gold

All posts tagged gold

In the previous post on Peter Schiff, some of the commenters suggested diversifying out of the US dollar and economy and instead investing in natural resource rich countries like Canada and Australia. One person who supports this theory is Marc Faber. He thinks there’s a strong possibility that the US might see 200% inflation. Right now he says its reversible “in theory”, but he’s confident that we’ll follow Zimbabwe down the road of Mugabe economics and devaluation of the dollar (which will be bullish for gold!).

“In the US, we have a totally new school, and it’s called the Zimbabwe school. And it’s founded by one of the great leaders of this world, Mr Robert Mugabe, that has managed to totally impoverish his own country. And that is the monetary policy the US is pursuing.”

Faber also thinks that US government bonds should have junk bond status!

Another person who’s bullish on gold (and therefore by default, bearish on the dollar) is David Einhorn of Greenlight Capital, who correctly predicted the fall of Lehman and other financial companies. In his recent newsletter to his shareholders, he was almost apologetic about investing in gold mining stocks right now.

We never thought we would ever buy gold or gold stocks. David’s grandfather Benjamin was a goldbug… And it was a lousy investment. Being a patient investor is one thing. Being ‘wrong’ for three decades is quite another.

To everyone’s dismay, we believe that some of Grandpa Ben’s predictions are playing out. Our current chairman of the Federal Reserve, Ben Bernanke, is an ‘inflationist.’ … The size of the Fed’s balance sheet is exploding and the currency is being debased… Our instinct is that gold will do good either way; deflation will lead to further steps to debase the currency, while inflation speaks for itself. We have bought gold, calls on gold, an index of gold mining stocks (GDX) and calls on higher long-term U.S. interest rates.

You can read his entire shareholder letter here. It’s informative and very easy to read.

[Note: I’m bullish on gold and own GDX.]

Here’s an excellent video starring Peter Schiff.  He predicts that the US Dollar will be the next bubble to burst. As a corrollary, I think gold will be the next bubble. The dollar collapse seems unlikely, you say? Well he did predict the collapse of the housing market 4 years ago and was met with wide-spread ridicule.

Like I’ve been saying for ages, make sure you buy some gold coinsSilver coins aren’t bad either.

Today’s post is an excerpt from What If Stocks Were Priced In Gold? posted at Experience Is Everything.  While the post is incredibly interesting it is rather long. The portion I’ve quoted explains why gold will likely outperform the dollar and stocks over the next few years. It follows that you should invest in gold. Even though, I’ve been recommending gold since it was at $495/oz back in December 2005, it’s still not too late.  If the below mentioned scenario comes true, you’ll be happy you did!

For much of the last century the dollar was tied to gold, and while the relationship was never perfect — and the U.S. government betrayed the union many times, in many different ways — there was at least some relationship, which helped pull the ratio down. Eventually, excessive inflationary printing caught up with the government in the 1960s, and it became clear it wouldn’t be able to honor redemptions against the dollar at the price it had fixed. Nixon essentially defaulted on the U.S. promise to redeem dollars for gold by taking the U.S. off the standard in the 1970s — and this, more than anything else, allowed inflationary pressure to drive general prices into the stratosphere. This was the moment the Dow-to-gold ratio approached 1:1. To fight rising prices, Paul Volcker, the Fed Chairman at the time, pushed the Fed’s target interest rate past 20% and barely saved the U.S. economy from collapse.

For most of the next 20 years, gold fell and stock prices rose. Meanwhile, the U.S. government capitalized on the lie it had created and printed more and more money. Who really cared? Everyone was making money in the stock market, and prices remained relatively stable. In fact, every time prices failed to act “correctly,” the Fed simply changed the rate at which it would lend to banks. But the illusion of the monetary policy game couldn’t last forever; people used easy money printed by the government to buy assets they couldn’t afford throughout the economy — especially houses. Finally the pressure was just too much, and everything started unraveling in 2007. But the gold market seemed to understand the game couldn’t last, and around 2000 it started a slow, steady rise.

Relative to everything, the number of dollars in the system in early 2009 is almost incomprehensible. Once de-leveraging reaches its nadir — and it’s coming soon — those dollars are going to hit the economy and drive prices much higher.

What have we learned about stocks in such periods of rising prices? Not only do they fail to perform, but adjusted for inflationary price pressures, they actually underperform. General prices and unemployment will continue to rise. The consumer will continue to be unable to consume. Corporate earnings and dividends will continue to collapse as a result. Stocks are going lower — probably much lower.

And what about the price of gold? It will almost certainly continue to increase — not only because people will flock to its long historical stability and consistency, but also because there are simply so many more dollars (and yen, and rubles, and euros) in the world. Remember, the U.S. isn’t the only country printing innumerable sheets of currency. And in that context, remember also that inflationary price increases have almost nothing to do with increased demand, but rather they are the result of currency devaluation and destruction — through printing.

I just want to share two more charts with you. The first should give you a little perspective — it is a historical chart of gold, in both nominal and real dollars. Notice the real price of gold in 1980 (in 2007 dollars) was $2272 per ounce. If I’m correct about inflation and the fate of the dollar — and I’m confident I am — then we are nowhere near the historical high in gold. But I don’t think we’re merely going to re-test that high — I think we’re going to blow through it as the dollar loses value.

In the 1930s, as corporate earnings and dividends disintegrated, the Dow lost nearly 90% of its value from peak to trough. The U.S. was a creditor nation with a huge manufacturing base. The dollar was tied closely to gold. Since its peak in October 2007, the Dow has lost less than 50% of its value. The U.S. is a debtor nation with a relatively small manufacturing base. I can’t say it enough: we borrow profusely, we manufacture very little, and we consume gluttonously. Nonetheless, the consumer has now lost almost all his purchasing power, and corporate earnings and dividends are going to suffer massively as a result.

In 2007, the Dow peaked at about 14,150. To give you some perspective, an 85% drop in the Dow from peak to trough would put it at about 2100.

I know its easy to imagine the Fed has magical powers. I’ve fantasized about such things myself at times of extreme weakness — that maybe the Fed will “somehow” figure out a way to fight and defeat the unprecedented evil specter of inflation it is foisting on its unsuspecting children. Sometimes I do believe that our Lord and Savior Barak Obama will wave his charmed “unicorn horn of change” and all will be well again. Likewise, at times I feel like I could let Uncle Ben Benanke take me just about anywhere in his helicopter of prosperity. My faith in the reverend John Maynard Keynes runs deep, as I hope, and hope, and hope. I find myself gleefully clicking my heels together and repeating, “the dollar is almighty, and the Stars and Stripes will prevail.” And when I am in this wonderful place, I have confidence that someday soon, we’ll all be buying houses with no money down, and with no jobs. Our driveways and backyards will once again overflow with boats, motorcycles, and sports cars.

Then I think about the 1930s. And suddenly I am wide-awake.

Let me ask you a simple question, and I want you to actually think about it. Do you really think we can’t get to the 1930s again? Do you really think that we’re going to return to the exuberant excess of the past few decades? If so, let me disabuse you of the notion: the United States was in much better shape, economically, going into the Great Depression than it is now. Prosperity is not coming back to the U.S. as we know it. We are in a lot of trouble.

Is a Dow-to-gold ratio of 1:1 so incomprehensible? Again, it has happened before — several times. But I’ll even take it a step further: what about a Dow-to-gold ratio of .5? Or less? I promise you, if the Fed fails to soak up all the dollars it’s putting in the system, that’s exactly where we’re going. And what, you may ask, does the Fed use to “soak up dollars?”

I’ll be glad to tell you that too. When the Fed needs to take dollars out of the system, it sells Treasuries (which means it buys dollars). The problem is, the U.S. debt-load is astronomical. Who, exactly, is going to buy that debt from the Fed? And at what interest rate? Remember, if the Fed is desperately trying to take dollars out of the system, there can be only one reason: it is scared of rising prices caused by inflation. But if the Fed floods the market with Treasuries, it will achieve exactly the opposite effect it’s looking for — it will cause rates to rise, probably dramatically. Do you really think the Chinese and the Japanese are going to buy Treasuries at a 2% yield if the Fed is panicking and trying to buy dollars to stop an inflationary price explosion? If so, you’re delusional. Chinese and Japanese people are smart. They’re not going to fund an inflationary dollar at 2%. Ever.

In the past it might have worked. Of course, in the past, the U.S. money supply was much smaller, and our ability to borrow was much stronger. But those days are gone.

As if I haven’t terrified you enough, the last thing I’m going to leave you with is really scary. It is a link to an excellent article by Mark J. Lundeen, whose insight into this economic catastrophe has been stupefying since long before all of this even started. Embedded in the article is a chart that shows historical dollars-in-circulation, relative to U.S. gold.

With that, I think I’ll let you do the rest of the math. Sleep well.

I strongly recommend you subscribe to his blog. And don’t forget to add some gold & silver to your portfolio.

Over a year ago, I wrote about China threatening to stop buying US Treasuries.

According to an article in the New York Times, it now looks like China is losing it’s appetite for US debt :

In the last five years, China has spent as much as one-seventh of its entire economic output buying foreign debt, mostly American. In September, it surpassed Japan as the largest overseas holder of Treasuries.

But now Beijing is seeking to pay for its own $600 billion stimulus – just as tax revenue is falling sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and medium-size enterprises, many of which are struggling with lower exports, and to local governments to build new roads and other projects.

All the key drivers of China’s Treasury purchases are disappearing – there’s a waning appetite for dollars and a waning appetite for Treasuries, and that complicates the outlook for interest rates, said Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland.

By itself, this is a concern for our government. Recently, it sold billions of 3 year treasuries at a 1.2% yield! But when the demand for treasuries eventually dries up, yield should start jumping higher. But to make matters worse, the government will start a slew of public works projects and bailouts, for which we will have to borrow even more money. At some point the demand will simply fall short of the supply.

Here’s an interesting note by James Quinn on investmentrarities.com:

As the politicians scurry to “save” capitalism through the use of communist measures, more Americans are becoming disheartened. The definition of communism according to Webster’s is:

A system in which goods are owned in common and are available to all as needed.

George Bush, Henry Paulson and Ben Bernanke have decided to seize money from the vast majority of Americans who lived within their means, utilized debt sparingly, and worked hard to get ahead, and give it to the most appalling failures in our society. They have shoveled billions to banks that operated their businesses like gambling parlors. They have shoveled hundreds of millions to people who bought houses with no money down, interest only mortgages and fraudulent loan applications. They are now rewarding automakers who made the wrong vehicles, pay 30,000 workers per year to not work, and have only been able to “sell” cars by giving them away with 0% financing to any schmuck who could sign on the dotted line. These acts fit the definition of communism. We are now more communist than China.

So what are the repercussions of our monetary policy? According to Chuck Butler of Everbank.com (which I highly recommend):

US government will have to ratchet the yield on these bonds up so high to attract investors… OR… Allow a general debasing of the dollar to allow those purchases of Treasuries to be made at a discounted clearing price.”

A lot of people will disagree, but during these economic times, we’ll see inflation and not deflation. And gold will continue to be a store of value and a hedge against inflation. Even though its quite popular to bash gold and call it a lousy investment, the fact remains that gold has been one of the best performing assets during the past decade. I’ve been buying gold coins since 2005 and while the price of gold is up around 50% since then, the premiums on gold and silver coins has increased more than twice that. (Premium is what you pay over the spot price of gold). This shows an increasing demand for gold coins.

Gold and silver coins will be the next bubble! The bubble has barely started and should take 2-3 years to play out.

The media has been going on and on about deflation. Long-term bond prices have also been trending up and long term yields have been dropping, which means that the market thinks there will be long-term deflation. Even the Consumer Price Index numbers that came out claim that inflation is under 2% annually!

(Of course, if you’re one of the unlucky 533,000 people who lost their jobs last month, you really couldn’t care less about deflation).

Let’s first look at the Government reported numbers.

                      May   June  July  Aug.  Sep.  Oct.  Nov.   ended     ended                      
                             2008  2008  2008  2008  2008  2008  2008 Nov. 2008 Nov. 2008

All items..........    .7   1.2    .9   -.2   -.1  -1.2  -2.1     -12.9        .7

Food and beverages    .3    .8    .9    .6    .6    .3    .2       4.2       6.0
Housing...........    .5    .5    .7    .0   -.2    .0   -.1       -.8       3.1

Apparel...........   -.2    .0    .8   1.0    .0  -1.2    .2      -3.9        .2
Transportation....   2.1   4.0   1.8  -1.7   -.7  -6.0 -10.9     -52.1     -10.4

Medical care......    .1    .2    .1    .3    .3    .1    .2       2.7       2.7
Recreation........    .0    .2    .4    .5    .2    .0   -.1        .8       1.9

Education and
  communication..    .3    .5    .5    .2    .0    .2    .2       1.6       3.4

Other goods and
  services.......    .5    .6    .5    .2    .2    .3    .1       2.4       4.4

Special indexes:Energy............   4.5   6.8   4.0  -3.2  -1.7  -9.0 -17.8     -70.8     -14.3

Food..............    .3    .8    .9    .6    .6    .3    .2       4.1       6.2
All items less
food and energy    .2    .3    .3    .2    .1   -.1    .0        .1       2.0

Lets start with the largest expense for most people, housing.

Yes, house prices have decreased. However, if you’re already a home owner or a renter then you’re probably not seeing any benefit. The only people who’re benefiting are those people who can actually qualify for a home loan and have enough cash for a down-payment. The 100% financing loans have disappeared as a result of the tightening of the lending standards. As I mentioned in the last post, it’s not the cost of credit, buts the availability of credit that is important.

Energy prices actually have dropped down from $147/barrel to around $40/barrel in the past 5 months. However, I heard billionaire T Boone Pickins on the radio today say that OPEC is going to keep cutting production until oil is back up at $75/barrel. In the long run, I agree with him. While a global recession might reduce the demand for oil, there are 3 billion people in Asia who are getting a little richer every day and want air conditioning, cars, motorbikes and other luxuries that consume oil. Without alternate energy sources, oil prices have to rise. The current price drop is likely to be short-lived.

According to official numbers, education costs have only gone up 1.6%-3.4% in the past year. However, my MBA program has seen a much higher percentage increase in tuition than last year, and it might see another increase next year (according to a letter I received from the Dean of my Business School).

Likewise, medical costs have also gone up only 2.7%, but my health premiums and medical costs seem somehow higher than that.

And while food and beverage prices have only seen an official 4.2-6% inflation, prices of food items that I consider my staple diet like Tyson Chicken Wings and Sirloin Steak Burgers at Costco have gone up about nearly 50% in the past 2 years.

Meanwhile, the Federal Reserve is printing money like its going out of style. (And at this rate, it actually might). In theory, increasing the money is inflationary. That’s one reason why a house that cost $30,000 in the 70’s costs $300,000 today. More money in circulation means every existing dollar is now worth less. At least thats the theory. Increases in productivity and technology have managed to improve our standard of living despite this inflationary pressure, but there must be some point at which you start seeing inflation. Maybe we’re at that point now.

The government has committed to more money on financial bailouts than its ever spent in its history. According to an article in the SF Gate, the Financial Bailout may end up costing the taxpayer $8.5 trillion dollars.

According to an article on CNBC, that’s more than the cost of almost everything else the US government has spent on even adjusting for inflation!

Here are estimates for the major US government expenditures (all figures inflation-adjusted):

Hoover Dam: $782 million

Panama Canal: $7.9 billion

Gulf War: $98 billion

Marshall Plan: $115.3 billion

Louisiana Purchase: $217 billion

Race to the Moon: $237 billion

Savings & Loan Crisis: $256 billion

Korean War: $454 billion

New Deal: ~$500 billion

Iraq/Afghanistan/War on Terror: $597 billion

Vietnam War: $698 billion

NASA Budget since inception: $851.2 billion

World War II: $3.6 trillion

Total = $7.63 trillion

I thought this was the most interesting section of the SF Gate article:

The Fed’s activities to shore up the financial system do not show up directly on the federal budget, although they can have an impact. The Fed lends money from its own balance sheet or by essentially creating new money. It has been doing both this year.

The problem is, “if you print money all the time, the money becomes worth less,” Rogers says. This usually leads to higher inflation and higher interest rates. The value of the dollar also falls because foreign investors become less willing to invest in the United States.

Today, interest rates are relatively low and the dollar has been mostly strengthening this year because U.S. Treasury securities “are still for the moment a very safe thing to be investing in because the financial market is so unstable,” Rogers said [That’s Diane Lim Rogers, chief economist with the Concord Coalition, not Jim Rogers!]. “Once we stabilize the stock market, people will not be so enamored of clutching onto Treasurys.”

At that point, interest rates and inflation will rise. Increased borrowing by the Treasury will also put upward pressure on interest rates.

In the past 10 years gold is up 300%+. That’s about 300% better than the return on the S&P500 over the same time period! This is not an indication of deflation.

And what does veteran investor Jim Rogers think about this? In a recent Bloomberg interview he predicted that the dollar is “going to lose its status as the world’s reserve currency,” adding, “It will be devalued and it will go down a lot. These guys in Washington, they want to debase the currency.”

“They think that if you drive down the value of your money, it makes you more competitive, now that has never worked in history in the long term,” said Rogers.

Paul Watson of the Prison Planet states:

The head of the International Monetary Fund, Dominique Strauss-Kahn, warned that advanced nations will be hit by violent civil unrest if the elite continue to restructure the economy around their own interests while looting the taxpayer. Strauss-Kahn’s comments echo those of others who have cautioned that civil unrest could arise, specifically in the U.S., as a result of the wholesale looting of the taxpayer and the devaluation of the dollar.

How long will it be before Americans realize the looming specter of hyperinflation spells disaster for their life savings? How long will it be before we see rioting in the streets on a par with the scenes witnessed in Iceland over the weekend, where the Icelandic krona has lost half its value in a matter of weeks?

I’m not buying the deflation argument. In fact, I wouldn’t be surprized to see 10-12% inflation for the next several years. I’ve been buying gold coins since gold was $500/ounce and I’ve adding to my position on pullbacks. Maybe in a few years time, $850 gold and $12 silver may look like a bargain!

Now that the Federal Reserve has bailed out Citigroup, it’s back to business as usual. Having personally helped destabilize the world financial markets, they’re now predicting a rise in gold prices to $2,000/oz in 2009.

According to an article in the UK Telegraph:

Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world’s monetary system with liquidity, according to an internal client note from the US bank Citigroup.

The bank said the damage caused by the financial excesses of the last quarter century was forcing the world’s authorities to take steps that had never been tried before.

This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

Wait, did he say wars? Caused by a depression? I’m no history buff, but when did either inflation or depression cause wars? I thought most wars were caused by megalomaniacs or over some natural resource like water, land, oil or maybe even gold. But I don’t think lack of jobs caused people to invade another country. Maybe we should redefine the large number of Mexican workers in the US as angry hordes of invading marauders 😉

Anyway, they try to justify their stance:

“They are throwing the kitchen sink at this,” said Tom Fitzpatrick, the bank’s chief technical strategist.

“The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.

“Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don’t think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes,” he said.

“This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised.”

“What happens if there is a meltdown in a country like Pakistan, which is a nuclear power. People react when they have their backs to the wall. We’re already seeing doubts emerge about the sovereign debts of developed AAA-rated countries, which is not something you can ignore,” he said.

Who is this people who are throwing around kitchen sinks?

But more importantly, did the author insinuate that Pakistan might start throwing around nuclear weapons if their economy falls?

According to the World Factbook:

Pakistan, an impoverished and underdeveloped country, has suffered from decades of internal political disputes, low levels of foreign investment, and a costly, ongoing confrontation with neighboring India.

Sounds like their back is already against the wall. So I guess the question is whether the default bonds from AAA-rated countries will push them over the edge! 😀

Sounds like Fitzpatrick’s original message got a little lost in translation.

Finally though, there’s something that makes sense. But that probably because it’s based on fact and not someone’s misquoted opinion.

Gold traders are playing close attention to reports from Beijing that the China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. “If true, this is a very material change,” he said.

Mr Fitzpatrick said Britain had made a mistake selling off half its gold at the bottom of the market between 1999 to 2002. “People have started to question the value of government debt,” he said.

Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off its all-time peak of $1,030 in February but has held up much better than other commodities over the last few months – reverting to is historical role as a safe-haven store of value and a de facto currency.

Gold has tripled in value over the last seven years, vastly outperforming Wall Street and European bourses.

Well, I think gold might hit $2,000 or more over the next few years. But hopefully there won’t be any more wars.

As a follow-up to my previous 2 posts on gold, here’s a news article about the Australian Perth Mint suspending orders for gold bullion until January. Apparently having it’s workers slog 7 days a week isn’t enough to meet demand!

FEARS of the unknown long-term effects from the global financial crisis have sparked a new gold rush.

With retail and wholesale clients around the world stocking up on the precious metal, the Perth Mint has been forced to suspend orders.

As the World Gold Council reported that the dollar demand for gold reached a quarterly record of $US32 billion ($50.73 billion) in the third quarter, industry insiders said the race to secure physical gold had reached an intensity that had never been witnessed before.

Perth Mint sales and marketing director Ron Currie said the unprecedented demand had forced the Mint to cease orders until January, with staff working seven days a week, 24-hour days, over three shifts to meet orders.

He said Europe was leading the demand, with Russia, Ukraine, Middle East and US all buying — making up 80 per cent of its sales. One European client purchased 30,000 ounces for $33 million.

“We have never seen this before and are working right at capacity. And we are seeing it from clients in the shop buying one ounce, right up to 30,000 ounces from overseas clients,” Mr Currie said.

Robert Jaggard, manager of bullion and rare coins dealer Jaggards, said business had picked up strongly and he expected it to increase further.

“All around the world there has been a heavy run on physical gold and there is a shortage of supply,” he said.

Mr Jaggard, who has been dealing in gold for 40 years and is an agent for the Perth Mint, said some clients were buying up to $1million worth of gold, paying a premium above the spot price.

Late yesterday afternoon, spot gold in Sydney was trading at $US747.30 an ounce, up $US8.15 on Thursday’s local close.

“Professional business people who have previously bought small amounts now want more gold because they are suffering in other markets,” Mr Jaggard said.

At a conference this week in Munich, delegates were lined up 30-deep to purchase physical gold. And reports out of the Middle East suggested that there had been unprecedented gold buying in Saudi Arabia during the first half of November, with an estimated $US3.5 billion purchased in recent weeks.

The World Gold Council, releasing its global demand trends yesterday, said identifiable investment demand, which incorporates demand for gold through exchange-traded funds and bars and coins, was the biggest contributor to overall demand during the quarter. It was up to $US10.7 billion, double last year’s levels.

The figures showed retail investment demand rose 121 per cent to 232 tonnes in the third quarter, with strong bar and coin buying reported in Swiss, German and US markets.

The quarter also witnessed widespread reports of gold shortages among bullion dealers across the globe, as investors searched for a haven. Overall, quarter three saw Europe reach an all-time record 51 tonnes of bar and coin buying. France became a net investor in gold for the first time since the early 1980s.

World Gold Council chief executive James Burton said gold’s universal role as a store of value had shone through during the quarter, helping attract investors and consumers to all forms of gold ownership.

“The rise in demand for gold bars and coins has been impressive,” he said.

Demand in India, the largest market for gold, recovered during the third quarter, encouraged by lower gold prices, a good monsoon and the onset of the festive season. At 250 tonnes, total consumer demand was 31 per cent higher than the same period last year. In value terms, demand hit the record quarterly sum of $US5 billion.

Here’s the link.

So there’s a surge in demand, but no spike in prices that’s usually associated with shortages!

Gold and silver are global commodities with spot prices being the same all over the world (assuming you live in an open society). The only differences are the premiums that dealers charge buyers. One of the surprising things has been the large increase in premiums on gold and silver coins. Even though the prices for both metals have dropped from their highs, the cost of buying gold or silver coins hasn’t dropped proportionately. In fact, there’s been reported shortages of these coins by the US Mint and the Australian Perth Mint, not to mention individual retailers. This seems to defy common wisdom; prices drop when demand decreases. Even though spot prices have increased, the demand seems to have increased and thus gold and silver coins aren’t as cheap as they should be.

Right now the premium on silver coins is a whopping 60%+. For gold it’s a lot lower but still higher than it’s historic 2.5-3%. I just got an email today from a newsletter service that I subscribe to that’s pretty interesting.

If You Want Cheap Gold Coins, Canada Has Them
By Tom Dyson

I don’t trust my bank. And I don’t trust the dollar.

As far as my savings are concerned, I’d rather keep them in gold. And I don’t mean gold futures or gold certificates or gold mining shares. I’m talking about physical gold bullion in a safety deposit box.

My family thinks I’m taking a big risk. But as I see it, they’re the ones taking the risk. I’m the one storing my money in the world’s safest asset… the asset that’s been used as money for 5,000 years… and the only money that’s no one else’s liability.

Besides, what have I got to lose? My bank pays less than 3% on its savings accounts.

I’d advise you to own at least a couple of ounces of gold, too… if nothing else, for insurance purposes.

Coins are the best way for individuals to buy gold. They come in small denominations, they’re portable, and you can exchange them for cash anywhere in the world at gold’s international spot price.

Here’s the thing: Right now, gold coins are hard to find. Even if you can find them, they’re more expensive than usual.

In normal markets, you can buy silver coins below the spot price and gold at a 1% or 2% premium to the spot price. I’ve spoken to at least six gold coin dealers in the last week. Three of them were out of stock. Of the dealers still in stock, the cheapest gold coins I found were selling for a 5% premium to the gold price.

In other words, with gold at $800, you’d have to spend at least $840 on a one-ounce coin. The scarcity of silver coins is even worse. One dealer told me he was paying $16 for one-ounce silver coins, purchased in bulk. Right now, the spot price of silver is $9 an ounce. So the premium’s almost 80%.

The financial crisis is the reason for this mispricing. Demand for coins, one-ounce bars, and other “retail” denominations of gold has outpaced the ability of fabricators to make them.

There is no shortage of physical gold. If you wanted to buy a kilo or a 100-ounce bar, you’d have no problem.

The shortage is just a short-term supply problem at the retail level. Gold producers will take advantage of the premium and ramp up production. So in a few months, the big mark-ups will disappear.

That said, if you want to buy small quantities of gold right now, go to Canada.

The Bank of Nova Scotia is one of the world’s largest precious-metals dealers. If you go to the Hollis Street branch in Halifax, Nova Scotia, or the King Street West branch in Toronto, they’ll sell you Canadian Maple Leaf coins at a 3.7% premium to spot and one-ounce wafers at a 2.6% premium to spot.

Good investing,

Tom

P.S. Gold doesn’t show up in airport security metal detectors. I’ve tested this with gold coins before. But if you’re traveling across the border with more than $10,000 worth of gold or currency, you must declare it at the border. They’ll run your name and make sure you’re not a money launderer. That’s it.

Of course, if you don’t feel like going all the way to Canada just to buy a few gold and silver coins you can always buy them cheaply here:
American & Canadian Silver Coins

American, Canadian French, & Swiss  Gold Coins

I’ve been an avid collector of gold and silver coins and have been following the prices for a years.

Gold is supposed to have a negative correlation with the stock market. This year has proved otherwise. Of course, as we’ve seen repeatedly in the past, all asset classes correlate to the downside.

Gold which peaked at $1030/oz earlier this year, has been trading in the $700 range for a few months. There has been a flight to safety, which for most people means buying US Treasuries. Indeed, the flight has been so large that it has pushed the yields down to absurdly low levels. The yield on the 3-month Treasury was almost zero at 0.4% and the 10 year is 3.52%. (The yield on the S&P500 was 3.55% this week, higher than the 10 year Treasuries rate for the first time since 1958).

The way that demand affects interest rates is that as people clamor for T-bills, they push up the prices for these bonds. Since the bonds pay out a fixed interest rate, the effective yield (also called yield-to-maturity or YTM) drops. So it’s the demand for stability in the current globally volatile economic environment that is pushing up bond prices and pushing down yields to almost nothing.

On the flip side, prices for a product fall as the demand drops off. So we’d expect the decrease in demand for gold as the cause of it’s low price. However, there have been several news reports stating that demand for gold is 50% higher than it was last year.

Demand For Gold Hits A Record Even As Institutions Head For Exits (November 19th, 2008)

The US Government Mint had to suspended retail selling gold coins and silver eagles earlier this year, and the Perth Mint just announced suspending production of gold coins.

So even though there is an increased demand for Gold, the prices haven’t been increasing proportionately. There have been several articles speculating on the reason for this.

According to:

The Disconnect Between Supply and Demand in Gold & Silver Markets (August 18th, 2008)

Obviously, enough people are willing to pay for gold and silver, at the previous $978 and $19.50 per troy ounce price, because the U.S. Mint could not source enough metal at those price, and had to suspend coin production.

This proves that people are more than willing to fork over, in whatever currency they are using, the previous prices for gold and silver, in such quantities, that a shortage was already existing, before the price collapse, especially in the silver market.  It is true that people in poorer countries like India, might have back on their consumption.

But, while they were cutting back, demand and consumption of gold in North America, including Canada and the USA, was soaring.  For example, before it suspended production of bullion coins, due to shortages, the U.S. Mint’s statistics show that it was printing 2.5 times as many gold coins, and almost 4 times as many silver bullion coins, this year, compared to last year.  Gold and silver bullion, in bar form, was also flying off North American retail shelves.

Bottom line: Enough people were buying, when the price was high, to exhaust the supply. Basic economics says that, in a free market, this means the price must rise.

Seems like somethings fishy in Denmark! The author further adds that

We have a disconnect between reality markets and fantasy markets.  The COMEX and London Metals Exchange are fantasy markets controlled by the big bullion banks.  They must be engaged in market manipulation, because nothing can explain a big price collapse, in the midst of widespread shortages and robust demand.  A group of big financial institutions, deeply enmeshed in the global trading system, and heavily involved in the gold and silver market, must be deliberately inducing temporary panic, for their own purposes.  These malevolent characters will eventually be able to buy back their short positions at low prices, and, possibly, also, even collect a significant long position.

I definitely think the prices are being manipulated, even though I’m not entirely sure why. One thing I do know is that you cannot manipulate prices indefinitely. Especially in the face of rising demand. Here’s an interesting snippet from the Standard.

(The Standard, Nov 14) Hong Kong: The mainland is seriously considering a plan to diversify more of its massive foreign-exchange reserves into gold, a person familiar with the situation told The Standard.

China’s fears about the long-term viability of parking most of its reserves in US government bonds were triggered by Treasury Secretary Henry Paulson’s US$700 billion (HK$5.46 trillion) bailout plan, which may make the US budget deficit balloon to well over US$1 trillion this fiscal year.

The United States holds 8,133.5 tonnes of gold reserves valued at US$188.23 billion. China holds gold reserves of just 600 tonnes, worth only US$13.89 billion.

Beijing’s reserves could easily go up to 3,000 to 4,000 tonnes, Tanrich Futures senior vice president Colleen Chow Yin-shan said.

That article was published last week when gold was trading under $720/oz. Since then, its jumped to almost $800/oz, with most of the move occurring yesterday.

Gold Prices for November 21, 2008

The bright green line is yesterday’s movement. Gold moved from under $750 to nearly $800. Looks like gold has become strongly correlated to the stock market after all!

I think the price of gold will continue to rise over the long term. It’s just a matter of how long it takes.

What’s the difference between a pigeon and a Wall Street banker?

The pigeon can still make a deposit on a Porsche!

Meanwhile, in what looks like a stunning display of stupidity, the Federal Reserve recently hired someone to “assess the safety and soundness of domestic banking institutions.” The new employee is none other than Former Bear Stearns chief risk officer (from 2006 to 2008) Michael Alix. Unbelievable! The Fed hired the guy who let Bear go bust.

Regular readers know that I’ve been saying the US government is broke for a while now. As if our national debt and unfunded future debt obligations weren’t enough, Henry Paulson proposed spending $700 billion to buy mortgages and other toxic “assets” from banks. Well, not only does the Treasury now want to spend bailout cash on all kinds of financial companies (from banks to bond insurers to specialty-finance firms like GE Capital) it’s becoming more and more obvious that the government didn’t actually have $700 billion lying around. The Treasury has borrowed $600 billion since mid-September, and it wants to borrow a record total of $550 billion during the fourth quarter of 2008 to help stabilize the financial sector.

In July, the Treasury estimated third-quarter borrowing would be $171 billion. It actually borrowed $530 billion, $300 billion of which was for its Supplementary Financing Program, launched in September, to keep Wall Street from melting down.

While people may argue that this was the best thing to do (of course you should bail out your buddies on Wall Street!), the fact is that this level of government borrowing and spending will have an inflationary affect. It’s still not too late to buy some gold coins and hedge against it.