crisis in Gold
Excellent blog at Unqualified Reservations about the lease rate.
It should be noted that the primary driver of lease rates has been miner hedging. Have a look at the chart at this blog and then compare to chart of lease rates.
You will see that as miner hedging increased from 1994, lease rates moved from average 0.75% during early 90s to 1.5% during mid 90s to early 00s. They then drop to historically low levels when miners started to de-hedge, all wanting to meet investor calls for full exposure to the gold price.
Doubtful this time miners will be hedging again so this lease spike totally dependent on when central banks regain confidence in bullion banks. Funny how they are prepared to throw fiat money around to any bank that needs it, but not so keen to do the same with gold.
It should be noted that the primary driver of lease rates has been miner hedging. Have a look at the chart at this blog and then compare to chart of lease rates.
You will see that as miner hedging increased from 1994, lease rates moved from average 0.75% during early 90s to 1.5% during mid 90s to early 00s. They then drop to historically low levels when miners started to de-hedge, all wanting to meet investor calls for full exposure to the gold price.
Doubtful this time miners will be hedging again so this lease spike totally dependent on when central banks regain confidence in bullion banks. Funny how they are prepared to throw fiat money around to any bank that needs it, but not so keen to do the same with gold.
James Turk says there is no shortage ...
... of wholesale precious metals, that is. In this GATA dispatch, James Turk says "So far the London and Zurich markets continue to operate without problems, but I sense some strains are developing" and "we are giving retail investors the opportunity to buy alongside big institutional firms operating in these markets and to gain the advantages of these markets -- deep liquidity and transparent pricing"
This is what I have been trying to say all along - physical metal in the wholesale markets is not in shortage, it is the conversion of that metal into retail coins and bars that is causing a shortage of retail product, pushing up their prices.
He goes on to note that his clients "are purchasing metal based on the spot price in London and Zurich for both gold and silver. Thus they are able to buy metal without the huge premiums now being charged on eBay, for example, for fabricated product like coins and small bars"
The unfortunate thing for precious metals is that because people don't trust Mr Turk's system or ones like it, they are "wasting", in a way, their purchasing power on premiums instead of on the metal itself. If the spot price for bulk silver is $10 p/oz but is $14 p/oz for retail silver, then those who spend their $14 on a GoldMoney type system create demand for 1.4 oz whereas those buying retail forms only create demand for 1.0 oz.
Could it be that the reason the silver price (or gold) is not as high as some would like is because all this demand to spend fiat dollars is not being fully channelled into silver but partly spent on premiums instead?
I am a strong advocate of holding physical metal, but once you have a reasonable stash if you want to make an impact on the price maybe continuing to pay incredible premiums may not be the way to go. Of course it does come down to trust in these systems, so I understand why people may not want to buy stored metal. However I can't help but think that a lot of dollar buying power is ending up as profit in the hands of coin dealers instead of into silver and gold itself.
This is what I have been trying to say all along - physical metal in the wholesale markets is not in shortage, it is the conversion of that metal into retail coins and bars that is causing a shortage of retail product, pushing up their prices.
He goes on to note that his clients "are purchasing metal based on the spot price in London and Zurich for both gold and silver. Thus they are able to buy metal without the huge premiums now being charged on eBay, for example, for fabricated product like coins and small bars"
The unfortunate thing for precious metals is that because people don't trust Mr Turk's system or ones like it, they are "wasting", in a way, their purchasing power on premiums instead of on the metal itself. If the spot price for bulk silver is $10 p/oz but is $14 p/oz for retail silver, then those who spend their $14 on a GoldMoney type system create demand for 1.4 oz whereas those buying retail forms only create demand for 1.0 oz.
Could it be that the reason the silver price (or gold) is not as high as some would like is because all this demand to spend fiat dollars is not being fully channelled into silver but partly spent on premiums instead?
I am a strong advocate of holding physical metal, but once you have a reasonable stash if you want to make an impact on the price maybe continuing to pay incredible premiums may not be the way to go. Of course it does come down to trust in these systems, so I understand why people may not want to buy stored metal. However I can't help but think that a lot of dollar buying power is ending up as profit in the hands of coin dealers instead of into silver and gold itself.
الجمعة، 10 أكتوبر 2008
The Price Finding Mechanism
I received this email below today from a long time client:
Bron, Hi.
I trust all is well with you, especially in these turbulent times.
I have a question, maybe you can help with.
What is, or will be Gold Corporation/Perth Mint's position in regard to the valuation of account holder's unallocated storage bullion when the gold and silver paper/futures market deleverages from the physical market and loses its role as the price finding mechanism?
Do I need to explain the question more? If at some time in the future Comex goes into default on physical delivery - say at around $US25.00, how might the Perth Mint ascribe a price to unallocated account holder's holdings?
It seems there is a price premium already emerging for physical gold bullion.
Regards,
Ian
Firstly, not all bullion traders look to COMEX for a price. There are two other markets that are used and will take up the price finding role if COMEX fails:
1) the over-the-counter (OTC) market
2) the London Fix
Both of these are spot markets, by which is meant they are for immediately delivery of wholesale (i.e. 400oz gold, 1000oz silver) physical metal. Actually probably more correct to say “2 day delivery”, as the OTC spot market works on 2 day settlement. If you are looking for the “real” price of precious metals, you need to look at the spot price, not COMEX price as that is a futures price. It therefore does not represent the price for immediately delivery.
Over-the-Counter
This price finding mechanism is simply a trader ringing up other traders to find what prices they are willing to trade at and choosing the best one. The more accounts one has (which is a factor of your creditworthiness) the more traders one can deal with and thus the better the price one is likely to achieve. It is therefore really only a professional/corporate market and is unfortunately opaque to the average investor.
To facilitate this price discovery, various trading platforms and/or information services are used. Traders use a service like Reuters as a bulletin board on which they publish their current bid and ask prices as a way of attracting business. Unlike an exchange, however, such prices are merely offers and not commitments to deal at those prices.
It a lot of case the so-called “spot price” is the price published on these services. I understand that the Kitco prices are a delayed feed from Bloomberg, for example. They are reliable indicators of the price for precious metal but sometimes do not always reflect the actual spot market. This can occur when traders are very busy and do not have time to update their quotes on services like Reuters. One needs to take this into account when using these information sources.
London Fix
I won’t go into the details of how the London Fix works, that can be found at the link above. Important feature of the Fix is that unlike the OTC price, it is a transparent price and is published. This makes it ideal for “valuation” purposes, as it is independent in nature. Also note that the Fix price will, by the force of arbitrage, reflect the spot price at the time of its fixing. Of all prices, it is the “most real”; as it reflects the price actual physical deals were transacted at.
A negative for the Fix is that it is only done twice a day (once for silver). This does not make it suitable for live trading, unlike the OTC price, which is a 24 hour market. However, if one is not too price sensitive and prepared to wait for the fix to occur (and you have a sizable trade that can be put on the Fix), placing an order with your dealer to buy or sell on the Fix is a great way to know exactly what you are being charged. The fact that the Fix is published means that your dealer has to be explicit about what fees they adding to the price. With OTC trading’s opacity, one can never be sure exactly what the dealer is adding to the spot price they are actually paying.
Retail Spot vs Wholesale Spot vs Futures
Just a final word on the “premium emerging for physical gold bullion”.
If by this one means the difference between the prices for retail forms – coins and bars – and the wholesale spot, then I agree. By definition, the spot price is the price for wholesale physical metal - 400oz gold, 1000oz silver. This is gold or silver’s “base price”, the price for the raw material for retail coins and bars. The current inability of the industry to covert the raw material into retail forms to meet the demand has caused a shortage which has caused the price to be bid up.
If by this one means the difference between the futures price and the wholesale spot, then I am not so sure. There will always be a price difference because a futures price is a mathematical function of the spot price plus the “time value of money”, with the price only converging to the spot price at expiry. This difference does not mean it is not “real” or in disconnect. To argue that it is in disconnect means that you believe traders are going to miss an opportunity to earn easy money by not arbitraging the divergence.
This is not to argue against manipulation of the markets or that futures markets may close at some point. Indeed it is essential to believe that futures prices and spot price are kept in alignment by arbitrage, because if they were not then there would be no way to transmit the manipulations in futures into the physical spot market. Indeed, the whole reason a futures market may close is precisely because arbitrageurs see a divergence and seek to correct it by taking delivery to settle their positions in the OTC spot market.
Bron, Hi.
I trust all is well with you, especially in these turbulent times.
I have a question, maybe you can help with.
What is, or will be Gold Corporation/Perth Mint's position in regard to the valuation of account holder's unallocated storage bullion when the gold and silver paper/futures market deleverages from the physical market and loses its role as the price finding mechanism?
Do I need to explain the question more? If at some time in the future Comex goes into default on physical delivery - say at around $US25.00, how might the Perth Mint ascribe a price to unallocated account holder's holdings?
It seems there is a price premium already emerging for physical gold bullion.
Regards,
Ian
Firstly, not all bullion traders look to COMEX for a price. There are two other markets that are used and will take up the price finding role if COMEX fails:
1) the over-the-counter (OTC) market
2) the London Fix
Both of these are spot markets, by which is meant they are for immediately delivery of wholesale (i.e. 400oz gold, 1000oz silver) physical metal. Actually probably more correct to say “2 day delivery”, as the OTC spot market works on 2 day settlement. If you are looking for the “real” price of precious metals, you need to look at the spot price, not COMEX price as that is a futures price. It therefore does not represent the price for immediately delivery.
Over-the-Counter
This price finding mechanism is simply a trader ringing up other traders to find what prices they are willing to trade at and choosing the best one. The more accounts one has (which is a factor of your creditworthiness) the more traders one can deal with and thus the better the price one is likely to achieve. It is therefore really only a professional/corporate market and is unfortunately opaque to the average investor.
To facilitate this price discovery, various trading platforms and/or information services are used. Traders use a service like Reuters as a bulletin board on which they publish their current bid and ask prices as a way of attracting business. Unlike an exchange, however, such prices are merely offers and not commitments to deal at those prices.
It a lot of case the so-called “spot price” is the price published on these services. I understand that the Kitco prices are a delayed feed from Bloomberg, for example. They are reliable indicators of the price for precious metal but sometimes do not always reflect the actual spot market. This can occur when traders are very busy and do not have time to update their quotes on services like Reuters. One needs to take this into account when using these information sources.
London Fix
I won’t go into the details of how the London Fix works, that can be found at the link above. Important feature of the Fix is that unlike the OTC price, it is a transparent price and is published. This makes it ideal for “valuation” purposes, as it is independent in nature. Also note that the Fix price will, by the force of arbitrage, reflect the spot price at the time of its fixing. Of all prices, it is the “most real”; as it reflects the price actual physical deals were transacted at.
A negative for the Fix is that it is only done twice a day (once for silver). This does not make it suitable for live trading, unlike the OTC price, which is a 24 hour market. However, if one is not too price sensitive and prepared to wait for the fix to occur (and you have a sizable trade that can be put on the Fix), placing an order with your dealer to buy or sell on the Fix is a great way to know exactly what you are being charged. The fact that the Fix is published means that your dealer has to be explicit about what fees they adding to the price. With OTC trading’s opacity, one can never be sure exactly what the dealer is adding to the spot price they are actually paying.
Retail Spot vs Wholesale Spot vs Futures
Just a final word on the “premium emerging for physical gold bullion”.
If by this one means the difference between the prices for retail forms – coins and bars – and the wholesale spot, then I agree. By definition, the spot price is the price for wholesale physical metal - 400oz gold, 1000oz silver. This is gold or silver’s “base price”, the price for the raw material for retail coins and bars. The current inability of the industry to covert the raw material into retail forms to meet the demand has caused a shortage which has caused the price to be bid up.
If by this one means the difference between the futures price and the wholesale spot, then I am not so sure. There will always be a price difference because a futures price is a mathematical function of the spot price plus the “time value of money”, with the price only converging to the spot price at expiry. This difference does not mean it is not “real” or in disconnect. To argue that it is in disconnect means that you believe traders are going to miss an opportunity to earn easy money by not arbitraging the divergence.
This is not to argue against manipulation of the markets or that futures markets may close at some point. Indeed it is essential to believe that futures prices and spot price are kept in alignment by arbitrage, because if they were not then there would be no way to transmit the manipulations in futures into the physical spot market. Indeed, the whole reason a futures market may close is precisely because arbitrageurs see a divergence and seek to correct it by taking delivery to settle their positions in the OTC spot market.
الأربعاء، 8 أكتوبر 2008
Central Bank Selling
This FT.com article (you will need to register to read it) says "central banks have all but stopped lending gold to commercial and investment banks and other participants in the precious metals market". This has caused lease rates to rise/forward rates to drop as noted by SilverAxis.
I think it is a bit late for central banks to start worrying about counterparty risk. I have been corresponding with someone who has been watching the markets and gold over the past 20 years and their view after analysing different reported data sets is that central banks are holding closer to 10,000 tonnes than 30,000 tonnes (and this guy knows his data).
I haven’t reviewed his analysis to confirm those numbers, but it makes sense to me as if asked I would have guessed that the legimate market for precious metal borrowing (ie manufacturers) is no where near the amount that is lent out, therefore the balance must have be lent to bullion banks for ultimate use in financing short sales and other gold derivatives. With gold interest rates around 2%, the carry trade doesn’t look that good anymore.
I find it interesting that some gold advocates get hot and bothered about central bank lending/selling. I don’t see the problem. So what if central banks sell their last 10,000t into the market in an attempt to support those banks with either proprietary short positions or who have lend to others who are short without good collateral to cover that exposure. This will supress the price, allowing individuals to buy a cheap prices. Then that part of central bank lending which has been short sold has to be bought back (a short is a future buyer, just as a long is a future seller). If that is not possible, then the lucky ones are those to whom it was short sold.
The end result will be gold in the hands of individuals and what I call “the decades long privatisation of gold” will be complete. As per Professor Fekete, the power over the money “supply” will then be in the hands of the average person, where it should be:
"Since gold coins served as bank reserves under the gold standard, by withdrawing their deposits and converting their notes into gold coins savers could force the banks to contract outstanding credit. ... Not only did it have the ballot paper, the electorate also had the gold coin with which to vote. And vote it did, on every business day. If it did not like the credit policies of the banks and the government the whip, gold hoarding, was at hand."
Surely this current crisis has shown that individuals couldn’t be any worse than central banks in managing a country's money supply/credit/interest?
I think it is a bit late for central banks to start worrying about counterparty risk. I have been corresponding with someone who has been watching the markets and gold over the past 20 years and their view after analysing different reported data sets is that central banks are holding closer to 10,000 tonnes than 30,000 tonnes (and this guy knows his data).
I haven’t reviewed his analysis to confirm those numbers, but it makes sense to me as if asked I would have guessed that the legimate market for precious metal borrowing (ie manufacturers) is no where near the amount that is lent out, therefore the balance must have be lent to bullion banks for ultimate use in financing short sales and other gold derivatives. With gold interest rates around 2%, the carry trade doesn’t look that good anymore.
I find it interesting that some gold advocates get hot and bothered about central bank lending/selling. I don’t see the problem. So what if central banks sell their last 10,000t into the market in an attempt to support those banks with either proprietary short positions or who have lend to others who are short without good collateral to cover that exposure. This will supress the price, allowing individuals to buy a cheap prices. Then that part of central bank lending which has been short sold has to be bought back (a short is a future buyer, just as a long is a future seller). If that is not possible, then the lucky ones are those to whom it was short sold.
The end result will be gold in the hands of individuals and what I call “the decades long privatisation of gold” will be complete. As per Professor Fekete, the power over the money “supply” will then be in the hands of the average person, where it should be:
"Since gold coins served as bank reserves under the gold standard, by withdrawing their deposits and converting their notes into gold coins savers could force the banks to contract outstanding credit. ... Not only did it have the ballot paper, the electorate also had the gold coin with which to vote. And vote it did, on every business day. If it did not like the credit policies of the banks and the government the whip, gold hoarding, was at hand."
Surely this current crisis has shown that individuals couldn’t be any worse than central banks in managing a country's money supply/credit/interest?
Steve Keen's Oz Debtwatch
http://www.debtdeflation.com/blogs/ subtitled: Analysing Australia’s 45 Year Obsession with Debt, a new addition to blogs I'm following after seeing him on the 7:30 report. Choice quotes:
"As the experience and the memory of the Great Depression receded, academic economics produced a hybrid of Keynes’s macroeconomic ideas grafted on top of Neoclassical microeconomics that they called “the Keynesian-Neoclassical Synthesis”.
Unfortunately, the ideas were incompatible–and over time, wherever there was a conflict, academic economics rejected the Keynesian graft, rather than the underlying Neoclassical microeconomics. After fifty years of this, Keynes’s ideas were completely ejected from the economic mainstream, the Neoclassical belief that the economy is self-correcting became dominant once more, and economists trained in this belief came to dominate Treasuries and Central Banks around the world. They ignored levels of private debt, championed deregulation of finance, and virtually encouraged asset price speculation.
Now we have twice as much debt as caused the Great Depression, and inflation so low that, were it not for unprecented factors (the rise of China, global warming and peak oil), deflation would almost be a certainty.
Having thus unlearnt the real lessons of the Great Depression, the economics profession may yet make us relive it."
"I can be pro-inflation and anti-gold at the same time because I have supreme confidence in the ability of our economic managers to FAIL to cause inflation. So I actually expect deflation in the future, in which case the money price of gold may well fall (though it will surely fall less than other commodities).
However, I could be gazumped by global warming and peak oil, which could cause the inflationary surge that our economic managers will finally realise is needed, but not know how to consciously cause. There is also the slim possibility that truly over the top increases in fiat money could trigger a hyperinflation.
So given those two possibilities, I’m not anti-gold; it depresses me to say that I have actually started considering whether I might put some of my money into gold. But I would still prefer to remain in both bank deposits and my super fund’s so-called cash accounts."
"As the experience and the memory of the Great Depression receded, academic economics produced a hybrid of Keynes’s macroeconomic ideas grafted on top of Neoclassical microeconomics that they called “the Keynesian-Neoclassical Synthesis”.
Unfortunately, the ideas were incompatible–and over time, wherever there was a conflict, academic economics rejected the Keynesian graft, rather than the underlying Neoclassical microeconomics. After fifty years of this, Keynes’s ideas were completely ejected from the economic mainstream, the Neoclassical belief that the economy is self-correcting became dominant once more, and economists trained in this belief came to dominate Treasuries and Central Banks around the world. They ignored levels of private debt, championed deregulation of finance, and virtually encouraged asset price speculation.
Now we have twice as much debt as caused the Great Depression, and inflation so low that, were it not for unprecented factors (the rise of China, global warming and peak oil), deflation would almost be a certainty.
Having thus unlearnt the real lessons of the Great Depression, the economics profession may yet make us relive it."
"I can be pro-inflation and anti-gold at the same time because I have supreme confidence in the ability of our economic managers to FAIL to cause inflation. So I actually expect deflation in the future, in which case the money price of gold may well fall (though it will surely fall less than other commodities).
However, I could be gazumped by global warming and peak oil, which could cause the inflationary surge that our economic managers will finally realise is needed, but not know how to consciously cause. There is also the slim possibility that truly over the top increases in fiat money could trigger a hyperinflation.
So given those two possibilities, I’m not anti-gold; it depresses me to say that I have actually started considering whether I might put some of my money into gold. But I would still prefer to remain in both bank deposits and my super fund’s so-called cash accounts."
الاثنين، 6 أكتوبر 2008
Premiums & GLD
I found this comment to this SilverAxis blog of interest:
Is CEF’s “sizable” premium (9% at the moment), really all that high for a verifiable vaulted proxy for real metal (assuming it is), when there is a 45% premium on Silver Eagles and a 14% premium on a 100 oz bars deliverable from Tulving?
The premium on the Central Fund of Canada is interesting compared to GLD, which consistently seems to get questions about whether it really has the gold behind each share. GLD does not trade with such a premium, and sure its open ended nature ensures it closely matches the spot wholesale price, but are not the premiums on CEF and retail physical indicators of the market's assessment of the "safety" of such ways of holding gold relative to other methods like GLD? Of course the market is a voting machine, not a weighing machine so the premium may just indicate mood rather than real risk.
While not having anything more to rely on but GLD's assurances that it has the gold, personally, I consider that since it was created and sponsored by the World Gold Council, which is owned by gold miners (who want the price to go up), that they would not be involved in an ETF that wasn't talking physical off the market (which is ultimately the best way to make the price go up).
Is CEF’s “sizable” premium (9% at the moment), really all that high for a verifiable vaulted proxy for real metal (assuming it is), when there is a 45% premium on Silver Eagles and a 14% premium on a 100 oz bars deliverable from Tulving?
The premium on the Central Fund of Canada is interesting compared to GLD, which consistently seems to get questions about whether it really has the gold behind each share. GLD does not trade with such a premium, and sure its open ended nature ensures it closely matches the spot wholesale price, but are not the premiums on CEF and retail physical indicators of the market's assessment of the "safety" of such ways of holding gold relative to other methods like GLD? Of course the market is a voting machine, not a weighing machine so the premium may just indicate mood rather than real risk.
While not having anything more to rely on but GLD's assurances that it has the gold, personally, I consider that since it was created and sponsored by the World Gold Council, which is owned by gold miners (who want the price to go up), that they would not be involved in an ETF that wasn't talking physical off the market (which is ultimately the best way to make the price go up).
الأحد، 5 أكتوبر 2008
FUD Update
In the FUD blog of 31 August, I suggested two scenarios. I was leaning more towards scenario 2, which was that Mints/Refineries would gear up in “a few months” (fact is industry bar production in sizable quantity is not like turning on a tap) and meet retail demand.
With the credit crisis becoming hot topic since then, scenario 1 (retail market going nuts) is happening quicker than I expected. Manufacturers will respond to this, but it will take time. But, if the retail shortage continues and starts to register on the general public's mind, combined with uncertainty about banks and holding cash, the fact is that after years of poor gold prices in the 1990s, as a whole the industry does not have the capacity to meet the sort of volumes that would from mass market/general public interest in coins and bars. Premiums above spot (and spot means, by definition, the price for wholesale 1000 oz silver and 400 oz gold bar) will increase dramatically as a result. Scenario 1b then becomes a possibility.
See this SilverAxis blog for some comment on the retail market situation.
I would also recommend this other blog from SilverAxis on the US Monetary Base.
With the credit crisis becoming hot topic since then, scenario 1 (retail market going nuts) is happening quicker than I expected. Manufacturers will respond to this, but it will take time. But, if the retail shortage continues and starts to register on the general public's mind, combined with uncertainty about banks and holding cash, the fact is that after years of poor gold prices in the 1990s, as a whole the industry does not have the capacity to meet the sort of volumes that would from mass market/general public interest in coins and bars. Premiums above spot (and spot means, by definition, the price for wholesale 1000 oz silver and 400 oz gold bar) will increase dramatically as a result. Scenario 1b then becomes a possibility.
See this SilverAxis blog for some comment on the retail market situation.
I would also recommend this other blog from SilverAxis on the US Monetary Base.
الأربعاء، 1 أكتوبر 2008
Public interest in private actions
In the complexity of modern commerce it should be recognised that there is no such thing as a "self-regarding" or a private action. ... Every industrial action, however detailed in character, however secretly conducted, has a public import, and necessarily affects the actions and interests of innumerable persons. Indeed it is often precisely in the knowledge of those matters regarded as most private, and most carefully secreted, that the public interest chiefly lies. Yet so firmly rooted in the business mind is the individualistic conception of industry, that any idea of a public development of those important private facts upon which the credit of a particular firm is based, would appear to destroy the very foundation of the commercial fabric.
But, although in the game of commerce a single firm which played its hand openly while others kept theirs well concealed might suffer failure, it is quite evident that the whole community interested in the game would gain immensely if all the hands were on the table. Many, if not most, of the great disasters of modern commercial societies are attributable precisely to the fact that the credit of great business firms, which is pre-eminently an affair of public interest, is regarded as purely private before the crash.
The Evolution of Modern Capitalism: A Study of Machine Production by John A Hobson, published 1906
But, although in the game of commerce a single firm which played its hand openly while others kept theirs well concealed might suffer failure, it is quite evident that the whole community interested in the game would gain immensely if all the hands were on the table. Many, if not most, of the great disasters of modern commercial societies are attributable precisely to the fact that the credit of great business firms, which is pre-eminently an affair of public interest, is regarded as purely private before the crash.
The Evolution of Modern Capitalism: A Study of Machine Production by John A Hobson, published 1906
الاثنين، 29 سبتمبر 2008
Nibbling at the Edges of the Power Structure
For reading material on the plane to Sydney on my recent holiday, I printed out Antal Fekete’s series of Monetary Economics lectures. Illuminating. During my holiday, I also got involved in a discussion on the Kitco forum about the silver shortage. On my return, sitting in my study, Antal’s work and the discussion got me thinking about what motivates those in the "gold community".
Scanning my bookcases my eye fell on two books: one I have read - Paul Hawken’s The Ecology of Commerce (1993) – and one I have only skimmed but been meaning to read - Lewis Mumford’s The Myth of the Machine: The Pentagon of Power (1970). What these two books share with Antal’s work is a strong moral sense, specifically that there is something wrong with the way society works, and a focus on making it better. The best gold advocates (I prefer this term instead of “goldbugs”, which implies emotional irrationality) I feel have this moral element to their work. It takes the form of a belief that fiat currencies, which lack any limits, are detrimental to society. This concept of limits also appears in Paul’s, Lewis’ and Antal’s work.
For Paul, economics needs to take account of, and operate within, the ecological limits of the planet: “the commercial systems of the future must be more like biological systems – self-sustaining, non-wasteful, self-regenerating.” Population and production cannot continue to grow forever, to do so means they take on the characteristics of something else that has no limits on its growth – cancer.
Lewis’ book deals with the dehumanisation of modern technological society and the aggregation of power. He advocates “a displacement of the mechanical world picture with an organic world picture.” His use of biological/organic systems as a model for a sustainable society is something he shares in common with Paul. What I find interesting about organic systems is that they are self-regulating, self-limiting. This I think is ultimately what Antal’s work on a gold-based monetary system is about – using gold as a monetary control mechanism.
Why is this important? Lewis notes “... the increasing translation of both political and economic power into purely abstract quantitative terms: mainly, terms of money. Physical power, applied to coerce other human beings, reaches natural limits at an early stage: if one applies too much, the victim dies. ... But when human functions are converted into abstract, uniform units, ultimately units of energy or money, there are no limits to the amount of power that can be seized, converted, and stored. The peculiarity of money is that it knows no biological limits or ecological restrictions.”
In this analysis, then, if there is no control over abstract money, then there is no control over power accumulation. Lewis goes on to conclude that the power complex’s “... final goal is quantitative abstraction – money or its etherialized and potentially limitless equivalent, credit. The latter, like the ‘faith’ of the Musical Banks in Erewhon, is at bottom only a pious belief that the system will continue indefinitely to work.”
A key aspect of Antal’s work is the power that physical gold money gives the consumer, the average person, over the monetary system. Without the ability to redeem gold, without the ability to hoard gold, there can be no control on power: “When a currency is redeemable in standard gold coins, any individual disturbed by the behaviour of the government or banks can attempt to protect himself by presenting for redemption such paper currency as he may command. It is this power of individuals that holds, or tends to hold, banks and government in check.”
Lewis also makes another interesting observation about the resemblance between the pleasure centre in the brain and the power complex’s obsession with profit and “indifference to other human needs, norms, and goals”. He cites a study where electrodes were inserted into the pleasure centre in laboratory monkeys and control of the current, which stimulated the pleasure centre, was given to the monkeys. What occurred was that the monkeys would continuously press the current regulator, regardless of any other physiological need, even to the point of starvation. He concludes that “the power complex seems to operate on the same principle. The magical electronic stimulus is money” and that both “recognize no quantitative limits ... the abstraction replaces the concrete reality, and therefore those who seek to increase it never know when they have had enough.”
Antal’s insistence on the use of physical gold in the monetary system removes the abstraction, provides the quantitative limit. If “money has proved the most dangerous of modern man’s hallucinogens” according to Lewis, then Antal is suggesting we need to go cold turkey (or is that gold turkey).
Being a practical person, while reading Antal’s work I kept thinking how to turn the theory into practice. The problem is more than one of mechanics, is it one of politics, of public perception. Also, considering the entrenched position of those who benefit from the existing system, how to effect change that will threaten them. Lewis has something interesting to say on this:
“... there is so little prospect of overcoming the defects of the power system by any attack that employs mass organization and mass efforts at persuasion; for these mass methods support the very system they attack. The changes that have so far been effective, and that give promise of further success, are those that have been initiated by animated individual minds, small groups, and local communities nibbling at the edges of the power structure by breaking routines and defying regulations. Such an attack seeks, not to capture the citadel of power, but to withdraw from it and quietly paralyse it. Once such initiatives become widespread, as they at last show signs of becoming, it will restore power and confident authority to its proper source: the human personality and the small face-to-face community.”
Scanning my bookcases my eye fell on two books: one I have read - Paul Hawken’s The Ecology of Commerce (1993) – and one I have only skimmed but been meaning to read - Lewis Mumford’s The Myth of the Machine: The Pentagon of Power (1970). What these two books share with Antal’s work is a strong moral sense, specifically that there is something wrong with the way society works, and a focus on making it better. The best gold advocates (I prefer this term instead of “goldbugs”, which implies emotional irrationality) I feel have this moral element to their work. It takes the form of a belief that fiat currencies, which lack any limits, are detrimental to society. This concept of limits also appears in Paul’s, Lewis’ and Antal’s work.
For Paul, economics needs to take account of, and operate within, the ecological limits of the planet: “the commercial systems of the future must be more like biological systems – self-sustaining, non-wasteful, self-regenerating.” Population and production cannot continue to grow forever, to do so means they take on the characteristics of something else that has no limits on its growth – cancer.
Lewis’ book deals with the dehumanisation of modern technological society and the aggregation of power. He advocates “a displacement of the mechanical world picture with an organic world picture.” His use of biological/organic systems as a model for a sustainable society is something he shares in common with Paul. What I find interesting about organic systems is that they are self-regulating, self-limiting. This I think is ultimately what Antal’s work on a gold-based monetary system is about – using gold as a monetary control mechanism.
Why is this important? Lewis notes “... the increasing translation of both political and economic power into purely abstract quantitative terms: mainly, terms of money. Physical power, applied to coerce other human beings, reaches natural limits at an early stage: if one applies too much, the victim dies. ... But when human functions are converted into abstract, uniform units, ultimately units of energy or money, there are no limits to the amount of power that can be seized, converted, and stored. The peculiarity of money is that it knows no biological limits or ecological restrictions.”
In this analysis, then, if there is no control over abstract money, then there is no control over power accumulation. Lewis goes on to conclude that the power complex’s “... final goal is quantitative abstraction – money or its etherialized and potentially limitless equivalent, credit. The latter, like the ‘faith’ of the Musical Banks in Erewhon, is at bottom only a pious belief that the system will continue indefinitely to work.”
A key aspect of Antal’s work is the power that physical gold money gives the consumer, the average person, over the monetary system. Without the ability to redeem gold, without the ability to hoard gold, there can be no control on power: “When a currency is redeemable in standard gold coins, any individual disturbed by the behaviour of the government or banks can attempt to protect himself by presenting for redemption such paper currency as he may command. It is this power of individuals that holds, or tends to hold, banks and government in check.”
Lewis also makes another interesting observation about the resemblance between the pleasure centre in the brain and the power complex’s obsession with profit and “indifference to other human needs, norms, and goals”. He cites a study where electrodes were inserted into the pleasure centre in laboratory monkeys and control of the current, which stimulated the pleasure centre, was given to the monkeys. What occurred was that the monkeys would continuously press the current regulator, regardless of any other physiological need, even to the point of starvation. He concludes that “the power complex seems to operate on the same principle. The magical electronic stimulus is money” and that both “recognize no quantitative limits ... the abstraction replaces the concrete reality, and therefore those who seek to increase it never know when they have had enough.”
Antal’s insistence on the use of physical gold in the monetary system removes the abstraction, provides the quantitative limit. If “money has proved the most dangerous of modern man’s hallucinogens” according to Lewis, then Antal is suggesting we need to go cold turkey (or is that gold turkey).
Being a practical person, while reading Antal’s work I kept thinking how to turn the theory into practice. The problem is more than one of mechanics, is it one of politics, of public perception. Also, considering the entrenched position of those who benefit from the existing system, how to effect change that will threaten them. Lewis has something interesting to say on this:
“... there is so little prospect of overcoming the defects of the power system by any attack that employs mass organization and mass efforts at persuasion; for these mass methods support the very system they attack. The changes that have so far been effective, and that give promise of further success, are those that have been initiated by animated individual minds, small groups, and local communities nibbling at the edges of the power structure by breaking routines and defying regulations. Such an attack seeks, not to capture the citadel of power, but to withdraw from it and quietly paralyse it. Once such initiatives become widespread, as they at last show signs of becoming, it will restore power and confident authority to its proper source: the human personality and the small face-to-face community.”
I cannot think of a better description than “animated individual minds ... nibbling at the edges of the power structure” for what gold advocates are all about.
الجمعة، 12 سبتمبر 2008
Gary North article on Silver & Hommel
http://www.garynorth.com/public/3992.cfm
Note: the label does not apply to Gary North, but to the subjects of his article.
Update:
15 Sep Additional from Gary: http://www.garynorth.com/public/4002.cfm
16 Sep Hommel's reply to Gary: http://silverstockreport.com/2008/shortagefeedback.html
Note: the label does not apply to Gary North, but to the subjects of his article.
Update:
15 Sep Additional from Gary: http://www.garynorth.com/public/4002.cfm
16 Sep Hommel's reply to Gary: http://silverstockreport.com/2008/shortagefeedback.html
الاثنين، 8 سبتمبر 2008
US Mint Inventory
Interesting article by James Turk about US Mint inability to meet demand for gold coins. He notes that the US Mint's reported working stock has remained at exactly 2,783,218.656 ounces since April 2006. Now I agree with him that this is unlikely, but in addition to his suggested reasons:
* Maybe the Treasury does not want to part with its remaining gold at these current low prices.
* Maybe the Treasury does not want Americans to exchange their fiat dollars for the safe haven of gold as the central banking fiat money scheme implodes.
* Maybe the Mint doesn't have any gold because the 2,783,218.656 ounces were loaned out.
* Maybe the Treasury doesn't have any gold either.
I would like to propose some more mundane reasons:
* Some linking formula in a spreadsheet broke and the government official responsible for putting the numbers together didn't notice it because they don't give a stuff.
* US Mint realised it is competitively sensitive information and don't want to supply it anymore (should still disclose that in the noted to the figures).
Out of interest I used the fms.treas.gov online enquiry and let them know about the discrepancy. No reply as of yet, will be interested to see if I get one or if the numbers get fixed. Will let you know what happens.
* Maybe the Treasury does not want to part with its remaining gold at these current low prices.
* Maybe the Treasury does not want Americans to exchange their fiat dollars for the safe haven of gold as the central banking fiat money scheme implodes.
* Maybe the Mint doesn't have any gold because the 2,783,218.656 ounces were loaned out.
* Maybe the Treasury doesn't have any gold either.
I would like to propose some more mundane reasons:
* Some linking formula in a spreadsheet broke and the government official responsible for putting the numbers together didn't notice it because they don't give a stuff.
* US Mint realised it is competitively sensitive information and don't want to supply it anymore (should still disclose that in the noted to the figures).
Out of interest I used the fms.treas.gov online enquiry and let them know about the discrepancy. No reply as of yet, will be interested to see if I get one or if the numbers get fixed. Will let you know what happens.
الأحد، 7 سبتمبر 2008
Deflation or Inflation?
Two scenarios are receiving increasing attention in assessments of the US economic outlook – inflation and deflation. Some assessments favour a combination of both – such as a severe deflation followed by inflation, or hyperinflation. Others feel that successive development of alternating deflationary and inflationary periods of increasing intensity is more likely, leading ultimately to a collapse of confidence in the US economy.
With the inflationary scenario, the rise in total US debt becomes so extreme that the level of interest rate required to attract ever higher international capital inflows seriously damages GNP growth. Faced with this dilemma, the Federal Reserve will have no choice but to relax its policies (as it is currently doing), and expand money supply with ultimately inflationary consequences. The interest rate reductions will debase the currency by allowing the real value of debt to be inflated away, a collapse in support for the USD abroad, and together with a retreat into gold by many USD holders.
With the deflationary scenario, proponents see similarities between the 1930s and the current situation. In their scenario, the debt explosion becomes too large to be serviced in many parts of the economy. Asset liquidation becomes endemic, forcing prices down, creating debt deflation in a vicious downward spiral with continuing attrition of debt collateral. Personal incomes and consumer confidence plunge, causing a contraction in spending. As faith in the USD evaporates, there is a flight into gold and other safe haven currencies.
The position of the USD as the major international reserve currency is pivotal to the unfolding of either scenario. The prospect of currency debasement through a monetary reflation by the Federal Reserve would undoubtedly provoke a flight from the dollar by foreign investors. Such a flight would cause a quick reversal of Federal Reserve policy and a surge in domestic interest rates, in an attempt to maintain investor confidence. This move would eventually undermine the corporate sector by raising debt servicing costs in an economy in recession, thereby ultimately triggering a credit collapse with consequent deflationary effects.
It is not possible to prove or disprove these theories and scenarios. Nonetheless, it is sufficient to note that the US has been on a track of increasing financial instability for 40 years and that inflation has been checked only by periodic credit crunches which have triggered debt crises, followed by another round of monetary stimulus.
Nevertheless, the evidence now accumulating in the financial and banking sectors suggests that the outcome is more likely to be a deflationary depression. There is no evidence of new developments in the US economy at this time that might transform international disinterest in the USD. Consequently, the US deficit will have to be internally funded in the future – unless the authorities choose some unforeseen strategy such a mobilising US gold reserves into gold swaps. The question is, however, whether internal funding is a practical option under the circumstances?
The old remedy of inflating out of this predicament by issuing cheaper and cheaper money into the banking system simply will not work this time. The reason is simple – the country is already awash with too many debtors.
Corporations, individual, and the Federal government are already suffering from a gigantic surfeit of debt, from the highest debt total to GNP levels in recent US history. The Federal Reserve can no longer make the inverted debt pyramid grow because the debtors in it are too illiquid – they are unable to go further into debt – no matter how attractive the authorities make interest rates. The lever of expansionary money has been pulled once too often. The next phase will be the rapid descent of investors down the inverted debt pyramid from illiquid assets such as property into quality money – including gold – at the inverted apex. This phase will be prompted by a collapse in confidence in the dollar – triggered possibly by the collapse of a major bank, the stock market, and/or the bond market.
In any case, as it is made clear above, the situation now emerging has all the hallmarks of an insoluble dilemma for the US authorities. Against the background of the global capital crunch, the decline of foreign savings to fund the increasing deficit, the growing global economic contraction, the deflationary or inflationary scenarios are both insoluble. There are no solutions that do not involve a dramatic transformation of the USD in international financial markets, and its role as the reserve currency. Both scenarios ultimately lead to a flight to quality money and liquidity, out of the USD and into gold and other currencies.
------
Unfortunately I cannot take credit for the insightful words above. They were written by my former boss - Michael Kile. What is shocking is that they were written in February 1991, one chapter in a 40 page document titled "The case for gold in the 1990s", published by the Perth Mint.
Consider that I had only to remove a few sentences (which included giveaway dates and figures) for it to read as if it was written in 2008. It is worth re-reading it with the understanding that the analysis is 17 years old and realise that during those 17 years the US got away with "the old remedy of inflating out of this predicament by issuing cheaper and cheaper money".
The question is: will the US get away with it this time, or will Mr Kile be finally correct that the old remedy "simply will not work this time"?
With the inflationary scenario, the rise in total US debt becomes so extreme that the level of interest rate required to attract ever higher international capital inflows seriously damages GNP growth. Faced with this dilemma, the Federal Reserve will have no choice but to relax its policies (as it is currently doing), and expand money supply with ultimately inflationary consequences. The interest rate reductions will debase the currency by allowing the real value of debt to be inflated away, a collapse in support for the USD abroad, and together with a retreat into gold by many USD holders.
With the deflationary scenario, proponents see similarities between the 1930s and the current situation. In their scenario, the debt explosion becomes too large to be serviced in many parts of the economy. Asset liquidation becomes endemic, forcing prices down, creating debt deflation in a vicious downward spiral with continuing attrition of debt collateral. Personal incomes and consumer confidence plunge, causing a contraction in spending. As faith in the USD evaporates, there is a flight into gold and other safe haven currencies.
The position of the USD as the major international reserve currency is pivotal to the unfolding of either scenario. The prospect of currency debasement through a monetary reflation by the Federal Reserve would undoubtedly provoke a flight from the dollar by foreign investors. Such a flight would cause a quick reversal of Federal Reserve policy and a surge in domestic interest rates, in an attempt to maintain investor confidence. This move would eventually undermine the corporate sector by raising debt servicing costs in an economy in recession, thereby ultimately triggering a credit collapse with consequent deflationary effects.
It is not possible to prove or disprove these theories and scenarios. Nonetheless, it is sufficient to note that the US has been on a track of increasing financial instability for 40 years and that inflation has been checked only by periodic credit crunches which have triggered debt crises, followed by another round of monetary stimulus.
Nevertheless, the evidence now accumulating in the financial and banking sectors suggests that the outcome is more likely to be a deflationary depression. There is no evidence of new developments in the US economy at this time that might transform international disinterest in the USD. Consequently, the US deficit will have to be internally funded in the future – unless the authorities choose some unforeseen strategy such a mobilising US gold reserves into gold swaps. The question is, however, whether internal funding is a practical option under the circumstances?
The old remedy of inflating out of this predicament by issuing cheaper and cheaper money into the banking system simply will not work this time. The reason is simple – the country is already awash with too many debtors.
Corporations, individual, and the Federal government are already suffering from a gigantic surfeit of debt, from the highest debt total to GNP levels in recent US history. The Federal Reserve can no longer make the inverted debt pyramid grow because the debtors in it are too illiquid – they are unable to go further into debt – no matter how attractive the authorities make interest rates. The lever of expansionary money has been pulled once too often. The next phase will be the rapid descent of investors down the inverted debt pyramid from illiquid assets such as property into quality money – including gold – at the inverted apex. This phase will be prompted by a collapse in confidence in the dollar – triggered possibly by the collapse of a major bank, the stock market, and/or the bond market.
In any case, as it is made clear above, the situation now emerging has all the hallmarks of an insoluble dilemma for the US authorities. Against the background of the global capital crunch, the decline of foreign savings to fund the increasing deficit, the growing global economic contraction, the deflationary or inflationary scenarios are both insoluble. There are no solutions that do not involve a dramatic transformation of the USD in international financial markets, and its role as the reserve currency. Both scenarios ultimately lead to a flight to quality money and liquidity, out of the USD and into gold and other currencies.
------
Unfortunately I cannot take credit for the insightful words above. They were written by my former boss - Michael Kile. What is shocking is that they were written in February 1991, one chapter in a 40 page document titled "The case for gold in the 1990s", published by the Perth Mint.
Consider that I had only to remove a few sentences (which included giveaway dates and figures) for it to read as if it was written in 2008. It is worth re-reading it with the understanding that the analysis is 17 years old and realise that during those 17 years the US got away with "the old remedy of inflating out of this predicament by issuing cheaper and cheaper money".
The question is: will the US get away with it this time, or will Mr Kile be finally correct that the old remedy "simply will not work this time"?
الخميس، 4 سبتمبر 2008
Reply to a Reply
From the start, I’d like to direct readers to my About This Blog. As I say there, my blog is not a Perth Mint mouthpiece and all my comments are my personal opinion and not endorsed by the Mint in any way. If you have a question about their operations or a complaint, ask them directly yourself, I am not their complaints department.
It is also probably important to be clear that I am bullish on gold and silver, although I take a long term view. If you sense I’m taking a bearish view that may be because I am a contrarian personality type and thus have a tendency always to look at the other side of any dominant view (and challenge my own views), as I believe the truth usually lies between the extremes.
Jason writes: I also think its normal for there to be shortages of silver and gold when inflation is raging out of control, and when the markets are manipulated, but I suppose we don't agree on reasons like that.
The comments I’ve made don’t exclude inflation or manipulation as factors. It is unfortunate that many have no confidence in COMEX; thankfully Australia does not have any precious metal futures markets. All I’m looking to do is to contribute some additional things to consider that no one else in the “gold internet community” talks about. Some of these factors may be important to the shortage of (retail) silver, some not so. It is just extra information that I hope fills out the picture, as no one knows everything.
Jason writes: That's insane. Right downstairs, they often run out of 100 oz. bars, and reportedly have no 1000 oz. bars for sale.
I asked our Shop if they have 100 oz bars and they said they have them available, so instead of relying on Jason’s “reportedly”, all I can say is that if you want to buy silver, ring our Shop up and buy it. Once your money clears, they'll ship. At the end of the day, my words and Jason’s words don’t matter – actions speak louder than words. And the only action that matters is delivery. Period.
Jason writes: Besides, that's a lie. Wholesale quantities in silver are 1 silver futures contract of 5000 ounces, which is about 1/6th of a tonne, not 20 tonnes! Further, I note that Nigel did NOT say he would SELL 20 tonnes of silver. He only wants to "deal" in that, minimum. He probably needs to buy that much to pull his fat out of the fire, as I will explain below.
The definition of “deal” by Encarta Dictionary within Microsoft Word is “an agreement, arrangement, or transaction, usually one that benefits all the parties involved”. This includes BOTH buying and selling. But to be clear, Nigel will SELL physical 1000 oz silver bars. Also, what I said was "he will do deals for a minimum". I did not say that "the wholesale market only deals in this minimum", you read that into my statement. That is just his minimum. He is the Treasurer for the whole Mint, not a retail bullion dealer; this is the deal size he operates at. Of course trading occurs in the wholesale market for quantities lesser than that. My point was that bulk quantities of silver are available in the over the counter (OTC) spot market. They are, and Nigel will supply them. Period.
Jason writes: AGR Matthey closed their silver operations!
Incorrect. AGR Matthey have not closed their “silver operations”. I quote from a letter dated 18 August 2008 to AGR Matthey’s customers:
“The Board of AGR Matthey has taken the decision to exit the jewellery business. AGR Matthey will no longer manufacture jewellery products in Australia or New Zealand. … The industrial business (medical and brazing alloys) will continue. … Arrangements are being made for fine gold grain (minimum order quantity 1 kilogram) to be made available through Perth to wholesale customers with delivery via Brinks premises on the eastern seaboard, provided there is sufficient demand. Larger secondary refining customers may be serviced through the refinery in WA.”
AGR Matthey refines around 10% of worldwide mine production and silver is a by product of that refining. It is not reliant on sourcing gold or silver from the general public. Australia is a net exporter of precious metals – in 2006/07 Australian mine production was 1674 tonnes with 431 tonnes of refined silver exported according to ABARE. Logically this means that there is enough silver to meet domestic demand.
Since the rest of your article with its “might have been” type speculations hinge on this error of fact about AGR Matthey, they are also incorrect and thus don’t warrant a response.
The Perth Mint’s unallocated facility is not the be all and end all of the organisation; the Mint sells bars, coins, numismatic products, unallocated storage, allocated storage, and an Australian Stock Exchange listed gold product – however customers want to buy their precious metal, the Mint strives to service it. Is the Mint perfect? No. But everyone who works there is passionate about precious metals and supporting the industry and is proud to work there. And so am I.
It is also probably important to be clear that I am bullish on gold and silver, although I take a long term view. If you sense I’m taking a bearish view that may be because I am a contrarian personality type and thus have a tendency always to look at the other side of any dominant view (and challenge my own views), as I believe the truth usually lies between the extremes.
Jason writes: I also think its normal for there to be shortages of silver and gold when inflation is raging out of control, and when the markets are manipulated, but I suppose we don't agree on reasons like that.
The comments I’ve made don’t exclude inflation or manipulation as factors. It is unfortunate that many have no confidence in COMEX; thankfully Australia does not have any precious metal futures markets. All I’m looking to do is to contribute some additional things to consider that no one else in the “gold internet community” talks about. Some of these factors may be important to the shortage of (retail) silver, some not so. It is just extra information that I hope fills out the picture, as no one knows everything.
Jason writes: That's insane. Right downstairs, they often run out of 100 oz. bars, and reportedly have no 1000 oz. bars for sale.
I asked our Shop if they have 100 oz bars and they said they have them available, so instead of relying on Jason’s “reportedly”, all I can say is that if you want to buy silver, ring our Shop up and buy it. Once your money clears, they'll ship. At the end of the day, my words and Jason’s words don’t matter – actions speak louder than words. And the only action that matters is delivery. Period.
Jason writes: Besides, that's a lie. Wholesale quantities in silver are 1 silver futures contract of 5000 ounces, which is about 1/6th of a tonne, not 20 tonnes! Further, I note that Nigel did NOT say he would SELL 20 tonnes of silver. He only wants to "deal" in that, minimum. He probably needs to buy that much to pull his fat out of the fire, as I will explain below.
The definition of “deal” by Encarta Dictionary within Microsoft Word is “an agreement, arrangement, or transaction, usually one that benefits all the parties involved”. This includes BOTH buying and selling. But to be clear, Nigel will SELL physical 1000 oz silver bars. Also, what I said was "he will do deals for a minimum". I did not say that "the wholesale market only deals in this minimum", you read that into my statement. That is just his minimum. He is the Treasurer for the whole Mint, not a retail bullion dealer; this is the deal size he operates at. Of course trading occurs in the wholesale market for quantities lesser than that. My point was that bulk quantities of silver are available in the over the counter (OTC) spot market. They are, and Nigel will supply them. Period.
Jason writes: AGR Matthey closed their silver operations!
Incorrect. AGR Matthey have not closed their “silver operations”. I quote from a letter dated 18 August 2008 to AGR Matthey’s customers:
“The Board of AGR Matthey has taken the decision to exit the jewellery business. AGR Matthey will no longer manufacture jewellery products in Australia or New Zealand. … The industrial business (medical and brazing alloys) will continue. … Arrangements are being made for fine gold grain (minimum order quantity 1 kilogram) to be made available through Perth to wholesale customers with delivery via Brinks premises on the eastern seaboard, provided there is sufficient demand. Larger secondary refining customers may be serviced through the refinery in WA.”
AGR Matthey refines around 10% of worldwide mine production and silver is a by product of that refining. It is not reliant on sourcing gold or silver from the general public. Australia is a net exporter of precious metals – in 2006/07 Australian mine production was 1674 tonnes with 431 tonnes of refined silver exported according to ABARE. Logically this means that there is enough silver to meet domestic demand.
Since the rest of your article with its “might have been” type speculations hinge on this error of fact about AGR Matthey, they are also incorrect and thus don’t warrant a response.
The Perth Mint’s unallocated facility is not the be all and end all of the organisation; the Mint sells bars, coins, numismatic products, unallocated storage, allocated storage, and an Australian Stock Exchange listed gold product – however customers want to buy their precious metal, the Mint strives to service it. Is the Mint perfect? No. But everyone who works there is passionate about precious metals and supporting the industry and is proud to work there. And so am I.
الثلاثاء، 2 سبتمبر 2008
Jason Hommel Reply
Jason Hommel has made some comments to my blog of 31 August that I think are important. His questions/statements are in italics and my replies below.
Yes, but where do you sit? Where are those 1000 oz. bars that kitco and perth can't seem to be able to find for customers who want them? Why do Perth/Kitco have a shortage of 1000 oz. silver bars?
It may not be clear from my blog that I work at the Perth Mint. I have updated my profile to include my LinkedIn profile and “About This Blog” link to be clear in what capacity I do this blog. I have also included a picture of my favourite new coin, it is a Good Fortune coin.
When I say that wholesale bars are available, it means in wholesale quantities. I cannot speak for Kitco, but I went upstairs and spoke to the Treasurer and he will do deals for a minimum of 20 tonnes of silver and 1 tonne of gold. Call Nigel Moffatt on (08) 9421 7403. Price will be on a deal-by-deal basis.
Depository have 1000 oz and 100 oz silver bars in stock for their clients to convert to allocate or collect. If you are a Depository client you have their contact details.
I also walked downstairs and spoke to the manager of our retail shop and they sell 100 oz bars for silver value + $74 per bar. They don’t really deal in 1000 oz bars because they are odd weight which doesn’t work well with their retail computer system and they are bulky, but I assume that most would rather 100 oz than 1000 oz anyway. Call Cathy or Liselle on (08) 9421 7428.
(Aside: while you may define collusion as something illegal, others may define it as anything that is against free market principles.)
The definition I used came from an online dictionary. See http://en.wikipedia.org/wiki/Collusion for another definition. The key elements are “secretive” and “fraud”. It does not mean “against free market principles”.
I would like to trade bullion in a free market manner, but it seems most everyone else want to "lock in" a guarantee of some sort or another.
I think it is entirely in keeping with free market principles that person A and person B have the freedom to enter into any agreement they see fit that does not hurt anyone else’s rights. There is nothing stopping person R (for retail buyer) from offering a higher price to A to secure supply of A’s silver. Anyway, even if A has committed to supply silver to B, there is nothing stopping B from selling that so acquired silver to R via auction or at a higher price.
The agreement between A and B may restrict A from supplying to R (which was all I was trying to explain) but not B from supplying to R. I therefore do not see any fraud being perpetrated against R or any restriction of the free market. In the end, the silver ends up in someone’s hands and they are free to auction it off to the highest bidder as you have recommended.
It's been my experience that people in the industry, the coin dealers, over-value their own direct personal experience, and have trouble seeing the big picture. They see the public selling silver to them, and thus, from their view, there is a "glut" … where public buying increased ten fold, and they've been turning away customers, and trying to buy from refineries, instead of sell to them, in all of 2008.There is an expression used to describe such a viewpoint. They can't see the forest because the trees are in their way.
I suppose I agree with you, but not sure this is a problem. The coin dealers operate at the end of the precious metal industry value chain so deal in “trees”, that is their business. You are exactly right, they either see net buying or net selling and either net buy or net sell from/to their source of product one step up in the value chain. This is good because it sends a signal about the volume of demand back to that source. I don’t know that they need to see the forest to do their job properly.
Yes, but where do you sit? Where are those 1000 oz. bars that kitco and perth can't seem to be able to find for customers who want them? Why do Perth/Kitco have a shortage of 1000 oz. silver bars?
It may not be clear from my blog that I work at the Perth Mint. I have updated my profile to include my LinkedIn profile and “About This Blog” link to be clear in what capacity I do this blog. I have also included a picture of my favourite new coin, it is a Good Fortune coin.
When I say that wholesale bars are available, it means in wholesale quantities. I cannot speak for Kitco, but I went upstairs and spoke to the Treasurer and he will do deals for a minimum of 20 tonnes of silver and 1 tonne of gold. Call Nigel Moffatt on (08) 9421 7403. Price will be on a deal-by-deal basis.
Depository have 1000 oz and 100 oz silver bars in stock for their clients to convert to allocate or collect. If you are a Depository client you have their contact details.
I also walked downstairs and spoke to the manager of our retail shop and they sell 100 oz bars for silver value + $74 per bar. They don’t really deal in 1000 oz bars because they are odd weight which doesn’t work well with their retail computer system and they are bulky, but I assume that most would rather 100 oz than 1000 oz anyway. Call Cathy or Liselle on (08) 9421 7428.
(Aside: while you may define collusion as something illegal, others may define it as anything that is against free market principles.)
The definition I used came from an online dictionary. See http://en.wikipedia.org/wiki/Collusion for another definition. The key elements are “secretive” and “fraud”. It does not mean “against free market principles”.
I would like to trade bullion in a free market manner, but it seems most everyone else want to "lock in" a guarantee of some sort or another.
I think it is entirely in keeping with free market principles that person A and person B have the freedom to enter into any agreement they see fit that does not hurt anyone else’s rights. There is nothing stopping person R (for retail buyer) from offering a higher price to A to secure supply of A’s silver. Anyway, even if A has committed to supply silver to B, there is nothing stopping B from selling that so acquired silver to R via auction or at a higher price.
The agreement between A and B may restrict A from supplying to R (which was all I was trying to explain) but not B from supplying to R. I therefore do not see any fraud being perpetrated against R or any restriction of the free market. In the end, the silver ends up in someone’s hands and they are free to auction it off to the highest bidder as you have recommended.
It's been my experience that people in the industry, the coin dealers, over-value their own direct personal experience, and have trouble seeing the big picture. They see the public selling silver to them, and thus, from their view, there is a "glut" … where public buying increased ten fold, and they've been turning away customers, and trying to buy from refineries, instead of sell to them, in all of 2008.There is an expression used to describe such a viewpoint. They can't see the forest because the trees are in their way.
I suppose I agree with you, but not sure this is a problem. The coin dealers operate at the end of the precious metal industry value chain so deal in “trees”, that is their business. You are exactly right, they either see net buying or net selling and either net buy or net sell from/to their source of product one step up in the value chain. This is good because it sends a signal about the volume of demand back to that source. I don’t know that they need to see the forest to do their job properly.
الأحد، 31 أغسطس 2008
FUD. Fear, uncertainty, doubt.
“FUD. Fear, uncertainty, doubt. Salesmen, politicians, markets thrive on it and create it whenever possible” - TinyTim, 28 Aug 02:12 PM, comment on Sorry, There Is No Silver Conspiracy
A fine little dispute has recently been stewing on the net around what is happening in the gold and silver market, prompted by the heavy correction in their prices. I’ve been following it here:
The Disconnect Between Supply and Demand in Gold & Silver Markets – James Conrad, 18 Aug
Gold Refining Squeezes Silver Bar Production? – Jason Hommel, 21 Aug
The Strange Case of Dr. GLD & Mr. Bullion – Graham Summers, 22 Aug
Ignoring the Free Market Causes Shortages – Jason Hommel, 23 Aug
The Disconnect Between Supply and Demand in Gold and Silver Markets, Part II – James Conrad, 25 Aug
Sorry, There Is No Silver Conspiracy – Otto Rock, 27 Aug
Independence Day: Decoupling Gold and Silver from the Dollar – James Conrad, 27 Aug
The Great Gold, Silver Conspiracy Explained – Mike Shedlock, 27 Aug
How to Explain Fiat Currency to Silverbugs – Otto Rock, 28 Aug
Conspiracy Theory Psychology – Mike Shedlock, 28 Aug
Gold Sale Spurs Manipulation Talk – Mike Shedlock, 30 Aug
Where are the insider admissions about gold? Right here – Chris Powell, 30 Aug
People seem to sit on either end of a number of propositions (doesn’t seem that shades of grey or agnostic positions are accepted), some agreeing with all, some disagreeing with all, some picking and choosing:
A lot of the hype stems from the interpretation that because it is difficult to get hold of retail forms of gold or silver (e.g. 1oz coins, 100oz silver bars) that there is a “shortage” of gold and silver. I think it has now been accepted that there is no shortage of gold and silver in the wholesale markets (that is, for 400oz gold and 1000oz silver bars). This should be obvious if you consider the fact that miners churn out 2000+ tonnes a year. What we have is a shortage of retail forms. It is also worth noting that demand and supply is also localised in the gold and silver markets. So you really need to be specific instead of just saying “shortage” – you need to indicate of what form and in what location.
Anyway, this is understandably frustrating for the retail buyer and naturally leads to questions, and attempted answers, as to why this has occurred and why manufacturers are not responding, say by auctioning off the limited quantities they have, or increasing production. I mean, they are profit seeking entities, are they not? Why would they be missing out on extra profit from all this demand?
Now one thing I can agree on is “profit seeking”, these businesses are not going to pass up profit. So how to explain their behaviour? For those who are puzzled, they only explanations can seem 1) they are idiots or 2) they are part of some conspiracy. Let me suggest an alternative explanation (and I use gold here to also include silver).
The gold industry's production capacity, distribution networks, and client base is set up to service a certain ratio of retail versus wholesale volumes. This is to be expected - if you are making big dollar decisions on equipment you will do so based on past demand patterns. There are long-term relationships in place with major distributors and clients. Production processes are set up to service this demand and with a bit of flexibility to service the shifts in this demand in response to price movements.
Now I don’t doubt for a moment that the demand has increased for retail forms of gold – there is plenty of proof of this in the above articles and discussion forums. With a sort of fixed production plan at the source manufacturers and some lead time/delay from source to end buyer, it is not surprising that retail coins and bars can run out from time to time. Now don’t get offended if you are a retail buyer, but in the big scheme of things all of your purchases added up are not that important volume wise. So the initial response by the industry is, short-term blip, it has happened before, production will catch up with demand, backlog orders will be cleared and thing will be back to normal before too soon. From my side of the fence, I’ve seen these surges in demand occur (plenty of times without running out of stock) and then subside. This is the nature of the market, it responds to prices, or drives them. It is difficult to compare this market to other goods (eg milk), because their prices don’t fluctuate like precious metals. When demand is stable, so are prices and so is supply.
OK, so based on past experience, people in the industry don’t get all excited when they run out of small coins and bars. This explains their lack of response to the initial demand. Then the demand continues, and the backorders increase, delivery times increase. Why does the industry not respond now? Well they are still not sure if this increase in demand will be sustained. Also consider that they don’t spend their time reading all these commentaries or watching ebay, so they don’t see the initial increase in premiums. The price signals are not getting through. But even if they are aware of the increasing interest in retail forms of gold (and increasing prices), they still don’t response. Why?
Manufacturers of gold and silver have long-term customers who buy in volume. Maybe the price they are receiving from these customers is lower than what they can sell their retail products at, but they have a difficult decision. Sure they could sell to retail buyers, or make their long-term customers compete at auction for their production with the retail buyers, but they worry that when the demand declines (as they have seen occur in the past) you retail buyers won’t be there anymore but their long-term customers will, and they will remember how the manufacturer “screwed” them and they will either take their business elsewhere or screw them back in turn. So the manufacturer, based on past experience of the fickleness of retail demand, decides to continue to supply their long-term customers. You also have to consider that some may have supply agreements, either for volume or at a price, that they cannot break.
Some manufacturers may have relatively flexible production processes and can switch production capacity to retail forms, but there is still a cost involved. Again, the delay in responding may be a result of the executives of these firms not being sure about the longevity of the demand and switching capacity also means that they have to cut back on some other products, products that they supply to their long-term customers.
What about putting on extra capacity? As you can imagine, capital expenditure decisions and bringing on new capacity is not like turning on a tap, there is a big lag in getting additional the machines delivered and operational. Again, the question that executives in the refineries and other manufacturers would be asking themselves is whether the increase in retail demand is permanent or temporary. If temporary, they don't want to waste money on capacity that will be left idle.
Given the above, the question then becomes: how long before the industry responds? This is hard to say. I see us at a crossroad - the future will take one of two paths:
Scenario 1
Given the natural conservatism described above and the continuing retail demand we see continuing shortages of retail forms of gold and silver, probably occurring in a stop/start fashion as one supplier catches up and then another runs out. This erratic supply increases premiums for retail bars and coins. This fans further hysteria about "shortages", driving more retail demand. Industry executives see the demand and premiums and finally see profit and decide to ramp up production. During the delay in getting capacity online (some quicker than others depending on how their production process are set up) the hysteria continues, increasing retail physical demand.
The retail shortage “story" is picked up by more commentators and increasingly by mainstream media, who in their ignorance create the perception of a shortage of wholesale physical. Fanned on by retail dealers who are making a killing from marking up bars and coins, conspiracists who think this will be the straw that will break the (short) camel’s back, and those who recommended investors into gold and silver, this drives average investor and speculators into the ETFs (because they are comfortable with this investment form and don’t have any idea how to buy physical even if they wanted to) which drives the gold price even higher. Eventually capacity will come online and retail bars and coins are supplied and stories of shortages dry up. Now there are two possible end games:
a) The hysteria process reverses as product is easily available. Perceptions change, there is now "oversupply" of gold, talk of similarities with the 1980s bubble, demand contracts and price drops, savagely. Lots of egg on certain faces.
b) Product is easily available but that has no effect. Retail demand is at a new level and remains there, the “shorts” have been broken, gold has moved to a new “level”, reclaimed its inflation adjusted price. The public are aware of the gold and silver again, distrustful of fiat currencies. A new Golden Age has dawned. Lots of egg on certain faces.
Scenario 2
Retail demand for gold and silver, while significantly higher than in the past, is not significant compared to the wholesale physical market to really move the physical spot price. Combined with the possibility that suppliers may be more flexible in production capacity than we suspect, product is brought onto the market in a few months. "Shortage" stories dry up, retail demand drops. Lots of egg on certain faces.
Either way, someone is going to be wrong. Unfortunately, only time will tell so we will have to wait to find out who. The second half of 2008 will certainly be interesting.
A fine little dispute has recently been stewing on the net around what is happening in the gold and silver market, prompted by the heavy correction in their prices. I’ve been following it here:
The Disconnect Between Supply and Demand in Gold & Silver Markets – James Conrad, 18 Aug
Gold Refining Squeezes Silver Bar Production? – Jason Hommel, 21 Aug
The Strange Case of Dr. GLD & Mr. Bullion – Graham Summers, 22 Aug
Ignoring the Free Market Causes Shortages – Jason Hommel, 23 Aug
The Disconnect Between Supply and Demand in Gold and Silver Markets, Part II – James Conrad, 25 Aug
Sorry, There Is No Silver Conspiracy – Otto Rock, 27 Aug
Independence Day: Decoupling Gold and Silver from the Dollar – James Conrad, 27 Aug
The Great Gold, Silver Conspiracy Explained – Mike Shedlock, 27 Aug
How to Explain Fiat Currency to Silverbugs – Otto Rock, 28 Aug
Conspiracy Theory Psychology – Mike Shedlock, 28 Aug
Gold Sale Spurs Manipulation Talk – Mike Shedlock, 30 Aug
Where are the insider admissions about gold? Right here – Chris Powell, 30 Aug
People seem to sit on either end of a number of propositions (doesn’t seem that shades of grey or agnostic positions are accepted), some agreeing with all, some disagreeing with all, some picking and choosing:
- There is a shortage of retail forms of gold and silver.
- Prices for retail forms of gold and silver are high.
- COMEX price is different from retail prices, therefore COMEX price is “fake”.
- Conspiracy to manipulate the gold and silver markets (by bullion banks for profit, by bullion banks on behalf of central banks).
- Etc, etc
A lot of the hype stems from the interpretation that because it is difficult to get hold of retail forms of gold or silver (e.g. 1oz coins, 100oz silver bars) that there is a “shortage” of gold and silver. I think it has now been accepted that there is no shortage of gold and silver in the wholesale markets (that is, for 400oz gold and 1000oz silver bars). This should be obvious if you consider the fact that miners churn out 2000+ tonnes a year. What we have is a shortage of retail forms. It is also worth noting that demand and supply is also localised in the gold and silver markets. So you really need to be specific instead of just saying “shortage” – you need to indicate of what form and in what location.
Anyway, this is understandably frustrating for the retail buyer and naturally leads to questions, and attempted answers, as to why this has occurred and why manufacturers are not responding, say by auctioning off the limited quantities they have, or increasing production. I mean, they are profit seeking entities, are they not? Why would they be missing out on extra profit from all this demand?
Now one thing I can agree on is “profit seeking”, these businesses are not going to pass up profit. So how to explain their behaviour? For those who are puzzled, they only explanations can seem 1) they are idiots or 2) they are part of some conspiracy. Let me suggest an alternative explanation (and I use gold here to also include silver).
The gold industry's production capacity, distribution networks, and client base is set up to service a certain ratio of retail versus wholesale volumes. This is to be expected - if you are making big dollar decisions on equipment you will do so based on past demand patterns. There are long-term relationships in place with major distributors and clients. Production processes are set up to service this demand and with a bit of flexibility to service the shifts in this demand in response to price movements.
Now I don’t doubt for a moment that the demand has increased for retail forms of gold – there is plenty of proof of this in the above articles and discussion forums. With a sort of fixed production plan at the source manufacturers and some lead time/delay from source to end buyer, it is not surprising that retail coins and bars can run out from time to time. Now don’t get offended if you are a retail buyer, but in the big scheme of things all of your purchases added up are not that important volume wise. So the initial response by the industry is, short-term blip, it has happened before, production will catch up with demand, backlog orders will be cleared and thing will be back to normal before too soon. From my side of the fence, I’ve seen these surges in demand occur (plenty of times without running out of stock) and then subside. This is the nature of the market, it responds to prices, or drives them. It is difficult to compare this market to other goods (eg milk), because their prices don’t fluctuate like precious metals. When demand is stable, so are prices and so is supply.
OK, so based on past experience, people in the industry don’t get all excited when they run out of small coins and bars. This explains their lack of response to the initial demand. Then the demand continues, and the backorders increase, delivery times increase. Why does the industry not respond now? Well they are still not sure if this increase in demand will be sustained. Also consider that they don’t spend their time reading all these commentaries or watching ebay, so they don’t see the initial increase in premiums. The price signals are not getting through. But even if they are aware of the increasing interest in retail forms of gold (and increasing prices), they still don’t response. Why?
Manufacturers of gold and silver have long-term customers who buy in volume. Maybe the price they are receiving from these customers is lower than what they can sell their retail products at, but they have a difficult decision. Sure they could sell to retail buyers, or make their long-term customers compete at auction for their production with the retail buyers, but they worry that when the demand declines (as they have seen occur in the past) you retail buyers won’t be there anymore but their long-term customers will, and they will remember how the manufacturer “screwed” them and they will either take their business elsewhere or screw them back in turn. So the manufacturer, based on past experience of the fickleness of retail demand, decides to continue to supply their long-term customers. You also have to consider that some may have supply agreements, either for volume or at a price, that they cannot break.
Some manufacturers may have relatively flexible production processes and can switch production capacity to retail forms, but there is still a cost involved. Again, the delay in responding may be a result of the executives of these firms not being sure about the longevity of the demand and switching capacity also means that they have to cut back on some other products, products that they supply to their long-term customers.
What about putting on extra capacity? As you can imagine, capital expenditure decisions and bringing on new capacity is not like turning on a tap, there is a big lag in getting additional the machines delivered and operational. Again, the question that executives in the refineries and other manufacturers would be asking themselves is whether the increase in retail demand is permanent or temporary. If temporary, they don't want to waste money on capacity that will be left idle.
Given the above, the question then becomes: how long before the industry responds? This is hard to say. I see us at a crossroad - the future will take one of two paths:
Scenario 1
Given the natural conservatism described above and the continuing retail demand we see continuing shortages of retail forms of gold and silver, probably occurring in a stop/start fashion as one supplier catches up and then another runs out. This erratic supply increases premiums for retail bars and coins. This fans further hysteria about "shortages", driving more retail demand. Industry executives see the demand and premiums and finally see profit and decide to ramp up production. During the delay in getting capacity online (some quicker than others depending on how their production process are set up) the hysteria continues, increasing retail physical demand.
The retail shortage “story" is picked up by more commentators and increasingly by mainstream media, who in their ignorance create the perception of a shortage of wholesale physical. Fanned on by retail dealers who are making a killing from marking up bars and coins, conspiracists who think this will be the straw that will break the (short) camel’s back, and those who recommended investors into gold and silver, this drives average investor and speculators into the ETFs (because they are comfortable with this investment form and don’t have any idea how to buy physical even if they wanted to) which drives the gold price even higher. Eventually capacity will come online and retail bars and coins are supplied and stories of shortages dry up. Now there are two possible end games:
a) The hysteria process reverses as product is easily available. Perceptions change, there is now "oversupply" of gold, talk of similarities with the 1980s bubble, demand contracts and price drops, savagely. Lots of egg on certain faces.
b) Product is easily available but that has no effect. Retail demand is at a new level and remains there, the “shorts” have been broken, gold has moved to a new “level”, reclaimed its inflation adjusted price. The public are aware of the gold and silver again, distrustful of fiat currencies. A new Golden Age has dawned. Lots of egg on certain faces.
Scenario 2
Retail demand for gold and silver, while significantly higher than in the past, is not significant compared to the wholesale physical market to really move the physical spot price. Combined with the possibility that suppliers may be more flexible in production capacity than we suspect, product is brought onto the market in a few months. "Shortage" stories dry up, retail demand drops. Lots of egg on certain faces.
Either way, someone is going to be wrong. Unfortunately, only time will tell so we will have to wait to find out who. The second half of 2008 will certainly be interesting.
الأحد، 24 أغسطس 2008
"The" Gold Price
The recent US Mint coin production suspension has, unsurprisingly, resulted in a bit of a premium developing on small forms of gold and silver. A few people have interpreted this as an increase in the "real" price of gold compared to the "fake" price (ie COMEX) and proof of manipulation.
My view is that coin prices are not the real price of gold and should thus not be accorded too much weight in trying to analyse what is happening in the gold market, particularly as it is small compared to the overall market. There are various prices for gold:
1) Spot Price. This is the price for wholesale 400oz bars for immediate delivery (actually, the market works on 2 day settlement) usually ex-London as traded in the over the counter (OTC) market. This is the "real" physical price and is the basis on which all the other prices are set.
2) Futures Price (eg COMEX). This is the price for delivery in the future (ie whenever the next contract is). Americans love to quote this price like it is "the" price of physical gold. It is not, it is a future price. It is related to the spot price, with differences reflecting the relative costs of borrowing cash and gold. COMEX type prices are just an exchange traded version of the OTC forward price, which is a lot more flexible as you can set any date of maturity and amount.
3) Exchange Traded Fund Price (eg GLD). This is a proxy for the spot price, because it is based on physical gold in 400oz bar form. Because any significant dealer can deliver physical (or take delivery) in exchange for shares (or deliver shares) its price will never significantly diverge from the Spot Price except to reflect the costs associated with the share creation/redemption process.
4) Retail Price. The price for small, non-wholesale amounts of physical gold (coins and bars). It is usually priced based on the spot price plus an additional fee to reflect the cost of turning 400oz bars into smaller sizes. This is a physical price of sorts, but it is not the spot price and can diverge from it if manufacturers don't forecast demand correctly and run out of or get too much inventory. All that is occurring is that the premium to the underlying gold value (based on the spot price) is changing based on shortage or excess of small forms of gold. Until the manufacturers can get metal from the spot market and convert it into small forms, the retail price will continue to diverge from its normal price.
The first three prices, because they can be traded in large quantities for wholesale forms of gold, will always stay in alignment. Why can I be so confident? Because I am relying on one of the few certainties in life - people like to make money. As the first three prices are for forms of gold that can be interchanged with little cost and delay, they are easily arbitraged. You can be 100% sure that no bullion market dealer is going to forgo easy profit for any length of time. Therefore there is nothing "fake" about the COMEX or ETF price - they are intimately linked to the spot price.
In contrast, the retail market price will diverge from the other three prices because wholesale forms of gold are not quickly or cheaply convertible into small forms of gold that the price represents. Arbitrage will still occur as manufacturers are not going to sit by while large coin/bar premiums go begging, but the response will be sluggish due to the lead times in making retail products.
Also note that what we see happening in the retail physical market or GLD or COMEX is but a small part of the overall market. As discussed in this blog what we can see represents about 2% of the entire gold market. By far the majority of trading occurs in the OTC market. If you want to know what is really happening, you need a contact in the industry who deals in large volumes. For most commentators this is not possible, so all they have to work with is GLD or COMEX or the US Mint's little problems. Unfortunately, this lack of information means people are over emphasising or extrapolating what happens in the markets they can see, resulting, in a lot of cases, the wrong conclusions.
My view is that coin prices are not the real price of gold and should thus not be accorded too much weight in trying to analyse what is happening in the gold market, particularly as it is small compared to the overall market. There are various prices for gold:
1) Spot Price. This is the price for wholesale 400oz bars for immediate delivery (actually, the market works on 2 day settlement) usually ex-London as traded in the over the counter (OTC) market. This is the "real" physical price and is the basis on which all the other prices are set.
2) Futures Price (eg COMEX). This is the price for delivery in the future (ie whenever the next contract is). Americans love to quote this price like it is "the" price of physical gold. It is not, it is a future price. It is related to the spot price, with differences reflecting the relative costs of borrowing cash and gold. COMEX type prices are just an exchange traded version of the OTC forward price, which is a lot more flexible as you can set any date of maturity and amount.
3) Exchange Traded Fund Price (eg GLD). This is a proxy for the spot price, because it is based on physical gold in 400oz bar form. Because any significant dealer can deliver physical (or take delivery) in exchange for shares (or deliver shares) its price will never significantly diverge from the Spot Price except to reflect the costs associated with the share creation/redemption process.
4) Retail Price. The price for small, non-wholesale amounts of physical gold (coins and bars). It is usually priced based on the spot price plus an additional fee to reflect the cost of turning 400oz bars into smaller sizes. This is a physical price of sorts, but it is not the spot price and can diverge from it if manufacturers don't forecast demand correctly and run out of or get too much inventory. All that is occurring is that the premium to the underlying gold value (based on the spot price) is changing based on shortage or excess of small forms of gold. Until the manufacturers can get metal from the spot market and convert it into small forms, the retail price will continue to diverge from its normal price.
The first three prices, because they can be traded in large quantities for wholesale forms of gold, will always stay in alignment. Why can I be so confident? Because I am relying on one of the few certainties in life - people like to make money. As the first three prices are for forms of gold that can be interchanged with little cost and delay, they are easily arbitraged. You can be 100% sure that no bullion market dealer is going to forgo easy profit for any length of time. Therefore there is nothing "fake" about the COMEX or ETF price - they are intimately linked to the spot price.
In contrast, the retail market price will diverge from the other three prices because wholesale forms of gold are not quickly or cheaply convertible into small forms of gold that the price represents. Arbitrage will still occur as manufacturers are not going to sit by while large coin/bar premiums go begging, but the response will be sluggish due to the lead times in making retail products.
Also note that what we see happening in the retail physical market or GLD or COMEX is but a small part of the overall market. As discussed in this blog what we can see represents about 2% of the entire gold market. By far the majority of trading occurs in the OTC market. If you want to know what is really happening, you need a contact in the industry who deals in large volumes. For most commentators this is not possible, so all they have to work with is GLD or COMEX or the US Mint's little problems. Unfortunately, this lack of information means people are over emphasising or extrapolating what happens in the markets they can see, resulting, in a lot of cases, the wrong conclusions.
الأربعاء، 20 أغسطس 2008
The Global Speculator View
I’ve just had an interesting chat with Troy of www.globalspeculator.com.au who I have a lot of time for. His response to my hedging chart is illuminating:
“It is worth considering that many gold producers are still struggling to turn a reasonable profit. Their costs have risen astronomically and some companies have actually folded (especially the ones attempting to bring old mines back into production). The ones that locked in a gold price have been the most vulnerable to collapse (massive balance sheet problems – hedge liability related), so I do not think that a mining CEO would be all that keen on taking on hedging again anytime soon. On the other hand if the gold price has a prolonged collapse hedging may be the difference between surviving and not. What we are seeing around the gold industry both here and internationally is not consistent with a peak in the gold price in my opinion. Gold supply is flat if not falling.
Your point about where the gold demand is going to come from once dehedging has run its inevitable course is a pertinent one and I think Central Banks hold the key. Central Bank selling of gold is trending lower with the Washington Agreement Quota of 500 tons p/a not being filled for the last two years (including this year although we have another month or so left). Many non-western central banks have actually begun buying (Russia, Middle East and Asia etc). I agree that it is probably not your average mum and dad retail investor which holds the key for the gold price moving forward. Once fiat currencies start coming into question and people get a better appreciation that the US dollar is not the only questionable currency, things will start to get interesting and somewhat clearer. At the moment there is just shifting from one currency to the next and gold is still very much linked to the US dollar’s fortunes.”
“It is worth considering that many gold producers are still struggling to turn a reasonable profit. Their costs have risen astronomically and some companies have actually folded (especially the ones attempting to bring old mines back into production). The ones that locked in a gold price have been the most vulnerable to collapse (massive balance sheet problems – hedge liability related), so I do not think that a mining CEO would be all that keen on taking on hedging again anytime soon. On the other hand if the gold price has a prolonged collapse hedging may be the difference between surviving and not. What we are seeing around the gold industry both here and internationally is not consistent with a peak in the gold price in my opinion. Gold supply is flat if not falling.
Your point about where the gold demand is going to come from once dehedging has run its inevitable course is a pertinent one and I think Central Banks hold the key. Central Bank selling of gold is trending lower with the Washington Agreement Quota of 500 tons p/a not being filled for the last two years (including this year although we have another month or so left). Many non-western central banks have actually begun buying (Russia, Middle East and Asia etc). I agree that it is probably not your average mum and dad retail investor which holds the key for the gold price moving forward. Once fiat currencies start coming into question and people get a better appreciation that the US dollar is not the only questionable currency, things will start to get interesting and somewhat clearer. At the moment there is just shifting from one currency to the next and gold is still very much linked to the US dollar’s fortunes.”
Producer (de)Hedging
Every quarter www.gfms.co.uk release their Global Hedge Book Analysis. I've been tracking it for a while now as it makes for a very interesting chart (see below). Quarter 2008 report was released last week.
Seems to be a very strong correlation between the decline in the hedge book (producer de-hedging creates demand for gold) and the rise in the gold price. "What," you say, "the increase in the gold price is not entirely due to the fall in the US dollar and the massive huge demand for US Eagle coins?" Yes, that is correct apprentice goldbug, things are not a simple as some ranters, sorry commentators, would have you believe.Interesting to note that the de-hedging for the first six months of this year has been 8,000,000 ounces. Sales of US Eagle for the 7 months of this year have been 311,000 ounces. Now don't get offended American coin buyers (and I think it is good you are buying physical) but YOU DON'T MATTER when it comes to making an impact on the gold price.
This chart raises two questions:
1. De-hedging cannot continue forever, it is the lowest it has been since 1987, as it runs down to zero it will remove a source of demand that has been there since 2001.
2. When sentiment changes and producers decide to hedge again, watch out.
Maybe this recent fall has been exacerbated by a miner deciding it is time to lock in these historically high prices? Maybe not. Either way they aint gonna tells anyone beforehand and once the announcement is out, it isn't going to be pretty. About time market commentators started to analyse the statements of the CEOs of producers for hints of their intentions and provide their subscribers with forwarning.
الثلاثاء، 19 أغسطس 2008
الأحد، 10 أغسطس 2008
AUSTRAC update
It appears that advice from AUSTRAC was wrong (see post of 27 July), we have alternative adivce that only cash transactions of bullion above $10,000 will need to be reported. It is also possible that the limit above which identification is required will be above $1,000, but not sure what it will be at this stage. Will keep you informed.
Promised article on gold confiscation is coming, a bit more involved than I first expected so is taking some time to write.
Promised article on gold confiscation is coming, a bit more involved than I first expected so is taking some time to write.
الخميس، 7 أغسطس 2008
Teaching Children How Debt Is Good
"Cent$ational Harry and the Balance of Life" is a play for primary schools to improve children's financial literacy. It was initiated by Ethical Investor with sponsorship from the Bank of Queensland.
Very admirable, but I was concerned when reading the "plot" or storyline of this educational play. I'll quote the sections of concern:
"They must first learn from Harry the way earthlings move, talk and dress so they can embark on their quest. But, Harry tells Ali and An, to achieve anything of value on earth you must first have money. “What’s money?” the ET’s ask. Harry must then teach these naïve characters the basic concepts of what money is and how it works.
However, each money making scheme, such as labouring, earning interest, making a profit and so on, requires time, and the aliens tell Harry, they need money NOW, for in 5 days they will expire. The only way to spend money without first making it, Harry realises, is through the use of credit, and he undertakes to use his credit card to make the journey to find the Berkelium.
Harry, however, mismanages the challenge, being seduced into purchasing unneeded computer games, mobile phones, fashionable garments and accessories, and he falls into the pit of despair and hopelessness."
So the message I would read into this if I was a kid was that you don't have to wait for money and work hard first, if you want something NOW, go and get credit. Now from the last paragraph it appears that there is a lesson coming about wasting money on useless things, which is good, but then we get:
"Harry must learn that he can only balance his finances if his expenditure equals his income plus his savings. He can't over spend on his credit card if there is insufficient money coming in to cover his repayments."
So it appears to me that the end point or lesson is not "don't get into debt" but assumes you are going to be in debt and that this is OK, so "learn to balance income and expenses". Where is the "pay off the debt" message? Couldn't the storyline be reimagined to show how debt is bad and to be avoided and that patience and savings are good?
Naive expectation of course, considering that it was sponsored by a Bank. I'm sure they love the central theme that credit cards play in the story. Sometimes I despair about where society is and where it is heading.
Very admirable, but I was concerned when reading the "plot" or storyline of this educational play. I'll quote the sections of concern:
"They must first learn from Harry the way earthlings move, talk and dress so they can embark on their quest. But, Harry tells Ali and An, to achieve anything of value on earth you must first have money. “What’s money?” the ET’s ask. Harry must then teach these naïve characters the basic concepts of what money is and how it works.
However, each money making scheme, such as labouring, earning interest, making a profit and so on, requires time, and the aliens tell Harry, they need money NOW, for in 5 days they will expire. The only way to spend money without first making it, Harry realises, is through the use of credit, and he undertakes to use his credit card to make the journey to find the Berkelium.
Harry, however, mismanages the challenge, being seduced into purchasing unneeded computer games, mobile phones, fashionable garments and accessories, and he falls into the pit of despair and hopelessness."
So the message I would read into this if I was a kid was that you don't have to wait for money and work hard first, if you want something NOW, go and get credit. Now from the last paragraph it appears that there is a lesson coming about wasting money on useless things, which is good, but then we get:
"Harry must learn that he can only balance his finances if his expenditure equals his income plus his savings. He can't over spend on his credit card if there is insufficient money coming in to cover his repayments."
So it appears to me that the end point or lesson is not "don't get into debt" but assumes you are going to be in debt and that this is OK, so "learn to balance income and expenses". Where is the "pay off the debt" message? Couldn't the storyline be reimagined to show how debt is bad and to be avoided and that patience and savings are good?
Naive expectation of course, considering that it was sponsored by a Bank. I'm sure they love the central theme that credit cards play in the story. Sometimes I despair about where society is and where it is heading.
الأحد، 3 أغسطس 2008
A History of Gold Controls in Australia
Below is the text of a press release and attachment that deals with a topic that you won't find much information about on the internet. I'm typing it out so that it becomes available and searchable. Next week I'll discuss what this means for the likelihood of gold confiscation occurring in Australia. In the meantime, I'll leave you to ponder the fact that Part IV of the Banking Act 1959 has only been "suspended".
PRESS RELEASE No 29
EMBARGO 6.00pm
STATEMENT BY THE TREASURER, THE HON PHILLIP LYNCH, M.P.
PRIVATE OWNERSHIP AND SALE OF GOLD BY AUSTRALIAN RESIDENTS
SUSPENSION OF PART IV OF THE BANKING ACT
The Treasurer, Mr Phillip Lyncy, said today that Commonwealth restrictions on the freedom of Australian residents to own, buy and sell gold in Australia had been removed.
He added that current restrictions on the purchase of gold coins had also been removed.
Australian residents could now export and import gold subject to normal exchange control and customs procedures.
Mr Lynch pointed out that legislation existed in some States to regulate gold buying and some dealings in gold.
The Treasurer was commenting on the effect of the suspension of Part IV of the Banking Act 1959-1974 by His Excellency the Administrator in Council on 30 January.
In terms of this part of the Banking Act, gold, apart from wrought gold and gold coins to a limited extent, had to be delivered to the Reserve Bank of Australia within one month of its coming into a person's possession.
The legislation had restricted the sale of gold in Australia only to the Reserve Bank or a person authorised by the bank.
It had also prohibited the export of gold without the Reserve Bank's permission.
Mr Lynch said the reasons for these restrictions on gold dealings by Australians no longer existed.
The role of gold in the international monetary system had declined substantially in recent years.
Similar restraints were not placed by the Commonwealth on dealings in silver, precious stones or other like forms of investment.
He noted that several other developed countries, including the United States and Japan, had removed restrictions on the private ownership of, and dealings in, gold.
A number of European countries also had no restrictions on gold holdings.
The Treasurer also pointed out that the Industries Assistance Commission, in its report on the "Production of Gold" dated 5 Jun 1975, had expressed doubts that the continued existence of the restrictions on gold transactions in Australia served any useful purpose.
Submissions received from the Gold Producers' Association (GPA) had pressed for removal of restrictions on gold marketing in Australia.
The Association welcomed the Government's decision to suspect Part IV of the Banking Act.
The Reserve Bank had been holding discussions with the GPA, the Banks and gold refiners to ensure that the marketing of Australia's gold was not disrupted.
The Treasurer said that gold producers, for the time being, would still be able to take their gold to banks or to refiners as they had done in the past.
However, if they wished they could now also sell their gold in other ways.
The industry would, in future, have greater flexibility in the disposal and marketing of its output.
Mr Lynch mentioned that investment in gold was not risk free and it involved significant costs such as storage, insurance and assaying.
An outline of the history of gold controls in Australia is attached.
30 Jan 1976
CANBERRA ACT
ATTACHMENT TO PRESS RELEASE ON PRIVATE OWNERSHIP AND SALE OF GOLD BY AUSTRALIAN RESIDENTS
GOLD CONTROLS IN AUSTRALIA - HISTORY
Australia, like most countries was on the Gold Standard before the First World War. Currency notes were circulated alongside, and were freely convertible into, gold coins. There were no restrictions on the import or export of gold. Legislation existed in some States to protect gold miners and to regulate the buying and smelting of gold.
The War disrupted the operations of the Gold Standard because of the physical difficulties of shipping gold and the special problems involved in financing the War effort. In 1915 Australia followed the United Kingdom in leaving the Gold Standard. Gold exports except with the Treasurer's consent were prohibited until Australia returned to the Gold Standard along with the UK in 1925.
In 1929 falling export prices and the cessation of long-term borrowing abroad called for special measures to conserve Australia’s overseas funds. The Commonwealth Bank Act in 1929 provided for the Bank (of which the Reserve Bank of Australia is the legal successor) to requisition all Australian gold in return for Australian notes. Formal action was never taken under this legislation but it marked the beginning of the end of holding of gold by banks and the public in Australia. In fact, there were no Commonwealth restrictions on the ownership and sale of gold between 1925 and 1939. Banks voluntarily accepted deposits with the Commonwealth Bank in return for their gold.
The outbreak of World War II again called for special Commonwealth gold controls. In 1939 regulations under the Defence Act provided for the acquisition by the Commonwealth Bank of newly won and other gold; regulations under the Customs Act prohibited the export of gold from Australia without authority.
After the war these controls were continued in the Banking Act and with some modifications were exercised by the Reserve Bank until today.
Until 1931 new-mined gold was added to the Commonwealth Bank’s stocks. The Bank made gold available to meet domestic industrial demand; exports were strictly controlled. The effect was to centralise gold in the Commonwealth Bank’s hands as part of Australia’s international liquidity.
In 1951 a premium over the official IMF price for gold emerged in world markets. Arrangements were made for Australian producers to obtain this premium for gold sold overseas. The Gold Producers’ Association was formed specifically for this purpose. In practice the Commonwealth Bank allowed the Association to repurchase the gold for sale overseas provided the foreign exchange earnings were returned to Australia and thus added to our international reserves. The Bank continued to retain sufficient gold to meet domestic demand.
In the 1960’s the gold premium rose markedly. For a time the major countries (not including Australia) sold gold to the free market to keep the price down. This was abandoned in 1968 when the major central banks agreed (Washington Agreement) not to add gold to their official reserves by way of purchases from the private markets. Australia was not a party to the Agreement but co-operated in it. Hence, the Reserve Bank held Australia’s gold reserves virtually constant and although the legislation required newly-won gold to be delivered to it, in practice the Bank returned it to the producers. Gold producers were permitted to export gold and sell to domestic industrial users. These arrangements continued until the suspension of Part IV.
EFFECTS OF SUSPENDING COMMONWEALTH CONTROLS
One effect of suspension is that gold producers (and the Reserve Bank) are freed from the requirement to pass newly-mined gold bank and forth between them.
More importantly suspension widens the market for sales of gold by the producers. Hitherto, they have been free to meet export demands but have been limited domestically to sales for professional and trade purposes. Now, so far as Commonwealth Law is concerned, they may sell to any person within or outside Australia. Concurrently of course, the previous Commonwealth restrictions on who may buy, hold and deal in gold are withdrawn. Although imports were not controlled, imported gold was subject to delivery to the Reserve Bank. Gold may now be imported free of this control.
Restrictions on the holdings of gold coins also have been withdrawn. Hitherto holdings of coins with an aggregate gold content of more than $50 required the prior consent of the Reserve Bank. The Bank administered their provision so as to enable genuine collectors to improve their collections and to permit dealers to meet the needs of genuine collectors.
While the Commonwealth restrictions have been removed there is still legislation in some States dealing with gold. Essentially legislation in Victoria, South Australia and Western Australia requires gold buyers or gold smelters in those States to hold a State licence. Certain classes of industrial users of gold are exempted from the licensing provisions. It will, of course be up to individuals wishing to buy gold to comply with State legislation.
MARKETING ARRANGEMENTS
The Reserve Bank has been in touch with the main parties concerned with the handling of Australian gold to ensure a smooth transition to the new situation. These parties are the representatives of the producers themselves (the GPA), the four refiners (including the Perth Mint which is the major refiner) and the Australian banks who have handled the transmission of much of the gold from mine to refiner.
In practice, newly-won gold hitherto has been sent by the producers to the refiners either direct or through one of the Banks. The refiner paid the producer the official price less assay and refining costs; the refiner received the official price for the gold from the Reserve Bank. Similarly, the Reserve Bank informed the Gold Producers’ Association of the gold available for sale and recouped from the Association the official price. The GPA then sold the gold domestically or overseas at the ruling market price and passed the premium over the official price back to the original producers.
In future, the steps involving the Reserve Bank will be omitted, and, as a technicality, the refiners and banks will not be agents of the Reserve Bank in this connection. Otherwise, there will be no essential change in the handling of newly-won gold because of suspension of Part IV. Eventually, of course, the greater freedom in gold trading may lead to new practices.
CANBERRA ACT
20 January 1976
PRESS RELEASE No 29
EMBARGO 6.00pm
STATEMENT BY THE TREASURER, THE HON PHILLIP LYNCH, M.P.
PRIVATE OWNERSHIP AND SALE OF GOLD BY AUSTRALIAN RESIDENTS
SUSPENSION OF PART IV OF THE BANKING ACT
The Treasurer, Mr Phillip Lyncy, said today that Commonwealth restrictions on the freedom of Australian residents to own, buy and sell gold in Australia had been removed.
He added that current restrictions on the purchase of gold coins had also been removed.
Australian residents could now export and import gold subject to normal exchange control and customs procedures.
Mr Lynch pointed out that legislation existed in some States to regulate gold buying and some dealings in gold.
The Treasurer was commenting on the effect of the suspension of Part IV of the Banking Act 1959-1974 by His Excellency the Administrator in Council on 30 January.
In terms of this part of the Banking Act, gold, apart from wrought gold and gold coins to a limited extent, had to be delivered to the Reserve Bank of Australia within one month of its coming into a person's possession.
The legislation had restricted the sale of gold in Australia only to the Reserve Bank or a person authorised by the bank.
It had also prohibited the export of gold without the Reserve Bank's permission.
Mr Lynch said the reasons for these restrictions on gold dealings by Australians no longer existed.
The role of gold in the international monetary system had declined substantially in recent years.
Similar restraints were not placed by the Commonwealth on dealings in silver, precious stones or other like forms of investment.
He noted that several other developed countries, including the United States and Japan, had removed restrictions on the private ownership of, and dealings in, gold.
A number of European countries also had no restrictions on gold holdings.
The Treasurer also pointed out that the Industries Assistance Commission, in its report on the "Production of Gold" dated 5 Jun 1975, had expressed doubts that the continued existence of the restrictions on gold transactions in Australia served any useful purpose.
Submissions received from the Gold Producers' Association (GPA) had pressed for removal of restrictions on gold marketing in Australia.
The Association welcomed the Government's decision to suspect Part IV of the Banking Act.
The Reserve Bank had been holding discussions with the GPA, the Banks and gold refiners to ensure that the marketing of Australia's gold was not disrupted.
The Treasurer said that gold producers, for the time being, would still be able to take their gold to banks or to refiners as they had done in the past.
However, if they wished they could now also sell their gold in other ways.
The industry would, in future, have greater flexibility in the disposal and marketing of its output.
Mr Lynch mentioned that investment in gold was not risk free and it involved significant costs such as storage, insurance and assaying.
An outline of the history of gold controls in Australia is attached.
30 Jan 1976
CANBERRA ACT
ATTACHMENT TO PRESS RELEASE ON PRIVATE OWNERSHIP AND SALE OF GOLD BY AUSTRALIAN RESIDENTS
GOLD CONTROLS IN AUSTRALIA - HISTORY
Australia, like most countries was on the Gold Standard before the First World War. Currency notes were circulated alongside, and were freely convertible into, gold coins. There were no restrictions on the import or export of gold. Legislation existed in some States to protect gold miners and to regulate the buying and smelting of gold.
The War disrupted the operations of the Gold Standard because of the physical difficulties of shipping gold and the special problems involved in financing the War effort. In 1915 Australia followed the United Kingdom in leaving the Gold Standard. Gold exports except with the Treasurer's consent were prohibited until Australia returned to the Gold Standard along with the UK in 1925.
In 1929 falling export prices and the cessation of long-term borrowing abroad called for special measures to conserve Australia’s overseas funds. The Commonwealth Bank Act in 1929 provided for the Bank (of which the Reserve Bank of Australia is the legal successor) to requisition all Australian gold in return for Australian notes. Formal action was never taken under this legislation but it marked the beginning of the end of holding of gold by banks and the public in Australia. In fact, there were no Commonwealth restrictions on the ownership and sale of gold between 1925 and 1939. Banks voluntarily accepted deposits with the Commonwealth Bank in return for their gold.
The outbreak of World War II again called for special Commonwealth gold controls. In 1939 regulations under the Defence Act provided for the acquisition by the Commonwealth Bank of newly won and other gold; regulations under the Customs Act prohibited the export of gold from Australia without authority.
After the war these controls were continued in the Banking Act and with some modifications were exercised by the Reserve Bank until today.
Until 1931 new-mined gold was added to the Commonwealth Bank’s stocks. The Bank made gold available to meet domestic industrial demand; exports were strictly controlled. The effect was to centralise gold in the Commonwealth Bank’s hands as part of Australia’s international liquidity.
In 1951 a premium over the official IMF price for gold emerged in world markets. Arrangements were made for Australian producers to obtain this premium for gold sold overseas. The Gold Producers’ Association was formed specifically for this purpose. In practice the Commonwealth Bank allowed the Association to repurchase the gold for sale overseas provided the foreign exchange earnings were returned to Australia and thus added to our international reserves. The Bank continued to retain sufficient gold to meet domestic demand.
In the 1960’s the gold premium rose markedly. For a time the major countries (not including Australia) sold gold to the free market to keep the price down. This was abandoned in 1968 when the major central banks agreed (Washington Agreement) not to add gold to their official reserves by way of purchases from the private markets. Australia was not a party to the Agreement but co-operated in it. Hence, the Reserve Bank held Australia’s gold reserves virtually constant and although the legislation required newly-won gold to be delivered to it, in practice the Bank returned it to the producers. Gold producers were permitted to export gold and sell to domestic industrial users. These arrangements continued until the suspension of Part IV.
EFFECTS OF SUSPENDING COMMONWEALTH CONTROLS
One effect of suspension is that gold producers (and the Reserve Bank) are freed from the requirement to pass newly-mined gold bank and forth between them.
More importantly suspension widens the market for sales of gold by the producers. Hitherto, they have been free to meet export demands but have been limited domestically to sales for professional and trade purposes. Now, so far as Commonwealth Law is concerned, they may sell to any person within or outside Australia. Concurrently of course, the previous Commonwealth restrictions on who may buy, hold and deal in gold are withdrawn. Although imports were not controlled, imported gold was subject to delivery to the Reserve Bank. Gold may now be imported free of this control.
Restrictions on the holdings of gold coins also have been withdrawn. Hitherto holdings of coins with an aggregate gold content of more than $50 required the prior consent of the Reserve Bank. The Bank administered their provision so as to enable genuine collectors to improve their collections and to permit dealers to meet the needs of genuine collectors.
While the Commonwealth restrictions have been removed there is still legislation in some States dealing with gold. Essentially legislation in Victoria, South Australia and Western Australia requires gold buyers or gold smelters in those States to hold a State licence. Certain classes of industrial users of gold are exempted from the licensing provisions. It will, of course be up to individuals wishing to buy gold to comply with State legislation.
MARKETING ARRANGEMENTS
The Reserve Bank has been in touch with the main parties concerned with the handling of Australian gold to ensure a smooth transition to the new situation. These parties are the representatives of the producers themselves (the GPA), the four refiners (including the Perth Mint which is the major refiner) and the Australian banks who have handled the transmission of much of the gold from mine to refiner.
In practice, newly-won gold hitherto has been sent by the producers to the refiners either direct or through one of the Banks. The refiner paid the producer the official price less assay and refining costs; the refiner received the official price for the gold from the Reserve Bank. Similarly, the Reserve Bank informed the Gold Producers’ Association of the gold available for sale and recouped from the Association the official price. The GPA then sold the gold domestically or overseas at the ruling market price and passed the premium over the official price back to the original producers.
In future, the steps involving the Reserve Bank will be omitted, and, as a technicality, the refiners and banks will not be agents of the Reserve Bank in this connection. Otherwise, there will be no essential change in the handling of newly-won gold because of suspension of Part IV. Eventually, of course, the greater freedom in gold trading may lead to new practices.
CANBERRA ACT
20 January 1976
السبت، 26 يوليو 2008
Aussie Govt Bullion Snooping
Australia, like most countries, has money laundering legislation and a regulator to go with it. AUSTRAC (Australian Transaction Reports and Analysis Centre) administers the Financial Transaction Reports Act 1988 (FTR Act). They also now administer the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act). Similar legislation has been enacted in many other countries.
A lot of the new AML/CTF laws around the world are a result of the Financial Action Task Force (FATF). Created in 1989, it "is an inter-governmental body whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing". Note that Australia's FTR Act came into being before FATF, and for a while Australia's AUSTRAC was "state of the art" in anti-money laundering in the world. It was admired for its data collection and matching system but in recent years had fallen behind.
One of FATF's self appointed roles is to report on the robustness of a country's money laundering systems and its noting that Australia's system had weaknesses is what prompted the Government to instigate a review of the FTR Act, resulting in the new AML/CTF Act. I suspect that FATF's assessments of other countries' system also resulted in similar changes to their legislation.
So if you are looking for someone to blame for new "know your customer" rules, FATF is up there. But you also have to blame 911, because this also revitalised FATF as Governments looked for expertise on how to tighten up on money flows. While I certainly think that there is a need to close off terrorism's money supply, I cannot help but think that Governments' new found interest in "fixing" their systems was more about the AML part rather than the CTF part. In other words, use terrorism to tighten up on tax evasion, and don't worry about privacy while you do it.
In Australia the old (although it is still in force) FTR Act basically had two key reporting mechanisms in respect of bullion: cash transactions report and suspicious transactions report. The first had to be filled out for any transaction involving more than $10,000 cash. Note that this $10,000 level has not changed in my understanding since the Act came into being in 1988. Funny how Government's never index anything to inflation, except maybe fines!
The second one had/has to be filled out if the business suspected the transaction was for or involved a criminal purpose. There is not real guidance given on this but in practise the rule is if in doubt, fill one out. This is because it acts sort of like a get out of jail card - if the transaction ended up being criminal and you hadn't filled out a suspect transaction report, the police may consider you in on the transaction (especially if is was really sus). Filling one out is then just a real cover your arse exercise.
The AML/CTF Act has given this reporting a makeover. Of particular interest to buyers of physical precious metal should be the changes to the cash transactions report. I understand this will now be called the transactions report, ie the word "cash" is dropped. I also understand that this means that anything that is a designated service (check out the link for a big list of what this covers, bullion gets its own special table #2) over $1,000 has to be reported. This is a big change because prior to this, only cash transactions above $10,000 had to be reported.
My advice to anyone who wishes to accumulate physical metal and as a result values their privacy should do so before the end of this year when the new report comes into play. I don't condone criminal activity, but I also believe that if you are buying physical precious metal you rightly don't want any records that you have done so as this opens you up for theft (either from your fellow man - eg criminal breaks into coin dealer and steals customer list - or from the Government itself at some future time when fiat currencies collapse). The ability to buy small amounts of metal from your local coin/bullion dealer in cash was the only way to do this and it looks like this door will soon close.
UPDATE 11 August - it appears that advice from AUSTRAC was wrong, we have alternative adivce that only cash transactions of bullion above $10,000 will need to be reported. It is also possible that the limit above which identification is required will be above $1,000, but not sure what it will be at this stage. Will keep you informed.
UPDATE 1 July 2009 - Perth Mint has received approval to set the limit above which some form of identification for a bullion transaction is required from $1,000 to $5,000.
A lot of the new AML/CTF laws around the world are a result of the Financial Action Task Force (FATF). Created in 1989, it "is an inter-governmental body whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing". Note that Australia's FTR Act came into being before FATF, and for a while Australia's AUSTRAC was "state of the art" in anti-money laundering in the world. It was admired for its data collection and matching system but in recent years had fallen behind.
One of FATF's self appointed roles is to report on the robustness of a country's money laundering systems and its noting that Australia's system had weaknesses is what prompted the Government to instigate a review of the FTR Act, resulting in the new AML/CTF Act. I suspect that FATF's assessments of other countries' system also resulted in similar changes to their legislation.
So if you are looking for someone to blame for new "know your customer" rules, FATF is up there. But you also have to blame 911, because this also revitalised FATF as Governments looked for expertise on how to tighten up on money flows. While I certainly think that there is a need to close off terrorism's money supply, I cannot help but think that Governments' new found interest in "fixing" their systems was more about the AML part rather than the CTF part. In other words, use terrorism to tighten up on tax evasion, and don't worry about privacy while you do it.
In Australia the old (although it is still in force) FTR Act basically had two key reporting mechanisms in respect of bullion: cash transactions report and suspicious transactions report. The first had to be filled out for any transaction involving more than $10,000 cash. Note that this $10,000 level has not changed in my understanding since the Act came into being in 1988. Funny how Government's never index anything to inflation, except maybe fines!
The second one had/has to be filled out if the business suspected the transaction was for or involved a criminal purpose. There is not real guidance given on this but in practise the rule is if in doubt, fill one out. This is because it acts sort of like a get out of jail card - if the transaction ended up being criminal and you hadn't filled out a suspect transaction report, the police may consider you in on the transaction (especially if is was really sus). Filling one out is then just a real cover your arse exercise.
The AML/CTF Act has given this reporting a makeover. Of particular interest to buyers of physical precious metal should be the changes to the cash transactions report. I understand this will now be called the transactions report, ie the word "cash" is dropped. I also understand that this means that anything that is a designated service (check out the link for a big list of what this covers, bullion gets its own special table #2) over $1,000 has to be reported. This is a big change because prior to this, only cash transactions above $10,000 had to be reported.
My advice to anyone who wishes to accumulate physical metal and as a result values their privacy should do so before the end of this year when the new report comes into play. I don't condone criminal activity, but I also believe that if you are buying physical precious metal you rightly don't want any records that you have done so as this opens you up for theft (either from your fellow man - eg criminal breaks into coin dealer and steals customer list - or from the Government itself at some future time when fiat currencies collapse). The ability to buy small amounts of metal from your local coin/bullion dealer in cash was the only way to do this and it looks like this door will soon close.
UPDATE 11 August - it appears that advice from AUSTRAC was wrong, we have alternative adivce that only cash transactions of bullion above $10,000 will need to be reported. It is also possible that the limit above which identification is required will be above $1,000, but not sure what it will be at this stage. Will keep you informed.
UPDATE 1 July 2009 - Perth Mint has received approval to set the limit above which some form of identification for a bullion transaction is required from $1,000 to $5,000.
الخميس، 24 يوليو 2008
Questions
I understand Deniece has been referring Depository clients to my blog. I usually post something up once a week, on the weekend. I have a list of things to cover, but if you have any questions or things you want explained or expanded upon, just leave a comment. Blogs are interactive, unlike most of the other commentators out there where you can only read what they say instead of being able to discuss it.
Coming up this weekend, how the Aussie Government will be increasing in snooping into your bullion dealings!
Coming up this weekend, how the Aussie Government will be increasing in snooping into your bullion dealings!
الخميس، 17 يوليو 2008
The 1974 Liquidity Squeeze in Australia
Googling for background on the Banking Act for a future blog, I found a paper titled "A History of Last-Resort Lending and Other Support for Troubled Financial Institutions in Australia" (http://www.rba.gov.au/rdp/RDP2001-07.pdf).
I had an unnerving déjà vu experience when reading Section 10 (except the bank run part, maybe that is next). Below are some extracts.
"Section 10 The 1970s
Following the comparative calm of the 1950s and 1960s, the growth of non-bank financial institutions fuelled a property boom in the early 1970s. The 1974 liquidity squeeze brought the boom to an abrupt end. The failure of a number of property financiers precipitated runs on building societies in several states, particularly South Australia and Queensland. Building societies in Queensland also experienced difficulties in 1976 and 1977. Weakness in the property market brought down the Bank of Adelaide later in the decade. The Reserve Bank provided some liquidity support in each of these cases, although it did not lend directly to non-banks.
10.1 The 1974 Liquidity Squeeze
Following a boom in lending by banks and non-bank financial institutions, the Reserve Bank tightened monetary policy in 1973. This was accompanied by a drain in liquidity resulting from a deterioration of the balance of payments and a government budget surplus. As interest rates soared, property prices began to collapse triggering the failure of several property development companies.
On 30 September 1974, the property financier Cambridge Credit went into liquidation. The failure of two other substantial property developers (Home Units Australia in July and Mainline Corporation in August) preceded Cambridge Credit’s closure. While those failures prompted sharp falls in the share prices of other property developers, finance companies and banks, Cambridge Credit’s failure saw public nervousness spread directly to other financial intermediaries. The following day, runs developed on building societies in NSW, Victoria, Queensland and South Australia. While the runs in NSW and Victoria were comparatively small, the runs in Queensland and South Australia were far more severe.
...
Although the Hindmarsh Building Society in South Australia was financially sound, it was subject to the most severe run. The run, based on rumours the society had lent to failed property companies, continued, little affected by the Acting Treasurer’s statement. The run exhausted the society’s cash reserves. The National Australia Bank lent the society cash until the National also ran low. On 3 October, the South Australian Premier, Don Dunstan, addressed customers queuing outside the Hindmarsh’s offices, assuring them that their funds were safe. The run subsided the next day."
For "youngsters" like me (I was only 5 years old when this liquidity squeeze occurred) I would also recommend reading "Appendix A: Financial Disturbances in Australia – A Chronology". Runs happen. Interesting question is whether the public these days would be comforted by a statement by a politician that all is OK. Maybe they will be, is there any proof that society has gotten any smarter? If anything one could argue they have gotten stupider and more greedy and are just as invested in keeping the system going so will want to believe there isn't any fundamental problem with the system. Coming soon to a theater near you: The F-Files: I Want to Believe in Fiat Currencies.
I also found some other interesting comments about legal tender gold backed notes in the paper:
“High-powered money consists of those forms of money that are directly exchangeable for real goods (i.e. commodity money, such as gold coin, and instruments declared to be legal tender). While, up until 1910 the notes issued by banks and backed by gold were also highly liquid, the fact that their widespread acceptance relied on public confidence in the banks that issued those notes indicated that they were one step removed from high-powered money.”
“In 1910, the Federal Government’s legal-tender note issue was introduced. Initially, it was required that the government’s gold reserve cover one-quarter of the value of notes issued up to £7 million. For any note issuance above £7 million, one-for-one backing was required. In 1914, however, the gold reserve provision was relaxed so that the required gold reserve was one-quarter of the value of notes on issue regardless of the size of the total note issue.”
“The bank [Commonwealth Bank] was required to maintain a minimum gold reserve of 25 per cent of the notes on issue (although the required gold reserve was reduced to 15 per cent in June 1931). Although Australia went off the gold standard at the end of 1929, it was not until the introduction of new banking legislation in 1945 that the gold reserve requirement was completely abandoned.”
I like the term "high-powered money". I wonder if this is some defined academic term or just made up by the authors? History lesson for today - get hold of some high-powered money!
I had an unnerving déjà vu experience when reading Section 10 (except the bank run part, maybe that is next). Below are some extracts.
"Section 10 The 1970s
Following the comparative calm of the 1950s and 1960s, the growth of non-bank financial institutions fuelled a property boom in the early 1970s. The 1974 liquidity squeeze brought the boom to an abrupt end. The failure of a number of property financiers precipitated runs on building societies in several states, particularly South Australia and Queensland. Building societies in Queensland also experienced difficulties in 1976 and 1977. Weakness in the property market brought down the Bank of Adelaide later in the decade. The Reserve Bank provided some liquidity support in each of these cases, although it did not lend directly to non-banks.
10.1 The 1974 Liquidity Squeeze
Following a boom in lending by banks and non-bank financial institutions, the Reserve Bank tightened monetary policy in 1973. This was accompanied by a drain in liquidity resulting from a deterioration of the balance of payments and a government budget surplus. As interest rates soared, property prices began to collapse triggering the failure of several property development companies.
On 30 September 1974, the property financier Cambridge Credit went into liquidation. The failure of two other substantial property developers (Home Units Australia in July and Mainline Corporation in August) preceded Cambridge Credit’s closure. While those failures prompted sharp falls in the share prices of other property developers, finance companies and banks, Cambridge Credit’s failure saw public nervousness spread directly to other financial intermediaries. The following day, runs developed on building societies in NSW, Victoria, Queensland and South Australia. While the runs in NSW and Victoria were comparatively small, the runs in Queensland and South Australia were far more severe.
...
Although the Hindmarsh Building Society in South Australia was financially sound, it was subject to the most severe run. The run, based on rumours the society had lent to failed property companies, continued, little affected by the Acting Treasurer’s statement. The run exhausted the society’s cash reserves. The National Australia Bank lent the society cash until the National also ran low. On 3 October, the South Australian Premier, Don Dunstan, addressed customers queuing outside the Hindmarsh’s offices, assuring them that their funds were safe. The run subsided the next day."
For "youngsters" like me (I was only 5 years old when this liquidity squeeze occurred) I would also recommend reading "Appendix A: Financial Disturbances in Australia – A Chronology". Runs happen. Interesting question is whether the public these days would be comforted by a statement by a politician that all is OK. Maybe they will be, is there any proof that society has gotten any smarter? If anything one could argue they have gotten stupider and more greedy and are just as invested in keeping the system going so will want to believe there isn't any fundamental problem with the system. Coming soon to a theater near you: The F-Files: I Want to Believe in Fiat Currencies.
I also found some other interesting comments about legal tender gold backed notes in the paper:
“High-powered money consists of those forms of money that are directly exchangeable for real goods (i.e. commodity money, such as gold coin, and instruments declared to be legal tender). While, up until 1910 the notes issued by banks and backed by gold were also highly liquid, the fact that their widespread acceptance relied on public confidence in the banks that issued those notes indicated that they were one step removed from high-powered money.”
“In 1910, the Federal Government’s legal-tender note issue was introduced. Initially, it was required that the government’s gold reserve cover one-quarter of the value of notes issued up to £7 million. For any note issuance above £7 million, one-for-one backing was required. In 1914, however, the gold reserve provision was relaxed so that the required gold reserve was one-quarter of the value of notes on issue regardless of the size of the total note issue.”
“The bank [Commonwealth Bank] was required to maintain a minimum gold reserve of 25 per cent of the notes on issue (although the required gold reserve was reduced to 15 per cent in June 1931). Although Australia went off the gold standard at the end of 1929, it was not until the introduction of new banking legislation in 1945 that the gold reserve requirement was completely abandoned.”
I like the term "high-powered money". I wonder if this is some defined academic term or just made up by the authors? History lesson for today - get hold of some high-powered money!
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