Edmund Burke, the 18th Century Irish Member of Parliament, friend and champion of Adam Smith, champion of American Liberty, scourge of the French Revolutionaries, warned against paid MPs. Expenses were a recurring scandal since medieval times: whenever a Parliament was summoned, MPs travelled to London to attend; there were frequent attempts to claim more for journeys and hostelry bills than propriety countenanced. Schemes and machinations abounded. Familiar? Yet at least these MPs were not salaried: they had their own incomes – expenses, being extra, were considered (except by the King) as fair game. Burke’s concern was that salaries for MPs would turn the members of the House of Commons into a professional caste.

The scandals over inflated expenses could, perhaps, have once been regarded as a small price to pay to avoid professional salaries; besides, of course, in those days Parliament only convened when there was business to conduct. The MPs expenses scandal of recent years shows how right Burke was: here were professional MPs, on fairly generous salaries, with expense accounts that allowed them to employ family members as staff – and capable of being stretched to cover all sorts of things not related to their duties.

This corruption must be seen as just one element of the moral corruption of the contemporary political class, as well as a wider corruption of the parliamentary system. For the question needs to be asked: what are professional politicians? Are they persons, scholarly of mind, who are learned in the history of the Common Law Constitution? Far from it; so far indeed that they are not even versed in the legislation that they pass: for example, when Gordon Brown as Chancellor introduced his unnecessarily complex Income Tax return forms, it was found that a sizeable number of MPs did not understand them. They were not, however, thrown back at the government on the grounds that if MPs couldn’t understand them, it was fair to assume that many of their constituents wouldn’t either.

One particularly corrupting influence is the habit of delegated legislation, now so widespread that it could be said that all legislation has become delegated legislation. Delegated legislation entails framing the intentions of an Act of Parliament in obscurely wide-ranging terms and concluding that for all practical outworkings and impositions of the Act, the relevant Minister is empowered, without further consultation with Parliament, to act as he sees fit.
That is, MPs pass the supervisory function over the executive that they are supposed to exercise, straight back to the executive. Presumably so that they can spend more time with their moats, ducks, first class railway tickets and McVitie’s biscuits, while lying to their mortgage providers….

This is not only moral corruption but dereliction of duty, indeed outright subversion of the very functions of a representative parliament. Burke’s prophecy has come to pass: a salariat professing political virtue and competence has become a self-interested cabal whose interests are diametrically opposed to those who elected them. Are these the people to be entrusted with overseeing the wealth of nations?

by Mark Rogers

Not long ago, the Halifax Building Society advertised its services under the banner “the U.K.’s largest mortgage provider”. Which being interpreted means: the British financial institution most exposed to the next collapse of the housing market.
Traditionally, a mortgage is the securing of a loan (which might be less than the value of the asset) against realty: a property with secure title was offered as collateral for debt.

With most people unable to purchase a property outright, a “mortgage loan” is arranged, which is actually the opposite of a mortgage: you choose the house you would like to rent from your bank/building society, which purchases it and rents it to you for a fixed term (typically 25 years in the U.K.). If you maintain the “rental” payments, after the term has elapsed you get to keep the house.

If you do not maintain them, the house is “repossessed” – another odd term, given that you do not possess it, your bank/building society does – and all that money paid over by you has done no more than what an ordinary rent would have achieved, somewhere to live pro tem, rather than an investment and/or a property you can pass on to your children.

At the end of the boom of the mid- to late-1980s, a wave of “repossessions” swept South-east England: young upwardly-mobile traders had bought substantial properties in the Home Counties on mortgages paid out of the commissions they were earning on City of London trading floors.

This was not all: they invested in furnishings and adornments appropriate to their new and their properties’ traditional status. All was lost! Bailiffs repossessed the properties and took possession of antiques, period furniture and antiquarian books and first editions.

A colleague of mine owned a small bookshop in the heart of a traditionally affluent part of west Surrey, a natural place for these traders to gravitate to. Bailiffs knew the value of the furniture they were appropriating: that went into auction. My colleague benefited from their lack of interest in books, and for months at the end of 1989 and well into 1990, estate cars would stop at his shop, packed with books at a tenner a box. Each box contained several valuable books.

A home is not just a house: it is how you decorate it and what you put in it, the sum creating a value you would, presumably, wish to preserve and cash in when the assets have appreciated, and/or pass through your family unto the last generation… So why would one try to do so on a modern mortgage? Especially as if anything is being “mortgaged”, it is your earnings. If your earnings are in an already precarious sector – such as the trading floors, with their complete lack of job security (one reason commissions are so high: compensation for potential instant dismissal) – this only increases the risks of property ownership. The matter is just as serious for the average earner on a wage: there is no guaranteed future in any job.

Of course there is value in realty, but the modern mortgage gets it exactly the wrong way round: your earnings dry up, you lose everything.

So why mortgage your salary?

By Mark Rogers

I am sure it will not come as a shock to learn that there is an on-going investigation into a host of « big banks » who are accused of fixing their inter-bank lending rate (LIBOR) to effectively disguise and downgrade their indebtedness. The period involved reveals this was taking place pre-2008 crisis.

The investigation is well under way and involves the major Financial Service Regulators of the US and UK amongst others.
The scale is breath-taking and the accusations extremely serious as indicated by the issuing of subpoenas to retrieve sensitive documents for the prosecutor’s evidence.

Here are the details as reported by C Powell of GATA following a report in the Financial Times:

Regulators in the United States, Japan, and UK are investigating whether some of the biggest banks conspired to “manipulate” the benchmark interest rate used to calculate the cost of billions of dollars of debt.

The investigation centres on the panel of 16 banks that help the British Bankers’ Association set the London interbank offered rate, or Libor — the estimated cost of borrowing for banks between each other.

In particular, the investigation was looking at how Libor was set for US dollars during 2006 to 2008, immediately before and during the financial crisis, people familiar with the probes said.

The probe came to light on Tuesday when the Swiss bank UBS disclosed in its annual report that it had received subpoenas from three US agencies and an information demand from the Japanese Financial Supervisory Agency.
The bank said the regulators were focusing on “whether there were improper attempts by UBS, either acting on its own or together with others, to manipulate Libor rates at certain times.”
All the panel members are believed to have received at least an informal request for information — an earlier stage in an investigative process before a subpoena.

Witnesses had been interviewed by investigators from the US Securities and Exchange Commission, the Department of Justice, and the UK’s Financial Services Authority, people familiar with the probe said.

The inquiry has been under way for some months. At least one bank received its initial request for information in October, people familiar with the matter said.

The BBA produces Libor rates for 10 currencies using eight to 20 contributor banks. The contributors submit the rates at which they think they could borrow on the open market. Outlying submissions are tossed out and the reported rate is the mean of the middle values.

Critics of the process for setting Libor — which is used as a reference rate for about $350,000 Billion in financial products — have long claimed it is antiquated and lacking in transparency. Commentators complained bitterly during the financial crisis that the rates were distorted because they believed weaker banks were unwilling to admit higher borrowing costs.

UBS declined to comment beyond its disclosure. The regulators declined to comment. The other banks on the panel at the time covered by the probe either declined to comment or spokesmen could not be reached.

They are: Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, HSBC, JPMorgan Chase, Lloyds, Rabobank, Royal Bank of Canada, Bank of Tokyo-Mitsubishi, Norinchukin Bank, Royal Bank of Scotland, and West LB.

HBOS, which has since merged with Lloyds, was also a member.

The BBA said: “We are committed to retaining the reputation and integrity of BBA Libor, which continues to be the authoritative benchmark of the wholesale money market. It has a straightforward and unambiguous calculation method, which excludes any rates which are significant outliers. It is fully transparent — all of the data inputted by the contributor banks is publicly available, as is our methodology.”
(By Brooke Masters, Patrick Jenkins, and Justin Baer , Financial Times)

Banks outside the law?

This type of activity is typical of the banking sector who operate amongst themselves as if they are untouchable and above law and regulation.
They believe in their own importance because of their size and apparent power which disregards national boundaries because of their global clout. They play by their own rules and we know where that leads us.

Even then, when they cause misery, mayhem and crisis for the whole world by their own greedy practices and mistakes they still come begging for more money to play with – and the worse thing is that incompetent governments full of over-educated, posh, millionaires who have absolutely no notion of the real world because of a privileged, sheltered, upbringing give them our taxes. I believe this should also be investigated as it stinks of incestuous, undeclared interests by senators and ministers who post politics suddenly appear on boards of directors doing nothing (consultants) for some enormous salary.

Do you trust your bank?

Do you know what they do with your money?

If there’s another crisis where will your money be?

If your bank gets into trouble will they have enough money to pay back all their customers?

Who do you think they will pay first? You? Yeah right!

If you’re not part of the Politocrat & Banking club you’ve got no chance.

I believe that Bankers should be personally responsible for their actions, decisions, judgements and huge mistakes they make and personally bankrupted to repay some of the missing funds. It should be in their contracts and not some huge retirement pay off for complete incompetence like Fred Goodwin (RBS).

Let’s face it they’re quick enough to give themselves performance related bonuses (when there’s the slightest positive news) so why doesn’t it work both ways? When a bank underperforms they should be responsible and pay for it just as they like to cream off their “rewards” for guessing right.

Stop bailing out incompetence – Let them fail!

I also believe that Banks that get themselves into a mess should get themselves out of it or let them go bust like any other business that fails – after all that’s why we have the word Bankrupt isn’t it?

It is two words combined – Bank & Corrupt! That about explains it!

The increasing problems of disasters and political unrest are putting further strains on all these large institutions that are exceptionally nervous because they know they are exposed and overstretched as pre-2008. Another feature is they never learn by experience!
In 2011 we will witness an economic crisis on a scale not yet seen.

The foundations of Countries economic policies and Financial Institutions “Good Practice” have not been prepared for the shock that is gathering strength and they will not withstand the shock and its magnitude.

Can you afford for them to go down with all your savings?

Should you wait until it starts and it’s on the Tele before you do something?

Should you buy fire insurance before or after a fire?
Act now and preserve some of your wealth by investing in tangible assets that will survive a crisis.

Act now to put your money into something that you own, that is not linked to a failing or devalued currency that will be a means of survival when you need it most.

Put your wealth into gold which has been the universal “currency” throughout history.

Don’t invest in “paper promises”.

Get Physical!

Own gold and gold coins.

People survived wars, crises, recession and depression because they owned Gold.

People also perished – because they didn’t!

What would you rather do? Survive or Perish?

Make your choice!

We need to go that way to avoid the rocks

The European Union is facing an economic and political crisis that threatens the single currency, exposes greed, bureaucratic strangulation, unsustainable social welfare programmes, raises questions on protectionism and the very fabric of the free market. If that was not enough, the weakness of its leaders becomes apparent and two of the giants France and Germany support a different solution. There is a very English phrase “ to muddle through” and that is what European leaders have been doing and hope they can continue doing so as not to put emphasis on radical change that can upset the apple cart either internally or externally. Muddling through depends on growth.

The European Union is still the world’s largest economy supporting over 500 million people of diverse race, cultures and languages. However, the EU is facing both an economic and a political crisis as governments and companies cannot easily borrow money and the euro wobbles. Initially the weakness of the euro was shrugged off as speculation and Anglo-Saxon conspiracy, but the real problem is that social welfare in many countries is so protected and expensive that it is strangling the economies. Europe has to grow just to maintain its welfare systems and innovation just to pay for increasing old age pensions and unemployment is not inspirational. Of the 27 countries in the EU only Poland managed positive growth in 2009, while it is true that recently many have now turned positive, but it can only be described as mediocre. Outside of Europe the perception is that the protectionist policies for citizen welfare indicate that there is no longer the guts to tackle the problems. A sick Europe benefits nobody and arguably, were it healthy, then the worst of the global crisis would be over.

It is the courage of Europe’s leaders to initiate structural reform that comes into question. As Jean-Claude Juncker, prime minister of Luxembourg, said memorably in 2007-  “We all know what to do, but we don’t know how to get re-elected once we have done it.”  Many of Europe’s problems stem from election seeking misallocation of public spending with years of subsidizing powerful interest groups, increasing civil service payrolls, early retirement schemes, job protection and unemployment benefits. Between 2005 and 2030 the working-age population of the European Union will shrink by 20m, and the number of those over 65 will increase by 40m. In Belgium only 35% of citizens over the age of 55 work. It is almost impossible to sack a person in Spain, great for those in work but for the 40% youth unemployment that it generates, it is immoral.   European leaders underestimate the realism of the voters and proposals in the UK and Netherland to raise the retirement age to as high as 70 have met with moans but no angry protest.  In France, according to an opinion poll proposals to increase the retirement age were unjust and did produce the usual French protest, few disagree that the current state pension scheme faces insolvency.

The single market does not truly exist and the EU is almost a third less productive than its American counter parts in services, because countries hide behind national barriers and so do not gain full economies of scale. Anyone who has worked in a multi national industry knows how difficult it is to get policies implemented, products introduced or to comply with a European directive that has been interpreted 27 different ways into national law. No company with any sense would open a factory or an office in France, Italy and some other EU countries, where protectionist employment laws could kill that company. I personally know of a case where a multi national company was trying to tighten its purse strings to remain solvent and Italian law forced that company to increase the salary of Italian employees and maintain periodic pay rises. In desperate times protectionism has raised its head. In France with Mr. Sakozy suggesting that French cars for French drivers should not be made in former Eastern bloc countries and the EC had to intervene to stop Germany offering incentives to a consortium proposing to buy the failing Opel company, to keep the German factories open to the detriment of more cost effective plants elsewhere.

This crisis has the ability to pull countries closer together or pull them further The key is Germany where they are furious that they have to bail out other countries until they realize that they created the situation in the first place. Germany companies have done very well and the economy has grown with exports particularly to Greece where they have risen by 130% in the last 10 years. So how did Greece pay for these exports. with loans from German banks. Therefore, it is essential that they and the French to a lesser extent rally around the single currency as they are sat on a large amount of southern Europe sovereign debt. That has been the pattern the industrious north has done well but those around the Mediterranean have been affected by the sun leaving the idyllic life but unable to pay for it. Great for a holiday but not for life, in fact Greece has become the most obese in Europe where once they had one of the healthiest diets.

The alternative approach is to a number of separatist theories with retraction from the Euro or a North South divide where the super efficient North have a strong euro and the languid south another. Which would France join?

Practically what can EU leaders do and which direction can they take and what have they done so far?  To date there have been last gasp austerity measures that may well in the short term pacify the bond market but is a risky course of action. These measures will inevitably lead to a weakening growth rate and increased unemployment. The same arguments were the difference between Labour and the coalition in how to solve the UK’s financial problems where at least there is time as the UK’s debt has the longest due date of all in Europe. Now Spain, Greece and Portugal face a log hard struggle to rebalance their economies

Markets have lost faith in the euro and the hope was that the economies of the 16 countries that use the euro would converge. The struggle to regain creditability with markets has lead to a divergence on the course to be taken by Germany and France. Germany has gone for stricter rules and discipline on borrowing and spending, sanctioning governments who fail to toe the line to the extent of freezing funds for EU mega projects and suspension of voting rights. The French favour a system of redistribution from richer to poorer members with some fiscal and social harmonization.

Germany’s proposals are unworkable, the reaction to losing voting rights is unacceptable particularly to the former communist countries where there has been such hard work to lead to democracy. Stopping funding on EU mega products where they cross boarders could penalize other countries. To redistribute, as the French recommend, to save the euro would require an equally unacceptable step towards political union.

What is the likely outcome?. It is likely to be a  form of compromise with temporary rescue packages, informal and semi formal discussions and agreements – in other words a muddle through.

It is possible for the EU to agree and force through essential legislation when it is a matter of survival. A key demand to European business is an EU wide patent that has been stuck for years over the status given languages in Spain and Italy. On 1^st July the EC forced this through to be valid in all 27 countries. Another example of the power of the EU market is where Germany was told it could not spend taxpayer’s money to protect Opel jobs in Germany without the same support to other countries. It is possible that the people understand the need for a free market economy better than their leaders where in a recent pole 73% of Germans and 67% of French said they were better off in a free market. Interestingly a greater percentage than in the middle of the boom and greater than America. We have already mentioned the need to pay for pensions and the less than feared reaction to raising the pension age. In the countries brought to the brink of disaster, the civil unrest was much less than expected and dominated by public sector workers with safe jobs. The leaders should have courage as this crisis gives the excuses for radical reform and there are hints that citizens are prepared to take there medicine.

However, the best bet would be a muddle through and hope for the growth that is needed to sustain it. An opportunity lost.

Maurice Hall

Originally the regulators, the Committee of European Banking Supervisors (CEBS), were only to look at the biggest European banks but they expanded the list to include 91, after there were some worries over some medium sized banks.  Collectively these 91 banks represent 65% of the European banking sector and the number and size of banks vary from country to country but must be at least 50% of each countries banking sector.

The failure rate was lower than expect as many experts predicted that as many as 12 would fail. Of the seven that failed 5 were from Spain (Diada, Espiga, Bianca Civica,Unnim and Cajasur, one from Germany (Hypo Real Estate) and one from Greece (ATEBank).

By conducting these tests it was hoped that international confidence would be restored to help finance economic recovery and to overcome the worry that European banks were either not strong enough to withstand a double dip recession or have large exposure to countries that might default on their debts. Also to identify any vulnerable bank so steps can be take to strengthen them. The aim is to continually test out the resilience of banks in the EU periodically and undertake a continuing program of improvement.

The banks were tested in scenarios where different assets might fall significantly in value, such as the collapse of a property market and if this resulted in losses so great that the banks capital was wiped out, then insolvency would result. E.g. if a loan cannot be recovered the bank writes down its capital by the amount of the loss and the investors take that loss and if the banks assets cannot repay all of its borrowings then insolvency follows.

The banks that failed will have to agree a plan over given time period to resolve their shortcomings.  The five Spanish banks to fail were regional savings banks with heavy losses due the downturn in the Spanish property market, but savings banks have been undertaking a restructuring process by the Bank of Spain so the overall picture in Spain is was considered sound.

The British Bankers Association said that work had already been  put in to strengthen UK banks and the four major UK banks RBS, Lloyds, HSBC and Barclays exceeded the standards set.  Also tested and passed was the Spanish giant Santander who own Abbey, Bradford and Bingley and the Alliance & Leicester in the UK, as was the Bank of Ireland who provide the banking services for the UK Post Office.

There are market concerns as although the EU set the parameters for these tests, they were conducted by national regulators who may have been lenient on their own banks. The test is against a ratio of tier one capital (capital of the highest quality) which is a core measure of the banks financial strength and a measure of insurance against loss. The trouble is that some of the forms of capital used in the test proved useless against losses in the recent crisis, thus the measure is more favourable to the bank. This pales into insignificance against the real problem with these tests and that is there is no test against sovereign debt, which is what brought us to crisis with Greece on the verge of bankruptcy.  So this appears to be more of a political exercise, as the EU will not even contemplate that a country within it, would default on its debt

However, the test that confidence has returned will be if today, the interbank lending market makes it easier for banks to borrow.

Read full report and results

Maurice Hall

During World War II the British sovereign was the only tangible and reliable currency in Greece and they were hoarded and hidden in every conceivable place. A girls dowry would often include a cache of sovereigns.  They were parachuted in to fund the Greek resistance to the German occupation. War is a crisis but now the Greek population face the crisis of being unable to repay its debts and once again they turn to the sovereign as the currency of choice.

It is remarkable and a tribute to the sovereign that it remained legal currency long after the war due to the unstable drachma until eventually in 1965  the Greek government placed restrictions on trading resulting in many hoarders cashing in their stocks. Even so at the slightest hint of uncertainty, and there have been many, the Greeks turned to their favourite foreign gold coin.

Greece has not really had a true period of financial stability for decades and markets are wondering whether they will default on repaying their debt given past behaviour  so the uncertainties  are understandable. The population is in panic resorting to strikes and riots and fear that Greece may leave the eurozone.

Once again  have returned to their known safe haven, the sovereign, as a hedge against financial collapse causing the the demand to increase year on year and the price to rise dramatically. For weeks citizens have been queueing at Athens central bank to buy sovereigns and have been prepared to pay the highest prices. It is estimated that in the first 4 months of the year 50,000 sovereigns were sold legally and as the demand increased so did the black market  and at least 100,000 were sold illegally with price up to €300 (£252).  The uncertainty and fear has driven people to pay a huge premium of almost 40% over the current value of the gold content to protect their wealth.

Without doubt the British sovereign has been the gold coin that has world wide recognition as mechanism for survival  whether it be a financial or physical crisis – see our article “Gold sovereigns open doors”

Maurice Hall

There are two camps of how to return the UK economy to growth and reduces our heavy debt, spend and cut or simply cut. What ever your personal view the new coalition government has decided that we will swallow the austerity pill with drastic cuts.  This has gone down well and the pound is at its strongest against the euro since November 2008 and the euro itself strengthened after the European central Bank has tightened monetary conditions.

We have seen a pull back in the gold price, but is this down to austerity which is the new buzz word in the UK and Europe. So as we start to live within our means does that mean that the need for gold as an insurance is weakened ?. We are rightly entangled in European economics as this is what affects our daily lives, but we found in 2008 that greed and subsequent collapse in America created an economic crisis in Europe, the worse since 1929 and the great depression. We are still feeling the affects and the steps taken to pump the economy lead to unprecedented sovereign debts and the collapse of economies in southern Europe. However, gold is intrinsically linked to the dollar so nothing has changed as the US try and spend there way out of the downturn, print more money to devalue the currency and have huge sovereign debt.

In the UK with CPI above 3% and more significantly the RPI above 5% it is virtually impossible after taxation  to get a ROI that does not lose money over the year. So that combined with economic fragility that could still lead to contagion means the case for gold is still strong.

What we are seeing is the seasonal adjustment that has been running for the last 40 years.  Gold has followed both seasonal and super cycles for decades and we are in the summer adjustment as predicted by my article on this blog in March (When is a good time to buy gold ?). However, gold has been stronger than my prediction by more than $100 per ounce, driven by more exposure to the fragility of world economies and unprecedented demand.  In fact we reached the end of year high I predicted before going into the summer recess so I would expect the price to now rise in Q4 to beyond $1300.  Traditionally investors who bought in summer made money by selling in Q4 a simple short term gain that has been repeated time and again.  Look also to the supercycle where the cycle and the seasonality meet in Q4 2011 and expect at least $1500 per ounce for the longer term investment.

The case for gold has not weakened and now is the time to buy gold the bull has a long way to run. Think also about ROI as gold and particularly legal tender gold coins (sovereigns and Britannias) stand out as a way to beat inflation and taxation. We have the best conditions in the UK for investing in gold coins no VAT or TAX applied.

Maurice Hall

In June our sister site (L’Or et l’Argent) has run a series of articles that follow the theme of a “house of cards” starting with Greece whose only resources, tourism and olive oil are not enough to lift them out of bankruptcy and a similar situation in Portugal. The next contagion is Spain, an economic giant in comparison, where unemployment is rife and debt would reach €225 billion in 2010. Although Spanish debt continues to grow, it remains lower than France which is the largest in the euro zone. Outside of the Euro Great Britain is cited as a contender for a “house of cards” following austerity measures announced at the budget and the marginalisation  of the GBP as we through national pride refused to join the eurozone.

This is an interesting take from a European prospective and draws attention to the two trains of thought in economic growth. The 2008 economic crisis still affects us today, we in the UK and most of the western world are in an era of fragility that needs to be stabilised. We could attempt to spend your way out of it as and stabilise growth before taking cost cutting measures as was the policy of the labour party or cut back immediately and risk stifling any growth. Meanwhile across the Atlantic Barack Obama seems to believe that the US can just spend their way out of it and print more dollars.

To me, if likened to a house hold, first you must recognise your debt and here in the UK we have gigantic debts to overcome, then you must take action. Spending on plastic has its day of reckoning and eventual you must cut your card in half, review expenditure and come up with a budget  that enables you to pay essential bills  and gradually repay your excesses with money saved. The economy of the country is no different, to improve your credit rating you cut wasteful spending, improve efficiency and live within means to gradually ease the sovereign debt. Austerity measures in the UK seems to have won respect in world markets as GBP has risen both against the Euro and the USD and the FTSE 100 has recovered to over 5100. More importantly the economy has grown marginally in the manufacturing section.

I have to say I have been pro Euro particularly when we could have joined in a position of strength but now I am in many ways glad we are still separate. Despite the Euro’s recent rally there is too much of a divide between the countries in the Euro zone, the efficient North and the chaotic South to the extent that the Germans would like to get out of the Euro as they feel they do not want to support the fragility of countries in crisis such as Greece, Spain, Portugal, Italy.

Do not the French and other eurozone countries recognize that the cost of pensions will drive many countries to bankruptcy. When many Europeans look at the UK, they scoff particularly at the raising of the pension age that is likely to reach 70 over a period of time.  There average ages of retirement age varies but in most countries people retire in their fifties and in Italy and France only 12%  are working beyond 60 years old.

Citizens should realise that there is a pensions time bomb with the average continental EU state pension equating to almost 60% of salary and with a much longer period of retirement, governments cannot afford it and it will drive many countries to bankruptcy.  A recent survey of 25 countries scored the UK highly and the affordability and sustainability of our pensions and France at the bottom. Those countries with such generous pensions and early retirement ages simply can no longer afford them and it will drive them to ruin. There needs to be a massive reformation, not only to increase working age  but to reduce the actual value, which would be so unpopular that one wonders if the their governments have the guts to take the action necessary.

In another time we should be screaming at our government at the unfairness of our pensions which are the lowest in Europe but with the aging population, the ratio of workers to pensions set to double and the current crisis we are in a stronger position to survive than our neighbours. Meanwhile proposals to raise the retirement age in France have typically been met with mass protests for what is a diminutive step to fight debt.

I am not suggesting by any means that there is reason for complacency in the UK situation and there is still danger of stalling economic growth as the cuts bite deeper but at least we have recognised the seriousness of sovereign debt while other bury their heads in the sand.

In the fragile countries of the eurozone, where sovereign debt could precipitate a financial collapse and even  in countries that fear the contagion, people are turning to gold as a protection and nowhere more so than in the strongest economy, Germany, where there is unprecedented investment in gold. In Britain we do not have a history with private individuals turning to  gold but rather we might buy a gold coin for commemorative purposes.  We are fortunate that we have so far not suffered hyper inflation, major currency devaluation or physical invasion so we do not hoard gold or in general even understand how gold can protect family wealth even though we have some of the best conditions in the world for gold investment. No VAT, no Capital Gains Tax on legal tender gold coins and up to 40% tax relief if we use gold within a Self Investment Pension Plan (SIPP). We need to save more to pay for our retirement and make wise investments, diversify our portfolios, utilise SIPPs and last but not least be aware of the potential of gold to protect our wealth.

Maurice Hall

I was listening to a programme on BBC Radio which is always an informative station and my ears pricked up on a discussion on the 2009 Bordeaux vintage which is reputed to be the best in 60 years.  I like wine very much but the grand Grands Crus of Bordeaux which have long catered for the discerning tastes of the elite in the western world are beyond my means. However, I thought it would be an interesting to understand why the wines are so great and if I had a rush of blood to the head and splashed out, what would be the best value for money. To my surprise there was little in the way of comparison of the various producers but a great deal on the destination of the very best of French wine

From the baroque tasting room of Chateau Mouton Rothschild, to the grand hall of the Union des Grands Crus, Chinese delegations declared their intent to siphon off huge quantities of first growths, the very best wines.  The price of the first growths are likely to cost £4000 per 12 bottle case and even as high as £1000 per bottle.  According to the Chinese importers money does not seem to be a problem and Lafite-Rothschild is said to be the tipple of choice for the Chinese industrialist.  Private companies are soaring and property values are rising fast so people have a lot of money.

You may wonder why I am writing about wine on a blog whose main interest is gold. Whilst critics were in raptures with the top wines from Haut-Brion, Margaux and Latour it seems to matter little to the Chinese consumer who are reported to glug their wine or dilute even the most expensive bottles with lemonade. The reason is one of economics, no longer do these famous vintages end up in the cellars of the rich in the western world and particularly recession hit America; but they have become prestigious gifts amongst Chinese business people.

Throughout history, all great powers have their day Egyptian, Greek, Roman. More recently countries such as Spain, France, and Great Britain all had periods of unrivalled power. Today, the United States still reigns as the world’s sole superpower but it is on the brink and is being credibly challenged by rising powers in Asia, India and more importantly China who have designs on world financial dominance. It is a process that will have huge implications for investors over the coming years. It is no surprise India is the greatest consumer of gold and China the largest producer.

The balance of power is swinging eastwards. First the West exported industrial plant to Asia leading to investment in technology in the East which coupled with a cheap workforce produced a number of startups. Their cost effectiveness captured markets normally supplied from the West and eventually western domestic markets were flooded by cheaper imports leading to a decline in the manufacturing base and vast trade deficits. Now we find our selves in a situation where we are even being financed by the East. Iconic UK brands MG and Jaguar are Chinese owned and the new Californian bullet train was not only funded by money borrowed from China but built by a Chinese company.

Sovereign debt is threatening the fabric of western society and dragging down our currencies. It reminiscent of the 1930s as austerity measures have been running in Ireland fore some time, problems in Greece and Spain have lead to strikes and a general strike is threatened in Italy. Portugal is in the same mould as Spain and Italy, later additions to the EU from former Eastern Europe are in great difficulty particularly Hungary, France has to tighten its belt and Germany is in a domestic struggle over the Euro. Outside the Euro zone, the UK debt is of a greater GDP of all but Spain and its only because our repayment has a longer time span that we are not in quite the same mess as Greece. If the June budget does not show sufficient promise to bring down our deficit our triple –A rating maybe under threat.

So how does the American superpower stand?. The economy is the country’s top concern, with persistently high unemployment the greatest threat the public sees. Eight of 10 Americans rate joblessness a high risk to the economy in the next two years, outranking the federal budget deficit, which is cited by 7 of 10. An increase in taxes is named as a high risk by almost 6 of 10. Fewer than 1 in 3 Americans think the economy will improve in the next six months….Only 32 percent of poll respondents believe the country is headed in the right direction, down from 40 percent who said so in September.” (Bloomberg).

The U.S. debt will top $13.6 trillion this year and climb to an estimated $19.6 trillion by 2015, according to a Treasury Department report to Congress. ( Reuter 8^th June). Economic contraction will continue with record numbers of foreclosures, personal bankruptcies, the highest rate of unemployment with millions more jobs to be lost as purse strings tighten.

Going back to the origination of this theme if Chinese businessmen can afford to mix lemonade with £1000 bottles of Bordeaux to impress friends and associates then there truly has been a swing to the East and that is where the demand for Gold will be driven. Currently the USD is the reserve currency but as power is being challenged so is the dollar as  both Russia and China are pushing for alternatives where gold may play a part.

Read the china Gold Report on this blog

Maurice Hall

Grading is probably the most controversial and by far the most important area of coin collecting and there are almost no grading guides for world coins. Grading issues have caused disputes between buyers and sellers since collecting begun and will continue to do so for ever more. Grading coins accurately is a skill acquired in time and after looking at many similar/identical coins in all ranges of condition. Many coins fall in between grades, and so terms such as ‘nearly VF’, ‘good VF’, ‘gem BU’ are encountered. The numerical system (1 -70) popular in the USA is not common in Europe but it does allow greater flexibility within key grades. We should bear in mind that their grading system is more generous than that of the UK. E.g. the lower ranges of Almost Uncirculated ( AU50 – 57) allows for some wear which is not acceptable in the UK, so care is needed. There are also differences between European countries where FDC (Fleur De Coin) is used to describe an uncirculated coin but in the UK, FDC is a perfect coin that could only be attributed to the best of proofs and is equivalent to the to the top number on the American system (MS70) and is rarely found

We are not numismatists and our concern is only with gold and silver coins as an investment so the grade is not as critical as it is for a collector of rare coins. Nevertheless the condition of a coin is important and numismatists agree that in most cases the condition of the coin is more important than its rarity.

There are key grades and grades between these grades so it is often easier to start with buckets, Circulated, Almost Uncirculated and Uncirculated.

The coin should be graded on its weakest side, look for overall wear and loss of design detail such as strands of hair, feathers or coats of arms.  Detecting wear can be made more difficult where relief is low particularly applicable to coins of Edward VII and George V

Some tips for sovereigns

The majority of Sovereigns since 1820 contain Benedetto  Pistrucci’s fantastic engraving of St. George slaying the dragon and there are some high points that can indicate wear.  Look at the helmet above the eye this is the first place wear occurs, the strap across St George’s chest, the fingers on the hand, signs of wear on the reins, relief of the sword against the flank. This reverse covered a number of monarchs on the obverse. In general look for detail of the ears on males and hair on females.

Look at the example below of a 1918 Halfcrown. With examination under magnification the slightest rubbing can be seen on the ear, cheek and moustache. A very nice coin but not Uncirculated

1918 Halfcrown AU (About Uncirculated) American AU58-59

KEY GRADES

I have listed the Key grades below with some sample coins of various denominations to give an idea of grading but please remember this is subjective and maybe variable in the eyes of the expert who would examine with magnification.

Poor: A very worn coin but better than a smooth disc. Inscriptions worn off, date illegible, only outline of design visible. Such coins are generally of no value to a collector.

Fair: A heavily worn coin but date and denomination legible, type recognisable. Very little detail visible , worth no more than the metal value

Penny Fair American F2

Good (G): (sometimes Mediocre) Inscriptions and date considerably worn but legible. Generally worth no more than the metal value

Very Good (VG): Considerable wear over the whole coin, and high spots worn through. Coins in this or the previous grades are really only collectable if extremely rare and generally worth no more than the metal value

Fine (F): Worn over whole area, but only the highest spots are worn completely through. Some of the hair volume should be visable but not individual strands (US Grade about VF)

Farthing F (Fine) American F12-14

Very Fine (VF): Detail clear, but obvious evidence of limited circulation. High spots worn but detail remains. More hair detail is evident and also detail of other designs. Traces of mint lustre may linger amongst the letters of the inscription. (US Grade about XF)

Sixpence VF (Very Fine) American VF25-30

Extremely Fine (EF): A coin with little sign of being circulated. Slight wear on high spots on close inspection, and all other detail clear and sharp with minimal scratches and marks. Much mint lustre may remain. (US Grade about AU)

Half Penny EF(Extremly Fine) American XF40 - 44

Almost Uncirculated (AU): Not quite in Uncirculated condition could be down graded because of heavy bag marks, edge knocks or other undesirable feature but without the slight wear that determine it to be EF, would usually contain more than half of its mint luster.

Florin gEF (Good Extremly Fine) American AU About Uncirculated AU55

Uncirculated (UNC): No wear, although it is possible for the design not to be fully struck up in the minting process. Not perfect as there may be bag abrasions and knocks through mass production. The coin should have most of its mint luster present. Older coins may be tarnished or toned.

Shilling UNC ( Uncirculated) American MS60-62

Brilliant Uncirculated (BU): There will be no visible signs of wear or handling and ideally no bag marks.  Usually implies full mint lustre, in other words no toning or tarnish.

Half Penny BU (Brilliant Uncirculated) American MS67-69

FDC: (Fleur de Coin) Perfect mint state, with no abrasions or marks, and full lustre. Usually applied to proof coins only, as coins intended for circulation are in contact with others during production.

Penny FDC (Fleur De Coin) American MS70

Proof: Not a condition, but the coin has been struck using specially prepared dies and polished blanks, and the minting process has been carried out usually twice with extra pressure to ensure the die is filled. A characteristic of proof coins is that they have very sharp edges because of the high pressures used to ensure that the metal flows into all details of the design.

All the above photographs are by courtesy of Wybrit British Coins

The table below attempts to show in detail the Key Grades in bold and grades in between

Maurice Hall

People are questioning whether the bull  run on gold over the last decade reached its climax with the December 2009 high of $1227 and we are on a downward slope. Let’s compare the conditions in 1980 with today and we will find that they are quite different.

1980

In 1971, the United States suspended the free exchange of U.S. gold for foreign-held dollars, then in 1974 lifted its four-decade ban on the private purchase of gold. At that time, gold bullion was being traded in European markets at highs approaching $200 an ounce. In 1975, the U.S. government began to sell some of its holdings on the open market and in 1978, along with most other nations, officially abandoned the gold standard. After being released from government control, the price of gold soared and touched $850 in January 1980.  In the three years before 1980 gold price grew eightfold  as the result of mainly fear but also greed

In Dec 2009 the gold price soared to $1227 per ounce. So was this the zenith and comparable to the 1980 high? Was this the end of the bull market that was running for almost a decade?.

There are many differences between 1980 and today not least of which the world is not the same following the most significant financial crisis since the great depression of the 1930’s, global warming threatening our existence and the economic balance between East and West swinging to the East. In 1980 the cold war still raged, the Berlin wall separated East and West Germany, and Eastern Europe was in soviet control, the Russian bear was feared. We must also remember that gold in real terms is trading at only half of the high reached in 1980 as the $850 to day equates to approximately $2200 when inflation is applied.

Political Fear – The Soviets had  signed a “bilateral treaty of cooperation” with Afghanistan in 1978, but by the next year relations had deteriorated and  the Soviet Invasion of Afganistan, which began around Christmas 1979, was a terrible global shock., Russian forces seized all major governmental, military and media buildings in Kabul, including their primary target – the Tajbeg Presidential Palace, where they killed President Hafizullah Amin and announced on Radio that Afghanistan had been liberated

It was a slap in the face to a cold war America.

At the same time the Russians were building up their strength  in southern Yemen close to Saudi Arabia and the oil fields. Also in Bulgaria’s border with Yugoslavia, a liberal communist country, whose 87 year old president Tito solely responsible for binding the  Serbs, Croatians and Muslims together since the end of WWII was very ill.

Iranian fundamentalists took over the US embassy in Tehran in November 1979 anther slap for America.  Ayatollah Khomeni became supreme leader in December and relations ships with Sadam Hussein’s Iraq were at an all time low eventually leading to the Iran –Iraq war.

Economic Fear – The 70’s were a period where inflation was spiraling out of control, stagflation unemployment, oil embargoes and subsequent spike in oil prices spread gloom and despair.  In 1979 inflation in the US was at 12% and was in double figures in most western countries  In the UK the winter of 1978-9 was known as the “winter of discontent” and during 1979 nearly 30 million working days were lost due to strikes.  Debt in the USA had risen to almost $1 trillion and the dollar was weak.

Another catalyst that shook the markets was Bunker Hunt’s run on silver. Hunt, an oil billionaire, his brother and friends by October 1979 had bought up all the silver paper propositions to the tune of 192 million ounces.  In early January 1980 , it became evident that COMEX intended to change the rules to only allow 10 million/oz of contracts per trader and that all contracts over that amount must be liquidated before February 18th. Of course, the CFTC promptly backed up the ruling. The escape hatch for the Hunts and some of the other large longs was simply to convert their futures contracts into physicals, On January 17th silver hit $50/oz, Bunker had continued to buy. At that point in time the Hunt’s silver position was worth $4.5 billion dollars. This caused chaos as there was no silver to be had to supply and the Hunts were driven to ruin.

Oil revenue to Gold – The rapid rise in oil price produced a sudden surge of wealth in  Saudi Arabia and the Gulf States  and enormous sums were diverted into gold. This was further accelerated by the fall of the Shah which exposed vulnerability of people in power in the Middle East and led them to protect their positions. It was common for Saudi dealers to bid for 50-100,000 ounce in a morning and one bank was asked to buy 300,000 ounces for a single client.  Speculators also used the opportunity to dupe the market to increase the price of gold by bidding for huge sums  through a Gulf bank giving the impression that Arabs were pouring money into gold, a story carried by media for some time.

Greed – Of course speculation reached the phase of public awareness which is always the last phase close to the peak just before the decent.

The world was in turmoil and inflation was out of control so everyone was scared. When people are scared fiat currency is not enough. They return to traditions going back to the beginning of civilization to secure wealth in physical gold that gives portability and liquidity. During times of crisis and fear gold rises and individual governments can’t stop it; but in peaceful times governments are able to maintain control. The future of the American economy and American power did not feel at all certain. As a safe haven in times of panic and strife, gold simply reflected that fear. As soon as the emotion subdued and rationality returned  the buying panic quickly subsided and turned to selling phase taking down the price.

The Fall – Prices will rise as supply cannot meet demand but in 1980  when the price touched $850 all over the world people began dishoarding their coins and  old jewellery in an unprecedented scale to the extent that dealers were running out of money to pay for the re cycled gold and Refinieries  had more than enough scrap gold. Thus supply quickly out grew demand.

In early 1980, Paul Volcker’s (Fed Chairman) new Fed policy began to bite. U.S. interest rates began to skyrocket. As they rose, the Dollar first slowed its descent, then stopped falling, and then began to rise. Both the public and the investment community which had stampeded into Gold was lured back into paper by this huge rise in interest rates – and by the prospect of a higher U.S. Dollar. The threat of financial meltdown was averted. There was a rush out of Gold and back to Dollars. The Dow was already rising in 1979 and really took off in 1982.

The gold price dropped off dramatically after its January 1980 high in short because people lost their fear as inflation the bane of the 1970s was finally coming under control, interest rates and the stock markets rose making other investments more attractive. Supply was greater than demand and the Middle abruptly exited the gold market.

2010

The financial crisis that rose its ugly head in 2008 and continued through 2009 is comparable to the fear generated in 1979-80 and was one of the reasons for the rise in gold as people sought a safe haven. The dollar has been weak, a norm for a corresponding high gold price and this was catalyzed by India buying 200 tonnes from the IMF to drive the price to the December high.

The Future – The difference between 1980 and today is that in 1980 we were exiting a terrible decade and the future looked bright economically. Today the future is far from bright and whilst we have managed the worst financial crisis since the depression and are even complacent; but the truth is we are not out of the crisis. The economy is recovering slowly and is still very volatile and in the UK we have £1.4 trillion in sovereign debt to face. According to the IMF spiralling sovereign debt in Europe, the US, and Japan has emerged as the top threat to the world economy and risks setting off a fresh financial storm. The eurozone is heading for one per cent growth this year, limping out of recession under the threat of a sovereign debt crisis. The main risk is that, if unchecked, market concerns about sovereign liquidity and solvency in Greece could turn into a full-blown sovereign debt crisis, leading to some contagion. The economies of Ireland, Spain and Portugal will shrink. The US’s ratio of total debt to GDP is likely to exceed 90% this year, making it more indebted even than Spain and Portugal. It is similar to Weimar Germany but for different reasons and has printed trillions of dollars of fiat currency which will eventually lead to debasement. The dollar is weak and is likely to get weaker. The Chinese Yuan is undervalued but it is not in China and the worlds interest to drop the dollar just yet but the time will come and dollar will fall. The Chinese are on the unmistakable path towards challenging the dollar and the ultimate aim is financial supremacy The dollar’s status as the worlds reserve currency is under threat and both Russia and China are pushing or an alternative in which gold must surely take a part.

Today we have a world of low interest rates where it is almost impossible to obtain an interest rate that does not lose on the capital invested each year when taking into account inflation and tax. With the right gold product tax on profit can be eliminated.

In 1980 Central banks were auctioning off gold, today central banks are turning to gold as many countries increase their gold reserves. Last year India bought 200 tonnes from the IMF to meet its international commitments. China has increased its reserves to 1054 tonnes and announced its intent to continue buying.

India is currently the largest consumer, China the largest producer and second largest consumer and Russia were not players in 1980 and it is these countries where the demand is currently driven. China is consuming all it can produce and quietly everything it can buy with out upsetting the price.

Public Awareness – In 1980 public awareness led to speculation and to frantic selling of gold, de hoarding which was contributory to the drop in price as the amount of scrap gold created an over supply. Today you can hardly open a newspaper or watch television without seeing an advert to persuade you to sell your old gold. This is the reverse of 1980 as the refineries need the re cycled gold to ease the demand. Also investment has not yet reached the public awareness stage. From the chart below  you will see that there is no slide just a correction which is normal

In conclusion gold is still a safe hedge, the world is uncertain with threats of sovereign debt, inflation and the weakening of the dollar. Gold is finite all the gold ever produced would fit into a 20 metre cube. As mining becomes more difficult production costs are rising to almost $800. The demand from the East cannot be met so demand is greater than supply and there will be more pressure on supply as the gold fields dry up. I have seen an analogy where more gold can be extracted per ton by harvesting old mobile phones than the majority of modern mines. Were are currently in a period of correction fed by a certain amount of complacency but trends indicate that we should see a breakthrough of $1300 by Q4 2011.

Maurice Hall

The half sovereign is a British gold coin with a face value half that of a sovereign: equivalent to half a pound sterling, ten shillings, or 120 old pence. Since the end of the gold standard until 2000, with the exception of 1982, it has been issued only in limited quantities as a commemorative coin with a sale price and resale value far in excess of its face value.

The half sovereign was first introduced in 1544 under Henry VIII. After 1604, the issue of half sovereigns, along with gold sovereigns, was discontinued until 1817, following a major revision of British coinage. Production continued until 1926 and in Australia’s Perth mint until 1933 and, apart from special issues for coronation years, was not restarted until 1982 and then only as a proof issue

During Victorian times the half sovereign was more widely circulated than the full sovereign. The average life of both a sovereign and the half sovereign was around 15 years before it fell below the lowest legal weight. It is estimated that only 1% of all gold sovereigns that have ever been minted are still in collectable condition In 1891 a proclamation was made that members of the general public could hand in any gold coins that were underweight and have them replaced by full weight coins. Any gold coin struck before 1837 also ceased to be legal tender. This recycled gold was subsequently reminted into 13,680,486 half sovereigns in 1892 and 10,846,741 sovereigns in 1900.

In 1982 2.5 million coins were issued and mostly throughout history the design has followed the full sovereign with the reverse side, featuring the famous and beautiful St. George slaying a dragon designed by Benedetto Pistrucci, whose initials appear to the right of the date. There were variations on the reverse with royal shield and the simplified George and dragon. There were only proof issue until 2000 when bullion production commenced.

1989 marked the 500 year anniversary of the first gold half sovereign ever issued, for Henry VII in 1489. The entire design, including the lettering, in a style inspired by the original 1489 sovereigns. The obverse design is Her Majesty, Queen Elizabeth II, seated enthroned, facing forwards and the reverse a crowned shield at the centre of a Tudor rose. Again this design, and the lettering, are in a style similar to that on the very first gold sovereign issues. A total of 23,471 coins were produced in individual and coin sets. This proof issue and a single date issue makes it doubly attractive to collectors  thus  it attracts a high premium.

There is good availability of the half sovereign with some rare issues and they are popular as a first entry into gold coins or to purchase as memento. Because they are quite small many half sovereigns have been mounted in jewllery either as rings or pendants. In general you would expect to extra premium on the half sovereign as is the norm with most small coins and on occasions that is true. The average over the last month was 7.5%  but here are also some huge spikes in the premium differential such as in October 2009 where the premium was over 90% so it is a coin that needs to be watched carefully. Of course as the half sovereign is a gold coin of  legal tender it is not subject to VAT or Capital Gains Tax

Specifications

Isambard Kingdom Brunel in 1843, while performing a conjuring trick for the amusement of his children, he accidentally swallowed a half-sovereign coin which became lodged in his windpipe. A special pair of forceps failed to remove it, as did a machine to shake it loose devised by Brunel himself. Eventually, at the suggestion of Sir Marc, IKB was strapped to a board, turned upside-down, and the coin was jerked free.

Maurice Hall

In an era when Fiat currencies are being printed indiscriminately leading to debasement of the currency itself it is satisfying to note that the worlds longest running consumer protection policy is still in place, to ensure the Great Britain’s physical coinage meets exacting requirements. Since 1282 our coins have been measured against the worlds most exacting standards  in the trial of the Pyx, which has taken place every single year, including in 1940 when a German bomb, just two days before, destroyed a large portion of the Goldsmith’s Hall. For the 728^th time the trial was conducted on the second Tuesday in February of this year in the Hall of the Worshipful company of Goldsmiths.

Goldsmiths Hall

The term Pyx is from the ancient Greek and refers to the boxwood chest in which the coins are placed for presentation to the Jury. Unlike many quaint customs in the UK this is legally binding procedure and is a trail in the true sense presided over by a judge with an expert jury of assayers. The Judge is the Queen’s Remembrancer which is oldest judicial position in continuance existence created by King Henry II in 1154. The jury is composed of at least six assayers from the Company of Goldsmiths. They have two months to test the provided coins, and decide whether they have been properly minted. Criteria are given for diameter, chemical composition and weight for each class of coinage. The verdict has to be reported in writing and signed by the Jury.

The benchmark against which the coins are measured is known as the Trial Plate, and these were kept under the personal guard of the Monarch, in the Exchequer. The earliest surviving Trial Plate is stored in the Royal Mint, and dates from 1279.

Trial Plates are still used today – although they are managed by the National Weights and Measures Laboratory – who send a representative to the Trial to deliver them to the Court.

Coins to be tested are drawn from the regular production of the Royal Mint. The Deputy Master of the Mint must, throughout the year, randomly select several thousand sample coins and place them aside for the Trial. These must be in a certain fixed proportion to the number of coins produced

The first phase of the Trial is the counting and weighing of coins brought to the hall in the Pyx boxes. Throughout the year, one coin from every single batch minted by the Royal Mint is set aside and put in sealed bags, each containing 50 coins. These bags are placed in the Pyx boxes for the Trial.  In a normal year of production in excess of 60,000 coins would be counted although the jury would only count about 1/10^th of them with the remainder counted by machines in a side room.

The Jury member opens the packet and selects a coin at random and puts it in the copper bowl and the remaining 49 coins in the wooden bowl. This wooden bowl is later weighed to check that the coins are the correct weight. The copper bowl will be taken away once the event is over, and the coins in that will be handed over to the Assay Office who will, over the next couple of months carry out detailed tests to confirm that the metallic content is as it should be.

Queen's Remembrancer

The verdict of the Jury is delivered to the Queen’s Remembrancer in May in the presence of the Master of the Mint, or his Deputy.  For those interested a copy of the verdict from the 2009 trial can be found on this link http://www.hm-treasury.gov.uk/d/pyx_2009.pdf. Our Interest is in Gold coins and you will see in the verdict how they were weighed, melted, assayed and compared with the standard gold plate within the prescribed tolerances.

Maurice Hall

If you search the web for information on when and how to buy gold and in what format you will get a wealth of advice on both the indicators and how to get the best return on your investment.  You may also see warnings from fake coins, tungsten in gold bars to loss of value on resale as dealers take there cut.  More of this later as there are certainly pitfalls that are easily avoided.

You may be driven to gloom and despair when you come across many hypotheses on the dangers of Fiat currency, whereby central banks are printing money and devaluing currencies be that USD, GBP or the Euro. You will certainly not be comforted by articles on Sovereign Debt £1.4 trillion coming up in the UK, the greater and more dangerous debts of the US, Japan, and the current difficulties with Greece, Italy,  Spain and Portugal in the Euro zone. We have already seen the collapse of Iceland and some former eastern European countries and Ireland on the brink (UK citizens who hold money in our Post Office should be aware that this is directly with the Bank of Ireland who is now 1.9 billion in debt). If you delve further you will see more political manoeuvring in the East and Russia, where there is a drive to move away from the USD as the reserve currency, additionally China has a long term strategy for financial domination. You may be forgiven for feeling that the world as we know it will come to a halt as you listen to many experts predicting an inevitable systemic crisis that would make  2008 pale into insignificance and global contagion would cause capitalism itself to collapse.

I am not saying we should ignore those warnings, far from it but the optimist would have some faith that the western world could stabilise, otherwise we will not be concerned with gold and money but food and weapons, and yes you will find that advice already common amongst the growing number of survivalists in the USA.  There will no doubt be rocky roads to follow, financial difficulties, pressures on currencies, but currency is not money.  There is no doubt that many people will be looking for a safe haven, an insurance policy and the only world wide respected haven is gold.  This gold must not be in the form stocks, un allocated gold at a bank or certificates but physical gold which is tangible either held secured at your residence or in a vault where you own it.  Even the survivalists after the guns and ammo recognise that a stash of gold coins would be necessary as a medium to exchange for supplies.

I would say that the majority of investors are optimistic enough to believe that we will overcome a financial crisis to a greater or lesser extent and not be plunged back into the third world. There is no doubt that we are in an investor “safe haven” and even the most optimistic are and should be hedging by diversifying part of their portfolio into gold.  We in the UK have always believed in our currency otherwise we would be part of the Euro zone, we have not been successfully invaded for almost 1000 years hence we have no country wide safe haven investment history. Twenty two miles across the channel, our nearest neighbour France, following a century of invasion, dramatic devaluation understand the safe haven that gold provides.  Families have survived through crisis because they put their wealth into gold napoleons and today French citizens have 3000 tonnes held privately in gold coins. Should a new crisis occur then many French families will be able to ride out the storm whereas hardly any in the UK would be in a similar position. There is a lesson to be learned here.

I have researched long and hard and think I understand the drivers, the risks the patterns.  The case for owning gold is clear but investors will always be looking for Return On Investment so clearly the timing of buying and selling is essential.  We saw in December 2009 the gold spot touch $1227 per ounce and is now holding around $1100. Where will it go is the big question and what are the drivers and is their anything to be gleaned historically or seasonally.

Let’s take a look at the drivers that keep the price low:

• The West has become complacent and does not have the level fear of financial crisis that it perceived a few months ago. The truth is that we are not out of the crisis the economy is recovering very slowly and is very volatile and we have the £1.4 trillion sovereign debt to face
• The West although no longer fearing a crisis is still tightening is belt and there is not the money around to spend particularly on jewellery. People are taking note of the volatility, companies who have vacancies are fearful of taking on new staff and unemployment is still a huge issue
• The USD has been relatively strong recently and as we al know a strong dollar weakens the gold price. Interestingly the GBP and Euro price has risen from the all time high dollar spot price due to weakening exchange rates.
• India’s private demand dropped in 2009 as people did not buy as much jewelry due to the high price although India’s central bank bought 200 Tonnes off the IMF to back its international commitments
• China is now the largest consumer and the greatest producer of gold but is playing a very political game as it is determined to increase its reserves and shed dollar assets but it does not want to do anything to increase the price of gold or weaken the dollar while it holds $2 trillion of dollar assets
• It is believed if demand continues at the current rate it will not overstretch supply.

What will drive the price up?

• At some point inflation will incur and the dollar will weaken as more money is printed
• It is likely that there will be another financial crisis that will send all the gold bugs scuttling to protect their wealth
• China, Russia and India will take up any slack in demand particularly China who want to increase their gold reserve but also have encouraged their citizens to save gold
• Central banks do not find holding foreign currencies attractive so they can only turn to gold
• There is a finite supply of gold all that has been produce in the world to date would fit in a 20m cube. It is more difficult and costly to mine and the ability to supply is falling off.

The new drive will come from the East as their central banks diversify from dollar assets and the new found prosperity of their consumers will lead to purchase of gold for jewellery and investment. Eastern currencies will appreciate as the dollar losses its status thus driving up the price in dollars over a period of time.

When is gold bought and sold?

• Seasonally – Over the last 30 years the gold price has been at lowest with remarkable consistence in the northern hemisphere summer as European jewellery fabricators and customers are on vacation with the biggest drive in the fourth quarter. This coincides with harvest and wedding festivals in the East. On average throughout this period gold bought in summer turned profitable by the end of the year. Professionals tend to sell at the beginning of the year.
• Historically – Gold has reached a high in cycles followed by quite severe corrections and periods of consolidation. In fact in the last several years gold’s peak highs have followed a super cycle of around 22 months.  Gold reached its famous high in 1980 at $850 which equates to around $2200 when adjusted for inflation so there is a very strong argument that gold still has a long way to go before it reaches its previous high and now we have in addition Russia, China and India as major players. Bearing in mind that cycles constrict and expand please look at the chart below where the next predicted super cycle high will be around 21 months from the high in December 2009 and that will be Q4 2011 and this also coincides with the seasonal trend.

When to buy and when to sell:

All the indicators point a period of consolidation, both seasonally and historically gold should reach a 2010 low in July to August probably $1050 – $1060 and that is probably the time to buy. Do not expect  an immediate significant rise but the trends show that there will be an increase towards the end of the year and probably another period of consolidation in early 2011 so time to hold your nerve.  Late in 2011 the seasonal and the super cycle trends combine and we shall reach the next peak. Conservatively that would be in excess of $1300 but many experts are expecting the next peak to be $1500 or higher. If you are a speculator you may want to take your profit now but if you consider your gold to be your insurance policy then you will hold on to it. If you are in the later category then you will hold your gold until there is a stabilisation and that would not happen until we stop printing currency and take our contractory medicine. See the article on When should we sell gold for more details

What to buy and how?

I mentioned in the opening paragraph that there are pitfalls to avoid and it is not too difficult. Apart from fakes, which can easily be avoided by using reputable sources and not trusting to buying through private individuals through auction site, everything else is designed to take away you profit.

Buy:

• Investment gold(1) to avoid VAT
• Investment gold to include in your SIPP so the UK government will pay you back 20% or 40% depending on your income tax bracket
• Legal tender gold coins(Sovereigns and Britannias) to avoid Capital Gains Tax on profit
• From a reputable source

Avoid:

• Dealers or companies that charge a high premium
• Proof coins that can have a premium of almost twice the gold value
• Any gold coins that demand a high initial premium
• Numismatic coins as they are best left to the experts in that field
• Large bars that are difficult to liquidate
• Removing your gold from the professional system as it immediately depreciates by 10-15%

Sovereign Elizabeth II Obverse

Buying gold bullion is good because the premium is low but we would recommend gold investment coins and in particular semi numismatic coins can attract a premium differential over the gold price particularly in times of crisis. Coins have greater liquidity than bullion bars which can be difficult to split.There is  quite a choice  and that may be appropriate to the country in which you live. The Krugerand is one of the oldest and well known bullion coins and can be purchased with little premium over a bullion bar. In the UK, the British sovereign is in my opinion is the best investment,  ”safe haven” and emergency coin in the world and can be bought at very little premium from the right source with added attraction of owning a beautiful historic coin with aesthetic value.

There is clearly a case for a platform that enables the discerning investor to incorporate the factors that removes the risk and reduces purchase premium and commissions to the minimum. This mechanism did not exist until a unique platform was developed to enable the buying and selling of gold in real time with best prices and secure storage,  in France in 2008 AuCOFFRE.com.  The  UK website is currently under development and will be available very soon.

(1) Investment gold is

(a) gold of a purity not less than 995 thousandths that is in the form of a bar, or a  wafer, of a weight accepted by bullion markets or:

(b) a gold coin minted after 1800 that:

¨ is of a purity of not less than 900 thousandths

¨ is, or has been, legal tender in its country of origin; and

¨ is of a description of a coin that is normally sold at a price that does not exceed 180% of the open market value of the gold contained in the coin; or:

(c)  an investment coin as specified in Notice 701/21A Investment gold coins.

Maurice Hall

We spend much time thinking about what to buy and when to buy it, when in fact knowing when to sell is more important. The case for owning gold is clear enough.

Gold, like all other commodities, is inherently speculative. Unlike well chosen stocks which you buy to hold to take advantage of their wealth-compounding properties, you only ever buy commodities to sell later. With this in mind, when should you sell gold?

Some would say the time to sell is now. Gold just isn’t the misunderstood, widely shunned asset it was a few years ago. Isn’t the gold bull market now long in the tooth, with better opportunities to be found elsewhere?

Willem Buiter called Gold a 6000 year bubble ft.com. The late and great Peter Bernstein subtitled his book about gold “the History of an Obsession”. But much as I admire these two great minds, such loaded phraseology implies there to be something irrational about owning gold and I think that’s just plain wrong. The fact is that there is a fundamental need for a medium of exchange. Early civilisations used pebbles or shells. Prisoners have used cigarettes.

Having a medium of exchange makes life easier than under barter economy and societies have always organised themselves around the best monetary standard they could find. Until industrialisation of the paper printing process, that happened to be gold, which is small, malleable, portable and with no tendency to tarnish. Crucially, it’s also relatively finite and this particular characteristic (in combination with the others) can be very useful in environments characterised by monetary mischief.

I view it primarily as insurance against such environments. It’s a lump of metal with no cash flows and no earnings power. In a very real sense it’s not intrinsically worth anything. If you buy it, you’re forgoing dividend or interest income and the gradual accumulation over time of intrinsic value since a lump of cold, industrially useless metal can offer none of these things. That forgone accumulation of wealth is like the insurance premium paid for a policy which will pay out in the event of an extreme inflation event.

Is there anything else which will do that? Some argue that equities hedge against inflation

because they are a claim on real assets, but most of the great bear market troughs of the 20thcentury occurred during inflationary periods. A more obvious inflation hedge is inflation linked bonds, but governments can default on these too. More exotic insurance products like sovereign CDSs, inflation caps, long-dated swaptions or upside yield curve volatility all have their intuitive merits. But they all come with counterparty risk. Physical gold doesn’t. Indeed, during the “6000 year gold bubble” no one has defaulted on gold. It is the one insurance policy which will pay out when you really need it to.

There is nothing mystical about gold and I don’t consider myself a gold bug. In fact, I’m not sure I’d even classify gold as an investment’ in the strictest sense of the word. Well chosen equities (not indices) will act as wealth-compounding machines and are likely to make many times the initial outlay in real terms over time. These are investments because so long as the economics of each business remain firm, you don’t want to sell. As they say in the textbooks, you buy to hold. But gold isn’t like that. Like all commodities, it’s intrinsically speculative because you only buy it to sell it in the future.

The reason I own gold is because I’m worried about the long-term solvency of developed

market governments. I know that Milton Friedman popularised the idea that inflation is always and everywhere a monetary phenomenon but if you look back through time at inflationary crises from ancient Rome, to Ming China, to revolutionary France and America or to Weimar Germany you’ll find that uncontrolled inflations are caused by overleveraged governments which resorted to printing as the easiest way to avoid explicit default (whereas inflation is merely an implicit default). It’s all very well for economists to point out that the cure for runaway inflation is simply a contraction of the money supply. It’s just that when you look at inflationary episodes you find that such monetary contractions haven’t been politically viable courses of action.

What causes the political winds to change? A government crisis. In 2008, Ireland came very close to going the way of Iceland. They had their crisis. And historians today still refer to the inflation fatigue” in Britain by the end of the 1970s. This was our crisis. So what we learn from these experiences and others like them is that a fiscal crisis is required to force a majority acceptance of the implications of an overleveraged government. But the political winds in countries with central banks are a long way from blowing in the direction of fiscal rectitude. And while it’s true that more people are at least talking about it, talk is very cheap and no one is yet close to walking the walk. Such steps remain politically unpopular because we haven’t had our crisis yet. Given the clear unsustainability of government finances and the explosive path government leverage is on, a government funding crisis is both inevitable and necessary. Dubai and Greece are merely the first claps of thunder in what is going to be a long emergency.

Eventually, there will be a crisis of such magnitude that the political winds change direction, and become blustering gales forcing us onto the course of fiscal sustainability. Until it does, the temptation to inflate will remain, as will economists with spurious mathematical rationalisations as to why such inflation will make everything OK (witness the IMF’s recent recommendation that inflation targets be raised to 4%). Until it does, the outlook will remain favorable for gold. But eventually, majority opinion will accept the painful contractionary medicine because it will have to. That will be the time to sell gold.

Extracted  from SOCIETE GENERAL Gross Asset Research Popular Delusions by Dylan Grice