Mannkal Economic Education Foundation

For those goldbugs of a libertrian/Austrian economics bent (most seem to be, funnily enough) this organisation is likely to be of interest. Their mission:

We aim to strengthen the free market system in Western Australia and Australia, by promoting ideals of voluntary co-operation, choice, personal rights, limited government and responsible resourcefulness of individuals.

The Liberal Democratic Party may also be of interest. How can you argue with this Econ 101 on the WA branch's site:

9. Prices Rise When the Government Prints Too Much Money. When a government creates large quantities of the nation's money, the value of the money falls. As a result, prices increase, requiring more of the same money to buy goods and services.

10. Government Manipulation of Interest Rates and Money Quantity Causes Booms & Busts. Making money cheap (low interest rates) and abundant leads to excessive short term consumption which leads entrepreneurs to over invest in non-productive assets. Excessive demand for goods from consumers and entrepreneurs then raises the price of goods and money (higher interest rates) which results in the liquidation of non-profitable investments (mal-investments). The destroyed capital and associated production dislocation is the recession.

Why has the WGC bought into BullionVault?

On Monday the World Gold Council (WGC) announced that it and Augmentum Capital had completed a £12.5 million funding round in BullionVault in exchange for an equity interest.

It is an interesting development in their strategy. Until 2002, the WGC strategy was to support those selling gold. The 12 August 2002 announcement by WGC of the appointment of James E Burton (ex-CEO of California Public Employees Retirement System) as their new CEO foreshadowed two important changes:

1. a realisation that investment demand, rather than jewellery, was more capable of driving the price higher; and
2. a shift from supporting the industry to sell gold to developing its own "products" and competing against them.

Perth Mint got first hand experience of this new strategy when it was developing its ASX listed gold product in late 2002/early 2003. At the same time a Mr Tuckwell was developing what would become the first gold ETF in the world. The WGC decided to "take sides" and chose to endorse the Tuckwell product. Needless to say, we weren't too impressed. They then went on to develop and sponsor many other gold EFTs, the US listed GLD being the biggest.

However, I will concede that considering the cost and work involved in launching an ETF, especially on overseas exchanges, it may have been excusable for the WGC to get involved in developing such products since no one else was willing to (Perth Mint and Tuckwell excepted).

But, given the huge success of the various WGC sponsored ETFs, is it really necessary for the WGC to further compete against others in the industry? After all, the WGC ETFs hold 48 million ounces compared to BullionVault's 635,000. Does online gold trading have the potential to match the ETFs for impact on the gold price? I doubt it, so what is the WGC's motivation to extend beyond ETFs?

The Telegraph reports Marcus Grubb, managing director of investment at the WGC, as saying taking the BullionVault stake was part of the Council's strategy of "increasing its portfolio of successful platforms for gold investment". Does increasing its portfolio mean WGC will next buy a refinery to make WGC bars, or open WGC coin shops?

Is it a simple case of management empire building, or has WGC management been told to expand its portfolio with the objective of becoming self funding, or are gold miners (the WGC's members) using WGC as a front to move down the gold value chain without being seen by their shareholders as getting involved in non-core businesses?

I note with interest that IAMGOLD Corporation, a shareholder in James Turk's GoldMoney (one of BullionVault's biggest competitors), is also a WGC member. Note that Durban Roodepoort Deep (not a member of WGC) is also a shareholder in GoldMoney. It will be interesting to see if IAMGOLD pulls out of the WGC as a result of their support for GoldMoney's competitor. It would result in a WGC miners versus non-WGC miners fight in the online gold market.

Visit to Melbourne

I will be speaking at the next ANDA Coin, Banknote and Stamp Show being held at the Caulfield Racecourse, Concourse Ground Level, Caulfield, Melbourne on 3rd and 4th July.

While my talk will be aimed at newbies, I will be holding an unofficial "masterclass" Q&A session on Saturday at 1pm after my talk, primarily for members of www.silverstackers.com but it is open to all. ANDA show details below.

Saturday 3 July

11.00am – Bron Suchecki - ‘Options for Bullion Investment’

2.00pm – Mark van der Sluys - ‘Gold as Money’ and ‘The role of Gold in an Investment Portfolio’

Sunday 4 July

11.00am – Andrew Crellin - ‘Trading Coins for Wealth’

1.00pm – Bron Suchecki - ‘Options for Bullion Investment’

3.00pm – Rob Jackman - ‘Investing in Rare Coin & Bank Notes’

Mark van der Sluys – ‘Gold as Money’ and ‘The role of Gold in an Investment Portfolio’ – Economic and monetary historian and CEO of BULLIONMARK, Mark van der Sluys, will present a, not to be missed, two part presentation covering the subject of ‘Gold as Money’ and ‘The Role of Gold in an investment portfolio’. Important insights that are central to protecting and growing your wealth.

Bron Suchecki – ‘Options for Bullion Investment’ – Perth Mint Senior Analyst Bron Suchecki will present a one hour information session on the variety of ways you can buy gold and silver including coins and bars, certificate programs, storage options and even via the Australian Stock Exchange.

Andrew Crellin - ‘Trading Coins for Wealth’ – Andrew Crellin, Managing Director of Sterling & Currency and industry renowned author, will provide an introduction to his next book titled “Trading Coins For Wealth”, written to give an insight into how successful collectors approach their craft.

Rob Jackman – ‘Investing in Rare Coin & Bank Notes’ – Rob Jackman, Managing Director of The Rare Coin Company, will give investors the benefit of his 26 years experience in the industry with a presentation on the intricacies of Investing in Rare Coins and Bank Notes for private investment portfolios.

The truth: there is zero gold in LME's vaults

There has been a lot of speculation recently about how much gold is held in London against unallocated accounts, see some examples below:

Bix Weir: "... stay away from COMEX/LME good delivery gold and silver bars ..."

Arnold Bock: "... there is little bullion in storage at the London Metals Exchange or New York's COMEX ..."

Bob Chapman: "... Do you really think that the COMEX and LME would deliver the gold even if they had it ..."

John Dizard: "Many of them apparently prefer to have their gold in vaults near where they are, Mr Smith’s “middle of nowhere”, rather than in LME or COMEX warehouse receipts."

Jim Willie: "A clearinghouse held a Letter of Intent to supply the London metals exchange with 250 metric tonnes of gold bullion."

I am now prepared to finally reveal the truth - there is actually NO gold in the vaults of the LME (London Metals Exchange). Now I know this is an explosive claim and I'm sure you'll want to know if I can back it up with proof. Well, go to the LME website and tell me where you see gold mentioned?

That's right, gold isn't mentioned. The LME is a base metals exchange and does not trade precious metals. Problem is this makes the commentators quoted above, who talk about gold on the LME, look foolish. In my opinion, if you do see a commentator make the mistake of thinking gold trades on the LME it is an indication that they don't know what they are talking about with regards to precious metals and you should treat their analysis with caution.

Gold is traded in London over-the-counter, in other words in direct deals between counterparties. There is no gold exchange in London. There is the London Bullion Market Association (LBMA), but that is just a trade association and it does not operate an exchange or have any vaults.

You may think I'm being a bit hard on those who confuse the LME and LBMA. You might argue that it is a reasonable mistake, since they are both in London and both deal in "metals".

To that I would say what sort of credence would you give a commentary by a stockbroker who talked about Pepsi trading on NASDAQ, or Microsoft trading on the NYSE? Would you feel comfortable following stock advice from someone who did not know which exchange a stock traded on?

Confusing LME and LBMA is actually worse than that because the LME is a base metal exchange whereas the LBMA is just a precious metals trade association - a basic Google search would reveal that.

Sorry, I don't think there is any valid excuse. Getting LME, LBMA and gold mixed up is a sure indicator that one has no actual precious metals market experience, an example of ultracrepidarianism. In which case, how can you trust them to know what is really going on, how can you know they haven't made other mistakes in their analysis of the gold market?

Coin shortages coming

I have been going on about the coming shortage of coins due to limited minting capacity in the industry for a while now. This interview with refiner Argor-Heraeus by Mineweb confirms this, see quote below.

Geoff Candy: Are we likely to see a shortage of supply of these sorts of denominations.

Bernhard Schnellmann: A shortage yes, but that's not because of the metal, it's just because of the minting capacity. You have to same situations of the four coins - if the bullion coin - if we are sold out it's not because there is not enough gold around but also because there are not enough minting presses around.

If you believe there will be increased mass market demand for gold going forward and like your minted coins or bars, then stock up now because you will face premium increases and/or rationing. Once that happens small cast bars will be the other economical option and I think it would be a while before industry capacity is maxed out for them.

I would also draw attention to Bernhard's comment that being sold out does not indicate that "there is not enough gold around". The "selling out" of retail size coins and bars is an indicator of mass market demand and is bullish, but it is not an indicator of no gold. If you see any commentator claiming this, then the only thing it is indicating is that the commentator has no precious metals industry experience on the physical side and in my view any basic commercial sense, in which case you should consider carefully any of their other claims. It is a very good indicator of a hype merchant rather than someone trying to give you good advice.

Gold and the Clash of Civilisations by Andy Smith

Well, it’s not ‘the end of history’, as Francis Fukuyama originally forecast in 1989. As events, as much as Samuel Huntington’s 1993 counter-thesis ‘The Clash of Civilisations’, have shown. For Fukuyama, it was ‘the politics’ that mattered. And these ‘ended’ when the Berlin Wall fell and, soon after, victory in the Cold War was declared by liberal democracy, happily “free from such fundamental internal contradictions” that undermined alternative forms of government. For Huntington, it was all about ‘the religious’, ‘the ethnic’. Since history, like nature, abhors a vacuum, ‘politics’ would be replaced by something .... like 9/11, and the Iraq and Afghanistan wars.

What if both are wrong? What if it’s ‘the economic’? And record gold prices (in all currencies) ‘prove’ it? In late 1993 Huntington challenged his critics to come up with an “alternative paradigm that accounts for the more crucial facts in equally simple or simpler terms.” A little late, here goes.

The deepest and most enduring schism in and between societies is that dividing creditors and debtors, and surplus and deficit countries. In turn, these sides champion hard or soft money, deflationary or inflationary policies. In the ‘good old days’ this was an even fight. Indeed, the climax of the ‘Gilded Age’ of prosperity in America at the end of the nineteenth century was marked by three successive defeats for the soft-money candidate, William Jennings Bryan.

The “plain people of this country” were Bryan’s army. And you’d “search the pages of history in vain to find a single instance in which the common people of any land ever declared themselves in favor of a gold standard”, ie hard money. For Bryan “the idle holders of idle capital” (with assets to defend) were pitted against “the struggling masses” (with debts to burn, they hoped). And “where, in law or morals” was the “authority for not protecting the debtors?” Or, as his more memorable rallying cry went: “you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”

This was probably the high water mark for the forces of hard money. Their ‘cross of gold’ discarded in the 1930s, now they have simply been outnumbered by debtors. And in democracies, power is a numbers game. In America today almost half the working population pays no Federal income tax, compared with only a fifth as recently as the late 1980s. What is this great subsidized majority going to vote for? Smaller government and fewer benefits - ‘hard choices’? A strong dollar that keeps inflation low and the real value of their debts up? Or personal profligacy funded by government excess?

The dwindling minority of (‘idle’ but taxpaying) creditors has worked this one out. And it is investing accordingly, in an asset viewed beyond the grasp of the mob or its elected representatives:

• in gold coin - American Eagle sales an 11 year high for May
• in gold bars - the securitized version, gold ETFs; 5 million ounces of the largest of these were bought in the thirty days after the Greek crisis broke, 23 April when Athens officially requested a bail out, more than in the month after the fall of Lehman Brothers, 15 September 2008

Similarly Europe’s largest creditor nation Germany finds itself ‘out-voted’ by debtor members of the euro. Albeit under duress, it has signed up to contribute over a quarter of the capital to the 440 billion euro ‘bail out’ fund – and the euro has reacted accordingly, falling to $1.19, no better than its launch on 1 January 1999. As the world’s biggest creditor, China, jumping from the frying pan of the dollar into the fire of the euro this past decade, will note, painfully. In fact, since the inception of the euro, all major currencies have fallen some 75% against gold. Bryan cannot have imagined that debtors would enjoy such ‘protection’.

A few hard money guerillas survive, in what some might call the backwoods. Ten American states are considering bills to reintroduce ‘Constitutional Money’. Namely, proposals to break the Federal Reserve’s monopoly (of paper currency) and return to Article 1, Section 10 of the 1787 Constitution which forbade states from making “anything but gold and silver coin a tender in payment of debts.” Stranger than the fiction of Ayn Rand? (In whose 1957 novel ‘Atlas Shrugged’ society’s creditors, its movers & shakers, fled a rapacious government to a hidden valley where gold and silver were the basis of transactions and savings.) Or the golden nail in the coffin of Fukuyama’s thesis that democracy is not “prey to ... contradictions so serious that they will eventually undermine it as a political system”?

Demand up, Supply down

Two news stories in my inbox this morning from Sharelynx:

Demand Up: Gold a ‘Good Choice’ for Boosting Global Use of Yuan

"China’s trade in yuan-denominated gold investment products moves the currency closer toward global acceptance and the country should develop more of them, a central bank official said."

Supply Down: South African gold output falls hard

"In an all too familiar announcement in recent years, the South African Chamber of Mines reported the country's first quarter gold production fell 15% quarter-on-quarter, extending the downward slide in output."

Niall Ferguson on gold

Sharelynx drew my attention to this 13 May 2010 lecture by Niall Ferguson at the Peterson Institute for International Economics titled Fiscal Crises and Imperial Collapses: Historical Perspective on Current Predicaments. The following is on the last page of the transcript:

Finally, I guess one just has to ask oneself what’s going to happen in the world of dodgy paper currencies, of fiat monies, because you could quite easily get burned if ultimately we do get a crisis not just of the euro but of fiat currencies generally. And I keep thinking that maybe I should be valuing my portfolio not in terms of this or that currency but in terms of the barrel or the ounce—in terms of commodities like oil and gold.

Maybe one of the lessons of history is that periodically paper currency loses credibility so much that we have to revert to commodity standards, and I think that may well be happening. When you look at what’s happening in the gold market, it’s not so much fundamentals that are driving gold up from a $1,000 towards $2,000. It’s a fact that more and more people feel that they should hold gold as perhaps 10 percent of their portfolios. If everybody thinks that, if that becomes a standard investment strategy, then gold is going to go a lot further than its present price. So I’ve really re-thought my attitude towards gold almost on that momentum basis.

Note that this is a presentation made to the "elites", mentioning ideas that were once considered crazy goldbug talk.

Bank of England holds 4700t of gold

Stumbled on the value of gold the BOE holds on custodial basis from a link in a Golden Sextant article.

Unfortunately, the annual reports only list gold value from 2005 onwards (note that BOE financial year end is 28 Feb):

Year, GBP value, ounces (based on GBP london PM fix on 28 feb)

2005, 25b, 110,368,454

2006, 35b, 110,035,903

2007, 43b, 126,857,129

2008, 72b, 147,283,237

2009, 102b, 152,282,217

Interesting that it was stable from 05 to 06, then starts increasing. 152 million oz = approx 4,700t, or 3% of all gold ever produced (160,000t). Hard to read anything into it as the holdings include central bank metal (reported in other figures) as well as other bullion bank and institutional metal, so you couldn't just add it to other reported figures as it would result in doubling up.

However, it is another indicator of increasing interest in gold as well as giving us an insight into the amount of metal held in London. On that last matter, consider that total COMEX registered and eligible stocks are currently 10.74 moz compared to the BOE stocks of 152.28 moz.

How to identify a gold bubble

There is no bubble in gold. Watch the first past of this news story on gold buying in China. When you see similar crowds in Western countries desperate to hand over paper banknotes for gold then you'll know we are in a bubble.

h/t to Sharelynx