May 072015

Following on from yesterday’s post, I had a bit of feedback that I was being a bit harsh just having one colour for all the negative returns and also asking it for silver and in Australian dollars. Below is the USD gold chart from yesterday updated and the additional.


This version does show that most of the “wasteland” is less than a negative 5% compound return, but it also does show some “black holes”, highlighting gold’s volatility over short timeframes.


The silver matrix shows a lot more variability than gold, and lower returns in general for the same time periods. Of concern is the greater prevalence of negative returns to the left of the 20 year line, which is not what you want to see if you are investing for retirement. This is a demonstration of silver’s higher volatility.


The AUD charts only start in 1975 as that is when The Perth Mint has reliable daily data. Compared to USD gold, Australian investors do not see as much volatility as our American cousins – there is a lot less negative area in this matrix but also not as much outstanding returns.


AUD silver likewise has a lot less risk than USD silver but we still see higher volatility than AUD gold and that impact of the 1980 bubble can be see by the light orange negative areas beyond the 20 year line for investors unfortunate enough to buy in the early 1980s (assuming they are still holdings on, that is!).

May 062015

Below is a returns matrix for gold since 1968. A returns matrix is a way of showing the return on an investment over a range of investment timeframes. Each square shows the compound annual return from investing in one year and selling in another – you pick a year from the bottom axis when you bought and draw a line up and then intersect with a line drawn from the left axis when you sold.

Returns Matrix Gold

The top left shows the 1970s bull market, where compounded annual returns of over 20% could be made in a few years. The 2000s bull market shows similar concentration of high returns. This contrasts with the area I’ve called the “wasteland of returns” where any investment during the 1980 showed negative returns for many years: in the case of 1980, it took up to 25 years before registering positive returns; investing in 1995 it took 10 years.

The black diagonal line represents time periods of 20 years – anything to the left and below this shows the returns on gold for time period over 20 years. If you are planning for retirement then this is the sort of long term time period you are looking at for your investment. You will note that most of the returns are between 0% and 10% and nothing above 10%, which is not surprising as over the long run it is highly unlikely that any investment can show consistently high returns.

The area to the right of this black diagonal line shows a lot of variation in returns, which is another way of saying that if you invest in gold for the short to medium term you are taking on a lot of risk.

Another way of using this matrix is to draw a diagonal line for the time period you intend to invest and then count up the number of red, yellow, green etc dots and that gives you a rough probability of what sort of risk you are taking on. The longer the timeframe (that is the closer the diagonal line gets to the bottom left corner) the lower the number of red dots – as well as lower the number of purple.

The lesson for risk adverse investors from this matrix is that gold is a long term investment.

 Comments Off on 45 year Returns Matrix for Gold
May 052015

Around this time of year The Perth Mint puts together its budget for the June 2014 to July 2015 financial year. For normal companies the whole budgeting process can be a cynical exercise but for a precious metals business it is even more problematic – our sales volumes are driven by the gold price, and if anyone knew how to forecast those, well they’d be “see you later suckers, I’m off to trade gold in the Bahamas based on my computer model.”

But they have to be done. Our approach is generally to use current precious metal prices and FX rates without any real aggressive forecast one way or the other. While we have no direct exposure to metal prices themselves (our unallocated clients own the metal in our business) our profit is impacted by price changes in that it affects the amount of, and mix of, coins and bars we sell and our premium revenue (for coins priced as a percentage of metal value). The result is we focus more on “what ifs” in our budgeting – for example, if prices decline, then what is the impact to our profit from volume and revenue changes.

Following on from that, the budget write up around the outlook for precious metal prices also takes a classic economist approach: on one hand X, on the other hand Y. For those who don’t want to read a whole lot of words, I’ve summarised the current competing forces that will drive precious metal prices during this year in the diagram below.

Factors driving metal prices

Foremost on the negative side for precious metals is the outlook for the US economy, with the consensus being that an improving US economy (which is debatable I think but that is the current consensus) will give the US Federal Reserve scope to increase interest rates, although in a tentative manner due to conflicting economic data about the strength of the recovery. With continued low inflation any interest rate rise will increase real interest rates, which have a long run negative correlation to gold prices. Increasing rates will also support the already strong US dollar, putting further pressure on gold.

Weak oil prices have impacted on gulf country gold demand with some retailers in Dubai reporting drops in sales volume of up to 40%. Lower oil prices have also lowered import costs for some emerging markets, particularly India, where the resulting easing of pressure on their current account balance has allowed the Government to tolerate higher gold imports, which is a counterbalancing positive force.

Recent strong gains in the Chinese stock market in conjunction with a weak to sideways trend in gold prices has resulted in Chinese investors favouring stocks over gold recently. However, GFMS see a growing demand side response from China and India as prices approach $1,100 that will help contain any falls. Currently we are seeing Chinese demand weaken on prices above $1,200 but return once it gets below that.

Finally, there is some risk that mining companies may cap any strength in gold prices with forward selling, which has doubled over the past year, as exemplified by some Australian producers who took advantage of higher AUD gold prices on the Aussie dollar’s weakness. GFMS do not however that the hedging increases have been limited to a handful of miners.

On the positive side (for precious metals, that is) continued weakness in the Europe and uncertainty around Greece has weakened the Euro which drives up local gold prices and attracts investor interest. For those emerging markets reliant on oil revenue or European consumer demand, the resulting economic slowdown leads to a continuation or increasing of financial repression policies, increasing demand for gold within the country as well as capital flight (some of which is going into gold but from local media noise it seems to all be going into Sydney real estate, but it seems that Vancouver, New York and London property are also getting some money flow).

Continued low gold prices have put pressure on mining companies, with many below all-in production cost or at very low margins. In this environment analysts do not forecast any significant increase in gold production, which some see as support for gold (at least those focusing on annual flows and not stock, which many mainstream financial analysts do).

I think the market continues to be complacent about geopolitical risks in Eastern Europe and the Middle East (lessened somewhat with recent US-Iran negotiations), which provides the potential for surprises to the upside in precious metal prices.

Right now prices are “stuck” as there is no compelling narrative or story to get mainstream professional investors to buy gold – the longer precious metals continue in this sideways range the more traders sell the bottom of the range and buy the top of the range and it becomes self fulfilling.

May 042015

On Friday GoldCore posted an article asking whether JP Morgan was cornering the silver bullion market, noting their Comex warehouse stocks of 55 million ounces and claims by Ted Butler that they “may be holding as much as 350 million ounces of physical silver.” My short answer: I don’t think so.

The clear import from the article is that because the warehouse has JP Morgan’s name out front that all the silver insider is theirs. However, JP Morgan has large market share of global precious metal market activity with a significant number of industry participants using JP Morgan to buy and sell physical and futures, and for storage services. It is therefore highly unlikely that none or little of the silver in JP Morgan’s warehouse is held on a custodial basis for clients.

While it is not possible to know who owns the metal, either from Comex eligible/registered warehouse reports or house/client delivery reports (do you think banks would allow a reporting structure that would make it so easy to work out their proprietary position?) as a data point consider the following net amounts of silver taken delivery of since JP Morgan opened its silver warehouse (data from Sharelynx):

  • Customers of JPM have taken delivery of a net 4781 contracts (23.9 million ounces)
  • JPM’s house (proprietary position) delivered a net 4683 contracts (23.4 million ounces)

Since a bank trading futures can receive or deliver silver held in other banks’ warehouses, we can’t just assume that JP Morgan owns 23.4 moz. Nevertheless, these figures at least show a significant amount of customer activity by their clients.

It should also be considered that a profitable part of a bank’s business is arbitrage and market making. For example, if silver speculators go long futures, JP Morgan can make a market by going short (there has to be a short for every long) and then hedge itself by buying physical silver.

So the silver in JP Morgan’s warehouse could be owned by its clients (individual and wholesale), other banks, or owned by itself but hedging other short positions. Only after taking off these three would any remaining silver be owned outright by JP Morgan.

As to the 350 million ounce figure, the only public explanation of this figure is this December 2014 article.  which it should be noted is a work of reasoned speculation, but speculation nonetheless.

Ted says that “I believe much more than 100 million oz of silver, perhaps double or triple that amount have been accumulated by JPMorgan using the SLV to transfer metal to its own London warehouses completely undetected and unreported” (my emphasis). Ted also claims that JP Morgan has acquired “as many as 70 million oz of Silver Eagles, or half the amount produced by the US Mint since April 2011.”

The main logic behind these claims is the “counterintuitive” metal flows in SLV and US Mint Eagle sales, namely, “that the public doesn’t normally buy investment assets on falling prices” and Ted says that he thinks “the most plausible reason is the presence of a big buyer in silver coins, whether those coins are Silver Eagles, Maple Leafs or Philharmonics.” I tend to agree with Steve St. Angelo in this article that Ted is not showing much faith in individual silver investors.

By Ted’s argument, any silver inflow/increase in mint sales, ETFs, funds, warehouses/custodians stock over the past few years is at odds with the falling silver price and the behaviour of gold ETFs (which have declined) and therefore must be supported by buying by JP Morgan for its secret long position. All I can say is that JP Morgan must be very busy intervening in all of the major known (reported) stocks of silver below (as maintained by Nick here). By this logic, 350 million ounces looks like an understatement!

Gold Money (maybe James Turk can confirm if JP Morgan is a big client of theirs)

Gold Money Stocks

Bullion Vault

Bullion Vault Stocks

Perth Mint Pool Allocated (I can confirm JP Morgan does not own any of this, all retail investors)

Perth Mint Stocks

Bullion Management Group (Nick Barisheff needs to give JP Morgan a call, looks like he has been left out)

Bullion Management Group Stocks

Permanent Portfolio Fund

Permanent Portfolio Fund Stocks

Now all the major ETFs, starting with iShares




ETF Securities


Julius Baer ETF

Julius Baer

Deutsche Bank ETF

Deutsche Bank

I could go on, but I think you get the point: investor interest in silver in the face of falling prices is a global phenomenon, not a JP Morgan one.

May 012015

Earlier this year Societe Generale mapped asset classes in a matrix according to popularity and profitability over the past few years. It got me thinking about applying the same idea to gold to show how its sentiment had changed over the past 10 years.

Working out the profitability dimension is easy – we can use the percentage change in the gold price. Popularity is a bit harder as there aren’t any investor sentiment surveys. To approximate sentiment, I have used changes in ounces held by the major gold ETFs, funds and other services like Perth Mint Depository. The result is the chart below.

Gold Price vs Sentiment Map

Gold Price vs Sentiment Map

For each month over the past 10 years the map plots a point for the percentage return on gold (over the prior 6 months) and the percentage change in ounces held (over the prior 6 months). The monthly plot points are then joined into a line for each year. I placed an arrow on December of each year to give an indication of the direction of movement over time.

For this sort of scatter type chart we would expect to see a direct relationship between price and popularity – as the price goes up, more investors would buy gold. In general we do see that most of the points are scattered diagonally from the Loss/Loathed (“Sad”) quadrant to the Profit/Liked (“Happy”) quadrant.

Particularly interesting is 2008 where the line strays into the “Crazy” quadrant where people like an investment that is losing money. As the gold price declined during 2008, the purple line moves towards the left (Loss) but instead of going down to Loathed, investor flows into gold actually increased. The explanation for this behaviour is that investors were fearful and looking to protect wealth. This subsequently turned out to be far from crazy as the gold price increased significantly from 2009 to 2011.

The 2010-2012 period (light blue and green lines) are also interesting in that while gold was still showing positive returns, interest/growth in ounce held never got above the 10% level. This weakening in the sentiment then led into Loathing, where we have been mired since.

So far the 2015 red line looks encouraging, with any luck gold will move out of the Sad quadrant and into the Happy corner (it is not coincidental that I put The Perth Mint’s swan logo in the top right corner, that is certainly a happy point for us as well as our customers).

Note on calculations (for nerds).

Using month on month percentage changes produced a lot of noise in the plots – I found a rolling 6 month change was ideal for showing the general direction of the trend.

For the gold price I used a rolling 5 month period average on USD gold prices as recorded by The Perth Mint, to smooth out the data and produce less noise in the plot.

For sentiment I used a rolling 5 month period average of the following ETFs/Funds/Services, as these were the only ones in existence 10 years ago (didn’t want to skew the ounce data with new funds starting up mid 10 year period, as they usually have an initial surge) and they also had to allow outflows and inflows (hence closed-end funds like Central Fund of Canada was excluded), in order of size: GLD, IAU, ETF Securities (LSE & ASX), Perth Mint Depository, Bullion Vault, Permanent Portfolio Fund, ABSA NewGold, Gold Money, Bullion Management Group, Goldist. Thanks to Nick at for the ounce data.