Archive for December, 2009
Gold, Paper Money and Greater Fool Dependency
Posted by robin in Financial Articles Monday December 7, 2009 7:48 pm
Tuning into the gold market in recent days two messages shout from the rooftops.
First, demand is the principal driver of higher prices, more specifically investment demand. Net central bank sales of past decades have reversed, ETF sales have tripled in the past two years and gold coin supplies are exhausting. Mainstay jewellery and industrial and dental demand has wilted under the pressure: down by more than a quarter and a fifth respectively in the year to September over 2008.
Second, central to investor thinking is currency debasement and inflation. The more paper money you print the less valuable it gets. And there’s a lot of printing going on. In extremis, you wind up with a Zimbabwe dollar.
Zimbabwe’s inflation rate hit 231m per cent in July and influential commentator Marc Faber is “100 per cent sure” hyperinflation lies in store for the US too. And what of the UK, which revealed last week our bank bailout cost £850bn, more than half our national income?
Whether gold is the ultimate currency or a yellow metal reliant on the greater fool theory, it’s clear there is a lot of smart money betting on a rising price for some time yet.
Pre Friday’s better than expected US labour report, gold had a run of good news that made you wonder just how much a market can stand. Here’s a flavour of what’s been said:
“Once again the US Mint has had to suspend sales of its one ounce gold coins, and some fractional ones too, as its supplies of physical gold cannot meet the demand.”
Mineweb
7 December
“This positive new flow is just getting ever greater and in those circumstances could gold pop significantly higher than where it is today? Yes it could. I guess the word caution – and this is something I remind everybody – it really has become a one horse race in some degree. It’s all about investment.”
Paul Walker CEO, GFMS
Mineweb
4 December
“China will overtake India as the world’s largest gold consumer in 2009, with total demand forecast at 432 tonnes.”
Reuters
4 December
“Holdings in all gold ETFs rose to a new high of 1,771.4 metric tons as of Wednesday, according to data collected by Barclays Capital.”
Marketwatch.com
3 December
“We bought our gold in foreign currency terms rather than US dollar terms, for we are convinced the world is turning its back on fiat currencies.”
Dennis Gartman, editor The Gartman Letter
The Sydney Morning Herald
3 December
“Gold will go up, as will other commodities. It’s basically the devaluation of currencies, which is ongoing and will be ongoing for many years to come.”
Mark Mobius, fund manager
The Sydney Morning Herald
3 December
“…reaching a record of $1,217.23 an ounce…analysts noted that the metal had hit fresh highs not just in dollar terms, but in euros, sterling and yen.”
FT
3 December
“Already, currency and gold markets are worried about future inflation.”
“The cost of preserving highly leveraged financial behemoths still has the potential to bankrupt governments and debauch their currencies, wreaking yet more damage to their economies.”
Niall Ferguson, FT
3 December
“Regardless of one’s take on the ‘idea’ of gold as a store of value, there is little doubt the trade has momentum and while there is certainly an end to the party, we remain of the belief that the end of the secular bull market in gold will not be occurring soon”
Dan Greenhaus, Chief Economic Strategist at Miller Tabak, FT
3 December
“US gold futures rose to record highs well above $1,200 an ounce on Wednesday in the face of a stronger dollar, boosted by heavy buying by hedge funds and other gold investment products.”
Reuters
2 December
“Chinese central bank wary of gold bubble.”
Financial Post
2 December
“…even Harrods is getting in on the act by selling gold bars…one of the fastest growing areas of gold investment is ordinary investors actually buying bars of gold.
“…market suggestions…Russia wants to add another 30 tonnes of gold to its cache by year-end, on top of the 15.5 tonnes in October.”
Daily Telegraph
29 November
“Holdings in gold exchange-traded funds have reached record levels, and the US mint has suspended sales of American Eagles, the world’s most popular gold coin, after running out of stock due to strong investor demand.”
FT
28 November
“Gold renewed its record-breaking run yesterday, surging towards $1,200 a troy ounce level, with bullion likely to make further gains after Sri Lanka joined other central banks in buying gold from the International Monetary Fund.
“The IMF said late yesterday that the Asian Country (Sri Lanka) had bought 10 tonnes of bullion from its reserves for $275m, confirming a trend of central bank buying that reverses two decades of heavy selling.
“The sale was the third from the IMF to a central bank this month after India bought 200 tonnes for $6.7bn and Mauritius purchased 2 tonnes for $71.7m.
“The IMF has still to sell 190 tonnes of the 403.3 it has earmarked for disposal.
“Traders are betting that other central banks, particularly China and Brazil, and sovereign wealth funds from the oil-rich Middle East countries could buy IMF gold.”
FT
26 November
“Spot gold prices rose $20.70, or 1.77 percent, to a record high of $1190.00.
“…gold, which is considered a safe-haven in times of uncertainty, was the standout performer of the day as the weak dollar supported commodity prices. Gold was also fuelled by a published report that India’s central bank was interested in buying more gold beyond the 200 tonnes it purchased earlier this month from the International Monetary Fund. The IMF had no comment.”
Reuters
25 November
“…if gold was forced up to a price that reflects the number of US dollars in issue, what price would it be then?
“(Dylan) Grice (of Societe Generale) reckons around $6,300 an ounce. With 260m ounces of gold held by the US and the Fed’s monetary base currently $1.7 trillion (and printing), I make it a mite higher at $6,538.”
MoneyWeek
25 November
“…the growing taste for gold can be seen as the latest sign that the greenback’s status as the world’s sole reserve currency is in jeopardy.”
“’The choice by central banks to diversify away from the dollar by using gold rather than other currencies is partly a bet that interest rates around the world will stay low for a long time. But it also reflects central bankers’ growing distrust of all paper currencies, not only the dollar,’ says Leo Larkin (equity metals analyst) at S&P.”
“’The growing anxiety about all paper currencies is a reaction to the enormous amounts of debt that many countries have assumed in order to recapitalise their banking systems and pull their economies out of recession’, he adds.
“’Gold is ‘a currency that can’t default. It doesn’t have any counterparty risk. It’s universal money,’ says Larkin.
“Gold does have what Wells Fargo Private Bank called ‘greater fool dependence’ in a Nov. 12 market report: ‘Because it has no inherent earnings power and no intrinsic value, investors in gold are hoping that other investors will come along to bid up their holdings in the future,’ the report said. That may be a common tactic of speculators, but it’s rarely a good long-term investment strategy, the report said.”
BusinessWeek
25 November
“’Don’t be frightened by talk of a gold bubble. There won’t be a bubble unless the cost of money rises sharply, the dollar strengthens and the budget deficits are reduced - scenarios that seem remote.
“’I hate predicting gold prices attached to specific dates, but my gut tells me this current part of the gold bull market, which should last a few more years, is far from over,’ says my gold guru, Frank Giustra, a Canadian mining entrepreneur from Vancouver.’ There is a growing realization that the U.S. dollar and other currencies are not going to offer the safe harbor feature that gold and other hard assets will.’”
Forbes
25 November
“Bull markets are marked by three distinct stages, and when gold climbed above $1,000, it only entered its second stage. In other words, gold has much further to climb in the months and years ahead.”
James Turk, Goldmoney.com
23 November
“Royal Mint cashes in on gold rush as coin output quadruples.”
FT
20 November
“Chinese consumers’ demand for gold reached record levels in the third quarter as the 60th anniversary of the founding of the People’s Republic of China on October 1 provided a boost to sales of jewellery and commemorative items.”
FT
19 November
“The World Gold Council and State Street Securities…gold exchange traded fund launched in 2004 has proved a winner. Now with assets of more than $40bn…State Street’s gold ETF is among the biggest holders of gold in the world. Indeed, ETFs backed by physical gold are now buying the equivalent of more than 20 per cent of new production.”
FT
20 November 2009
“Demand for investment gold was up by 280% Q1 09 versus Q1 08 as retail awareness increases and significantly, pension and hedge funds have sized physical gold as an integral part of their ongoing portfolios.”
Professional Adviser
19 November 2009
“Housing savant Paulson now looks to gold.”
“Billionaire John Paulson, who earned his hedge fund billions when he made a bet against the housing bubble, is making a new noteworthy bet.
He is investing as much as $250 million in a new gold fund next year.”
CNN
18 November
“Gold climbs to record as Indian Central Bank buys IMF bullion. (200 tonnes)
“’It is the biggest single central-bank purchase in that we know about for at least 30 years in such a short period’, said Timothy Green author of ‘Ages of Gold’”.
Bloomberg
3 November
“Physical Gold has joined Pointon York with Pointon York SIPP Solutions to offer UK retail investors the opportunity to include solid gold bars in their self-invested personal pensions.”
FT Adviser
17 September
“Gold breaks through US$1,000 as investors seek out wealth preservation.”
World Gold Council
8 September 2009
“…the Chinese government is doing an extraordinary thing…it is encouraging their citizens to put at least 5% of their savings into precious metals.”
Casey’s Gold & Resource Report
“Demand for gold from Exchange Traded Funds (ETFs) in Q2 2009 “was robust on a historical basis but…marked a significant reduction on the 465.1 tonnes experienced in Q1 2009”
Q1 465.1 tonnes
Q2 56.7 tonnes
“…identifiable investment demand…up 46% on year earlier levels”
World Gold Council
Sept 2009
Online physical gold seller Bullionvault.com which started trading in March 2005 boasts 120,000 customers holding 18 tonnes of gold.
Supply and Demand
(tonnes)
2006 2007 2008 2009 (to end of Q3)
Supply 3,569 3,475 3,508 2,958
Demand 3,423 3,552 3,805 2,569
Demand
(tonnes)
2006 2007 2008 2009 (to end of Q3)
Jewellery 2,288 2,404 2,186 1,234
Industrial & Dental 460 462 435 274
Bar & coin retail 424 446 649 317
Other retail investment (8) (14) 213 181
ETFs & similar 260 253 321 563
“Inferred Investment” 145 (77) (296) 389
Source: GFMS/WGC
“Inferred investment” is described as including institutional investment other than ‘ETFs and similar’ amongst other factors.
Demand categorised ETF and similar has tripled year to date in two years. It accounted for almost 22% of total demand up to the end of the third quarter of 2009, against a little over 7% in the equivalent period in 2007.
In contrast, the other two demand categories - jewellery and industrial and dental demand - have fallen 27.5% and nearly 21% respectively to the end of Q3 2009, over the equivalent period in 2008.
Biggest gold stashes…and the UK..!
Tonnes % of Reserves
US 8,133 77
Germany 3,408 69
IMF 3,217
Italy 2,451 66
France 2,445 70
China 1,945 2
GLD (Gold ETF) 1,095
Switzerland 1,040 29
UK 310 17
Total World 29,633
Source: World Gold Council
Between 1999/2002 the UK sold around 395 tonnes from a holding at the start of the programme of approximately 715 tonnes. (And no, I can’t make it add up either!)
The average price from a series of auctions was around $250/troy ounce.
The proceeds, around $3.5bn, were reinvested in “foreign currency interest-bearing assets…broadly in the proportion: 40% dollars, 40% euro and 20% yen.”
According to a 2002 Treasury report: “The motivation for the restructuring was one of risk reduction. With nearly 50 per cent of the net foreign currency reserves invested in gold, the exposure to a single asset was too great.”
Venezuela and Portugal today each hold more gold than the UK.
Gold v FTSE
FTSE 100 Gold (GBP)
1yr 4.5 26.5
3yrs (1.4) 24.6
5yrs 5.6 21.6
Source: Global Insight/World Gold Council
September 2009
One currency where gold is not (yet) making new highs…
The Aussie dollar - Australia is unique among G20 nations in having raised interest rates in October and November 2009 by a quarter of a per cent each time.
Northern Ireland’s Neglected Savers
Posted by robin in Financial Articles Wednesday December 2, 2009 3:09 pm
A call out of the blue from Northern Ireland…
“Have you heard of the Presbytarian Mutual Society?”
Um, not a lot.
A year’s worth of distress follows in quick time: an account of another financial institution that got dashed on the rocks of the credit crunch.
The difference here is this one actually went bust and missed the bail out. It merits scant national media attention but resonates loudly in Belfast among the 9,500 who are out of pocket, some of their life savings. Approximately two-thirds of their number is over 60 years old and, after a year of waiting, some have “started to die”.
PMS Ltd was set up as an Industrial and Provident society in 1982. There are around 160 such societies registered as limited liability companies in Northern Ireland and more than 8,000 registered with the FSA.
Such organisations typically serve communities with a “common bond” to one another. They are set up as limited liability companies either as co-operatives or with a view that the business conducted will be to the benefit of the community. In Northern Ireland these include a variety of housing associations and agricultural societies amongst other trades.
FSA guidelines define an Industrial and Provident society as:
“…an organisation conducting an industry, business or trade, either as a co-operative or for the benefit of the community…”
“Co-operative societies are run for the mutual benefit of their members, with any surplus usually being ploughed back into the organisation to provide better services and facilities.”
The FSA is the UK regulating authority for such organisations. Only in the case of PMS it wasn’t. PMS was registered but not regulated by the Northern Ireland’s Department for Enterprise, Trade and Investment (DETI).
A condition of set up is defining the “objects” of the society. In the case of PMS these were:
· To promote thrift among its members by the accumulation of their savings
· To use and manage such savings for the mutual benefit of members
· to create a source of credit for the benefit of its members at a fair and reasonable rate of interest
PMS’s growth over time had accelerated rapidly in recent years. Assets had increased from £50m to £300m in the six years prior to its swift and brutal end. An “unprecedented run on the Society’s cash” led to administrator, Arthur Boyd & Company, being appointed on 17 November 2008. Its stated aim was first, to see if PMS could be rescued or if that was not possible, then organising a wind up of assets in an orderly manner.
The administrator’s last report on 15 June 2009 updated its assessment of the PMS loan book and identified where the holes lie.
Nature of Advance Amount Estimated Recovery
(£m) (£m)
Advances to Congregation 11 11
Advances secured on:
Own homes 9 8
Houses for sale 3 2
Agricultural land 26 22
Other forms of security 4 3
Buy to let properties 24 17
Commercial property 17 10
Building sites & development land 85 34
Total 179 107
The report notes half the advances made between 2005 and 2007 were “to fund commercial property, building sites and development land”. The Northern Ireland property boom saw values double in the three years to June 2007. By June 2009 they were pretty much back where they started having fallen an estimated 40-60%, though the market has been recovering since.
This small credit institution boasted 21 directors, including six addressed as Reverend. Barclays, in contrast, with around £1.5trn in assets gets by with a board of 13. But it appears societies originally required a minimum of 21 members to form in the first place, so perhaps this was the legacy from inception.
My caller maintains savers didn’t know what was going on. The administrator too noted in its June report approaches from “a number of members” who believed themselves depositors rather than investors. Returns received by savers were those akin to a deposit account with interest credited annually. One disappointed saver says:
“We were never told our savings were at risk, in fact we were told the exact opposite; the directors assured us that they would not speculate with our savings.”
Though this was an unregulated entity with the FSA, the UK regulator has since made enquiries and on 9 April broke with protocol for ongoing investigations when it announced on that PMS “was conducting regulated activities without the necessary authorisation or exemption”.
Meanwhile some savers, with all their money tied up, continue to suffer. Calls on the administrator to set up a “hardship fund” could not be realised for legal reasons.
In mid-January 2009, Northern Ireland’s Enterprise Minister Arlene Foster stated it was a UK government problem:
“The Executive has done everything it can within its powers to assist the Presbyterian Mutual Society. It does not have the same options open to it as the UK Government in terms of depositor protection.
“The UK Government must act now to assist the members.”
The UK government didn’t see it that way and lobbed the problem back at Northern Ireland. Northern Ireland secretary Shaun Woodward explained their position in parliamentary questions on 3 June:
“We appreciate the gravity of the situation, but we equally have to recognise that, under the law, those people who put money into the PMS did so not as savers, but as investors, and that the regulation of this body in Northern Ireland is the responsibility of devolved government in Northern Ireland, not of Whitehall.”
Mark Durkan MP pointed out to the Minister the assertion that most with money entrusted to PMS believed themselves savers NOT investors. Tory MPs Ann Winterton and shadow Northern Ireland secretary, Owen Paterson, said the government was to blame for PMS’s downfall. The blanket deposit guarantee scheme issued on 8 October 2008, excluded the unregulated PMS from its protection. Their savers subsequently rushed to withdraw funds and switch to government guaranteed deposits.
Between 27 October and 17 November 2008, when it went into administration, the Society had withdrawal requests of £50m and only £4m in the bank. The government had bailed out Dunfermline why not this Society the MPs wanted to know?
That was a building society regulated by the FSA and its depositors were savers reiterated Woodward, explaining further that:
“…they made an investment in the form of risk capital in the form of withdrawable shares and loans”.
We might also note that Dunfermline was 10 times the problem, with assets of more than £3bn and that Scotland is not wanting for political influence in Westminster.
Mr Woodward cited the FSA’s judgement on the matter that PMS had been “conducting regulated activities without the necessary authorisation or exemption”. The Minister also alluded to “issues about the regulation of bodies such as the PMS and they will need to be addressed,” perhaps this starts with the question: how did DETI and the FSA miss this unregulated bank?
The findings of the UK Accountancy and Actuarial Discipline Board might make revealing reading when published. They launched an investigation in August to look at the actions of directors and the society’s auditor, Moore Stephens.
Further parliamentary questions to Sinn Fein Deputy Leader Martin McGuiness MP on 9 November suggested an increased likelihood of government assistance. This is envisaged along the lines of solutions provided for Dunfermline and Bradford & Bingley, though care is needed not to fall foul of EU state aid rules.
Some form of white knight bank has been mentioned. An FT report in February suggested RBS subsidiary Ulster Bank as a possible buyer. The Belfast Telegraph reported “three financial institutions have shown an interest” in November with Ulster Bank again in the frame.
Meantime the anniversary of this collapse has recently passed and some savers, who put life savings with PMS, are facing a second Christmas of financial hardship. A “delayed” report on PMS from a Ministerial Working Group set up back on 17 June is due to be presented to Gordon Brown by NI Minister Shaun Woodward “within weeks”.
“They were originally due in September but were then pushed back to October…”
It’s now December and still no report.
Administrator Arthur Boyd, meanwhile, is sitting on its hands awaiting possible government assistance before proceeding to wind up PMS’s assets.
My caller fears political heat cools with distance and their plight needs to resonate more loudly in Westminster. Given an urgent call for action was made six months ago and an overdue report is yet to materialise, it seems a fair point.
Government machinery turns slowly on this one, in contrast to similar such problems of late. Presbytarians reportedly place great importance on education and life-long learning. This unfortunate experience provides plenty of both.
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