Jun 302015

UPDATE 2nd July: Please see this post for a correction to some of the statements I made below, it is unlikely that total precious metal derivatives have declined.

Yes, you heard that right, the US Office of the Comptroller of the Currency’s (OCC) latest quarterly report show a reduction in total precious metal derivatives from $106,293 million to $75,620 million. This is at odds with Zero Hedge’s post first, ask questions later approach where they say that there was a “237% increase in the total amount of precious metals (which include gold) contracts in the quarter”.

Zero Hedge get their percentage from a graph from the report (see below) that does show a big jump. However, if you look more deeply into the Table 9 figures they also featured, it becomes clear that the chart is most likely a mistake.

In the picture below I have drawn lines from the tables to the chart, to show where the chart is getting its figures from. For Q1 2015 you can see with the green lines which Precious Metals figures from Table 9 their chartist has used. Note that in the Q1 2015 report this table refers to the total of gold AND the other precious metals.

For Q4 2014 you can see with the red lines that the chartist has used the figures from the column named “Precious Metals”, mistakenly thinking that because this column has the same name as those from the Q1 table, that the figures refer to the same thing. This is not correct, as the Q4 Table 9’s “Precious Metals” means the other white metals only.

OCC PM Derivatives

A true apples with apples comparison would add up both the gold and precious metals figures (see purple circles) from Q4 2014 . If you do this you get a total precious metal derivative notional amount of $106,293 million for Q4, which declined 29% to $75,620 million in Q1. Such a decline doesn’t make for much of a meme that the OCC is trying to hide a radical increase in gold derivatives.

Indeed, if you take the last twenty years or so of OCC gold derivative figures and eliminate the effect of changing metal prices to convert them into notional tonnes to see what has really been going on in the gold market, you get a chart like the one below.



You may be surprised to see this chart showing a very dramatic decrease in bank gold derivative activity, as the impression most gold commentators give is that gold speculative derivative activity by banks is huge and increasing. A fair part of that decrease is the result of miners reducing their hedging (see here for a comparison of the miner hedge book versus OCC derivatives over time).

It is unfortunate that the OCC has decided to lump gold in with the other precious metals as it means we will no longer be able to estimate the notional tonnage of gold derivatives with any accuracy – yet another blow to transparency in the gold market. But whatever the reason for the change, it certainly isn’t an attempt to hide any massive increase in gold derivatives.

Jun 102015

Today we complete our 12 reasons not to own gold, which also draws to a close this little pros and cons exercise.  Read on for further issues to consider in advance of any gold and precious metals purchases.

7. Supply/Substitution

Nearly all the gold ever mined is still in existence today – this has been part of its attraction (durability) as a form of money throughout history – and it also makes it somewhat unique.  Although there are some industrial uses for gold it is, as a result of its value, normally economic to recycle this (it’s typically not consumed in said industrial processes) and this therefore means it continues to remain in the total pool of available metal. In the global gold marketplace, there is no real distinction between ‘new’ (first supply after mining and refining) and ‘old’ (recycled) gold, and these differing sources compete directly for the same pool of demand. The issue this presents is, if gold demand drops substantially enough, the market can become significantly oversupplied as a result of the level of secondary metal available. This can even lead to net purchasers becoming net sellers, thereby both reducing demand and increasing supply. Compare this to oil, wheat etc. that are consumed when used and therefore, assuming no substitution becomes available, there will always be a demand for more.  In essence, the demand for gold has in the past and could again go ‘negative’ with secondary supply exceeding demand.

8. Size of Market

Although the gold market is a reasonable size and relatively liquid, it pales in comparison to the size and liquidity of the equities, bonds or derivatives markets.  Arguably this could actually be considered a positive as well as a negative, however it is clear that a smaller market is more prone to large movements in price, and hence increased volatility.  Furthermore, the ‘other’ precious metal markets are actually significantly smaller in size than gold and can experience liquidity issues – one only needs to view the spread on platinum and palladium spot prices to see the issue this presents.  There have even been historical precedents of precious metals markets being ‘cornered’.

9. Popularity Shift

If you look at the developed Western part of the world, there is mostly a level of ambivalence towards precious metals for anything other than ornamentation and jewellery – there are notable exceptions such as Germany, but even there the general populace’s view of gold is still primarily as a means of decoration. In one of the prior blogs we identified the rise and increasing per capita wealth of China and India, with their cultural affinity for gold, as potentially being very positive for gold prices mid to long term.  This could also easily be expanded to include most of Asia and the Middle East – pretty much as soon as you head south and east of the Mediterranean, gold appreciation begins to rise.  However, what if increasing prosperity at an individual level (the main reason given for support of demand and subsequently prices) actually changed the perception and therefore demand of gold and precious metals within the populace of these various places?  What if the ‘Love Trade’ was somewhat weakened?  It is certainly a potential eventuality worth considering.

10. Government Confiscation

As the old saying goes ‘History may not repeat itself but it does rhyme’.  Although the idea of government confiscation may to some appear outlandish, we must at least acknowledge that this has happened in the past, with the US Executive Order 6102 potentially being the most notable example. Perhaps in this case “confiscate” is too harsh a term as private holders of gold did actually get recompensed for the gold they handed in. Crucially, however, compensation was paid at USD20.67 per oz and then the gold was immediately revalued to USD35.00 per oz – i.e. private holders were, to put it inelegantly, royally stiffed.  Many jurisdictions actually have statutes on the books which can be leveraged to confiscate private gold holdings, usually in cases of emergency.  Clearly what constitutes an emergency would be at the discretion of the authorities enforcing said statutes…

11. Rise of the challengers

The digital age has not only provided us with the convenience of mobile banking (and the inconvenience of social media…), it has also spawned various crypto currencies, the most well-known of which is Bitcoin.  Although it is my humble opinion that these crypto currencies exhibit many of the potential negatives of holding gold (volatility, no yield, popularity shift etc.) and little of the positives, there is no question that we live in a digital age and following generations may have more of an affinity with a digital rather than historical form of money. Crypto currencies do have some advantages including anonymity, direct merchant acceptance and ease of international transacting, which physical gold doesn’t necessarily share.  Is it a direct competitor?  I’d say not. But as an additional alternative to fiat currency, it may attract some of the money flows which would otherwise go to gold and precious metals.

12. Barbarous Relic

Many a gold bug scoffs at this statement; however it has been uttered by some influential thinkers and investors – John Maynard Keynes and Warren Buffet to name two. Whether we agree with them or not, these two people have had a profound impact on the current thinking around both monetary policy (Keynesian economic policy is pretty much the playbook all developed economies have in the back pocket) and investment psychology.  When the Oracle of Omaha speaks, people listen.  And when central bankers speak, a (albeit slightly twisted) version of Keynes can be heard.  Arguably these two people alone may have had quite an impact (likely not positive) on people’s attitude to, and appreciation for, gold and other precious metals. Has this already been priced in though?


We’ve now completed both the pros and cons of owning gold (and precious metals in general) which we hope you’ve found useful. Upon reflection it’s apparent that the cons identified really indicate that you shouldn’t put all of your wealth into gold (or precious metals in general) however the pros emphasise the value of having a portion of your portfolio devoted to these hard assets.

The way I personally view ownership of gold is as a pure savings and wealth preservation vehicle, with a little insurance thrown in, as opposed to as an ‘investment’ (investment in this case being an allocation of capital which is put at risk in the attempt to significantly grow overall wealth).

So in summation, the path isn’t completely golden (yes, bad pun intended – I formally apologise) when owning precious metals, and it is important that any prospective purchaser understands that…however the merits of allocating at least a portion of your portfolio in the direction of precious metals are certainly there.

Jun 092015

OK readers, we’ve had the uppers, now it’s time for the downers.  Ownership of any ‘asset class’ is never a one way street – there are clear advantages and disadvantages and it pays to consider both.  Only seeking out confirmation bias with your investment decision making is potentially a one way trip to the poor house.  Read on for some of the issues you should consider before taking that plunge into gold and other precious metals ownership. Please note, as with the prior ’12 reasons’, these are in no particular order of importance.

1. No Yield

Gold (and other precious metals) typically doesn’t offer a yield.  Although some central banks and the larger bullion banks may have the opportunity to lease out their respective metal holdings, this is not an avenue available to the majority of precious metals owners. As identified in prior blogs, the low interest environment we are currently in does somewhat mitigate the opportunity cost of forgone yields, however it is important to acknowledge that there are still competing investments available that offer reasonably enticing yields (whether these are enough to offset the risk to capital is clearly debatable). Clearly this must be appropriately weighed up by anyone considering purchasing gold.

2. Ownership Costs

Depending on how and where you hold your gold, not only may you not receive yield, you may actually need to pay storage (or other related admin fees) on your account and/or holdings.  Any reputable custodian of your metal should have secure storage facilities (underground vaults etc.) and complete insurance coverage – none of these facilities are likely to come free.  There are certainly some cheaper alternatives, for instance our own unallocated product has no storage or other such annual fees. If pursuing any of these potentially more economical alternatives, individual owners will need to satisfy themselves around counterparty risk as often many of them will not have specifically allocated metal held in your name.

3. Historical Returns

Looking historically, and given enough of a timeframe, total returns on stocks have always outperformed gold.  For the last 100 years, the return on gold has annualised at 4.2% whereas the total return on stocks (with reinvested dividends) has been roughly 10% annually.  You can see this is quite a difference and given the magic of compounding, it provides a very substantial difference to long term returns.

To illustrate, 1 oz of gold was roughly USD19.25 in 1915 and in 2015 has hovered around USD1,180.00, good for a little over 6000% in gains. Not bad, but at the same time USD19.25 invested in shares in 1915 would now be worth upwards of USD265,277.00 – and this is roughly 250 times the return received on gold.  Interestingly, if you shorten the time horizon to when President Nixon severed the last link to gold (1971) which removed direct price fixing of the yellow metal (although debatably not price manipulation – but that’s a whole other topic), the returns become far more similar although they still favour shares. In short, gold is a great way of staying, but not necessarily of getting, wealthy over the medium to long term.

4. Medium of Exchange

Although historically precious metals, specifically gold and silver, have regularly been used as a direct medium of exchange for goods and services in one form or another, this is certainly not the case in the contemporary environment.  In essence this means you can’t walk into your local grocery store and pay with a minted precious metal coin, certainly not if you want to receive fair value (many minted coins have a legal tender value far below the intrinsic metal value…but would it be sensible to use at face value?).  The moral – definitely don’t hold all your wealth in the form of precious metals, you still need to be able to easily access circulating currency in most modern urban environments.

5. Price Volatility (when measured in fiat currency)

Somewhat related to the above, the price for gold can fluctuate quite dramatically when measured in fiat (paper) currency, be it the USD, Euro, GBP or even the little old Aussie battler, AUD.  As most people’s revenues and costs (to use accounting speak) are usually received and paid in fiat currency, and often only one at that, the movement in value of gold holdings in this respective currency may be a little disconcerting.  As the gold market is largely USD based (although you can buy and sell in pretty much all internationally traded currencies), this volatility is typically, though not always, heightened for those whose main currency of exchange isn’t USD.  The advent of ETFs, derivatives and various other financialisation tools appear to have led to an increase of speculative inflows into gold (and other precious metals) which also seem to amplify this price volatility.

6. Commodities Link

There is little doubt that gold is largely an ‘investment’ metal with a low relative percentage of industrial use, however it is still more often than not considered a commodity by the majority of the participants in the modern global market, and this means it is vulnerable to movements within the commodities market in general.  This is likely exacerbated by all three of the ‘blanco plateado’ precious metals (silver, platinum and palladium) having strong industrial uses and therefore more commodity like characteristics – guilt by association one might say…  Although this has been identified as a con in our little pros and cons exercise, it could also be considered a pro, particularly when commodities markets are strong.  Given our emphasis on Gold and precious metals acting as an anchor in somewhat turbulent global financial markets, we’ve decided that a commodities association is more of a negative than a positive (albeit a very minor one).


So there you have it – our first 6 considerations which should give you pause for thought before rushing head long into sinking all of your available funds into gold, or other precious metals.  We’ll pick up where we left off tomorrow and fire off another 6 points to carefully consider before progressing your gold or precious metals purchase.

Jun 042015

Continuing on bravely from Part 1, we give you 6 more compelling reasons to own Gold.

7. The rise of Chindia

China and India, with almost 40% of the world’s population (combined total of nearly 2.7 billion people) albeit only 15% of global nominal GDP, are both developing and growing rapidly. Although there will be inevitable hiccups along the way, both countries are increasing overall GDP and, more importantly for gold, GDP per capita, at a fairly rapid rate. China is somewhat ahead of India on the development timeline, however there is hope that with the election of Narendra Modi, India will be able to further accelerate it’s development. There are clear indications that after many years of acrimony, these two developing giants are starting to find some fertile common ground. This is a significant benefit not only for them, but for the global economy at large. It’s also important to note that as well as a shared border, they have fairly complementary economical models with China focusing on manufacturing and India on services, including IT. Both countries have a strong cultural affinity with gold and further GDP per capita growth would likely prove supportive of gold demand in the medium to long term.

8. Equity market valuations

Given it’s continued importance in the global market place, we’ll put our emphasise on US Share prices. There is little question that regardless of which market ratio metric you care to use, the equity markets are richly valued. Earnings growth has outstripped revenue growth substantially in the last few years, largely as a result of a reduced cost of debt (as a result of interest rate suppression) and very active cost reduction, often in the form of labour cost savings. Combine this with the above average CAPE (26.9 now versus 16.6 historically) and we can see a reversion to mean in earnings (as a percentage of revenues) and the CAPE multiple could lead to a significant market re-rating. Critically, these are far from the only indicators flickering red. Please take note, I am far from suggesting that the stock market is due an imminent crash, as although prices appear elevated compared to history they have been more elevated in the past – the quote often attributed to John Maynard Keynes comes to mind: “Markets can remain irrational longer than you can remain solvent”. However, given the price correction gold has endured over the last couple of years it could certainly be argued that, relatively speaking, it’s become better value.

9. Diversification

Wherever you are on your savings and investment journey, diversification is key. You can be more aggressive or defensive in your investment approach, depending on what stage you are at in life, however you should never ignore the value and merits of diversification. Many are the stories of broken and bankrupt individuals or corporations who put all their eggs in one basket, only for that particular market to plummet and turn all their hard earned capital to dust. There are various asset allocation theories, such as the permanent portfolio, which largely operate under the premise that disparate asset classes perform differently depending on the condition of the economy. Although it can be convincingly argued that the modern monetary approach of interest rate suppression and money printing has had the effect of a rising tide appearing to lift all asset boats, and somewhat subverting the previous observed differences in asset class performance, there is little doubt that a certain level of diversification is still important. It would be prudent to include an allocation to hard assets (and gold/precious metals specifically) in any portfolio.

10. Eliminate counterparty risk

In todays highly financialised world, one entities asset is often another entities liability – in essence, there’s an owner, and an ower – and this clearly creates counterparty risk. Take something as simple as the cash you may hold at the bank – to you, that is an asset however to the bank it’s a liability – and that, for you, presents a risk. If the bank were to chew through it’s capital and reach a point of insolvency, you may become an unsecured creditor. I know, I know, most sovereign states provide deposit insurance, at least up unto a prescribed limit…however I think that is likely cold comfort for many holders of bank deposits in Cyprus a couple of years ago. Real assets in your possession overcome this counterparty risk issue – if you own it, and hold it, you aren’t reliant on any counterparty to make good on it.

11. History

Historically gold has proven to be exceptionally successful as a store of value. Whilst inflation has had it’s merry way with all fiat currency values, unscrupulously eating into the purchasing power of each note you hold (the king of kings USD has by some estimates lost 98% of it’s purchasing power since the formation of the Fed in 1913) gold continues to purchase, very roughly, the same amount of goods it has been able to purchase for centuries. To be somewhat glib, an ounce of gold could buy you a quality toga in classical Athens just as it can buy you are reasonable suit today. Perhaps surprisingly, even though the USD only purchases approximately 2% of what it did a little over a century ago, it is actually one of the outperformers in the fiat currency realm – you only have to look as recently as Zimbabwe to see some real destruction of fiat currency purchasing power. If you view gold as ‘savings’ and a repository of value, history is unquestionably on your side.

12. Insurance

Astute readers will notice this was the topic of my first blog post…and it hasn’t lost it’s relevance in the week since (surprising huh…). Due to some of the reasons contained within the dozen detailed in the last two days…and many more…gold continues to have a legitimate role to play in insuring your overall portfolio for the ongoing systemic risk, and volatility (and potential failure) inherent in the current global financial system.

So there you have it – a dozen solid reasons to invest in gold. There was an element of crossover with my initial blog, but with any luck the repetition has only served to reinforce the message. Feel free to contribute your own suggestions below – there are undoubtedly many more valid and appropriate reasons out there.

Keep an eye out early next week for a follow up blog where, in the interests of balance, we’ll give some reasons for not owning gold.

Jun 032015

If you needed any further justification to take the plunge and invest in some precious metals, or to add to current holdings, then read on.  Below we provide our first half dozen reasons why, in no particular order, investing in gold may just be a good idea.

1. Excessive Global Debt

Whether you consider Sovereign, Corporate or Private (individual) debt we are at or near historic highs on almost any metric you might care to evaluate. The markets attempt to deleverage after the Global Financial Crisis/Great Recession was offset by Sovereign state bailouts, financial repression and rampant money printing.  The ongoing suppression of interest rates has allowed numerous struggling parties – be they Corporate, Individual or Sovereign – to continue to service, and in some cases add to, the high levels of debt held on their respective balance sheets.  Greece is perhaps the most public example of ‘debt retention’ where potentially the more prudent and fair solution may have been for a constructive default.  The combination of these excessive debt levels with the apparent refusal to allow the market forces to prevail (and subsequent defaults to ensue) has somewhat tied the hands of Sovereign states and their related central banks – largely leading to the following 2 points.

2. Low Interest rates

Many critics of gold point to its lack of yield as a key weakness of gold ownership.  Although it may be tempting to dismiss this out of hand, there is no denying that by allocating some of your precious resources to gold ownership, you are accepting the opportunity cost of not receiving any yield and/or income.  However, in the low interest rate environment that we currently have throughout the developed world this opportunity cost is greatly reduced, if not negated entirely.  As a matter of fact, in some jurisdictions, negative interest rates have already been introduced, and some bond yields have already dipped into negative territory. Interestingly in both of these specific aforementioned circumstances, gold actually starts to have a more attractive yield.

3. Money Printing

Call it quantitive easing, asset re-purchases or ‘one of three arrows’, the results are largely the same – a significant increase in the balance sheet of central banks and a considerable monetary influx into the financial system.  Given the digitisation of our financial system, this is easily achieved without even actually printing any additional circulating currency – just simply adding a few zeros via computerised systems achieves the objective.  How much this translates into genuine stimulus at main street level is debatable, although it’s unclear if this is genuinely the desired outcome.  At this stage there is little end in sight for this unconventional monetary stimulus – as soon as one jurisdiction puts the baton down, another comes to pick it up.  As we are in uncharted waters, it is unclear what inevitable outcome this will have on the global economy in the medium to long term, but what is clear from history – more money chasing the same amount of goods (including gold) inevitably leads to increasing prices.

4. Currency Wars

It is somewhat inevitable in any low growth global economic environment that beggar thy neighbour policies get some airtime, albeit not necessarily publicly. Given the resistance internationally to increasing barriers to trade through tariffs and restrictions (a great lesson learned from prior financial calamities, not least of which was the Great Depression) various Sovereign states are required to be more subtle in their attempts at ‘stealing’ growth from competitors.  A tried and true method of achieving this is by weakening the currency, making imports more expensive and exports and labour costs cheaper, providing a quick and easy boost to competitiveness. Unfortunately this is perceived as preferable to true structural reforms and resultant productivity gains that actually may benefit the global economy in the long run.  As more nation states engage in currency debasement, real assets become increasingly attractive.

5. Financial system fragility

The Global financial system is now so integrated that a crisis in any one area could easily set off a contagion effect, reverberating throughout the global financial marketplace.  We must also consider the derivatives market, with value estimates from 600 trillion to as high as 1.5 quadrillion – that’s 1,500,000,000,000,000.00 in numerical terms – or at least 20 times global GDP.  Yes – you read that right, the current global financial system supports ‘hedging transactions’ (I use the term loosely) that in total face value are equal to more than 20 times the total measured output of goods and services from every man, woman and child on our planet.  In light of these facts, I think it’s relatively easy to acknowledge that there is some fragility within the system (Ed note – this sentence is being nominated for understatement of the year).

6. Geopolitical Risk

Although this is an issue that never seems to fully go away, no matter how enlightened and learned we become as a collective race, it does appear that of late the risks have been heightened.  The Middle East continues to be somewhat of a powder keg with Syria, ISIS, Iran and the Saudis ‘incursion’ in Yemen all vying for print space on a regular basis.  Looking to Asia we have the US openly stating they are engaging in a ‘pacific tilt’, including in relation to force projection, clearly attempting to contain a rising China. Additionally, China themselves have been throwing their weight around in their own backyard with the South China Sea seething with territorial disputes. The renewing of tensions between Russia and the US (and greater Europe), most aptly represented by the conflagration within the Ukraine, shows that even geographical locations close to the ‘developed world’ are not free from open conflict.  Given Europe has given rise to 2 of the most bloody and destructive conflicts in human history, it’s not overstating the fact that geopolitical risks are somewhat heightened.

Tomorrow in Part 2 we will finish off our 12 reasons to own gold now.