Thursday, December 29, 2011

Gold Shares and Gold Bullion

There seems to be a big disparity between gold shares and gold bullion. While gold bullion and spot gold have been increasing around 12 percent this year, shares of gold miners have been falling around 15 percent. In fact the smaller gold miners are down much more, around 40 percent.

This gulf between the price of gold and the price of gold shares has caused acute pain for some of the biggest names on Wall Street including John Paulson, George Soros, David Einhorn, Seth Klarman and Thomas Kaplan, a few of which went for gold mining shares instead of gold bullion.

In an interview recently with King World News, Egon von Greyerz, founder and managing partner at Matterhorn Asset Management out of Switzerland, spoke about the big drop in gold recently. "... I’m not really surprised because last time I talked ... I did say gold could go down to $1,550 support and maybe even $1,420. In my view that would be quite normal in a very thin market and I said that would probably happen by the year end."

"But this is all a thin paper market; we have not seen one single physical seller of gold or silver at these prices. So it’s just manipulation and panic in a paper market at the year end. Of course, it's easy for anyone who wants to intervene to push the price down even further in a thin market. So I think that’s what’s happening and I wouldn’t worry the slightest bit. "

When asked where he sees gold heading in 2012, von Greyerz responded, "I wouldn't be surprised to see several thousand dollars (for gold), let’s say between $3,000 and $5,000 next year. I see that as the next move and fundamentally everything supports that. "

Getting back to the subject at hand, possibly the slow in gold mining stocks is influenced by concerns mining costs are rising and governments are beginning to see resource stocks as a easy tax target. This plus the fact that some gold miners also dabble in other resources which can affect the share price adversely. In addition mining companies sometimes diversify their profits into areas not related to gold.

"When you sell your portfolio, you say, well, what's cyclical, and that includes mining stocks," says Patrick Chidley an analyst at HSBC. He called gold-mining stocks a "buying opportunity" in a June research report.

For example, one long time gold investor, Mr. Kaplan, who administers a family fund held over 50 million shares in Novagold Resources Inc., whose stock dropped a massive 40% this year. Mr Kaplan also owns over 60 million shares of Gabriel Resources Ltd., A mining company with a huge gold project in Romania, down more than 20% this year.

Although these declines have cost Mr. Kaplan about $430 million this year, he bought in at price considerably lower than today’s figures and is still holding huge profits on gold.

"Our focus is on adding to our holdings, especially mines and equities in safe" jurisdictions, says Mr. Kaplan, who believes gold shares are due for a rebound.
Seth Klarman's Baupost Group, a value-oriented firm, owned nearly 13% of Gabriel at the end of the third quarter. He added to his position through much of this year, according to regulatory filings. Mr. Klarman also bought five million shares of Novagold in the third quarter.

Mr. Einhorn is another investor who says they are holding on to gold mining stocks. "It has reached the point where gold mining stocks should do well even in a stable gold market," Mr. Einhorn wrote in his most recent letter to investors. "We expect the price of gold to appreciate further, so gold miners should do even better."

Currently at the end of 2011, AngloGold is down about 14% so far this year. Gold Fields Ltd is down about 14% in 2011. Barrick Gold, fell around 14%.

"It's a little perverse that gold loses value when there's a currency crisis occurring in Europe" that should spark interest in gold", says Darren Pollock., who helps run Cheviot Value Management, LLC in Los Angeles and has been a fan of gold shares.

So while gold shares have, for the most part, fallen gold bullion has continued to climb and looks set to continue in the new year 2012.

Tuesday, December 27, 2011

China Tightening Control over Gold Exchanges

China is moving to tighten controls over the mushrooming of small gold exchanges operating around the provinces.

The Peoples Central Bank (PCB0 has restricted gold spot trading to the Shanghai Gold Exchange and the Shanghai Futures exchange, with unauthorized exchanges ordered to stop trading.

According to the World Gold Council, China has overtaken India in the third quarter of 2011 as the largest gold jewelry market in the world. Gold bullion imports from Hong King into China increased by over 50 percent to a all time record in October of the year.

"It's part of a concerted effort to crackdown on commodities trading on illegal platforms, including gold," Roland Wang, general manager at the World Gold Council in Beijing, recently commented. "I don’t think it’s going to affect China's gold consumption or imports, because these speculative trades rarely involved the physical deliveries of gold in the first place."

"No local authority, institution, or individual is allowed to set up gold exchanges," said the notice dated December 20 and jointly issued by the People's Bank of China, the Ministry of Public Security, and other regulators.

"Gold is considered a form of currency and is an important component of central banks’ foreign reserves," The statement said "Gold has to be traded on exchanges approved by the State Council and other related regulators in order to safeguard social stability and economic and finance safety. The central bank will also proceed with opening up the gold market and steadily lead it onto a path of "healthy development," it said.

The notice, published on the central bank website, stated that the Shanghai Gold Exchange and the Shanghai Futures Exchange are sufficient to meet domestic investor demand for spot gold and futures trading.

An official at the Beijing Gold Exchange Centre, who declined to be identified, told Reuters over the phone that the exchange has not received any detailed instructions.

"But the talk of a crackdown has been going on for a while," he said. "Of course this affects our business."

Sources: Reuters. Bloomberg

Monday, December 12, 2011

Gold Coin fetches 7.4 Million Dollars

Blanchard and Co., the New Orleans-based coin and precious metals company recently brokered a deal in which extremely rare gold coin was sold for a record 7.4 million dollars.

The gold coin was sold to a Wall Street investment firm, the identity of which along with the seller, was not disclosed.

The rare Gold Coin was minted by Ephraim Brasher the goldsmith in 1787 and contains 26.66 grams of gold or just under an ounce. Worth only 15 dollars an ounce at the time the coin was struck, the gold value nowadays is something over 1500 dollars.
It is the only one of six coins of this type, called the doubloon due to its striking likeness to the Spanish doubloon. This one differs from the other five in that the distinctive hallmark is punch on the eagle's breast whereas the other five known doubloons have the hallmarked punched on the eagle's left wing.

The Brasher doubloon is considered the first American-made gold coin denominated in dollars. The U.S. Mint in Philadelphia did not begin striking coins until the 1790s, and foreign coins of various currencies were used in the nation's early years.

The gold coin, smaller than a half dollar must have looked very small indeed when it was delivered to the buyer in a large security truck after the sale.

The Brasher doubloon last changed hands in 2004 for $3 million. "We have known about it and coveted it for years," said Blanchard CEO Donald Doyle Jr.
Before the sale, the doubloon was sent to John Albanese of Certified Acceptance Corp. for grading and authentication, a consulting partner for Blanchard and well-established in the coin grading field. Albanese commented that he had previously made an offer of $5.5 million three years ago, but the offer was rejected at the time.

On the coin scale of 0 to 70 used in investment coin grading, Albanese graded the doubloon a 50. "It's a truly beautiful coin," he said.

Although such gold coins are few and far between, there are still many gold coins worth collecting. A modern day gold coin may not fetch $7.4 million dollars but it is still worth while buying a gold coin.

Sunday, December 11, 2011

Gold backing loans

Gold is increasingly used to back loans in India. This is getting closer to the use of gold as a standard. More than Rs 50,000 million worth of gold is going to be used as collateral to get loans in a rapidly expanding gold loans market.

Industry estimates indicate that 200 or so tones of gold were used as collateral to raise loans over the past 12 months or so.

According to industry estimates, around 200 tonnes of gold have been used as collateral to raise loans by end November in 2011-12 fiscal.

"Gold loans help unlock value that is normally lying idle," said Siddhartha Sanyal, chief India economist, Barclays Capital.

"The organised gold loan market is just developing in India and can potentially be a source of liquidity, particularly for the middle and upper-middle class category," he added.

Citibank recently published a report that showed the organised gold loan market was worth over 100 million dollars in 2010 to 2011 and this market has been growing at over 30 percent per annum.

Gold has traditionally been used as a store of value but is a very secure asset.

"Propensity of default is also very low because the borrowers are emotionally attached to their gold," said V Sriram, CEO of IMaCS (ICRA Management Consulting Services).

The loans are very attractive for borrowers also, as the rates charged are lower than on unsecured personal loans.

The average rate of interest on loans issued against gold is 12-24% and time taken to process an application is at most 24 hours, whereas the rates on personal loans go up to 36% and processing takes much longer.

"This (organized gold loans) could further support consumption since gold is no longer considered an asset to buy and hold that is, a 'dead' asset and is now being used as collateral across income groups", said Rohini Malkani and Anushka Shah.

And what are the gold loans used for? "Gold loans are mostly raised for personal uses. For instance, in rural areas gold loans are used for agricultural purposes or to finance consumption.

At the very least it gives more value to gold in these frail economic times. India is the largest buyer of gold in the world and their demand is increasing exponentially.

Gold backing loans gives new support to the gold standard. Perhaps this will be a race between China and India.

Buying Gold in Australia

A new reason to buy gold in Australia has emerged.

Just recently the Reserve Bank of Australia, who sets the benchmark interest rate, reduced the cash or official interest rate twice in a row bringing the official cash rate to 4.25 per cent at the time of writing this.

In November the RBA cut the Interest Rates by 0.25% to 4.50% In December by 0.25% to 4.25%. In his public statement, Governor Glenn Stevens noted, slowing growth in China and the global economy, "sovereign credit and banking problems in Europe" have caused considerable turbulence in financial markets, with financing conditions becoming "much more difficult".

"This, together with precautionary behaviour by firms and households, means that the likelihood of a further material slowing in global growth has increased".

Easing commodity prices as a result of these factors has taken pressure off CPI inflation rates, which "afforded scope for a modest reduction in the cash rate".
This means the banks have, somewhat reluctantly of course, had to follow suit and reduce the mortgage rate for home loans. This is very nice for those with a mortgage (I am one of those) but it also means the saving rate for bonds and general bank savings is also reduced. Not good for savers.

The banks will not continue to pay high interest on savings when the interest rate has been cut. These rates will be reduced also. Something not generally mentioned in the media but the banks do issue paid ads announcing the changes not long after the rate cut.

Along with general inflation this means the annual interest rate will remain below 5 or 6 percent a year. When you consider that gold appreciates in value by around 20 percent per year this certainly makes gold a much better 'investment' than cash in the bank.

In addition, interest accumulated at the bank attre3acts tax at the highest rate for the individual. This can be literally half the gains made from the interest on savings. Gold, on the other hand, does not attract any interest and so does not attract any tax. Ones asset is safe, both when one buys gold and even when one sells gold.

So to buy gold in Australia is now a much more attractive proposition than buying cash. Of course the banks won’t tell you that. Hardly in their interest, no pun intended.

Tuesday, December 06, 2011

Gold the Reserve Currency

Could gold be the reserve currency of the day?

According to Eric Sprott, CEO of Sprott Asset Management, gold has unwittingly been made the reserve currency of the central banks.

In a recent interview Sprott stated, "I don't care whether the central banks have or governments have, but the markets made it the reserve currency... central banks have been aiding and abetting that process - they're almost making it the reserve currency by their actions, not by their statements and when it was a reserve currency silver traded at a ratio of 15 to 16:1 of the price of gold."

Over the shorter term, he says there is clear evidence of strong demand for the metal, "demand for silver is versus the demand for gold in the investment arena and when I see people like Gold Money sell as many dollars of silver, as gold. When I see the US Mint sell as many dollars of silver as gold which by the way implies in both instances, 50 times more physical than gold. And when we did the IPO for Gold Trust we made $440 million. When we did the IPO for the Silver Trust we made $550 million...Well how can the price be 50:1 when the money is going in 1:1?"

In the face of the potential global financial meltdown central banks are buying up gold as a hedge against currency losses, supporting the argument that gold is money.
Countries are also buying up gold and holding it in reserve. Russia, China, India are the biggest but also smaller countries such as Korea for example, are accumulating gold by the ton.

India is also not the only country where individuals accumulate and store gold, China is encouraging its citizens to do the same. Interesting that the western powers are encouraging people to buy currency, not gold.

This says more about the countries governmental policies than it does about gold as money.

The Maxim to follow? Buy gold, not money!

Monday, December 05, 2011

You can print money but you can’t print gold.

Which is probably the reason why the banking fraternity regard gold as a rebellious cousin to be tolerated out the back, but not shown to the public.

Unfortunately printing money does not increase the value of money quite the contrary, but it does improve the price of gold. A good excuse to buy gold incidently.

Some banks still instinctively understand the value of gold as evidenced by their continued buying of the precious metal. According to the World Gold Council central banks have been accelerating their gold purchases over the past few months. Are they shoring up their assets in preparation for an expected fall? Can they see something on the horizon that we can't?

The Bank of Korea for example. Which bought 25 tone of gold in June and July this year followed that up with regular purchases including 15 tones in November. "We bought the gold as part of our diversification strategy and based on long-term investment considerations," Lee Jung, an official at the bank's reserve management group, told reporters.

The bank said recently they bought gold in November for the second time this year, 'to diversify its foreign reserves, joining its counterparts in other countries in seeking protection against financial instability and inflation.'

According to Arne Lohmann Rasmussen, the head of rates, foreign-exchange and commodity strategy at Danske Bank A/S, "South Korea has huge reserves. When they are buying gold, it’s supportive for the market."

So with the instability in the financial markets caused by excessive debt, even the central banks will turn to the only stable of gold bullion to protect its interests.
"Emerging economies including Russia and China have been adding their gold reserves, as the situation in the United States and Europe is not looking great," said Hou Xinqiang, an analyst at Jinrui Futures in China.

"Growing appetite for gold from central banks will surely support gold prices to further rally in the next few years, and gold is gaining an increasingly prominent status on central banks' books."

"While the bulk of central bank gold is still held in North America and Europe, a build-up of gold reserves in emerging markets has been a consistent feature over the last few years," said the council in a research report published recently.
But China’s gold accumulation is moving forward in leaps and bounds. Gold purchases in Sept hit an all time high of 56.9 tones. In the July to Sept quarter over 140 tones of gold bullion was bought by China.

China has been encouraging its citizens to buy and hold physical gold and has widened the number of banks allowed to import gold. It has been encouraging its citizens to buy gold and the encouragement of gold investment has been emphasised with gold exchanges now opening around China with the first opened on Jun 28th this year. In fact China's demand for gold has increased 25 percent, much more than the usual global average of seven percent.

And China's Middle Class is growing by the day buying more and more gold. With 320 million Chinese introduced in to the gold market, the gold purchases in the western world will pale into insignificance.

What will that do to the gold price I wonder?

Indeed, is China going to be the first country to adopt a gold standard? It seems quite possible that the new gold standard may be 'hosted' not by the US or Europe (even Switzerland has bailed out) but by Asia with its determination to reduce its exposure to foreign debt. Converting this debt into gold is a sound practice.

Gold is the only money around. All else is simply paper, Asia knows this, the banks know this. Astute gold bugs know this. Even some parts of the mainstream media are starting to wake up. And the more people do, the more demand is going to be placed for gold and the higher the value is going to be placed on gold as real money. The rise is going to be exponential and soon only the central banks, institutions and the very wealthy will be able to afford a simple ounce of gold. That is, if China does not have it all.

The gold standard is not far away now. Time to buy gold. Afterall, you can print money but you can't print gold.