Don’t listen to what people say, look at what they do

Next up is the old adage, don’t listen to what people say, look at what they do. Central banks have become net buyers of gold since 2009 and the Chinese are buying it like the clappers. There are many suggesting that at some point China will declare its currency to be backed by gold. Their official holdings stand at 1000 tons but they only update this data every 5 years (next figs due out in 2014 if that pattern holds). There are many well calculated estimates based on imports through Hong Kong, where figures are available, that the current total stands at between 5,000 and 10,000 tons. The higher figure would beat the official 8000 tons that the US allegedly still has. Indeed one Chinese official in 2009 let slip this figure was actually a target. China is the world’s largest gold producer and exports zero. The West may consider gold is no longer money… but to be perfectly candid and quite frank, that may become an irrelevance – even if they do control the paper price in the near term. Physical ownership is where it is at.

Pinso gold-and-silver-bars 1

The advantage physical gold has is that it is no-one else’s liability. Proper gold bugs would also go further and say “if you don’t hold it you don’t own it” and readers should at least be aware that some gold vehicles such as ETF’s (Exchange traded funds) are just a paper representation of gold and not the gold itself. They can be convenient but you are often not the owner of the physical asset – which isn’t much use in a crisis. It is estimated that the gold and silver markets are leveraged by up to 100:1. That means there is 100 times more metals traded than actually exist. If everyone asks for delivery then a lot of people will be bitterly disappointed – but at least one is going to be very happy.

 

Of course this has already started. ABN Amro the Dutch bank has already told its customers they can no longer have their gold delivered and all will be settled in paper currency.

 

France has recently banned precious metals being sent through the post

 

and now India has banned gold imports (it will just go via the black market instead). If you can’t see the trend, it can’t be your friend.

 

Now, if you want to know where the price for gold and silver may end up ask someone else – I don’t know. But just for fun, let’s use some historical metrics. Now remember, history is no guarantee of future returns and any figures mentioned here are purely conjecture and may massively be affected by the number of dollars in circulation. Also, due to your brains anchoring systems, as soon as I mention a figure you are automatically affected by it – even if you think you are not… so you have been warned!

 

If we take the 1980 price of gold at $850 (the high point) and apply official inflation figs we get to a current price of approx $2700. However, just like the news, the official figs in the US are heavily manipulated. Fortunately for us John William’s shadow stats site calculates the real inflation figs which he says are running at twice the official ones (feel familiar?). In this case the actual inflation adjusted price is $9400 (for silver it is over $300). But that’s not the end. Twice in the 20th Century the price of gold has been on parity with the number of dollars in circulation. Just divide the number of dollars by the number of Oz’s of US gold holdings and you get a figure north of $38,000!!! Now I am not claiming that it will ever get that high – but should it then it wouldn’t be the first time (relatively speaking) it has, it would be the third. Shocking? Absolutely. Impossible? No. So whenever you hear the claim that gold is currently in a bubble at $1225 (2% above the average cost of production!) – you may want to moisten your underwear with laughter. Silver will no doubt produce larger returns but that one will be a proper white knuckle ride.

Some (not all) things to consider if you are buying gold or silver:

  1. You can hold physical gold in a pension (e.g. SIPP), you can’t with silver. Although you can own gold/silver stocks and funds
  2. If you are a UK resident and buy UK denominated coins such as Britannias and Sovereigns they are not subject to any capital gains tax
  3. Gold has no VAT, silver does at 20%
  4. The current margin spread on gold coins is approx 3-5%, whereas silver is 20+ % above spot (that’s something to carefully consider)
  5. If you do not want to store gold/silver yourself you can use online providers – such as Bullion Vault here the gold/silver is held in professional vaults outside the banking system (absolutely essential) and you own it under what is called a bailment, which is similar to the legal title you hold when you own a property. So it’s legally more robust and in theory eliminates the counterparty risk. Of course, it is still held with a 3rd party – but it is not in the same form as most ‘paper contracts’. Also, here it is worth noting that the silver is VAT free (but not CGT free) as long as you don’t remove it from storage.

If you want advice I suggest you use an IFA (but please see the book for my notes on their limitations). For the record I use Mark Sekree

Now before I go, I would like to point out to those who are very frustrated by the corruption within the current systems that there is something you may be able to do about it. Buy physical silver. Why? The price of silver is designated by the ‘paper’ markets. The silver market is much larger than the gold, but much of that is used by industry so in fact the amount available for investment in silver is much lower than gold. Secondly silver is subject to depletion. Its current price means that it is not worth the effort of recycling the small amounts used in for example smart phones etc. So whilst the amount of silver above ground is higher than gold, the amount of usable silver is about 1:1. The price ratio currently is about 60:1. The naturally occurring below ground ratio is about 15:1. So you could argue it’s somewhat undervalued with a potentially high upside.

Where it becomes interesting is that if physical demand for silver increases (which is exactly what is happening) and people start to demand physical delivery from the COMEX and LBMA (the two main trading markets) then the whole Ponzi scheme gets exposed and they would be forced to settle in cash. Now, don’t be so naive to expect that the likes of JPMorgan won’t manage to get themselves on the right side of this trade. But if there is a default on the COMEX – it’s an Emperor’s new clothes moment – and I would suggest at this point everyone starts worrying about every paper derivative contact out there (that’s over 1 quadrillion). If this happens, having your wealth stored in non-debt based tangible assets such as gold and silver would be a very wise move. Don’t feel guilty about chivvying it along, it’s going to happen anyway. In fact some people are actively encouraging it… 

 

There are many good bullion dealers out there but again for the record I have found Atkinsons in the UK offer one of the lowest margin spreads on silver coins. But do your own research.

 

Let me be clear. I’m not here to tell you what to do, only to make you think. I hope you have enjoyed reading these few guest blogs and I truly wish you every creative success. My next project is writing a sitcom and the first draft should be complete by the end of June 2013. So whilst the world may occasionally appear bleak – I am choosing to negotiate that by indulging in some shared humour. I’ll leave you with one moral thought from arguably the cleverest mind of the 20th Century:

“If you have the privilege to know you have the duty to act” – Albert Einstein

The question is, will you?

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