Silver on the Up and Up; Why This Time it’s Different

Analysts have watched precious metals with intent interest over the past weeks, as both gold and silver officially entered ‘bull markets’ – namely, both exceeded 20% growth. Though the threshold is notoriously arbitrary, it does represent a significant psychological barrier for market agents all the same, this is undeniable. What the attaining of ‘bull market’ status actually means moving forward though, has been a matter of much debate in recent days. Some seem to believe that now is the time to position ones self short, while others think that now is the time to entrench ones self for the long haul. We would tend to side with the latter, as this market run is dramatically different in its character than any of those that we have seen over the course of the past half-decade.

As the spot price of silver approaches year highs, up from multi-year lows, the thought that sustained growth might be possible seems counter intuitive – usually, one tries to buy low and sell high, not enter when it seems things have topped out. This being said, the peak that we are approaching has been a long time in coming, much longer in fact than any of the previous highs that we have seen in the past five years. This is because, since the absurd heights of 2011, and particularly in the last three years, investors (those who have a long-term, passive and vested faith in the performance and stability of silver) have either been licking their wounds or enjoying the fruits of their success, meaning that the market had largely been driven by speculators (those with an active long or short term interest in the commodity in the eventual view of monetizing), particularly those buying shorts, or looking to offset these positions.

Speculators tend to be highly leveraged, meaning that they tend to be trading with loaned money, or with money taken and invested with a clearly stated risk tolerance – both of which at times provoke ‘necessity buying’ so as to either offset risk, or protect the initial capital. The result of necessity buying, which often comes in general waves, is a periodic ‘overheating’ and ‘rapid cooling’ of the market – namely boom and bust. This instability served to further deter long term investors, who are often seeking greater stability of their assets through market stability in commodities rather than grand profits (long or short term). In other words, the market environment of silver has recently been one of increased, rather than decreased risk – a reality which betrays part of the basic function of precious metals as an investment tool.

This latest rally in silver displays decidedly different fundamentals though. It started normally enough, with speculators scooping up shorts as silver rebounded from lows. These agents saw the absurd ratio between the price of gold and silver, which had dropped from a stable relation of around 55oz silver: 1oz gold to 80:1 in early 2016. Chinese markets picked up on this as well, and a buying frenzy in Asian markets gained momentum, prompting even more in the West to begin to pile on. The coalescence of strong market interest, and good historical value led speculators taking up long positions to become almost as numerous as those interested in shorts. Then unexpectedly, investors began to trickle in as those dealing in shorts began to back off, leading to a minor plateau, and then a less intense, more sustained upward trend.

The reason that the presence of investors is a good long-term market indicator is that, as opposed to speculators, investors carry with them larger pools of stable, committed capital which are far less susceptible to flight. Rather than revving in second gear, silver prices managed to smoothly change into third, opening a new price range for the coming months. From this, we may gauge price elasticity – the normal ratio of silver to gold is 55:1, gold is following a more aggressive upward trend, investors feel that silver had bottomed out, and so all of the ingredients are present to be baked into a silver-bull pie. What is more is that the recent period of gains bears all of the hallmarks of a sustainable benchmark due to the calculated rise of silver spot, as well as the re-entry of sincere investors into the commodities arena.

Though by no means a ‘get rich quick’ tip, the re-emergence of silver as a stable and long-term investment apparatus is good news for silver stackers and investors alike, and it is our feeling that at this point, the ‘white metal’ presents a good opportunity for future gains with minimal downside risk.

Kerosene to the Fire; India’s Gold Strike in a Bull Market

Attempting to amend severe budgetary deficits, the Indian government tried introducing a 1% excise tax on gold back in 2012. It might not seem like much, but when one takes into account the sheer size of the Indian gold economy (it is, afterall, the world’s second largest consumer of the yellow metal), the potential governmental revenue was enormous. This being said, the margins that most jewellers and bullion dealers work on mean that the introduction of even a small tax would make a substantial proportion of transactions involving gold unviable. In light of this, the India Bullion and Jewellers Association led a three-week strike against the new tax, successfully getting it withdrawn from consideration.

Four years later, persistent economic issues have prompted the government of India to once again propose a 1% ‘gold tax’ – unsurprisingly inciting the same reaction as it did nearly a half decade ago. There is little wonder as to why time has not made those involved with the gold trade warm to the proposed duty – the industry has not changed at all in it’s operating mechanics, meaning that what would block a viable livelihood then would still today. Reasonably, the India Bullion and Jewellers Association has proposed increasing the import tax on the yellow metal as an alternative source of revenue, rather than placing a tariff on domestic transactions. For the moment the government has not responded to the protestors, instead allowing the strike to enter a third week, thus continuing estimated daily losses of $150 million to the Indian economy.

Interestingly, this legislative debacle comes at a crossroads in terms of the international gold market. With the spot price up and holding over $150 from the beginning of the year, bears have backed off, and bulls are already paying attention to even minor fluctuations. This being said, sustained gains have begun to taper off, leading some commentators to conclude that “the punch bowl is becoming stale.” Renowned trader and analyst Peter Hug predicts a range of $1220-50/oz for the foreseeable future, with relative economic stability and the summer months serving to cool off a hot precious metals market. Though a sound perspective, it has the potential to be undermined by the situation in India.

There are two factors at play which will almost certainly see increased demand within India, and thus have a perceptible effect on the market price of gold. The first is that the resumption of demand after a prolonged strike will put great pressure on the the existing reserve of gold on the market. This might partly be because the supply has readjusted to reduced demand, but there is also the second factor to consider – namely the issue of artificial demand stoppage, and then the associated frenzy to buy once stocks do become available. This might be likened to the consumer fervor when new smartphones are launched.

Seeing as how India is a net importer of gold, and a massive one at that, increased domestic trading as is typically seen during the festival season translates into greater international demand. With India’s pent-up demand ready to run red hot, it is easy to see how this situation has the potential to jump-start sputtering gains on a global level. Timing will be everything in terms of whether an end to the strike yields market dividends – but for the moment, the alignment of a large, artificial reduction of trade velocity and an upward market which just needs a little more fuel makes this a drama that we certainly would not like to miss!

What Goes up Simultaneously Comes Down

As gold sees substantial, sustained gains, it might be surprising to hear that one of the world’s most stable economies is liquidating their gold reserves.

Canada is a net gold exporter, and once had substantial gold reserves, a segment which has seen a steady decline in it’s overall share in the nation’s total reserve equity. At the height of the cold war, in 1965, the large but sparsely populated nation had over 1 000 tonnes of the yellow metal backing their currency – this fell by over 30% in the following 5 years, and by 1995, only a little over 10% of peak totals remained.

The precipitous fall in the role of gold in Canada’s economic backing is part of a global trend in national economic planning – from the UK leaving the gold standard back in ’31 to the US following suit 4 decades later. FIAT currencies and diversified government holdings have brought unprecedented growth and opportunity through the course of the past 60 years. The dark side of this, of course are the inherent instability and institutional distrust which result from a system entirely dictated by the whims of market agents which most people see as being motivated exclusively by greed.

The point of this piece is not to comment on the merits of FIAT currencies (the weight of a now enormous historical data set speaks for itself) or the greed of market agents (the virtual daily reports of banking scandals more than speak to that), rather we confine ourselves here merely to the apparent paradox of phasing out a performing asset.

With most analysts agreed that the gold bear was going to soon have to face the bull, the Canadian Government more than halved their holdings at the end of last year to a paltry 0.62 tonnes. This of course, was just before the New Year’s market chaos and ‘safe havens’ upswing. The complete lack of market timing has been blamed on the fact that the latest round of “sales […] being conducted over a long period and in a controlled manner” and without any eye to “a specific gold price.”

Though it might make sense for national reserves to be more dynamic than they have in past, this does not mean that they should abandon common sense – rather than being mired in bureaucracy, governmental institutions should keep an eye to profitability. I suppose that the latest round of selling is simply yet another case of wasted opportunity.

India’s Inability to Control Gold

Back in 2013, authorities on the national level already realized that there were mounting problems with India’s gold trade. Costly imports and lax regulation of the industry were not only costing the economy, they were once again devaluing the rupee and decreasing real wages.

This is not the first time that India’s unquenchable thirst for the yellow metal had provoked such a cycle – the 1968 Gold Control Act was introduced to stem the harmful habit of enormous imports and re-stabilize the national economy. Fast forward 45 years, and the government’s response was once again to introduce what was supposed to be restrictive legislation. This time, rather than implementing a ‘negative’ or ‘absolute’ law, it was decided that a ‘consequential,’ or ‘economic’ impediment would be more effective.

Shortly after the introduction of a tax hike to 10% on gold imports, a smuggling crisis ensued, with illegal imports amounting to over 175 tonnes in 2014 alone. Far from stemming the flow of gold and benefiting the economy, new legislation had in fact served to deprive the state of billions of rupees that it would otherwise have collected.

Seemingly acknowledging that there is no way to stop the influx of gold into the country, Modi’s government unveiled a massive gold monetization scheme with much fanfare. The idea was that if one could not stop imports, that at least the government could make use of the gold once in the country. By the end of 2015, a grand total of 1kg of the estimated 20 000 tonnes of privately held gold had been deposited. The scheme, though sound in principle only offered 2% interest on deposits, and in a country where the inflation rate is at 5%, handing over your sure store of value for a -3% return is not very appealing.

The first day of this year brought with it yet another regulation, this time requiring purchasers of gold exceeding 200 000 rupees (around $2 950) to disclose their tax code, or Permanent Account Number (PAN). Already, a problem emerges when one considers the fact that only around 3% of India’s population pays income tax, and would thus have a PAN. Secondly, it ignores the fact that the colossal smuggling problem has not subsided, meaning that a sizable chunk of India’s gold trade is not conducted legitimately at any rate. The result has been a sudden boost to the illicit gold trade, with some legitimate vendors actually moving into the black market.

It would seem that the Indian government arrives at it’s legislative Waterloo every time it tries to regulate the gold industry – every move to control or even monitor the import and exchange of the yellow metal ends in disaster. The latest chapter in this decades long debacle is not only harmful to the Indian economy, but dangerous, as it promises to empower smugglers and criminal organizations in the long term. India has a very special relationship with gold, and authorities would be wise to be mindful of that.

Eagles Soar as Gold Begins It’s Turnaround

Some time ago, we discussed the correlation between US mint sales of physical bullion and the actual demand for precious metals, as well as how this might affect markets long term. The short of it is that though markets perform in one way, the actions and demands of investors and consumers might indicate a disparate reality. In other words, just because the spot price is down does not mean that interest in precious metals as an investment tool has evaporated.

The gap between spot price and actual, physical demand reached absurd proportions last year when many mints were forced to suspend or restrict their silver bullion programmes, and there seems to be a good chance that this is apt to happen to gold. Despite a 10.3% slump in spot price to a 6 year low, the US Mint reported that sales of their gold ‘Eagle’ coins were up 53% from the year before. Obviously, investors believe that the ‘price is right,’ and yet for some reason, this is not translating into a proportionally stronger overall market.

More interesting though, is that despite relatively little movement in the market following the holidays, the first day of sale for the 2016 Eagles saw nearly 60 000 ounces purchased, clearly indicating an incredible pent-up demand. The implication here is that if the US Mint (a notoriously bureaucratic organization) is not responsive enough at this crucial juncture, there is a serious risk that they will not be able to meet demand.

The American Eagle is not the only bullion coin on the market, accounting for roughly 12.5% of the global total of consumer bullion coins, meaning that yet another suspension or restriction of gold sales from the US Mint will have little effect. This being said, in commodities markets, the consumer is king, and rumblings have already started. It would seem that the bears are backing off, and we are about to see a ‘running of the bulls.’

If Commodities are Like Icarus, Gold is a Boeing 747

It has been said that China’s rise has been unprecedented, and that as a result, the commodities super-cycle that it drove will never be repeated. When one looks at the numbers, China’s metals consumption as a percentage of the global total went from 6.4% in 1990 to nearly 44% in 2015. These figures, when taken into consideration along with 8% annual economic growth, would certainly give the impression of a ‘Chinese miracle,’ but a quick look at historical metals consumption per capita shows that Japan’s growth between 1950 and 1975 presented similar strains for commodities markets, and indeed overall macroeconomic characteristics. The miracle is not so miraculous after all.

This being said, economic stagnation for China is bad news for miners and refiners of metals of all kinds. The diversity and scale of Chinese industry means that the vast majority of mineral commodities see a large chunk of their demand coming this economy. As a result, it has been estimated that a 1% drop in Chinese growth would likely translate into a 1.3-5.5% drop in commodities prices. Already, nickel (which lost 42% of it’s value last year) and iron (which is expected to see a 25% decline this year after an abysmal end to 2015) are feeling the pinch, and the overall outlook is a similar shade of depressing for most metals.

Moody’s recently issued a report saying that because of the discrepancy between supply and demand for physical commodities, largely driven by increased output designed to offset early losses during the commodities route, this slump is likely going to be a long one. Apparently, this situation is only made worse by a strengthening US dollar, which has traditionally meant greater pressure on commodities prices. Moody’s has also threatened to slash the ratings of 175 mining and energy firms in response to what they see as a growing storm.

It is all very convenient to be able to treat the commodities market as a monolith, painting all mineral extracts with the same brush, but this simply cannot be said of gold. Figures out of Hong Kong, Shanghai and Beijing all indicate ever-increasing for the yellow metal, while at the same time many analysts are left scratching their heads as demand for jewellery and consumer electronics remains strong from China’s growing middle class. Evidently, the pent up consumer demand from China will outlive it’s economic ‘miracle,’ perhaps creating an ‘unprecedented’ secondary market.

With such a diversity of applications, as well as a special place as an internationally recognized asset class, gold has already begun to buck trends as it’s spot price stabilizes while other metals remain in free fall. Despite quite a bit of naysaying, especially by British commodities analysts, gold appears to have found it’s floor at around USD $1 100/oz – a further indication that AU is a difficult beast to wrap one’s head around. Though I think that we can all agree that a gold market breakout is unlikely in the short term, the overall message is to remain sensible when listening to the grandiose claims of many economists and market commentators. When it comes down to it, nothing is quite as simple as bold, blanket statements would have you believe, meaning that the panic that they often incite is equally often unjustified.

Gold, the Environment, and a Government Trying to Prove a Point

In northern Greece, nestled in the forests of the Chalkidiki region of Macedonia, lies one of the largest gold deposits not just in Greece, but the world. It is owned by Canadian mining firm Eldorado Gold, and for the moment, it is at a standstill. This though, will soon change, as a years-long legal battle appears to be coming to an end.

The reason that this mine is perhaps not better known is that for decades, locals and elements within the central government have successfully blocked substantial development of the site. Opponents cite a mix of reasons to block mining in the region, varying from environmental impact to putting off tourists – all legitimate concerns, especially when all is running well, and the central government can start considering how to develop more outlying regions.

Then 2008 happened. Grandiose plans to redevelop Chalkidiki along post-industrial, tourism economy lines fell through as funding dried up. Once again, the mine changed hands in 2011, and permission was granted to Eldorado to begin operations – part of a larger scheme to attract foreign investment. Since 2012, the mining firm has invested over $450 million in kitting out the pit and getting things started – much of which went straight into the local economy due to the terms of the agreement.

At this point, locals became divided. Opposition groups staged protests, as did those who supported the much needed injection of jobs and capital – thousands showed up to the rallies organized by each side.

A new government was elected in Greece based on general dissatisfaction, and a rapidly deteriorating economic situation. They promised big things, but relied on non-cooperative gestures and harsh language to create the illusion that things were actually getting done. One way of winning points at home while simultaneously sending a message of ‘independent’ obstinance was to crack down on an ‘evil’ foreign corporation who could be perceived as literally ravaging Greece – the cross hairs closed in on Eldorado and the mine was shut.

This first closure was overturned on appeal, and another was instituted. Eldorado threatened to permanently suspend operations at two of it’s Greek operations, effectvely jeopardizing 1 100 much needed jobs – the central government accused it of “blackmail.”

The most recent court order has ordered the mine re-opened, perhaps a coalescence of the fact that the technicality cited by the government didn’t pan out in legal terms, and the sobering realization that in these desperate times, Greek economic policy cannot be determined by ego and political agendas. The fact of the matter is that the aspirations of a region, political agendas from Athens, and the desire for profits all have to be mitigated through the scope of an overarching socio-political situation, both domestic and global.

With the economy in the shape that it is, and the general will of the local population leaning ever further in the direction of development, it would be negligent for the central government to continue harassing a genuine partner in economic development. It would seem that in this case, practicality has trumped the ideal.

When the Ground Litterally Gave Way; The Tale of Cerro de Pasco

It is a dark irony, but one of the world’s highest cities (by altitude) is also one of its fastest sinking. The mining town of Cerro de Pasco in the highlands of Peru has a population of 70 000, beautiful vistas, and a massive open pit mine which is slowly devouring the settlement.

Though mining has been an essential part of Cerro de Pasco’s economy for the best part of 500 years, after the Spanish discovered silver in the region, truly unsustainable mineral extraction began in 1956 with the opening of an open-pit zinc and lead mine. For over a half a century, the operation has been contaminating the air, soil and water of the city, leading to numerous health problems for the population including elevated rates of cancer, lead poisoning, seizures, and reduced IQs.

In 1996, tests were performed on locals to look into reports of ill health, and in 2007 the US’s Centers of Disease Control and Prevention (CDC) became involved – more than half of the children living in Cerro de Pasco tested positive for dangerously elevated levels of lead content in their blood.

This prompted a ‘state of environmental emergency’ to be declared in 2012, but with little actual change coming on the declaration’s heels. With the mine’s operator, Volcan Compañía Minera actively expanding operations in the region, it seems unlikely that anything will change anytime soon.

A further complicating issue is the fact that the physical infrastructure of the city is precipitously close to being engulfed by the massive hole, with some structures having to have been moved / demolished, and others teetering on the edge of the void.

The provincial and federal governments have both said that they are in no way responsible for relocating the settlement, but at least the ministry of health has agreed that it will provide necessary healthcare to the inhabitants. It would seem that so long as the allure of high mining profits remain, so too will Cerro de Pasco’s unwanted attraction.

A Whole New Meaning to ‘Rich Desert’

 

Following in the footsteps of Wall Street Burger Shoppe’s $175 Kobe beef burger topped with gold flakes and Luke Venner’s gold leaf lobster roll, New York’s Manila Social Club has launched gold sprinkled doughnuts.

These confections, produced using the purple ube (a type of yam used extensively in Filipino cuisine), and are filled with ube and champagne jelly before being rounded off with a Cristal champagne and gold icing. The cost of this sumptuous luxury: $1 200 per dozen.

Created by chef and owner Björn DelaCruz, it has been noted of the taste that “the honey notes from the Cristal pair well with the ube mouse.” It must also be mentioned that the gold has no perceptible effect on the flavour.

Though $100 gold doughnuts might seem outlandish and unsaleable, it is worth bearing in mind that over 5 dozen have been sold since the beginning of the year – forget building a metals portfolio, devour it!

The Extinct Metal Which May Have been Rarer than Gold?

As a numismatist, I was flabbergasted to discover that I was completely unaware of the existence of Orichalcum (also sometimes spelled Aurichalcum) – a particularly brilliant variety of brass which was produced in the ancient world.

It is perhaps no wonder that this metal has avoided entering into my sphere of knowledge, as it was apparently only known by name by the time of Plato. Today used by numismatists to refer to the brass used in Roman Sesterus and Dupondius coins (as well as the bi-metallic medal of Commodus pictured above), there is a real belief by some scholars that the original metal might well be a mineral no longer known to humanity.

More likely is that it was an alloy of some sort, and if the cargo of an ancient shipwreck found off the coast of Sicily is anything to go by, Orichalcum was a mix of copper (75%), zinc (15%), as well as varying levels of nickel, iron and lead.

Another theory posits that our mystery metal was a mix of copper and zinc oxide (known as Calmia) which was once found on the shores of the black sea. This hypothesis seems most plausible, as the accessible deposits of zinc oxide in this region were exhausted during ancient times – accounting for its disappearance, and being referenced in ancient texts.

Though we might never know exactly what the mystery metal actually was, two things are certain – it was highly prized, and it looked remarkably like gold. With accessible deposits of many of our earths resources being depleted, we should probably ask ourselves how many other commodities will go the way of Orichalcum.