Tuesday, October 5, 2010

Gold Preserves Wealth in Volatile Times

A presentation from the World Gold Council on preventing tail risks by a prudent allocation of gold to a portfolio.

Is Gold The Best Hedge Against Tail Risk, When Uber-Wealthy Bank Clients Buy Up Tons Of Physical Gold?

From Zerohedge:

A question that has become very prevalent recently is whether in a world denominated in fiat ponzi equivalents, in which central banker intervention is hell-bent on devaluing this very system, whether gold (with a recent Sharpe ratio most portfolio managers can only dream of) is not currently the best hedge against tail risks. Conveniently, the World Gold Council has just released a paper, and, for those with a shorter attention span, a video clip, which provides an affirmative answer to that question. From the WGC: "In the analysis the WGC shows that during the period between October 2007 and March 2009—the height of the global financial meltdown—an investor with a portfolio of US$10 million experienced an additional US$500,000 financial loss simply by not maintaining a position in gold. The study used a composition similar to a benchmark portfolio, which included an 8.5% allocation to gold, to show that total losses incurred during the period reduced by 5% relative to an equivalent portfolio without gold." But before we get into the WGC paper's findings, we would like to point out a special report by Reuters which confirms what all the "goldbugs" have known all along: "The world's wealthiest people have responded to economic worries by buying bars of gold, sometimes by the ton, and moving assets out of the financial system, bankers catering to the very rich said on Monday... A banker said, "We had a clear example of a couple buying over a ton of gold ... and carrying it to another place."" Guess why JPMorgan is doing all it can to preserve as much physical gold within its system before it all runs out, and all those demands for physical delivery skyrocket (even more).

From the Reuters report:

Fears of a double-dip downturn had boosted the appetite for physical bullion as well as mining company shares and exchange-traded funds, UBS executive Josef Stadler told the Reuters Global Private Banking Summit.

"They don't only buy ETFs or futures, they buy physical gold," said Stadler, who runs the Swiss bank's services for clients with assets of at least $50 million to invest.

UBS is recommending top-tier clients hold 7-10 percent of their assets in precious metals like gold, which is on course for its tenth consecutive yearly gain and traded at around $1,317 an ounce on Monday, near the record level reached last week.

In a sign of the uncertain times, some clients go further.

"We had a clear example of a couple buying over a ton of gold ... and carrying it to another place," Stadler said. At today's prices, that shipment would be worth about $42 million.

Julius Baer's chief investment officer for Asia is also recommending that wealthy investors park some of their assets in gold as a defensive stance following a string of lackluster U.S. data and amid concerns about currency weakness.

"I see gold as an insurance," Van Anantha-Nageswaran said. "I recommend 10 percent as minimum in portfolios and anything more than that to be used for trading purposes, to respond to short-term over-bought or over-sold signals."

And below are the summary finding from the WGC report, via report author Juan Carlos Artigas:

In previous studies, the WGC has shown gold to be a highly effective and consistent portfolio diversifier. We can now demonstrate that gold does not only help increase expected risk-adjusted returns, it can also considerably mitigate the potential for wealth to be eroded by extreme events.

“In the last decade we have seen two of the worst bear markets in the last hundred years. As one might expect, sensitivity to risk still runs high for investors around the world, and as assets are rebuilt an ability to protect capital irrespective of market conditions is paramount. Considering portfolio diversification is clearly important, but protecting against systemic risk can be an entirely separate matter. This research shows that gold protects against tail risk events, but equally in more positive times reduces the volatility of a portfolio without sacrificing expected returns.”

The analysis suggests that even relatively small allocations to gold, ranging from 2.3% to 9.0%, can have a positive impact. On average, such allocations can reduce the Value at Risk (VaR) while maintaining a similar return profile to equivalent portfolios which do not include gold. Conceptually, VaR is a way of measuring the maximum amount an investor could expect to lose in a given period of time, with a certain degree of confidence, in the case of an unlikely, yet possible, event occurring.

Don't kowtow to the Chinese Govt.

From the Australian:

THE international community needs to engage Beijing in a web of rules and customs.

IS this the year that China's leadership lets us all know that it is determined not to abide by routine international norms but will use raw power to take whatever it wants?

That is too strong a conclusion just yet, but it has certainly been a year of rugged behaviour from Beijing, behaviour that we should study closely.

Consider, first, the contrasting cases of Stern Hu and Zan Qixiong.

Hu, you'll recall, is the Australian former No 2 for giant miner Rio Tinto. In July last year he was arrested, initially on charges of espionage. Later he was convicted of bribery and corruption charges. At the start the Chinese government wouldn't communicate with the Australian government over the matter. Later it barely conformed to the minimum requirements of the consular agreement between the two nations.

We will never know if Hu was remotely guilty of anything. We do know that corruption is rife in China and Hu was the only foreign executive singled out by the Chinese authorities this way.

We also know the context. The Chinese were annoyed by the prices they were paying for Australian minerals and deeply furious that their bid for a big equity stake in Rio Tinto had failed.

Within Australia the reliable pro-China gang, centred on the Australian National University, but well represented in business as well, told us in effect to keep quiet and not protest against Hu's punishment. We were to protect the Chinese legal system, as though that were not among the most corrupt and politicised legal systems in the world.

Now consider Zan's case. Zan is a Chinese fishing boat captain. He was plying his trade in the Senkaku Islands in the East China Sea. Japan considers these islands to be part of Japan and exercises normal control over them. China also claims the islands, as it does much of the maritime domain of northeast and Southeast Asia.

Zan's boat was approached by the Japanese navy. Now, all over the world, what does an illegal fisherman do if approached by a national coastguard? Universally, the fisherman runs away.

But in Zan's case, according to the Japanese navy, he rammed the Japanese vessel. That is akin to piracy and is certainly equivalent to criminal damage.

Zan was taken into Japanese custody. He was not charged with being in Japanese waters illegally but with offences arising out of ramming the Japanese ship. Many analysts believe the fisherman's actions were directed by the Chinese government as a deliberate way of testing the Japanese.

The Chinese reaction could not have been more different from the Australian response to Hu. There were no significant voices within China urging that Japanese legal processes be allowed to unfold.

Instead, the Chinese reaction was brutal and effective. Beijing cancelled high-level meetings with Japanese officials, including with the Japanese Prime Minister. Groups of Chinese tourists were prevented from visiting Japan. Four Japanese in China were suddenly arrested in what looked like preposterous charges of photographing Chinese military establishments. A high-level torrent of abuse was directed at Japan from Chinese government and media sources.

It was alleged that China banned temporarily the export of rare earth metals -- vital in much hi-tech gadgetry -- to Japan, though this was later denied.

Eventually the Japanese gave in and let Zan go, at which point the Chinese demanded apologies and compensation. Outraged public opinion finally forced Tokyo to reject this.

The Zan episode needs to be seen in the context of three other episodes this year where the Chinese have flouted well-established international norms......read on

Ben Davies interviewed (part II)

The continuation of the Ben Davies interview with Eric King late last week......listen here

John Hathaway interviewed

John Hathaway interviewed by Eric King of King World News discusses Inflation, Gold and Silver.....listen here

JPMorgan reopens New York gold vault as investors scramble for yellow metal

From the UK Telegraph:

JPMorgan Chase has reportedly reopened a gold vault in New York as banks seek to profit from the yellow metal's longest rally since 1920.

The reopening of the vault, which was closed in the 1990s, is also evidence that there's appetite from investors to actually buy the metal itself, rather than just gain exposure to gold through mining shares or other assets, the Financial Times reported.

"There is growing interest from ETFs (exchange traded funds) and other institutions as well as from corporates and high-net worth individuals to store precious metals," Peter Smith, head of JPMorgan's vaulting service, told the FT.

The gold price is already up 20pc this year and, with a 10th straight year of gains in sight, is on course for its longest rally since 1920.

The prospect of the US and the UK embarking on another round of quantitative easing is sparking fears among some that inflation will inevitably follow.

Investors see silver lining in economic gloom

From the UK Telegraph:

Forget gold. Silver, the yellow metal's poor cousin, has been the investment of the year.

Silver prices have risen 31pc in 2010 to a 30-year high, outperforming gold, equities and most base metals. On Tuesday, the gold-silver ratio dropped below 60 for the first time in 11 months.

The gold-silver ratio is simply the number of ounces of silver it takes to buy one ounce of gold. The silver price is currently $22.11 and the gold price is $1,317, so the silver ratio now stands at 59.6. The ratio varies wildly. In 1970, it was about 20 and it peaked at just under 100 in 1991. The average is around about 40 – and that is the key to any silver bull's argument. Historically, it appears that silver is undervalued in relation to gold, they argue. In 2010, the ratio has been as high as 72, recorded in February, and is now just below 60. Many believe it could have further to fall.

The reasons for gold's outperformance are well documented – inflationary fears, currency woes and safe-haven demand – but does the declining ratio towards its average mean that silver is going to continue with its charge forward? Most analysts are not that bullish – with a price of about $24 targeted for next year. There are some, however, that believe the silver price will become much more lustrous over the coming years.

James Turk, who founded bullion dealer GoldMoney in 2001 and manages $1.2bn (£758m) of assets, thinks prices could hit $50 by the end of next year, but accepts that there will be volatility along the way. Mr Turk believes quantitative easing will devalue currencies and send precious metals much higher. "Just pick up your newspaper to see what central banks are doing to destroy currencies," Mr Turk says. "Unlike the 1970s, there are no safe havens from currency debasement – such as the deutschemark."

Mr Turk is more bullish on silver than gold. "The problem is the volatility," Mr Turk says. "Essentially it is a cheap form of gold, but it is not for everyone because of the volatility." He says investors should always buy the physical metal and not paper and advises a portfolio of one-third silver to one-third gold.

Suki Cooper, a precious metals analyst at Barclays Capital is not so bullish. She has an average target for silver next year of $22.2, expecting the metal to peak in the second quarter at an average price of $23.7. "Silver mine supply is still growing and industrial demand – although improving – remains relatively weak. Silver is still in surplus, but it has benefited from safe-haven buying," Ms Cooper says. "The price could fall sharply if investor interest wanes." Already investor interest this year is much lower than last year, which is surprising given the recent bull run. In the current year to date investment inflows into silver have amounted to 1,377 tonnes. In the nine-months to September 2009 it was 2,942 tonnes – with full year 2009 inflows at 4,112 tonnes, Ms Cooper notes.

However, Mr Turk remains unbowed. "I expect the gold-silver ratio to fall back below 23 over the next three-to-five years," he says, despite most analysts thinking this is unlikely.

Precious metals consultancy GFMS also believes that there is a risk of a sharp fall in the silver price. Silver has risen on gold's coat-tails, but it is also used in industrial processes so it has risen on hopes of a recovery in the global economy too. Philip Klapwijk, GFMS's chairman, said last week that the absence of an improvement in the economy will be a negative for the silver price. "If you think gold will continue to advance in the medium term, then why wouldn't silver necessarily follow suit? One reason could be that if economic prospects take a bath, that side of the argument for silver becomes a lot weaker," Mr Klapwijk said. "In the current situation, silver is benefiting from both general optimism on industrial production in emerging markets, and the investor interest in safe-haven assets like gold," he added.

Scrap Metal and Paper Recyclers

By Peter Souleles:

You may find this difficult to believe, but there are over 300 million scrap metal and paper recyclers in the United States. In Japan there are over 127 million, Europe 730 million and the list goes on. The truth is that just about every human being on the planet is a scrap metal and paper recycler by virtue of his or her usage of fiat currencies.

Despite the billions of recyclers only a small percentage has actually made money in the last 10 years. They are the ones who converted their scrap into hard assets and in particular precious metals. The rest are being played for fools and the evidence is there for all to see. The majority recycled their scrap into other forms of paper called junk bonds, municipal bonds, treasuries, equities and so on. The government on the other hand also recycled the scrap paper they collected as taxes into other metal products such as tanks, jets, bombs and clunkers which inevitably also become scrap in good time.

If the onward and upward march of gold and silver prices for over a decade is not proof enough, then consider the ongoing and relentless efforts of governments the world over to devalue their currencies. What that means is that your dollar is being attacked by your own government so that it can buy less and less. Now, is that a store of value?

If currencies are truly stores of value, it begs the question as to why their owners (i.e. national governments) are intent on devaluing them.

The US is currently successfully devaluing its currency which in any case is worth zilch. The effect though, is a desperate frenzy of US dollar buying by other nations in exchange for their own currencies. So we have more dollars, less value, but an even greater number of greenback tentacles in the world's financial system. Where do they end up? Probably in short term US treasuries so as to fund more US government deficit spending at close to zero rates of interest. This might be great for some form of global monetary easing (liquidity), but of questionable benefit to solvency. Just remember that the US is more interested in the position of its dollar in the world's financial system than its value.

When President Chavez of Venezuela devalued the Bolivar against the dollar in January, the people rushed to the supermarkets and emptied the shelves of televisions and refrigerators in anticipation of inflating prices for imported goods. Once again they were only half smart because since January their refrigerators (eventual scrap metal) have lost major value while the price of gold has rocketed.

Do you want more proof?

Well in Britain the deputy governor of the Bank of England came out in the last few days and urged the country to go on a shopping spree to boost the fragile economy. The governor's name is Mr Bean. Yes that's right, Mr BEAN. This one is not the real Mr Bean, he is just an impostor who believes that the profligate spending by the Brits which got them into trouble in the first place now needs to be repeated.

There is of course some method in his madness (even though it is just madness) because it is estimated that by slamming savers he will be depriving them of £18 billion whilst putting £26 billion in the pockets of consumers. Another misguided effort at injecting an £8 billion stimulus into the economy, for which the taxpayers of Britain pay him £250,000 a year. How much of his pay will he spend? I can assure you that he will be saving more than most of us.

The government of the UK is slashing its spending to bring down its debt but encourages Brits to do the opposite despite being near record levels of mortgage and credit card debt totalling £1.456 trillion.

Dear readers the currency you hold is not a store of value. You are simply holding onto a bucket that has a hole in the bottom. Scrap metal and paper fiat should be used only for necessities, getting a real education for your kids, paying off fiat debt and buying real assets of which gold and silver are presently the safest.

If the savers of Britain want to get their message through to Mr Bean, they only need to march down to their mint and convert the bulk of their savings to gold and silver. That should work wonders in no time at all. Better still they should form their own bullion bank which is open to customer inspection unlike Fort Knox (or should it be called Fort Nix?). In fact that is what savers the world over need to do to reclaim their right to a store of value. A 347% increase in the price of gold in British pounds over the last 10 years says it all.

As reported in the British press, Mr Bean admitted the economic recovery was being hampered by what economists call the "paradox of thrift" where savings may benefit individuals but not help the economy.

What the man does not understand is that periods of idiotic profligacy MUST be followed by painful periods of thrift (i.e. deleveraging) otherwise the subsequent downturn will be a collapse. As I wrote some time ago:

"Unless this deleveraging takes place people will not be able to deleverage their life styles and this is where the crux of the problem lies. This deleveraging will cause further pain and losses, but will stop when that which is left is productive rather than seductive, deserving rather than self-serving and needed rather than wanted. This is the simple formula that should be applied at all levels."

Is Mr Bean telling us that we can lose weight by eating more even though this will lead us to further financial illness and even though an estimated 140,000 Brits become insolvent this year?

In fairness to the man, he is but one of many clueless central bankers that believe that the financial system can be detoxed with the use of more toxins just like BP is doing in the Gulf of Mexico. What do you expect from men that have only two brain cells that spend their day trying to find each other to form a synapse.

Yes, currency is valuable as a medium of exchange, but each time we exchange it for something else, that subsequent purchase or payment for services must be for something that adds value to our existence and future, otherwise we are nothing more than rats on the bankers' treadmill.

The currency attempts at devaluations we are seeing are a zero sum game that will not aid or abet the economic recovery. The only purpose they serve is for a limited number of people to make serious amounts of money as a result of volatility. You just have to remember in May this year when the Euro crisis hit, how the Euro was predicted to hit parity with the dollar. Well we now see the result of that prediction.

We have also seen the result of volatility on the world's stock markets - profit for some and disappointment for most.

For the rest of us who have no great insights into or influence over volatility, I continue to recommend gold, silver and the repayment of debt.

In the meantime, will the real Mr Bean do something about his hapless relative at the Bank of England?