Bond yields up, gold and silver up and stocks down

Bond yields up, gold and silver up and stocks down

Exciting price moves for silver and gold

Both silver and gold pushed up strongly in the last few days with Thursday the 15th August being notable as silver moved up 70 cents from 16.50 euro to the 17.20 area. This is hugely interesting because the silver price has been anchored down around the 15.00 euro area for most of the summer and just 2 weeks ago it was down to 14.80 as the Fed issued new commentary regarding tapering. In our opinion this is just an opening salvo from stocks bonds and metals as all three asset classes flash red warning lights over the strength of the US economy and its trajectory minus massive bond purchases from the Federal Reserve.

With positive new jobs data yesterday in the US the market hammered stocks and bonds downward as yields on US treasuries continued to rise. All this while gold and particularly silver had one of their best days of the year in terms of price movement. The talking heads on CNBC and Bloomberg attributed the metals strong performance to disturbances in Egypt where they bothered to note it at all. But it is our belief that the metals strong showing yesterday had nothing do with the middle east and everything to do with the market warning the Federal Reserve not to get off the QE tightrope. If the Fed allows the free market to set the proper interest rates for US debt there is a crisis looming that will make the issues in the Eurozone look like a cakewalk!

Strong evidence is emerging that both China and Japan are backing away from US debt in advance of any tapering from the Federal Reserve. The simple truth here is that without the Federal Reserve persevering in its purchases of mortgage backed securities and money printing there will be scant support for US treasuries at current yields. If the Federal Reserve does taper it risks allowing yields to explode and pushing the US government into a Greek style crisis within 6 months. With yields rising and stocks falling while metals rose this is the market sending out yet another early warning to Bernanke – the US economy, housing, stocks and bonds all depend totally on easy money and near zero interest rates. Without the Fed’s MBS purchases over the last year where would the property market be now in the US? And without a stabilisation in housing who would think there was any strength in the American economy?

Gold Bull Market

Is the Gold Bull Market Over

Is the Gold Bull Market Over? For those who are disillusioned by the recent downturn in the price of gold and silver, it is worth re-visiting the fundamentals of what exactly has been driving the current bull market.

Ask yourself the 13 questions below and then ask yourself is the perceived bull market decline based on a change in the facts or on simple sentiment:

  1. Are the PIIGs reduced their debt burdens? Or have they increased further since recent crises?
  2. Does the US bond market look healthy or does it look like a 30 year bubble ready to bust?
  3. Are western consumers debt burdens dealt with?
  4. Are real interest rates positive or negative?
  5. Was the Cyprus savings confiscation something that occurs in a financially stable region?
  6. Are bank’s balance completely sheets largely cleared of bad debt?
  7. Are governments increasing or decreasing the burden on productive business?
  8. Are governments increasing or decreasing the burden on productive citizens?
  9. Are savers suddenly being rewarded for holding paper money?
  10. Is the public sector increasing or decreasing its influence on society as a whole?
  11. Why is the stock market hitting new highs if the general economy continues to struggle?
  12. Who and what exactly is leading the supposed recovery in housing ? Could it have anything (everything!) to do with the Fed buying 85 billion a month of mortgage backed securities?
  13. Are stocks or bonds or property at bargain valuations compared with historical metrics?

If the questions listed do not give cause for concern then you would be better off holding fiat currencies.

However not one of the answers would convince me that the bull market in metals is over.

Great reasons to invest in silver

Great reasons to invest in silver after recent price falls

Silver Bullion

1. Recently the spot price has fallen yet the mining cost has increased by almost 10% in the last 2 years.

2. Spot prices have fallen yet refiners and dealers margins have both increased substantially signifying supply pressures as retail demand increases.

3. Refiners cannot keep pace with the increased demand every silver price drop brings, it is clear there is a divergence between paper and physical markets. Buyers realise the value when a paper sell off allows them to buy physical product at a cheaper rate.

4. Margins on silver increase because the physical product is unavailable, every price drop in the last 6 weeks has increased the margin for physical product.

5. The unsustainability of the present low prices is clear because miners already operating in very difficult circumstances (financially) are squeezed further by the drop in price i.e. there is an increased demand for physical driven by the price drop and miners are expected to deliver more silver to the market and still remain profitable?

6. For every kilo of gold sold by miners to market there is 30 kilos of silver sold, despite the fact that the rate of mining is 1 kilos of gold to 10 kilos of silver.

7. The silver-gold price ratio has increased to over 60:1 which the highest for 2 years.

8. Silver’s key industrial uses in non-recyclable items could potentially be a important factor as silver reserves are further depleted.

9. Two of silver’s best years in the last decade(2009 and 2010) were preceded by its worst year(2008), silver being a highly volatile metal tends to have big swings in one direction then the other. Silver is now due a period of outperformance.

10. Although sentiment is against silver right now, the saying that your profit is made when you buy not when you sell couldn’t hold truer than now, with silver at 17.50euro(current spot price 24/05/13).

Gold price drop offers buying opportunity

Gold price drop offers buying opportunity

The recent hard falls in the price of gold and silver, where hundreds of tonnes of paper gold were sold onto the markets over 2 days on Friday the 12th and Monday the 15th of April dropped the price of gold to nearly 1000 euro an oz by close of business that Monday. Given the slow sideways to negative price movement of the metals for the preceding six months this perhaps represented a final capitulation by professional traders and ETF’s in gold.

What has been so interesting about all of this is the response of individual investors to this dramatic price fall – the period since this price fall has seen the busiest period of the year for most bullion dealers (including ourselves). Supply shortages have developed across the supply chain as customers flooded back into the metals markets to pick up bargains in gold and silver coins and bars. This has been evident worldwide but perhaps most spectacularly in Asia where Chinese and Indian buyers have been falling over themselves to take advantage of this ‘firesale’ in the metals.

At the same time as ordinary investors are proving the appetite for gold is as strong and perhaps stronger than ever the financial media is focusing on golds 20% price fall from its peaks last year. For instance, yesterday the Bloomberg website headlined with stories about the ‘Gold price rout’ and how gold could fall to 800 dollars in the next few months. At the very same time the actual gold price was up more than 2.5% yesterday while the Dow Jones was only up 0.17% – perhaps telling a more accurate story than the headlines. An interesting trend is emerging where the financial media is trying to drum up interest in stocks and slamming commodities particularly gold, but the private investor isn’t buying into this story of the ‘end of the gold bull market’.

In many ways this current period in the gold market  is reminiscent of the mid 1970’s where the gold price dropped by 50% in 1975 and 1976 but then posted gains of over 500% in the following five year period. What has been highly unusual has been the straight upward trajectory of the gold price for the last decade with so few sharp corrections. This 20% pullback is very healthy for the market and represents, in our opinion, one of the great buying opportunities of this huge gold bull market. The mainstream media is playing the story of a huge US economic recovery and a new goldilocks economy but a quick look at the real world numbers for sovereign debt, unemployment, US trade data all paint a much grimmer picture than that which is portrayed by CNBC, Bloomberg et al. This suggests the strong run up in the Dow Jones to the 14700 level today maybe somewhat premature and further forward progress for stocks depends entirely on the Federal Reserve renewing its commitment to QE – without this easy money the stock market will hit a brick wall.

Our expectation is that weaker than expected US economic data and renewed deflationary threats will force the Fed’s hand to not only sustain current levels of money printing but to increase the dose over the next 18 months. If the market suddenly realises that all the talk of a withdrawal of QE by the Fed was just a smokescreen and doesn’t reflect reality this is likely to lead to another major upward movement in the metals prices. At that point, with the benefit of hindsight, investors are likely to realise what a great buying opportunity April 2013’s price falls were.

How to spot counterfeit gold coins


Buyers need to aware of the fact that Gold is extremely dense, it is the 7th most dense metal, and the other 6 with the exception of platinum are unsuitable for the production of coinage. Platinum is a different colour and rarer than gold, so it is often more expensive than gold.

Gold is also the most malleable of metals meaning it can be beaten in thinner sheets than any other metal, the fineness of 24k gold coins is testament to this, the detail and fineness of the Canadian gold maple and Australian kangaroo would not be possible with another metal. So how does this help us in verifying the authenticity of a gold coin? Take for example the British Gold Sovereign; primarily this is minted in the UK by the British Royal Mint. The dimensions (W*H*D) are set and have been by the mint since 1816.

Therefore we know that gold has a unique density and we know that the Royal mint has set unalterable dimensions on the coin. The mint’s reputation rests upon this premise. Counterfeiters in order to turn a profit would have to use a much cheaper substitute base metal, so the weight will be significantly less due to a lower density. The other alternative to the counterfeiter is to alter the dimensions i.e. make the coin much bigger in order to allow it to weigh more. So if the coin is fake either the weight or the size will be incorrect, they cannot fake both.

An individual can measure weight and dimensions themselves by using the appropriate equipment (scales, callipers etc.).However there is a unique and intelligent device called the ‘Fisch’, this small plastic device does not look too impressive at first sight, but has been crafted to check dimensions and weight of gold coins. There is a device for each major gold coin and it’s a fool proof method of quickly and accurately verifying your gold coin.

Malleability is another method of determining a coins authenticity. However experience is beneficial when it comes to understanding why. Gold as I mentioned is the most malleable of metals allowing mints to create extreme levels of fineness in detail and design. So base metals are obviously much less malleable, and this is noticeable in the finish.

Taking the famous British gold sovereign as an example, the sovereign has St. George slaying the dragon on the facade, in a real sovereign the detail of the horse’s mane and tail are vivid, even the contours of the horses muscles can be seen. With a fake coin this detail is impossible to create, all intricacies are smoothed over. With 24kcoins it becomes even harder for counterfeiters. The detail level of the Aussie Kangaroo or Canadian Maple Leaf is down to it being crafted with pure gold, an imitation would be so far off that any reasonable counterfeiter would not even attempt it.

So when it comes to buying gold coins, make sure you take the time to determine you are getting exactly what you are paying for.

22 or 24 carat gold bullion

22 or 24 carat gold bullion?

When it comes to purchasing gold coins investors are often split between buying 22k and 24k coins.

Firstly to those who are unfamiliar with the terminology carat simply means simply a level of purity for gold alloys, the purity is measured as 24 times the purity by mass. In lay terms 24 carat is 99.99% gold (none or minimal alloy) and 22 carat is 91.66% (22 parts gold and 2 parts alloy). Understanding this leads to the question why use an alloy? The primary reason is due to gold’s inherent softness, pure gold is extremely soft and malleable, in jewellery or coinage this is often unsuitable. Unsuitable because coins in distribution are susceptible to wear and tear, the alloy toughens the coin and copper is much harder. The alloy(typically copper but sometimes silver) that is added changes the colour of the coin, copper adds a red-ish brown colour(as evidenced in the Krugerrand) and silver being a less dominant colour softens the gold colour(as evidenced in the American eagle).

Many buyers of gold coins believe that they are getting an inferior product when they are buying 22k gold coins, however this is not the case. 22k coins(Kruger, eagle, sovereign) weigh more than their equivalent 24k coins, the alloy is an extra weight difference that the buyer is not paying for. The gold is what the customer is paying for and when dealers present Krugerrands etc, they do call them 1 troy oz coins but this is simply because the alloy is disregarded.

24k coins in mint condition do have an aesthetic appeal that 22k does not have, this is because pure gold has a sparkle and fineness that dissipates when an alloy is added. However 24k coins are a relatively new phenomenon and are not minted to be handled/circulated. An example being the exquisite Aussie Kangaroo it certainly looks more attractive than the 22k equivalent.

However what many customers fail to understand regarding 24k coins is the fact that these coins are soft and scratch easily. The 24k coins often come in cases for good reason as a damaged or scratched 24k coin loses its premium. From experience many older 24k coins have not been maintained properly. On the other hand sovereigns from as early as the 19th century are often in a perfectly saleable condition. Most Krugerrands from the 1970’s again are in good condition and not as susceptible to scratching.

Good advice to buyers when buying gold coins is: only buy 24k if you are prepared to look after them (i.e. keep them encased). For those of you who like to handle your gold coins 22k is perhaps more suitable.

Concerned at the fall in the gold price

Concerned at the fall in the gold price?

Since September 2012 to date the gold price has gone from 1384 euro all the way down to the sub 1200 euro area now (22cd Feb). Today an ounce of gold costs 1195.44 euro and we’ve seen gold tumble down in roughly 20 euro increments every few months. At the same time the Dow Jones index has rallied since the 15 November 2012 from a low of 12496 to 13946 today – that’s a rise of almost 1500 points or more than 10%.

Accompanying the stock market rise in the last 6 months we seen a rise in bullish sentiment among financial commentators and analysts so along with metals, treasuries have suffered as investors look for ‘risk on’ higher yield investments. This is all predicated on the idea that the US economy is racing out of recession and there are blue skies ahead. However when the herd all rushes to one side of the room a degree of scepticism should be employed. There are some serious problems with the idea of a resurgent US economy unfortunately. One of those factors (which everyone is trying to explain away) is that US GDP actually shrank in Q4 2012 by -0.1% the first time we’ve had negative reading since Q1 2009.

Areas such as housing which have shown resurgent strength are also the areas where the Federal Reserve has been most directly involved – who believes US housing would be showing any pricing strength without the Fed’s QE3 monthly 40 billion dollar purchases of mortgage backed securities? This is a problem, because what happens when the Fed tries to ease back on these purchases? A real free market would continue to drive down real estate prices until they represented outstanding value for investors and this would allow prices to reach a stable equilibrium – but the Feds actions are encouraging the banks to begin writing more mortgages and more business than would be the case in a true free market potentially creating even more problems down the line. Unless of course the Fed is committed to QE forever but that will lead to a crisis in either the currency markets (dollar collapse) or the bond markets (international investors lose confidence in Treasuries). There is no way out of this trap.

If you ignore factors such as negative GDP numbers last quarter or artificially propped up housing market you might well conclude the present stock market rally is built on rock solid foundations but it is worth considering that perhaps the Fed’s money printing has something to do with the run up? Also ask yourself if 14000 dollars (Dow Jones now) today buys you more than 10000 dollars (Dow Jones 2000) in 2000 (the end of the greatest bull market in stocks in history). The answer (no!) tells you that, at best stocks have been trading sideways for 13 years – that looks more like a great bear market a la the 1970’s than the any sort of bull market from history! Based on the current economic fundamentals it seems clear that the half year run up in stocks that we’ve seen since November, is, at the very least, standing on some shaky foundations. That has coincided with a period of weakening metals prices. However the fundamental factors driving gold and silver to outperform stocks and property for the last decade remain very firmly in place. With sentiment so firmly against the metals this is a great time to pick up bargains. Metals may well go lower from here but as soon as sentiment in the stock market is shocked into realising the US economy is still mired in excessive debt with a wobbling currency the markets are likely to reverse in a big way. What will happen to the price of gold and silver then? Draw your own conclusions and base your investment decisions on fundamentals, not on sentiment!

Should you buy Gold Coins or Gold Bars?

Should you buy Gold Coins or Gold Bars?

Buyers are often unsure whether to buy gold coins or gold bars when it comes to investing in gold. Firstly people need to be aware that they are investing in gold not the coin or bar, coins or bars are simply different forms of the same product. That is not to say they are exactly the same value, there are advantages and disadvantages to both, but for the average investor who is unaware of these it is worth pointing them out.

If we start with coins, the main advantage of coins is the ability of a dealer to distinguish its authenticity.  Gold has a unique density as a metal, it is one of the most dense metals on the periodic table. This is highly significant because, a well-known coin has its dimensions set by the mint it originates from. A quick internet search will reveal these dimensions to you. Using this information you simply need to measure your coin’s dimensions and if they match you then need to check the weight. If both are correct you have a legitimate coin. You can perform these checks in seconds using a  ‘Fisch’ device. This is an advantage over bars or bullion as I’ll explain later.

Coins can also have a numismatic element to them. The advantage of this is you may come across a coin that is worth more than its bullion content. However this is rare as coin collectors don’t often let collectible coins slip through the net undetected. The disadvantage of numismatics are paying too much over the bullion content and getting an emotional attachment to the coin. If your purpose is investing in gold, try not to get distracted by buying numismatics, leave that to the collectors.

Most of the best known coins in the gold market are backed by government rather than private refiners, i.e. sovereign, maple etc. Again this can lead to a slight premium in price but it more than pays for itself when it comes to selling. Also certain coins such as the gold sovereign have an affinity with the Irish and British markets, the same can be said of the gold maple in Canada. Again this is an advantage when it comes to re-sale.

The main advantage of gold bars is a low premium but it is important to get the product from a reputable source and the bar should be fabricated by a well-known refiner. The dimensions of bars are non-standardised, meaning you can get several different types cast, machined, assay stamped, assay unstamped. Therefore, counterfeiters are not bound by a mint’s pre-set dimensions. This simply means that they can create their own dimensions on a copy and then have the correct weight.

Other advantages of bars are the lack of emotional attachment that can come with coins particularly numismatics. Gold bar premiums do decrease with the larger bars but this is offset when it comes time to sell, it becomes harder to sell the product above 100g size.

In conclusion, of course there is an element of personal preference in the type of product the investor chooses, and indeed different investors will have different requirements. However, my advice would be to go for coins that are low premium, well known and easily tradable. In Ireland it is hard to look beyond the gold sovereign, it scores very highly in all three categories.

Silver price prospects in 2013

Silver price prospects in 2013..

 Silver rose 6.4% against the euro in 2012 rising from 21.38 on the 1st January 2012 to 22.75 by the 31st December 2012. In the decade up to the end of 2011 the average price performance for silver against the euro was 19.3% increase per annum so 2012 ranks as a very modestly positive year for silver prices. In dollar terms the silver price averaged gains of 22.3% in the decade up to the start of 2012 and from January to December last year the silver price in dollars was up by 8.3% from 27.70 to 30.00 dollars. So last year was very unremarkable in terms of precious metals.

Metals investors might have expected more positive price action in the last 12 months particularly in light of the fact that silver prices actually fell in 2011 in almost all major currencies losing -7.5% against the euro and -10.2% against the dollar. Since the start of this century every down year in silver prices has been followed a generally robust upward price movement in subsequent years. One thing worth pointing out though is that 2012 was a US presidential election year and both silver and gold prices have always struggled in any election year since the start of this bull market in 2001. In fact, if you look at 2008 as an example of this, silver lost -19.5% against the euro  and -23% against the dollar when Obama won his first four year term.  In that context 2012 really wasn’t so bad and both the President and the Federal Reserve would have been doing their best to ensure a smooth ride for the US economy over the course of that year to help Obama’s re-election prospects.

As we enter 2013, the stock market is booming with the Dow Jones at 13,940.70 hovering close to record territory (in nominal terms) and the S&P at 1,498.11. Both indices have had blistering starts to the year and the commentary in the financial world is all about a ‘real recovery’ in the economy reflected in stronger housing data and good jobs reports etc. This all sounds very convincing except for one thing – history. The bull market in stocks which ended in 2000 was the greatest and most powerful bull market in history. Other asset classes were deserted as investors flocked in a mania into stocks irrespective of earnings, PE ratios etc. History tells us that all great bubbles are followed by huge busts and washouts in the overvalued asset classes and a rise in value in other asset classes. Today the stock market is not in a bubble but it’s hardly a bargain either – think of the foundations for the great bull market stretching from 1980 to 2000 in stocks – by the end of the 1970’s and early 1980’s magazines such as Newsweek and Businessweek were headlining with news stories about the ‘death of equities’  such was investor apathy to stocks at the time.  We are nowhere near that type of scenario today.

Another big reason to be sceptical about any big move upwards in the stock market is the general economic environment is so much worse now than it was in 1980. Then you had a high level of savings (absent today) to fund spending by consumers, you had a cost cutting pro-business, low tax president coming into office (Ronald Reagan and his UK counterpart Thatcher), relatively low levels of government debt to allow interest rates to rise and a great deal of scepticism or even disdain towards the stock market. Also, interestingly, at that time you had a mania in gold and silver – the reverse of the mania in stocks 20 years later. Investor psychology was setting the platform for a historic bull market in stocks in 1980 and a historic bear market in stocks in 2000.

In light of the strong start to the year for stocks precious metals have been firmly in the shade for January 2013. There are two probable ways this can play out price wise from here.  One scenario is that surprise bad news on the earnings front or economic data disappoints the stock market bulls and shocks the herd leading to a strong downward move in the market with downward momentum dominating the latter part of the year – in that situation I would expect metals to benefit hugely as investors become ever more sceptical about the prospects for economic recovery and the Fed’s money presses are cranked up another gear to stave off a deflationary depression.

The second scenario is that demand picks up across the economy and the bulls are confirmed in their early year optimism as the US economy gains some momentum. The problem with this is that if demand is maintained then the velocity of money will pick up rapidly and that means big inflation. Big inflation dominated the 1970’s but the stock market ultimately went nowhere in real terms and started the 1980’s at a 1 to 1 price relationship with gold – that’s 850 for the Dow Jones and 850 for an ounce of gold.  But big inflation is great news for precious metals – if paper is in freefall gold and silver will always thrive.

I think at the moment there is lot more negative than positive surprises in store for western economies over the course of 2013 but as we’ve outlined, almost regardless of which way the economic picture shapes up this year gold and silver are likely to do very well. I think it is a safe bet that whatever percentage gain stocks notch up over the next 11 months to the end of December, in percentage terms gold and silver will deliver a stronger result than equities. We are expecting silver to hit 30 euros an oz this year and to be able to hold above this level – this is a gain of approximately 29% from today’s price of 23.28 (1st Feb 2012) and we would expect gold to at least deliver its average gain of 15% per annum this year to get to 1405 from a current price of 1222.08 euro.

Gold Sovereigns

Gold Sovereigns are money


buy gold coinsThe Gold Sovereign Coin truly is money. Whenever I try to explain to people that the Euro, the Dollar, the Yen and all paper currencies are not money, I usually get a bewildered look. In the simplest of terms Money must serve two basic principles, firstly it must be a medium of exchange and secondly it must be a store of value over time. Immediately it’s obvious then that currencies are not money, as they clearly are not a store of value over time. The most practical example of why gold is money can be seen with the gold sovereign.

The gold sovereign for more than 500 years has been a medium of exchange and a store of value. It’s hard to believe that the sovereign coin can trace its roots back to medieval times but it was Henry VII who first issued the sovereign in 20 shilling denominations in 1489.

The sovereigns appeal was further enhanced in 1816 when George slaying the dragon was introduced under George III. St George 275-303AD was a Roman soldier from modern day Turkey. He was and still is, an Islamic and Christian martyr. St George hugely increased the appeal of the sovereign as is seen, by the fact that he is the patron saint of Canada, Catalonia, England, Georgia, Greece, Portugal and Serbia.

Sovereigns that were minted under Edward VII and George V are the leading pre 1933 gold coins reflecting their dominant position at the time. Later in the 20th century the sovereign had an important role to play in WW2, where the sovereign was believed to be the only true measure of value as fiat currencies crumbled throughout Europe. The Germans use of the sovereign lasted right up until the final days of the third reich, where fleeing officers secured passage to South America with them, the reichsmark at this point had returned to its intrinsic value.

Although the sovereign had periods of time where it was not produced, it always came back due to its reliability as the unalterable measure of value. This can be seen by the fact that immeasurable amount of paper currencies have died in the lifespan of the sovereign. Indeed certain older sovereigns are often considered numismatic or semi numismatic, therefore attracting a premium over their bullion value.

The sovereign which is 11 parts gold and 1 part copper (92%/8%) was designed like this to increase the durability of the coin due to gold’s softness. This made it ideal for circulation throughout the world. Although the sovereign no longer has complete dominance over the gold coin market its reputation was enhanced further by the Krugerrand(the leading 1ozt coin) when in 1967 the South African mint chose to copy the gold and copper alloy known as ‘crown gold’, a testament to the excellence of the sovereign.

The timeless appeal of the sovereign was reflected once again in 2002 when QE II celebrated her golden jubilee. The shield sovereign a rare and unique sovereign last seen in 1887 was re-deployed for this special occasion. So up to this very day the sovereign is being minted and remains much sought after, more than 500 years old. There is no better example of a store of value and a medium of exchange and that is why the sovereign truly is money.