A rally that is not meant to be sold

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. [read more]

What is the best gold & silver % allocation for Australian investors & does rebalancing matter

Following on from yesterday’s post, I chart the:

1. the best gold and silver percentage allocations for Australian investors by the year one starts investing
2. “times increase” of the 100% gold, 100% silver and 50%/50% strategies for Australian investors
3. percentage difference between the two total ending USD values of a rebalance versus a simpler no rebalance/buy in the same proportions each month

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The ideal percentage allocation between gold & silver

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).[read more]

Risk Radar - 101 ways the world could possibly end

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. [read more]

Understanding Open Interest

Techniques for analysing and trading equities, looking at price and volume, can be applied to precious metal futures markets. Futures, however, introduce another data point – open interest – that has to be considered. With equities, the quantity of shares on issue is generally fixed and rarely changes. Therefore all buying is done from sellers who hold the shares.

With futures, the amount of contracts “on issue” or “open” changes daily, as a future is a contract to trade metal in the future and an exchange will create, or open, as many new contacts as people wish to enter into. If a seller of metal and buyer of metal want to enter into a contract, then a new contract will be opened. If an existing seller of a contact (a “short”) and an existing buyer of a contact (a “long”) want to exit their contract, then the contact will be closed.


Open interest represents the number of contacts created and in existence at a point in time. The table below summarises how open interest will change, depending upon who is buying and who is selling.



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Baby boomer bugs to bust bullion?

 

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. [read more]

The Precious Metal Forum List

One of the best ways to learn about precious metals is to engage with other investors on a discussion forum. There can be a lot of rubbish on them (as with the internet in general) but generally you’ll get good advice from others who have been there before. The list below has the main active PM forums (or sub forums) where precious metals are discussed from an investing point of view. I have ranked them by total membership numbers, which is not perfect as it doesn’t necessarily represent active users but it is a fair indicator of either popularity or longevity of the forum.

 

Each forum has its own personality and particular focus – some skew towards one metal or the other, or peer to peer trading, or prepping. I’d suggest checking them all out and reading topics/threads to get a feel and see what suits you. Alternatively, you can subscribe to my Precious Metals Forums bundle on the feed reading service Inoreader, which aggregates threads from Kitco, Silver Stackers, SilverSeek, GoldEagle, Goldtent, Gold is Money, Reddit and Gold Club Asia forums if you want to keep your finger on the pulse of global PM discussion. [read more]

Demand-Price Disconnect

Last week I explained why shortages occur and how they are generally caused by production capacity shortages. Often such shortages of retail coin products are spun by commentators into a shortage of raw gold or silver or a physical-paper disconnect and thus a sure sign that metal prices will rise.

Mike Shedlock, in his very direct style, says that “any time you see articles promoting the difference between physical gold and paper gold you are most likely reading a pile of crap”, referring to the fact that “one can get physical gold near spot rather easily” and giving the example of GoldMoney or BitGold.

Mike’s comments were in response to this article that argued that because “demand for physical metal is very high … yet, the prices of bullion in the futures market have consistently fallen during this entire period. The only possible explanation is manipulation.” Market manipulation is certainly a factor but claiming it is the only possible explanation is taking a limited view of the dynamics involved. [read more]

Coin Shortage FAQs: telling a real shortage from a capacity shortage

Temporary coins shortages first started in 2008 after the global financial crisis and they have occurred repeatedly since then. Don’t get caught up in the marketing hype the next time a shortage occurs – if you follow the advice above on how to tell if it is a real shortage, or just a production capacity shortage, then you will be able to keep calm and carry on stacking (economically). [read more]

A very silly thing to think about Comex

Last month I covered Comex warehouse stocks in response to “a lot of chatter about the potential or certainty of failed settlement and Comex default”, making a number of points:

• inventory can be converted from eligible to registered relatively quickly
• including eligible inventory give a very different picture of warehouse stocks and owners per ounce
• the actual percentage that stand for delivery is only 2-4%
• current registered stocks vs open interest is well within current delivery rates

For those who focused on the registered stocks only, recent Comex deliveries have caused some disbelief. The best example of this is this piece by Zero Hedge. They way they word some statements could be misconstrued by investors new to precious metal, so as an education service below are some quotes from the article and some clarifications. [read more]

Will gold miners hedge, like the 1990s, into a falling price?

Reuters recently covered the latest Societe Generale/GFMS gold hedge book analysis report, which noted that “while miners overall remain wary of hedging … those who do favour the strategy are leaning more strongly towards options”. The total size of the hedge book has increased from its low of 91 tonnes in Q4 2013 to 193 tonnes at Q1 2015, but it is still massively below its peak of 3230 tonnes in 1999 (see chart below).


A timely study considering Metal Focus was reported yesterday as concluding that “on an [all-in sustaining cost] basis, the proportion of loss-making mines at $1,100 swells to 24%”. Metals Focus say that this does not mean that mines will be shut down, as “closing a mine in itself is often a very costly undertaking” and thus “mining companies will often be prepared to operate at a loss in the short term in the hope that commodity prices recover”.


For mines running at a loss it may make sense to look at hedging even at current low prices because it provides protection against further gold price falls – extending how long they can continue to operate and thus increasing the chance they will still be around when the price recovers. While this may make sense for each miner individually, it doesn’t make sense for the industry as a whole if everyone does it. Let’s just hope miners have learnt the lessons of the 1990s.


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How much gold should you have in your portfolio?

Amid a sea of mainstream media gloomy gold gloating, this unemotional article from Financial Times’ Alphaville blogger Matthew Klein asking the question how much of your portfolio should be in gold is worth a read. The first part discusses the idea that each person’s optimal portfolio depends upon their unique personal circumstances and risks. For example, if you have a stable job like a tenured professor, you could afford to have a more risky portfolio than a casual labourer. Matthew then asks, so “do you have liabilities [ie risks] that gold can usefully hedge”? [read more]

Divergence, convergence and gold

Michael Pettis argues that a market dominated by speculators tends to be more volatile as it is sensitive to changes (in consensus) in the way news is interpreted. If gold is entirely a speculative market, as I argued in Friday’s post, then we should see high volatility. While gold is more volatile than many other assets and currencies, it is not as excessive as we would expect based on Pettis’ theory. Why is this? I think it is because it is difficult for gold speculators to converge on a consensus view. [read more]