Silver debunking

Silver has been running hot and so has the misinformation. Some antidotes:

Sprott Begins Selling PSLV Shares Good detective work by Kid Dynamite on Sprott's other funds selling their PSLV shares. My guess is that the funds sold their shares and then bought physical at spot, pocketing PSLV's 17% premium

Comex Explains Large Adjustment in Silver & Gold Registered Inventories Brian O'Flanagan explains the large transfers of COMEX silver from registered to eligible.

How the COMEX Didn’t Lose its Silver Tom Szabo's detailed coverage of the COMEX transfer issue.

Bernanke an economic voice of reason

Reading this opening line from a Seeking Alpha article "Ben Bernanke continues to be one of the only economic voices of reason in the United States" my first thought was the article was humorous. Not so, he is actually serious! It continues:

Gold is economically irrelevant for the following reasons:

1. The pricing mechanism of gold is too easily manipulated by extremists. Gold is the investment vehicle of fear.
2. Gold is no longer a currency. Gold has no fundamentals.
3. Gold prices are transitory. This is a fad.
4. Bond prices, gold stocks, and core inflation suggest there is no imminent threat to the economy.

This is the mainstream view, unfortunately. We are a long way off a bubble.

Vietnam Government resisting a move to gold as money?

Commodity Online reports that the State Bank of Vietnam is putting further restrictions on gold lending and has asked commercial banks to cease lending gold and eventually to stop accepting gold deposits.

"Vietnam has already forbidden banks from lending gold for the production and trade of gold bars since October last year. But starting May 1 banks are not allowed to offer gold loans to jewelry makers either."

"The new rule is an attempt to eliminate the role of gold as a means of payment in Vietnam, the central bank said. It noted that the government will, however, continue to recognize the right of citizens to have gold holdings."

"Gold holdings by the public were estimated to be about 400-500 tons then, said Vietnam Gold Association. Vietnam has been among a handful of countries in which banking sector takes gold deposits - bearing some interest - and lends gold as a lawful monetary means to bank borrowers. However, this practice may soon end with new regulations from the central bank."

Commodity Online has been reporting for some time about increasing restrictions on gold as its people increasing move to using gold instead of their fiat currency and with this latest move it sounds like Government sees a real threat brewing. I've had a view for some time that one will not wake up with gold suddenly banned - it will happen incrementally - and this behaviour supports that view (although this could depend on country by country factors).

Vietnam I think will be worth watching - we may well be seeing a loss of faith in fiat (hyperinflation) developing in a country where there is an existing use of and infrastructure of gold as money. How the Government responds could give some indication of how others will, but it is a unique situation as few countries have populations that familiar with gold.

Interesting to contrast Vietnam's approach with India (whose public is said to hold between 10,000 and 15,000 tonnes).

Indian bullion dealer RiddiSiddhi Bullions Limited (RSBL) has just launched a gold account with the option of allowing RSBL to lend your gold out on your behalf.

RSBL "will lend your bullion to various professional bullion market participants against adequate security ... at the sole discretion of RSBL Commodities to decide whom to lend and for what time period." As its fee, RSBL retains 10% of the income and will take liability for any defaults by borrowers.

Note that the account is not targeted at the average investor with the minimum purchase size for gold being 1 kilo.

Shuttling wealth through a crisis

Quote from FOFOA's latest post:

That's right, gold is not at its highest and best use being spent (circulated) as a currency during a hunger crisis. Instead, if you are one with PLENTY of net worth, gold is the very best way to shuttle your wealth THROUGH a crisis to the other side. If you are forced to deploy this wealth for food during a crisis, then you apparently planned poorly.

Couldn't agree more - gold is not meant to be used during a crisis, but after.

We are nearing an endgame

I consider comments like these below from a high profile business executive (as reported by The Australian) as significant. You can be sure the smart money is now positioning itself.

THE world economy is on "life support", living beyond its means, with the threat of a cataclysmic shock within the next eight years, ABC chairman Maurice Newman warned yesterday. The former chairman of the Australian Securities Exchange, who is also a director of the Queensland Investment Corporation, said the Australian economy was better placed than many others to withstand the potential major shock to the world trade and financial system. But he warned that Australia had only a few years to get its economic house in order ...

"We are nearing an endgame, which I put at no more than eight years away, possibly less," he said. He warned that policy failures of governments, rising social costs and financial market volatility would "create a crisis" that would trigger "widespread trade and capital market dislocation". ...

But investors needed to prepare for the crisis by de-risking their portfolios and cleaning up their balance sheets. Australians needed to press their political leaders to make the economy more competitive.

Mr Newman predicted that the coming financial crisis could trigger an end to the role of the US dollar as the reserve currency of the world. He said it could be replaced by a system of International Monetary Fund drawing rights, which could be made up of a basket of currencies including the Chinese renminbi and gold.

Ambivalent about taking delivery

So "Tocqueville Gold Fund manager John Hathaway was ambivalent about the necessity for the University of Texas' endowment to take delivery of its gold investment" according to GATA. Of course he is, the last thing gold fund managers want is institutional investors realising that they can store gold themselves for 0.10%.

To be fair, Tocqueville only holds 5% of its fund in physical gold so the 1.35% management fee you are paying him is for stock selection.

Ben Davies' Hinde Gold Fund however "holds at all times between 75% and 100% of its assets in allocated gold in secure vaults in a leading Swiss private bank, Julius Baer" with a management fee of 1.5% and performance fee 20%. If we assume Hinde is getting similar rates for its gold, then his effective management fee for the 25% which are stocks is 5.7%

For example, if you are investing $100m, then Hinde is charging you $1,500,000 a year. But you could store $75m worth of the gold yourself at 0.1% = $75,000, so you are really paying $1,425,000 management fee on $25m, which equals 5.7%.

It will be interesting to see how Davies, Sprott and the ETFs deal with this. My guess is not talk about it. If you are an insitutional investor of size who does not have a legal restriction on holding physical gold, then you'd be stupid to not hold allocated directly.

As Bloomberg note "By comparison, the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, charges a management fee of 0.4 percent of invested assets. That would reach almost $4 million for the Texas fund." A couple of years at $4m is enough to build your own vault!

From that same article is an amusing statement from Ralph Preston of  Heritage West Financial, a futures trading firm: “The call to take delivery is more of a challenge to the system and it borders on the anarchistic ... It’s poor sportsmanship.” It sure is Ralph, I mean how are you going to earn brokerage every time an investor needs to roll their futures if they don't have futures.

Taking delivery is poor sportsmanship, what a joke. That takes talking your book to new heights.

M3 Inflation and the Gold Price

Very interesting article showing a good correlation between the author's M3 Inflation figure and the gold price. His M3 Inflation is M3 growth minus 90 day bank bill rate. It seems the gold price lags the M3 Inflation figure by a few years, making it a potential macro gold price forecasting tool.