Apr 302015

In January Steven Saville of The Speculative Investor newsletter wrote an article saying that “focusing on the changes in gold location is pointless if your goal is to find clues regarding gold’s prospects.” While I get what he was trying to debunk, I think he has thrown the baby out with the bathwater in doing so.

His target was specifically those who make the claim that “demand is rising even though the price is falling”, usually in respect of Chinese demand. I agree that this is a nonsense statement as for every buyer there is a seller, so to say that demand is up in China is the same as saying that supply is up in Switzerland.

Steven is correct that “the price trend is determined by the general urgency to sell relative to the general urgency to buy” and that price is the only way to know the relative urgency: “If the price is rising we know, with 100% certainty, that buyers are generally more motivated than sellers.”

So who is the baby that Steven threw out in his article? A clue is in this statement:

“while there could be a reason for wanting to know the amount of gold being transferred to China (I can’t think of a reason, but maybe there is one), the information will tell you nothing about the past or the likely future performance of the gold price”

It is the future price baby. When looking at the past, I could concede that price is probably all that matters, but when it comes to the future price, who bought (or sold) I think matters a lot. Steven himself says in his follow up post that “the most useful information is that which provides clues about the likely future intensity of buying relative to selling”.

Let me explain by an example. When I was a kid, football cards were popular. If you live on the moon, this is what I’m talking about.









I picked the first two names I recognised out of google’s image search. Apparently people collect these things. When I was a kid we used them to flick them and play snap type games and they’d get damaged quite a bit, then I grew out of them and gave them away.

Anyway, according to Steven, all you need to look at is the price of football cards going up. It is not important to know who was buying, say that it was a crazy old millionaire who was buying, stacking them in his house and never selling them – that would apparently have no impact on future prices.

I’d argue that it does matter if the buyers were a wide variety of normal collectors vs a market dominated by one crazy buyer. I’d like to know if he was keeping the cards in good order, or whether they were rotting away in a basement, and how old he was and whether his children had any interest in cards or would dump them on the market when he died. That seems all pretty relevant to the “future intensity of buying relative to selling.” Knowing who was buying in this case would give you an edge on guessing future football card prices.

To bring this back to gold, it does matter to me to know if the buying in size was coming from institutions/hedge funds (ETF flows give an indicator of this) or Chinese/Indians, for example. On the balance of probabilities on past behaviour, I would not want to make a long term bet on gold prices based on hedge fund buying as it is only a “trade” to those people and I could be sure they will sell up at some point.

However, given the known and demonstrated cultural hoarding behaviour of Chinese and Indians, I would have a bit more confidence that this gold would not be coming back into the market in the future. On the other hand, if one thinks that the Chinese economy is going to struggle, then maybe buying will drop off or even dishoarding will occur. Steve may not care to know estimates of how much gold is in China or India, but surely the bigger the hoard the bigger the risk that accumulation may stop (eg China gets enough central bank gold reserves to get into the SDR) or reverse?

Now while India and China are like black holes for gold consumption, I would point out that this is price positive only in the long term. It is a macro factor supporting gold but has less impact on prices in the short run, which is why if you run a correlation between ETF or Chinese flows to price you don’t get much. This is probably what Steven is rebelling against, this simplistic construction of a Chinese demand “meme” as respect to immediate prices.

The fact that people may be making the wrong assessment about the future (lack of) selling intensity of current gold holders, or that they are focusing far too much on short term prices, or that they may be using such “analysis” to pump their products/services (the bathwater), doesn’t mean not knowing who the market participants are (the baby) is not important. Reasoned and considered analysis of the current buyers and sellers and their motivations I think has some predictive usefulness.

Someone who would agree with me I bet would be HSBC and JP Morgan. As the two bullion banks with the greatest market share of the gold trade, they have access to information about where gold is flowing from and to well before anyone else. I find it hard to believe that seeing orders to buy gold (to replace sold coins/bars) from The Perth Mint and other mints and distributors, seeing orders from miners, jewellery manufactures, from scrap merchants and industry users – that all that “who” information is “pointless” for future price prediction.

Some people wonder why bullion banks are so successful and the fractional reserve bullion banking system hasn’t imminently failed. Maybe, just maybe, that knowing exactly who, when, where and how much is being bought and sold both in physical and paper markets is information that has value and gives one an edge.

Apr 292015

The Permanent Portfolio is an investment strategy developed by Harry Browne in the 1970s that advocates splitting your money equally across four assets – cash, gold, equities and bonds – and rebalancing back to that split whenever they diverge too much. Mainstream financial planners would probably balk at a 5% allocation to gold, let alone 25%, but how does such a strategy perform in reality and could you get your financial planner to consider it?

For Australian investors hard numbers on the Permanent Portfolio strategy can be found by looking at the Cor Capital Fund, run by Davin Hood. His latest Quarterly Report is out and his fund’s performance, as summarised in the chart below, I think justifies giving the strategy some consideration.

Cor Capital Performance Chart

Cor Capital Performance Chart

It is important to note that the blue line is the theoretical performance of the strategy before the fund started and the while line is its actual performance. What is clear from this chart is the low volatility of the fund’s performance – yes, you don’t get big gains (as the Australian Equities line shows in 2006 & 2007) but nor do you get the big losses (as happened in 2008). For those looking for a consistent and safe investment plan for the long run, this chart shows that the strategy has merit.

Part of the performance comes from not just the choice of asset classes to allocate to but the disciplined rebalancing between those asset classes. Unless you are willing to hold all of these asset classes, and sell those which are up and buy those which are low, the strategy probably will not work as indicated.

Unfortunately, if you are looking for someone else to be that disciplined investor for you, Cor Capital is currently limited to sophisticated/wholesale investors, which means, for example, an initial investment of $500,000. For US investors there is a fund which follows the concept but it tends to be overweight on inflation fighting assets and they also hold 12% in gold coin, which in my opinion adds unnecessary costs for a fund of this size which could hold cheaper 400oz bars.

If you are interested in investigating this strategy further I would recommend The Permanent Portfolio book by Craig Rowland and also Craig’s blog and associated discussion forum.

To be clear, I am not saying you should invest according to this strategy, just bringing it to your attention and of course you should discuss any investment strategy with your financial advisor – at a minimum it will force them to justify why their current advice is better than Cor Capital’s performance.

Even if you are not comfortable with the 25% allocations and have your own allocations between asset classes, the idea of forced rebalancings back to your target allocations is a good discipline to follow in my opinion. Looking through our Depository client account I see a many who have never sold their gold or silver, or bought additional, since they first purchased many years ago. It is hard to believe that their initial percentage allocation to precious metals has remained the same for their entire portfolio over that time.

Apr 282015

The new London Gold Price, which replaced the London Fix, has seen fifty price “settings” (“fix” is understandably on the nose these days) since it launched on 20th March this year. As part of the change, the administrator of the setting publishes details of each round, which you can view here.

This detail was not previously available to the public and represents a move towards transparency. In the past, all that was revealed was the price achieved but the retail investor did not have access to the volume traded, number of participants, how many rounds it took (for information on how the process works, see here).

This data is a valuable insight into the buying and selling dynamics in the London professional market, particularly since many professionals claim the London Gold Price provides a point of deep liquidity for the gold market. While it is early days, I am sure that analysts will look to mine this data, as some do with futures markets data, for clues on whether bull or bears have the upper hand. For example:

  • How many rounds were required to set a price?
  • How big was the gap between buying and selling volume on the first round?
  • How did buying and selling volume change in response to each round?
  • Did buyers increase volume to match sellers, or vice versa, or did they both move?
  • Was the price change from the first round to the final price related to any of the above?
  • Do any of the above predict future prices or volatility?

It is too early to read too much into the data as 50 price settings is not enough statistically but so far:

  • 20% only take one round to set a price with the majority taking between 4 to 6 rounds, averaging 3 minutes in total.
  • The longest setting took 12 rounds and close to 10 minutes.
  • Average volume is 89,233oz, or around 3 tonnes ($100m).
  • So far all the fixes have been below 6 tonnes, except for one afternoon of the 27th of March, when 608,117oz or 19 tonnes were traded ($727m worth).

For me so far the most interesting observation is the number of days where the volume offered for sale does not change, or changes very little, through each round. On those days the buyers can only be induced to increase the volume they will bid by the Chair dropping the price.

Who could be these price insensitive sellers, these “price takers” turning up each day? My guess is that it is mining companies, as we know many sell their production on the London Gold Price benchmark. Maybe they need to get a bit smarter and stop putting in “sell at market” type orders? It doesn’t look like it is doing them, or us, any good.

Apr 122015

Loco swaps are a way to move gold or silver to another location without physically shipping it. It is a transaction where two parties agree to exchange (swap) gold they have in different locations (locos) with each other.

As discussed in Loco, gold trades at different prices in different locations. This means that the loco discount or premium needs to be transferred between the swap parties in addition to the metal itself.

The Perth Mint records loco swap trades as linked buy and sell trades. For example, a mining companying swapping its Perth gold for London gold would be entered as (assuming a gold price of $1000 and a loco Perth discount of $1.00):

Trade Number 1 2
Perth Mint is Buying Selling
Metal Gold Gold
Currency USD USD
Price $1000.00 $1001.00
Ounces 100.000 100.000
Loco Perth London
Trade Value $100,000.00 100,100.00

While there are two separate trades, on settlement the USD trade values are netted against each other and the mining company pays the Perth Mint $100.00. The metal values however are settled independently as they are for different locos – the Perth Mint would deposit 100oz into the mining company’s London metal account and withdraw 100oz from its metal account with the Perth Mint.

The most common type of loco swap the Perth Mint does is with mining companies. The reason for this is many mining companies trade their gold or silver in the over the counter (OTC) market in London with bullion banks, or have other contractual obligations to deliver metal they need to meet. Miners could ask for the Perth Mint to refine their gold and ship it to London, but from the point of view of the industry as whole, however, this is not always efficient. For example, with a huge demand in India for 99.99% kilo bars it would not make much sense for:

  1. an Australian miner to ship 99.5% 400oz bars to London;
  2. a bullion bank to then ship those bars to a refinery;
  3. a refinery to reprocesses those bars into 99.99% kilo bars; and
  4. a refinery to ship the kilo bars to India for sale.

So it is more efficient (cheaper) for all parties for the Perth Mint to keep the miner’s gold, refine it directly to 99.99% purity and then ship the kilo bars to India.

Apr 112015

To trade efficiently, market participants need to agree on standards for the products they deal in. In addition to agreeing where the product they will trade will be located (eg COMEX gold must be in a warehouse in New York) and in what form (eg COMEX bars must weigh 100oz), market participants need to agree on which manufacturers they will accept product from. This is the purpose of accreditation.

In the precious metals markets it is the refiners that are accredited, as refiners are the first point of supply into the market of purified and standardised gold and silver. Accreditation occurs on a market by market basis as well as by metal. So it is possible that a refiner may be accredited for gold but not silver, or in one market but not another. Most of the major refiners are accredited across markets. For example, the Perth Mint is accredited as a refiner, weight master and assayer with the:

  • London Bullion Market Association (LBMA)
  • New York Commodity Exchange (COMEX/CME)
  • Dubai Multi Commodities Centre (DMCC)
  • Tokyo Commodity Exchange (TOCOM)

The most widely recognised and respected accreditation is that granted by the LBMA, which is also licenced by the CME as part of its own accreditation procedures for COMEX. This status is not just based on the requirements for listing, which include an established track record and minimum annual refining volumes and tangible net worth, but also the rigorous scrutiny of an organisation’s standards and procedures and the successful completion of searching practical testing before being accepted for accreditation.

In addition, LBMA accredited refiners are subject to a Proactive Monitoring regime where they have to demonstrate the are maintaining LBMA refining and assaying standards on an ongoing basis.

Market participants can therefore be assured of the stated weight, purity and integrity of the products produced by accredited refiners. The end result is that traders will accept bars from any accredited refiner without question in settlement of their trades, which simplifies the process for both buyer and seller.

The LBMA’s list of accredited refiners can be found here.

Finally, it is important to distinguish between accreditation of refiners from accreditation of product. Each market has different rules as to what form is acceptable for settlement. For example, while the Perth Mint is accredited with both the London and COMEX markets, only its 400oz Good Delivery Bar is accepted in the London market whereas only three Perth Mint gold kilo bars (or a 100oz bar) would be acceptable in settlement of a COMEX futures contract. Perth Mint coins would not be acceptable in either of those markets as they are professional wholesale markets which do not deal in small sized products.

While small sized bars and coins are not themselves accredited, investors do often take comfort that a manufacturer of bars and coins is accredited because it means that the accreditation weight, purity and integrity standards will apply across the organisation and thus to all of their products.

Apr 102015

Loco is short for Location. Location is relevant for gold and silver because it is a physical commodity and it costs money to move it between locations. People used to trading shares and bonds and other “virtual” products can sometimes overlook the implications and risks of dealing in something that is physical.

In the industry “spot price” is really shorthand for “the price of gold located in London”. Why London? Because that is where, historically, gold was traded. It is where the major bullion banks have head offices and where many large vaults are located and a fair amount of physical gold is located. Thus the price quoted on information services like Reuters and Bloomberg is for gold located in London, or in industry jargon, “loco London”. If you are dealing with a dealer who has trading accounts with bullion banks, the spot price they are quoting is effectively a loco London price. This is effectively gold’s “base” price.

If you deal in gold in other locations, e.g. loco Perth, the price is different to gold’s price loco London because it costs money to freight gold between locations. The question is, who pays this difference? Answer is, supply and demand.

For example, Australian mines produce a lot more gold than domestic buyers want, so loco Perth supply is higher than demand. Without enough Perth buyers the gold will have to be shipped to London or China or other markets where there are more buyers. So Perth gold trades at a discount to the loco London gold price, the discount generally being equal to the cost of getting the gold to the other location.

So each location can trade at a premium or discount to London depending upon local supply and demand at that time. As a result, loco discounts/premiums are not fixed and change over time as local supply/demand changes. Normally the supply/demand situation is stable, which is another way of saying that the physical flows around the globe are stable.

Generally loco discounts/premiums are small and are often included into fabrication premiums. This can therefore give investors the impression that there is one global spot price for gold. This is misleading because when markets change and there is sustained buying or selling imbalances in a location, the discount/premium can start to become quite large. The result may be that the spot price in that location starts to diverge from the loco London price


Apr 092015

Foreign currency and precious metal markets use the International Organization for Standardization’s (ISO) currency code standard ISO 4217:2008 when referring to currencies. Each currency has a three-letter alphabetic code which, where possible, is composed by making the first two letters equal the ISO 3166 country code and setting the third letter as the first letter of the currency name.

The four precious metals are included in the list as they are treated by most financial firms as a currency and traded on their foreign currency systems. The precious metals are the only metals with a formal currency code. The coding convention for precious metals is “X” as the first letter and the metal’s element symbol as the next two letters.

Some of the currency codes used by the Perth Mint include:

Country Currency Alphabetic Code
n/a Gold XAU
n/a Silver XAG
n/a Platinum XPT
n/a Palladium XPD
Australia Australian Dollar AUD
Hong Kong Hong Kong Dollar HKD
India Indian Rupee INR
Indonesia Rupiah IDR
Japan Yen JPY
Malaysia Malaysian Ringgit MYR
Netherlands Euro EUR
New Zealand New Zealand Dollar NZD
Singapore Singapore Dollar SGD
South Africa Rand ZAR
Switzerland Swiss Franc CHF
United Kingdom Pound Sterling GBP
United States US Dollar USD
Apr 082015

There are three key dates recorded on Perth Mint precious metal buy and sell transactions: Trade, Value and Delivery.

Trade Date

Trade Date is the date on which the deal is executed, that is, the metal price and other terms are agreed. Trade Date is often abbreviated to “T”. The gold or silver price is fixed on this date and once agreed, the client and the Perth Mint are both committed to that price and the transaction will not be reversed or refunded.

Value Date

Value Date is the date on which the transaction settles, that is, cash and metal are exchanged and when the buyer gains ownership/title to the metal. Sometimes it is referred to as Settlement Date.

The precious metals markets, like foreign exchange markets, work on a standard of settling transactions two business days from the trade date. You will see this referred to as “T+2” or “spot”. Therefore, when you see references to the “spot price” of gold it means agreeing to the price to buy or sell gold today with settlement of cash and metal to occur in two business days.

It is possible to arrange for settlement on the trade date (unusual) or in one business day – referred to as T+1 or TOM (short for tomorrow). Settlement of transactions later than T+2 are also possible and these are referred to as “forwards”. A “forward” metal price will differ to the “spot” metal price as it takes into account the cost of funding the delayed settlement (that is, the cash value of the trade is adjusted for the time value/interest rates of money and the metal).

The calculation of value date needs to take into account any public holidays that apply to the countries where both of the currencies in the transaction will settle. For example, the purchase of loco gold London in US dollars would need to consider both US and UK holidays.

Foreign exchange market convention requires one business day between the trade date and the value date for US dollars and for all other currencies (including gold and silver) there must be two business days between the trade date and the value date.

An example of how this works can be found at the London Bullion Market Association precious metal value dates webpage. Consider these two examples:

  • Trade date of Monday 31st December 2012. Normally a Monday trade would settle two days later on a Wednesday, but with a New Year’s Day holiday on Tuesday the 1st of January, the revised value date is Thursday 3rd of January as the metal side of the trade requires two business days.
  • Trade date of Thursday 14th February 2013. Normally settlement would be on Monday the 18th, but that is US President’s Day holiday so the value date is moved to the next day Tuesday the 19th.
  • Trade date of Friday 15th February 2013. Settlement will occur on Tuesday the 19th, even though US President’s Day holiday is on Monday the 18th. The “one business day minimum for US dollars” rule means that the Tuesday value date fulfils that requirement and for the metal side of the trade there is no UK public holidays so the “two day minimum for all other currencies” rule is satisfied.

Note that in the case of an Australian dollar gold transaction, the value date would need to take into account Australian and UK holidays and apply a two business days rule to both.

Delivery Date

Delivery (or Stock) Date is a Perth Mint specific term indicating the date on which physical metal is delivered/shipped to the client.

Normally in wholesale market transactions the delivery date of the physical (or paper) metal equals the value date. There is a risk with this that the customer fails to send its cash (or metal) on the value date, leaving the Perth Mint short. We manage this by setting a maximum (credit) limit of how much we are prepared to risk, based on the credit rating and trustworthiness of the other party.

In the case of individuals or companies without credit ratings, the Perth Mint cannot take such a risk, so it needs to verify that it has received the cash (or metal) on the value date before sending the metal (or cash) to the customer. As a result, the delivery of the metal (or cash) occurs on a different date to the value date when the cash (or metal) was received.

Apr 072015

There are two key markets in which the prices of gold and silver are determined.

1. Over-the-Counter (OTC)

The OTC market consists of traders dealing with other traders on a one-on-one basis. It operates much like the internet – it is just a network of traders independently dealing with each other 24 hours a day. OTC is generally meant to refer to professional/corporate entities trading 400oz gold bars (and 1000oz silver bars), usually for settlement in London. However, when you buy a coin from a bullion dealer, you are also doing an OTC deal.

OTC trading is done on the telephone or via a dealer’s proprietary trading platform software. Just like your transaction with a coin dealer, the amount dealt and the spot price agreed is not public.

To facilitate price discovery in what is an otherwise opaque market, precious metal dealers often use a service like Reuters or Bloomberg as an indicator of where the spot price is. This spot price is updated by the bullion desks of the big banks and is, in effect, a bulletin board or forum where these banks can publish their prices. However, unlike a stock market, it is not a commitment to deal at those prices (but generally one can).

It is therefore hard to “pin down” the OTC spot price, compared to a public exchange.

2. Futures Exchanges

Futures markets are public, regulated exchanges where the price for delivery of gold or silver at various dates into the future is traded. The largest and most influential market is the US COMEX market.

Often the current (or nearest) future prices quoted as a spot price of physical gold. Technically this is not correct as it is a price for gold or silver to settle in the future whereas the “spot price” is the price for settlement in two business days. However, in countries with futures exchanges dealers often base their price for immediate delivery of gold or silver off their local futures market, so from a retail customer’s point of view in these countries a futures prices is effectively the spot price.

It is important to note that futures and spot prices are related to each other and as such are kept in alignment by arbitrage traders who look at the relative costs of borrowing cash and gold (and other factors) and will sell futures and buy OTC spot (or vice versa) if they see too much divergence between the prices.

There has been some debate as to whether US futures markets or the London OTC spot markets drive the price. This analysis concludes that it is not fixed and changes over time, even though the London OTC market is much larger than COMEX in terms of ounces traded.

A Bullion Dealer’s Spot Price

So how do bullion dealers selling to customer set their spot price? They do so by considering the following factors into account:

  • The spot/futures price may change in the time between committing to a price with their customer and executing a deal with their OTC counterparty or futures market broker.
  • OTC and futures markets are wholesale markets (trading in “lots” of 1,000oz and 100oz of gold, respectively) whereas a dealer’s retail customers will be buying in much smaller amounts. This means it may take some time before they have accumulated enough ounces to execute a deal, during which the OTC/futures price will change.
  • The dealer may not be quoted the Reuters or Bloomberg screen price when trying to lock in a price in the OTC market, especially when the market is moving quickly and bullion banks are not updating their prices into those information services quickly enough.
  • For futures trading, the dealer will be charged brokerage fees. For both futures and OTC trading there is also general costs of employing dealers and settling trades.

The way bullion dealers manage the above factors is to add a margin (or buffer) to the spot or futures price they see quoted. How much they add and how often they will change their spot prices depends on how volatile the wholesale price is and how much buying or selling their clients are doing. This changes dynamically during the day and will also vary between each bullion dealer. Note that this spot price margin is in addition to any fabrication premium.

The result is that you will find each bullion dealer quoting different spot prices. This can be confusing to first time investors who are used to, for example, a single price for a company’s stock on a single exchange. It often leads to questions about whether they are being quoted a “fair” price.

The only way to know if you are getting a fair price is to do what bullion dealers themselves have to do, which is to shop around and see who is offering the best price at that time and take it. In doing so, you become part of the huge, opaque precious metal market “network” of over-the-counter traders. Good luck!


Apr 062015

Gold or silver items have many different weights depending on what is being measured and the purpose. First, some terminology definitions:

Gross total weight as registered by a scale
Fine gross weight multiplied by purity
Actual true, factual or real amount
Nominal deemed, defined or assumed amount

The above results in four weights:

Actual Gross total real scale weight
Nominal Gross Actual Gross rounded up/down
Actual Fine Actual Gross multiplied by actual purity
Nominal Fine Nominal Gross multiplied by nominal purity, or Actual Fine rounded up/down

Actual weights are mostly used in the manufacturing process whereas nominal weights are often used to standardise or simplify weights when selling/trading gold and silver coins and bars. The reason nominal is needed because manufacturing processes result in small variations – it is not possible (or often cost effective) to produce exact weights as per the product specifications. If you weighed a coin or bar with a very precise scale you would find they all have slightly different weights (although all will be above the specification weight) resulting from normal variations in manufacturing.

For example, a 10oz gold bar, if weighed and assayed accurately may show a actual gross weight of 10.0003oz and a purity of 99.9876%, giving an actual fine weight of 9.9990599628oz. Needless to say, if one operated this accurately for every bar it would make recording and trading very complicated. As a result, a 10oz gold bar is given the following nominal weights:

Gross – 10.000oz
Purity – 99.99%
Fine – 9.999oz

Another example of nominal weights is the London gold market specifications for good delivery bars. These have their gross weight rounded down to the nearest 0.025 of an ounce. The reported weight in bar lists is therefore a nominal gross weight, with the fine weight calculated from this and not the actual gross weight.

A common reaction to use of nominal weights is that it disadvantages one party to the trade. In the 10oz gold bar example, the customer is only paying for 9.999oz of gold and the seller loses as they have “given away” 0.0000599628 ounces. This is true, but note that when selling that bar later, the owner is only going to get 9.999oz and not 9.9990599628oz. The industry works on the basis that what one gives up on day, one will receive back another day. It is also worth noting that these “give aways” are also very small in dollar terms.

However, for a large net seller like The Perth Mint, these “give aways” can add up to a significant cost and our manufacturing staff are constantly working to reduce them.