Sep 142015
 

Last week I got into a Twitter debate with Jan Nieuwenhuijs ‏(aka Koos Jansen) on his tweet about Peter Hambro’s Bloomberg interview:

I sarcastically replied that if it was virtually impossible to get physical “then Bullion Vault and Gold Money must be running fractional scams, alert James Turk immediately to put a stop to it”. As I said in this post, when physical pool products start to increase premiums or limit inflows, then you know there is a real shortage.

Don’t get me wrong, there is a shortage of retail coins and bars – at The Perth Mint we are seeing huge demand for silver and we are trying to get back in stock on 1oz Koalas but struggling to keep up. However, turning what is a production capacity issue into a meme that there is a shortage at the wholesale level and that the gold and silver markets will “fail” or “default” is fear mongering.

The level of hype does get quite silly. I saw one dealer referring to the high price of junk bags of silver relative to spot as an example of backwardation. Some got very excited about this Financial Times reference that the “cost of borrowing physical gold in London has risen sharply in recent weeks”, which would not have been news to anyone following the work of Keith Weiner, whose basis charts showed increasing scarcity since mid-July.

Zero Hedge, unsurprisingly, got into the act with this claiming that the shortage of US Mint coins was proof that there was no metal in Comex warehouses:

“IF that silver were actually in the [Comex] vault, the U.S. mint could buy a spot contract – September has a silver contract open – and take immediate delivery.”

I find it surprising that Zero Hedge/article’s author are completely unaware that the US Mint cannot accept 1,000oz bars and instead has outsourced blank manufacture (see here). They also seem oblivious that their logic can be equally applied thus:

“If Eric Sprott’s PSLV fund’s silver were actually in the vault, the US Mint could buy the fund and request a physical redemption.”

Of course PSLV is backed by physical metal so how can we explain the fact that PSLV has not had one physical redemption since it listed and is only trading at a very small premium to net asset value if the “silver market is seizing up”? Obviously because wholesale players have no problem acquiring 1,000oz bars and thus don’t want to pay the costs of redeeming from PSLV. For additional proof of that, consider this recent interview with Sunshine Minting’s CEO Tom Power by Silver Doctors:

  • “We act as a conduit for the US Mint for acquisition of silver on the market. We go out on a weekly basis and puts bids out for the supply of the 1000-ounce bars – the raw materials – that we use for the US Mint”
  • “we have seen a push on premiums … subtle changes … little push on premiums”
  • “as soon as we start to see the physical shortage on the supply side for 1,000oz bars because the refining output is down then that’s when I normally would believe that’s when the price would start to escalate again and we just quite haven’t hit that point yet”

He does note that some suppliers “seem to be digging deep into the vaults and pulling out a lot of old stock that has been sitting there for a while … you can always tell when the market starts to get a little tight” but then only talks about subtle changes and little premiums and does not say there is a shortage on the supply side.

Furthering the hype is the recent reduction in Comex warehouse stocks and resulting owners per ounce (open interest vs stocks) moving to over 200:1. This is a perennial favourite of bloggers and while a useful statistic it is often presented using a narrow definition of stocks (eligible) which can give a distorted view – see here and also this recent tweet:

As Kid Dynamite (widely hated in goldbug circles so I guess most will ignore his quote) noted to me in an email, “the key to this meme is to start with the false equivalency: registered gold equals deliverable gold” and it ignores the fact, as this commenter notes, that “the percentage of the open interest that is actually positioned in the front months to take possession of any gold is about 5%, so that drops his 200:1 to about 10:1”.


In my tweet debate with Jan Nieuwenhuijs he questioned my scepticism. Why am I so cynical about shortages? Maybe it has something to do with the fact that I first covered this topic in my personal blog way back in August 2008 and repeatedly since, without any of the predicted failures of “the system”. Alternatively, try this video which covers the repeated claims of Comex’s imminent default (h/t Jan and Frank) – which I personally think would work better with the Benny Hill theme.

For all the conspiracy theories commentators are willing to believe, the one that they do not consider is that maybe Comex warehouse stocks aren’t what they appear to be and that maybe they are the ones being played, just like it has been done before:

“They were moving silver from New York to London where the Buffett orders were being executed. This made the US warehouse inventories drop sharply. Go look at the analysts who talked silver up on that very fundamental. If they said there was a shortage of silver and you better buy it is going to $100, then you may be dealing with a shill or a biased analyst.”

Bill Holter may not think that you should be shocked about 25% premiums in silver and that “whatever you must pay to get it into your hands” is fine. Personally I can’t see the sense of paying 25% when for a few percent you can buy physically backed pool accounts.

Think of it this way: when people are willing to pay 25% premium then for every $100,000 spent, only $80,000 goes to buying silver, which would be 5,333 ounces at $15/oz. If those people would be prepared to buy pool allocated at 1% fees, then the pool operator is going out and buying 6,600 ounces. That is over a full extra 1000oz bar pulled out of the physical market for each $100,000 spent on silver.

Guess who loves the fact that they are being saved from having to find and extra 1,000oz bar for every 5 bars currently being bought? Bullion banks. So silver buyers are so distrustful of The Perth Mint, Eric Sprott, James Turk and any other pool allocated operator that they are willing to take pressure off the silver market by spending their hard earned dollars on premiums rather than metal.

I will conclude with this comment from the owner of the Australian bullion dealer Gold Stackers: “A few core distributors in the U.S. are making an absolute killing in this market. Not a bad gig when wholesale margins go from 5c/oz to over 80c/oz, and the market is silly enough to say ‘Moar! Moar!’.”

So when you see the next article screaming about shortages and telling you to stock up on physical at any premium, ask yourself: who is the player and who is being played?

Sep 102015
 

Would you lend money to someone in another country who told you they were doing it because interest rates in your currency were cheaper than their currency and not to worry about them paying you back if the size of the loan amount in their currency increased due any weakening in their exchange rate as they would set aside the money they saved in interest to cover that risk? I hope you answered NO!

Such foreign currency denominated loans are attractive to borrowers facing high interest rates who are willing to overlook the exchange rate risk (or be sold them by a bank underplaying that risk). Polish Swiss franc mortgages, which blew up when Switzerland dropped its currency peg, are the latest in a long line of such exploitation of unsophisticated or desperate borrowers. My Australian readers of mature age are no doubt familiar with the 1980s foreign currency loan scandal that “involved significant financial losses and personal suffering for many borrowers”.

So who is the latest desperate borrower to ask investors to lend them their foreign currency at cheap interest rates? Well if you only read mainstream media who just report press releases without any analysis, you’d have missed that it was the Government of India (GoI) asking average Indians to lend them their gold. Although in this case I think it is the lender than is going to lose, not the borrower.

Lest you think I am exaggerating, here it is clearly stated in this official press release on the Indian Sovereign Gold Bonds Scheme:

“The amount received from the bonds will be used by GoI in lieu of government borrowing and the notional interest saved on this amount would be credited in an account “Gold Reserve Fund” which will … take care of the risk of increase in gold price that will be borne by the government.”

What could go wrong with that? Certainly the Government doesn’t think there is much risk as the borrowing “will not be hedged and all risks associated with gold price and currency will be borne by GoI”. But don’t worry, “the Gold Reserve Fund will be continuously monitored for sustainability”, with sustainability being lovely bureaucratic speak for “are we losing money”.

The Government only seems concerned about the risks to the lenders, noting that “investors will need to be aware of the volatility in gold prices” and that the bond tenor “could be for a minimum of 5 to 7 years, so that it would protect investors from medium term volatility in gold prices” and giving investors the option to roll over the bond if the gold price falls. But don’t those same risks equally apply to person on the other side of the loan?

Why is the Government so confident that the Rupee price of gold will fall? Possibly they think that by “reducing the demand for physical gold by shifting a part of the estimated 300 tons of physical bars and coins purchased every year for Investment into gold bonds” the global gold market will be weakened?

I should note that this Sovereign Gold “Bond” is another example of government doublespeak as one does not initially lend gold but instead pays Rupees and is given a loan denominated in grams of gold, receiving Rupees back at the end (based on gold prices at maturity). There is a Gold Monetization scheme where you can deposit actual gold but there is little difference to the Gold “Bond” as the medium and long-term deposits are redeemable “only in cash, in equivalent rupees of the weight of the deposited gold at the prices prevailing at the time of redemption”.

I will at least give the Government credit for being explicit about what they are doing as they say “the deposited gold will be utilised in the following ways …

  • Auctioning
  • Replenishment of RBIs Gold Reserves
  • Coins
  • Lending to jewellers”

The first and the third point are basically the Government selling the gold and taking a (vaguely Gold Reserve Fund hedged) short position against the depositor. The last one is the only legitimate and minimal risk use of gold (but as I explained here, it has limited use in throttling Indian gold imports). The second is the Government effectively buying the depositor’s gold on the cheap, as long as interest savings outweigh Rupee price changes.

The key question of course is what will happen to Rupee gold prices. Yes, Rupee prices have been stable the past few years, but note the general downward trend in the INR/USD rate.

forex4xauinr

What would happen if the Gold Reserve Fund became “unsustainable”? Would the Government just give up all its interest saving gains and incur the cost of hedging its position, or decide that it might need to roll over the bond to protect itself “from medium term volatility in gold prices”. What me worry indeed.

Sep 092015
 

Last couple of days I was in Malaysia meeting with our distributor Quantum Metal and their clients. While it is trite to say that the East views gold differently to the West, it is still striking when sitting in a meeting with a senior executive of a bank to hear them say “buying gold is not actually spending, it is just buying another currency”. Not something I could imagine a Western bank saying. Or for a Chairman of a large Malaysian co-operative to be keen to make it easy for their members to buy gold, seeing it as a smart way to save.

For Western “sophisticates” this would be considered backward but if they lived in a country where their exchange rate had depreciated over 30% in the space of one year, like the Malaysian Ringgit has, their views may be different.

While one does not need to educate Malaysians about why to hold gold, confidence in buying gold has been damaged by businesses like Genneva Sdn Bhd. It is unfortunate that gold trading is not regulated in Malaysia as this makes it a target for Ponzi schemes to use the affinity for gold as a way of attracting customers (although high monthly returns on investments should be a warning sign).

Sep 042015
 

Blogger John Koning recently posted on the negative skewness (or as he says: bulls walk up the stairs, bears jump out the window) of the stock market. He notes that “there are plenty of famous meltdowns in stocks, including 1914, 1929, 1987, and 2008, but almost no famous melt ups”. To demonstrate this, he produces a chart of 22,013 trading days since 1928 grouped by the daily return and showing the percentage of days that were negative.

The chart below replicates Koning’s figures but I have also included gold and silver London Fixes since 1968 for comparison, which is the longest data set I have.

dist

In a rising market we should see percentages below 50 reflecting more up than down days. For the S&P Koning notes that 51.9% of daily changes over 2% were negative, that is, “there are more extreme negative results than extreme positive results”. He lists some of the academic theories to explain this but the only one the could apply to precious metals is volatility feedback:

“When important news arrives, this signals that market volatility has increased. If the news is good, investor jubilation will be partially offset by an increase in wariness over volatility, the final change in share price being smaller than it would otherwise have been. When the news is bad, disappointment will be reinforced by this wariness, amplifying the decline.”

It is interesting that gold doesn’t exhibit negative skewness like the S&P but silver demonstrates an unusual skew negative on small returns but no so much for the extremes, a case of bears walking down stairs.

However, because the groups in Koning’s chart compress the data quite and bit and there wasn’t a globally free market in gold until 1975, I think it is better to look at a time period starting from the 1976 bottom (after the excitement of gold becoming legal again had washed out). To get a better handle on the skewness, I have broken up the daily returns into 0.25% increments, and the chart below shows the distribution for gold.

audist

Note that gold has a long tail with a lot of concentration in the sub 1% returns. Converting that data into Koning’s “percentage which are negative” results in the chart below.

auneg

Generally this shows little skewing, keeping in mind that the larger percentages for the groups over 3% are based on a very small number of days (less than 30) so a difference of a few days can result in large percentage variances. For silver, below, the distribution is a lot more fatter.

agdist

This reflect silver’s higher volatility and while not a statistically normal distribution it doesn’t to my eye show excessive tail skewness. When plotted as percentage negative we again see the skew negative on the small returns but with some big positive skews for daily returns above 2.5%.

agneg

Looking at these results I don’t think they support the volatility feedback theory. The best explanation I can come up with is that gold and silver react strongly to positive news (ie everyone is pretty clear what is bad economic news and good for gold and silver), hence we see more 55-60% skew to positive large daily returns. However, in general prices grind down as people slowly get out of the fear trade, due to everyone having a different assessment of when the bad news/event that triggers the price spike is no longer a risk.

Sep 022015
 

Reuters reported last week that “South Africa’s mining industry, unions and the government have committed to a broad plan to stem job losses, including boosting platinum by promoting the metal as a central bank reserve asset”. This is apparently an idea put forward by the World Platinum Investment Council in late 2014.

The idea got me thinking about the role of platinum and palladium in a precious metal portfolio. Generally I shy away from recommending them due to their lower liquidity compared to gold and silver and more volatile and industrial nature. As a theoretical exercise I thought I would extend the work done in this and this post to include platinum and palladium.

In those previous posts I was only dealing with two metals, which with 1% incremental changes only involves 101 different percentage allocations to run through. With four metals and a 5% increment, I was looking at over 1,771 different portfolios (assuming my macro was working correctly!)

Also, because I only had pricing data for the platinum group metals from mid 1990, I have just run the simulation from July 1990 to July 2015 with $100 being bought each month (total cash invested $30,000). The result in the chart below.

auagptpd

Across the X axis are each of the 1771 different percentage combinations of the four metals, sorted roughly by the resulting end portfolio value/return. The colours show the general weightings of each metal.

In general terms, the worst performing portfolios are those with a lot of platinum and the best those with more palladium. Gold takes a big role but is somewhat interchangeable with silver within a particular allocation to gold/silver.

I think the result is skewed by a higher average monthly return on palladium (0.86% per month) compared to platinum (0.38%). I would also note that palladium returns have a low correlation of  0.31 to gold and 0.42 to silver, coupled with higher volatility, probably giving better diversification benefits than platinum, which has a higher correlation to gold and silver (0.559 and 0.561 respectively).

Using a single 25 year time period with a flat $100 monthly investment also skews the result towards the performance of the four metal during the 1990s. For the record, the best performing portfolio combination was 30% gold and 70% palladium at $90,046 and the worst 100% platinum at $49,449.

I would be careful reading to much into this brief analysis, but it does indicate that there is some role for platinum and palladium in a precious metal portfolio (unless you are Australian, because palladium attracts a 10% Goods and Services Tax).

Aug 312015
 

In this interview, Jim Sinclair says that “we are going into unprecedented deflation, and it’s the reaction of central banks around the world to the concept of deflation that brings about hyperinflation” and the resulting increase in the gold price is therefore “a rally that is not meant to be sold. What is coming up in front of us is the Great Reset where currencies wear their gold like ladies wear a necklace, and the most beautiful necklace will be the strongest currency.”

I find this advice dangerous because many people reading it will go away thinking “OK, so in the next gold bull market I shouldn’t sell”. However, how will you know if the initial bull market is just a speculative bubble that will bust or the start of a hyperinflation?

Secondly, the “great reset” and “beautiful necklace” references are to countries going back to (some) version of a gold standard. Some gold standards involve free trade of gold, but the last one involved expropriation and making gold illegal to hold. If Jim is right and countries want the strongest currency, then that would imply they will want all their citizen’s gold, in which case you get expropriated at some pre-reset price.

The retort to my second point is what is the point of selling out for fiat money if that is being hyperinflated. I agree, but my answer is if you believe in the hyperinflation scenario and that gold is money, then logically you should be converting fiat prices into ounces of gold – now. The advantage of doing this is that if gold is just in a bubble, then the prices of other assets in ounces will be really low, indicating that those other hard assets are cheap and giving you a signal to sell your gold for other assets. Below are some charts of what assets priced in gold look like.

ushouse

This showed that 1980 and 2011 were exceptional gold bubbles.

longtermspxgoldlogtr1920

Stocks also shows the 1980 and 2011 bubbles. These are just two charts to give you the idea, but you should look across all assets in terms of ounces of gold to get a general picture of gold’s relative value. There is even a website dedicated to this, naturally called http://pricedingold.com/, which has charts of various things in terms of gold.

In a hyperinflation scenario, these charts will look like the one below of the LME base metals index in ounces of gold. Note how the price is a lot more stable for long periods, even though gold changed a lot during these 20 years.

lmeAu

If you see the price of gold going up but the price of a wide range of other assets priced in gold somewhat stable, then that is an indication that there is general inflationary force in the economy. If that is occurring when dollar prices are going up rapidly, then again, consider selling the “rally” but only for a switch into other assets, not fiat.

Over the past 15 years I have spoken to a number of wealthy Perth Mint Depository clients. They all made their money doing productive things, building businesses. A lot of them felt that gold was a dead asset, producing nothing, but they were buying it because they did not see much business opportunity and economic growth going forward and were sheltering their wealth in gold. However, they all had the strategy of keeping an eye on the value of productive assets and were waiting for when they were cheap and then they would sell their gold and buy those assets. They were not interested in selling out at the dollar price peak, their eye was on productive assets and their relative value and they told me they would rather sell out early and miss the peak to buy these assets cheap before other entrepreneurs bid them up.

If you ignore their advice and follow the “rally that is not meant to be sold” tip, I think you are really just treating gold like a pet rock, watching its nominal fiat price go ever higher and getting that nice psychological payback against the gold haters that “we was right”, while others around you are cashing out their gold insurance and buying real assets at bargain prices.

Aug 262015
 

Following on from yesterday’s post, below is the chart of the best gold and silver percentage allocations for Australian investors by the year one starts investing.

beststrategyau

This is not too much different to the chart for US investors, with a slight skew towards gold in the late 1970s. This is to be expected as we are affecting both USD gold and USD silver by the same AUD/USD exchange rate, which would only magnify the variability in gold and silver by a small amount. The chart comparing the “times increase” of the 100% gold, 100% silver and 50%/50% strategies can be found below.

3strategyau

I have left the scale the same as the one for US investors, so it can be compared directly. Note that Australian investors experience a much lower variability in returns, which is driven by the fact that often US precious metal prices are affected by US dollar strength/weakness, which also affects the value of the Australian dollar, helping to mute changes in AUD gold and silver prices. The advice for Australian investors is the same as that for US – the 50/50 strategy appears to be a good all weather approach to take.

The results above, and for yesterday’s post for US investors, were based on a constant rebalancing. For example, every month the investor would adjust their purchases (and sell one metal if necessary) to bring the portfolio back to 50% gold and 50% silver by value and not just spend their monthly $100 savings as $50 on gold and $50 on silver.

The chart below shows the percentage difference between the two total ending USD values of a rebalance versus a simpler no rebalance/buy in the same proportions each month. It is a busy chart but the key takeaway is that not rebalancing theoretically produces a lower overall return.

norebal

However, it is not a big difference considering that we are in most cases talking about increases on the cash invested of 100% to 300%. If we included transaction fees and the tax consequences of rebalancing (having to pay tax on any profits from selling whatever metal is overweight), then I think this negative difference would disappear. The difference could also be reduced by adjusting how much gold or silver one buys so as to move the overall portfolio split as close to 50/50 as possible, although this would only have an effect early on as later in ones savings the $100 a month is minor compared to the value of the portfolio.

While the analysis above and in the previous post is simplistic in that it does not consider one’s rising income, inflation, taxes and transaction fees, it does indicate that there is merit in buying 50% gold and 50% silver as a conservative precious metals investing strategy.

Aug 252015
 

There are three major types of Perth Mint Depository investor:

  1. Those that only buy gold
  2. Those that only buy silver
  3. Those that buy 50% gold and 50% silver

There are others who include platinum, or have different percentages, but the above three types are a significant majority of our clients. I find it interesting that most investors who weren’t strong goldbugs or silverbugs and couldn’t decide between them went with a simple 50/50 strategy. This begs the question: is this a good strategy and what is the ideal percentage allocation one should make between gold and silver?

To answer this I have assumed an investor saving regularly for retirement, for simplicity $100 a month, including rebalancing each month to bring the value of gold and silver held back to the target percentages. I also assume an investing period of 25 years, on the basis that one does not start saving serious money until 40 (see this post for the investor lifecycle logic behind this) and retires at 65.

I then ran through every combination of gold and silver percentages to come up with a total value at the end of the 25 year investing period (which is 300 months, or $30,000 in total cash invested). As an example, the chart below shows the portfolio value for an investor who started in 1985 and retired in 2010, across various percentage mixes.

us1985

If this person only invested in gold then 25 years later their portfolio would be worth just under $89,000. A silver only investor would have just shy of $93,000. However if this 1985 investor had perfect forecasting ability they would know that investing 37% into gold and 63% into silver would maximise their return at $94,932, over three times the total cash they put in.

However, given the varying performance of gold and silver over time, the year a person starts and finishes investing affects their return. To compare different years I divided the total portfolio value by the dollars invested, to give a simple “times” figure (eg 3 means you’ve tripled your money). The chart below shows this calculation for three selected years, each demonstrating that a different strategy maximised the return.

us858802

The year 1985 is shown here again, but as a “times invested money” figure. While a gold/silver mix was the best return when starting in 1985, if you started in 1988 you would have been better off just investing in silver as you would have increased your $30,000 by over 5 times, compared to a gold only strategy of quadrupling your money. Starting in 2002 (which only covers 13 years) a gold only would have been the best strategy, increasing your $16,300 investment by 1.67 times to $27,181.

Of course the above is all very handy if you have hindsight, but what if you are starting to invest in precious metals in 2015? In 25 years will starting in 2015 end up like 1985, 1988 or 2002 in terms of what is the best strategy given the relative performances of gold and silver? One way of answering this question is to look at the strategy that gave the best performance for each year and see if there is a strategy that performs best across all different time periods.

The chart below looks at each year starting from 1975 up to today and shows the gold/silver percentages that gave the best return for a person starting to invest in precious metals in that year over the following 25 years. From 1990 onwards it is not for a full 25 year investment period, but I’ve included it for comparison purposes. Note, the chart is not showing the best strategy for that year, but the best strategy for an investor starting in that year).

beststrategy

The chart shows that there isn’t any consistency across time in which gold/silver proportions are best. A skew towards silver seems to be best during the 1980s with 100% gold being best at other times. This is reflecting the relative outperformance of gold or silver over the various 25 year timeframes. I didn’t find this very helpful in terms of identifying an all-weather strategy.

I then noticed that some years, like 1985, don’t have a big difference between the best and worst strategy – in the case of 1985, between $89,000 and $95,000, a gap of less than 7% on an increase of around 200%. To get some sense of the variability of returns, I’ve charted the “times increase” of the 100% gold, 100% silver and 50%/50% strategies below.

3strategy

This chart is similar to the one above, showing that a silver only strategy performed best in the 1980s and gold better than silver for most of the other investment time periods. The reason for the high performance in the late 1980s is because an investor starting then is averaging in during gold’s bear market, lowering their cost of purchase, and then exiting at gold’s relative highs in 2011-13.

What is interesting is how close the 50/50 strategy is to gold or silver when they are the best strategy and indeed there are times when the 50/50 strategy outperforms a gold or silver only strategy. The key for me is that over time the 50/50 is closer to the best strategy than the worst – for example, if you picked a gold only strategy and the next 25 years turned out like those for an investor starting in 1985 and retiring in 2010, then you would see an increase of 4 times when a 50/50 would have given you a 4.7 times increase, not far off 5 times for a silver only. A silver only approach however, would have underperformed a lot if the future turned out like the 1990s, when a 50/50 was very close to a gold only strategy anyway.

My conclusion is that a 50/50 strategy is a very good all-weather approach to take. You will not give up too much return if gold only or silver only turns out to be the best strategy but a 50/50 will protect you from underperformance if your choice of metal does not turn out to be the best.

Tomorrow I’ll have a look at the situation for Australian investors to see if the advice is any different, and also look at the effect of not rebalancing (just buying on a 50/50 basis each month).

Aug 242015
 

Richard Watson is a futurist and scenario planner I’ve been following for years. Each year he comes up with unique graphical representations of his thoughts on future trends (see here for an example) with a focus on technology. His latest takes a classic risk based approach (likelihood & consequence) and so is suited to gold which people run to when unexpected things happen. Consider this the intelligent person’s doomer list.

So of all the risks identified, what is Richard’s biggest worry:

“another global financial meltdown (far worse than last time due to increased debt levels, a lack of liquidity and the newly networked nature of fear). This could be triggered by rising US interest rates, although the actual trigger is irrelevant. There is so much stress built up in the system I believe almost anything could trigger a panic sell off. I suspect that QE won’t work again either, although one might argue that QE is itself a risk and should be on the map.”

Aug 192015
 

In response to a Craig Hemke comment that “the ability to convert fiat and stack physical metal at these depressed paper prices is a gift, not a disaster”, Chris Powell of GATA noted that “it would be a much more valuable gift for people in their 20s and 30s than for people in their 60s and 70s. Indeed, for the latter group it could look more like another ripoff.”

The response got me thinking about generational differences and the demographic cliff (see this Mauldin Economics article for a summary by Harry Dent about the demographic cliff). Harry’s work on demographics focuses on the generational life cycle in respect of spending patterns, which he says peaks at the age of 46. What I’m more interested in is the peak saving age, because this may give us some clues to gold demand going forward.

Harry says that “people save the most at age fifty‐four and have the highest net worth at age sixty‐four”. This fits in with his peak spending at 46 – after that one would start to save more in expectation of retirement in 20 or so years – and after 54 saving would start to tail off as one approaches mid 60s and the retirement phase of one’s life.

The chart below shows the US population by age as at 2014, with my rough generations based on clear differences in the number of people by age. Can you see the problem?

usdemographics

As the Baby Boomers get further into retirement they will need to sell their gold. The problem is that the 15 years worth of Generation X that is just now coming into their peak savings age are a lot smaller. More sellers and less buyers is not a recipe for higher prices. This is something that affects all asset classes, but I do wonder if gold will be one of the first assets to be sold, rather than dividend paying stocks or rental properties.

It is coincidental that just as the early Boomers started moving into retirement age and the late Boomers reached peak saving age that the gold market was weak? The chart would seem to argue that if you are an early Boomer best to sell now while your later Boomers are still in saving mode rather than wait for when Generation X comes along.

If you are a late Boomer then the news isn’t good because it will be about 20 years before the first of the Millennials are reaching peak saving age, which will be when you are between 70 to 75 years old. However, it is questionable as to whether Millennials will be big goldbugs. Consider this interview with generation expert Neil Howe who says that:

“Millennials are much more collective in their orientation and they are much more optimistic about the future. We do a lot of surveys on political attitudes by age and Boomers are by far the most pessimistic of all generations and the most apocalyptical in their values and orientation. Whereas Millennials are much more practical, collectivist and much more optimistic about how things are going to turn out.”

“Today, we talk about our Millennials, China talks about their Little Emperors, you know, the generation which never tasted bitterness, who are incredibly positive about the future and who trust their parents to educate them and wanting to join something big – the China Dream.”

It sounds like gold is going to be a hard sell to Millennials. Is China the saviour? Consider their demographics from Wikipedia below.

Chinapop_svg

Their “boomers” are a bit younger but by only 5 years or so and they have the same Western Generation X population drop off problem.

Now I’m not asserting that demographics are the major driver in the gold market, and there are a lot of other factors to consider, such as different generational behaviour (eg, Generation X starting families later than Baby Boomers, so maybe their peak saving age differs), effects of migration, and whether gold is something people will spend or pass on to later generations (which probably differs by culture as well). But demographics are certainly something investors should consider and something I’ll be looking to research further (and welcoming your helpful suggestions and thoughts).