Producing more than you consume

From The Flow of Value blog:

"All investments are made with surplus value (some of which has been borrowed to be invested), which has been netted out of the flow of value by those who produce more than they consume. This stock of value is commonly known as wealth. But governments and borrowers are consuming more than they produce, and as such are consuming from this wealth accrued by others."

Part of the problem is that those who produce more than they consume stupidly lend to those who consume more than they produce. If the lenders only lent to those legitimately aiming to increase value by starting/expanding businesses (real wealth creation) would we be in the problem we are?

However, few can directly lend to productive members of society. That is the function performed by bankers as they are supposed to intermediate between lender and borrower, doing the checks on the borrower the lender does not have the skills or time to do.

However, the banks haven't been productively lending as proven by Money Morning who show, as an example, an Australian bank (ANZ) is currently lending 59% into the residential mortgage market compared to 25% in 1978, when they were lending a far bigger proportion to wealth creating business. As Money Morning says:

"In 1978, total lending to the business sector made up over half of all the bank’s lending. Yet today it’s a pathetic 17%. ... The result is less credit flows through to business, including entrepreneurial business. It means just as private enterprise can be crowded out by government spending, private enterprise can be crowded out by a misallocation of resources by retail banks."

Dave in Denver - The Golden Truth?

A couple of weeks ago this blogger did a post about the University of Texas taking delivery. In it he made the following statement

"Delaware Depository also serves as one of the Comex depositories and you risk having your gold mingled with unallocated gold or "accidentally" borrowed"

To me he is saying Delaware Depository would defraud their clients by giving/lending a bullion bank the client's allocated gold without their knowledge. I left a comment saying as such and that I thought he had stepped over the line with this.

He replied, saying I "crossed over the line by accusing me of crossing over the line". I left another response disagreeing, but he did not allow it through. I emailed him to ask if he hadn't got the response or had, but wasn't going to publish it. No reply back from him.

My view of blogging is that you should be prepared to defend yourself (or admit you were wrong) if you are really after the truth. Dave obviously disagrees. Below is the response he would not publish - I'll let you make up your mind on whether Dave is really after the Golden Truth.

"Very few people/entities can be trusted in the world of precious metals" Agreed, but I gather you don't include Perth Mint in that :)

Your argument against DDSC is based on two red flags. First is non disclosure of insurance arrangements. Here "DDSC agrees to maintain "all risk" insurance coverage for Precious Metals stored for you." That is a bit vague as it doesn't say "fully" but they do say here that "All precious metal assets held at DDSC are maintained in customer-specific custody accounts, on a fully insured basis, and off of DDSC's balance sheet." If they aren't fully insuring but saying they are then that is not good and a real red flag - I'm assuming you know for a fact that they don't fully insure.

I would note that any depository of size is unable to be fully insured because insurance markets don't have the capacity/willingness to underwrite it. That would cut in at around $1b - $2b with the cost getting prohibitive beyond that, assuming it is even available. If DDSC's total holdings are above that you may have a point.

"DDC is a Comex depository - sorry, guilt by association and guilt by sleaze." I think you're second red flag of guilt by association is weak. As you say "With the sleaze and corruption embedded in our entire system, especially on Wall Street" you can't trust Wall Street. But then you yourself "trading on Wall Street. For nine of those years, I traded junk bonds for a large bank", so couldn't someone just raise a similar guilt by association red flag on you? You don't disclose that you didn't work for Goldman? Don't get me wrong, I'm not saying you are guilty by association, just suggesting you put the shoe on the other foot and see how it feels.

"If you want to read into or infer anything from what I wrote, that's your business" I don't think it is just me reading that in, I think most people would. Because I think most people would read that into it that is why I think it steps over the line.

When you say "you risk having your gold mingled with unallocated gold or 'accidentally' borrowed" you are saying there is a reasonable possibility (ie risk) that DDSC will engage in criminal fraudulent action to comingle a client's metal and/or lease it out. That is a pretty strong statement.

"you crossed over the line by accusing me of crossing over the line" So it is OK for you to accuse someone of being at risk of acting criminally but not OK for me to simply say I think you went too far by making that statement? I think our differing views about “crossing the line” is a difference between Australia and America in respects of custom and laws regarding defamation and free speech.

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.

Closing Unallocated

In the entire time I have worked in the Depository business (since 1998) through the many times I have explained our unallocated "business model", the one thing that has surprised me is no one asked a very simple question, a question that cuts to the core and would reveal whether the Perth Mint had any integrity and whether we were lying about unallocated:

"So if it is funding working inventory, you will have to close it at some point, yes?"

That point has been reached with silver as announced on the corporate blog. Gold will follow in due course, possibly quite quickly once people realise the best storage deal in the world cannot continue forever.

You would not be surprised to know that our Certificate Approved Dealers were not overly happy about it - which business wants to stop selling its best product line - but it could not go on forever.

Of course the move has raised questions, and I'm currently managing four discussions on it (Ed Steer, Kitco, Gold is Money, SilverStackers).

This move should now raise another important question, but I'm not going to wait in case no one asks it:

"So if the West Australian Government is on the hook for the Perth Mint, surely there is a limit to how much they can guarantee, so therefore a limit to Depository?"

Answer is yes, at some point Depository will also close Pool Allocated and Allocated. When is an open question depending on how fast metal flows in and what happens to the gold price. But the day will come. The Government does not have the financial capacity or willingness to guarantee massive precious metal liabilities.

This suits me fine and should suit our clients, as the bigger you are the bigger the target - theft and political.

Many people just don't get this about the Perth Mint. It is not some money hungry management team looking to take on leverage and grow for the sake of growing and bonuses. It is conservative and about looking out for the interests of its clients. When we end up closing the whole Depository business to new clients, maybe the message will get through. Problem is it will be too late for some.

PS - an excellent analysis and history of the Liberty dollar case.