Archive for May, 2011

Gold vs. Silver : Gold wins, as always

Monday, May 23rd, 2011

Recently, a wave of panic swept the precious metals markets and there was talk about the end of the cycles of mega-rise in raw materials! And whereas some thought there was a bubble on gold, it was on silver that the bubble inflated, then burst: The Wall Street Journal talked about the sudden   fall in the grey metal which “ fell 12% in just 11 minutes when the fall was at its most severe. Spot silver saw its informal open at $47.863/oz before rising to a peak of $48.150/oz; it then sold off sharply to a base of $42.210 before stabilizing.

The move down is the first break in an extraordinary run for silver, which has more than doubled in price over the past six months as investors bet on rising prices from renewed industrial demand and as a cheap safe-haven alternative to gold.”.

A piece in the  Financial Times asked  “Did the Silver bubble just burst?”,  illustrating with a chart that “the grey precious metal has tumbled 20 per cent in a week”.

The feeling was that a rapid rebound would be unlikely as expressed by Phillip Klapwijk, executive chairman of the precious metals consultancy GFMS, who said of silver’s position, “I think it could be over on the upside for the next little while.”

The FT also explained the extent of the early May slump sayingSilver prices plunged for the fifth consecutive day on Friday(6th May) as the grey precious metal suffered its biggest correction since the billionaire Hunt brothers cornered the market in 1980. As the week drew to an end they summarised “The reversal of fortunes for silver – which until this week’s 25 per cent drop had been up 56 per cent since January – has led a wider sell-off in commodities markets, which were heading towards one of their worst one-day falls on record.”

Market manipulation rumours were rife and silver faced additional challenges because of rule changes by the CME Group.The volatility in silver has been exacerbated by a series of increases in margin – or the amount of cash that investors must set aside to trade each contract – by CME Group, which runs the silver futures exchange in New York.

CME has raised its margin requirements five times in the past 15 days. Investors must now set aside $14,000 per silver futures contract, worth about $180,000 at current prices. The rate will rise to $16,000 on Monday (9th).”

The grey metal, with a predominantly industrial use, is traditionally much more volatile than gold.

So where does gold feature in all this?

According to the FT “gold has managed to remain relatively unscathed compared with its poorer cousin

It remains on top, as always!

Silver has never been able to compete with gold

For a long time, these two precious metals have been linked by a ratio of 10 to 15.5. In the time of the Pharaohs, it was said that there was a ratio of 13.3 between gold and silver. In 440 BC, this ratio was of 13 during the Roman Empire it was set as 12.

In 1876, Henri Cernushi wrote in “The Bimetallic Currency” that “gold and silver are two natural and eternal currencies. Nobody can produce them artificially nor by decree and this is why they remain a trustworthy guarantee”. During this era most fiduciary systems fixed the parity between gold and silver at 15.5.
In 1840 Europe, the situation was tense because almost everyone felt that there was a tendency to believe that the ratio of 15.5 tended to overvalue silver.  Indeed the grey metal was abundant due specifically to heavy production in the United States.

These historical references are interesting because they are not too distant from geologist’s estimates that Silver is 17 times more abundant than Gold in the earth’s crust. This has given rise to some investors believing this ratio is the natural balance between the two metals and that one day we should somehow return to it.

Many traders, speculators, and investors focus on the gold/silver price ratio in determining which metal is under or overvalued. In recent weeks and months the ratio has collapsed from above 65:1. The ratio of gold to silver prices is at its lowest since 1980, and has plunged from 46 in January this year to 33

Throughout the twentieth century, the gold/silver price ratio went to nearly 100:1, occasionally dipped below 30:1, and only briefly hit a ratio of 17:1 in 1980.

Put against gold, silver does look distinctly volatile and vulnerable.

Simone Wapler (Editor of MoneyWeek France) writing in La Chronique Agora explains why this ratio dropped:

“The gold/silver ratio collapsed because gold, like silver, has been demonetarized. Silver even more than gold. The central banks still have some gold in their coffers, but not silver. Gold is always popular in the jewellery market, but aside from  monetary uses, the uses of silver are in decline (traditional  photography, silverware). For many silver is just a poor man’s gold. When one cannot afford gold, one buys silver.

However this argument although valid is not strictly true because of innovations that make gold investments even more accessible and in a way that is not restricted by individual budgets.

Investors no longer need to settle for second best when they can have the real thing.

It is now possible to start investing in gold by the gram including a savings account that encourages investment in physical gold (that you own outright) with a plan to start from as little as 1g of gold per month.”

Similarly this form of investment is finding increasing favour from businesses looking to protect their contingency funds against inflation and the risk of traditional portfolio investments that are vulnerable to sovereign and national debt issues. Holding physical gold as an owned asset has an increasing appeal   as an investment with security and profits.

But when the figures speak for themselves…

Simone Wapler also adds that “when gold goes up, so does silver, but to a lesser degree. When gold drops, so does silver, but to a greater degree”.   Furthermore, gold gains twice as much as silver during a rise yet silver loses twice as much as gold during a fall. Before the bubble on silver this rule was proved, clearly meaning that something was going on. The sharp current correction reminds us that there was an unfounded rush on silver- and today the rate should be around 25 euros. Above that it is overheating.

If you are not convinced, here is a brief outline of the evolution in the rates for silver and gold, in recent days and over the last 5 years.

In short, when gold sneezes, silver catches a cold, and when silver starts to take take-off, gold reaches towards its peak!

Gold remains a safe haven

According to the French daily Le Monde, one reads that in spite of the fall in rates, “gold should remain protected by its status as a safe haven when faced with inflationary threats, and a prolonged decline in oil prices does not appear very likely. Worldwide demand remains solid and supply remains under the shadow of tensions in the Arab world, with light crude from Libya still cruelly lacking.”

In MoneyWeek France we are told that “Falls are necessary and compulsory in a large bull market we are more than ever convinced that gold has a promising future ahead. Let’s give time for the new world order to be created, for the former rich countries to become aware that they are the new poor and that they live well above their means… in short, there is still quite a while to go”.

Arguments in favour of gold

Indeed, gold has recorded a slight fall recently, but if you need additional arguments to be convinced of its role as a tangible asset;

  • gold is “reconverting into money”: it is clearly not the case for silver
  • silver has lost its status as a safe haven contrary to gold
  • silver is a rare industrial metal, very volatile just like other raw materials.   Let us take for example palladium: the market for palladium remains confidential and prices extremely volatile. The production of palladium is concentrated within Russia and in South Africa. This concentration of production confers a certain instability in the market with regards to price and reliability of supply. And uncertainties with regards to its provision have even caused the price of palladium to rise in October 2010, reaching its highest level since June at 605.13 dollars an ounce. Demand is increasing consistently, mining development is limited, a hold by the Russian State on reserves and lack of investors: such are the characteristics that have led to the palladium market finding itself in deficit.
  • silver is not a product for protection against crisis. It is rather comparable to platinum which had fallen in 2008 because the automotive industry was at its lowest point (noteably platinum is used in catalytic converters)
  • silver is increasingly rare and difficult to revalue. Silver is a non-renewable resource and experts agree that by 2021 -2023 the exhaustion of silver supplies will be final.  In any event, silver is a metal which cannot be synthesized and for which no substitute exists. And even if the exact date of a drain in the metal market still remains on hold, in 2010, with a production of 19,300 tons, and demand standing at 25,200 tons, reserves are clearly running low. Remember that principle industrial uses consume the silver
  • silver takes up space in storage, and savers prefer gold which in value and in volume is better
  • because of its scarcity, industrialists are trying to replace silver as soon as possible. This  linked article deals  with the uses of silver in particular in the manufacture of RFID Tags for stock control and identity cards. If we imagine that one day industrialists find another metal or synthetic to replace this need what leeway will remain for silver? This article is based on a completely biased study of silver. All industrialists say if one day they are able to do without silver, they will do so because it is expensive. The use of gold in industry itself remains limited compared to its use for investment purposes and jewellery.

This is exactly what one is looking for from gold, once again it becomes  a private currency, regardless of form.

Let us leave silver to those who want to get their fingers burnt with molten metal…

Financial Meltdown and Black Swans – Myth or Reality?

Monday, May 16th, 2011

“A black swan is the illustration of a cognitive bias (error in decision-making or of behaviour adopted when faced with a given situation).

If one encounters or observes only white swans, one will quickly deduce in error that all swans are white and that is what Europeans believed, for a long time, before making the discovery of the existence of black swans in Australia, in the 17th century.

In point of fact, only the observation of all existing swans may give us the confirmation or invalidation that these are indeed still white but taking the time and means to observe all swans on Earth before confirming that they are all white is just not possible.

It is thus preferable to make the hasty assumption that they are white, in the expectation of seeing the theory dropped by the observation of a swan of another colour.

Thus we create arguments by starting off with incomplete information, which leads us ending-up with false certainties.”

What is the relevance of this story to the economy and your investments?

Quite simple really. Read on and observe the trend emerging.

– The University of Texas uses gold for its cash-flow….
Important information that has gone unnoticed is that the University of Texas has just invested approximately 1 billion of its cash-flow in gold. You will find below the article by Bloomberg.

The Board members see gold “just as another money but one which cannot be devalued by an additional printing of notes”.

Interestingly, they asked to take delivery of their gold – 6,643 gold bars,  which is stored in a New York vault because of the fear of a Comex paper gold scam.

It should be noted that this university also trains economists.
So what should one think of such a strategy?  Only that more and more private individuals and institutions are starting to have increasing doubts on the continuity of the global economic system in its current make-up. It also suggests that those in the know prefer hard physical assets to “paper promises”.
Yet “experts” previously thought that this was unimaginable and impossible!


But that is not all. These last weeks have been exceptional in terms of alarm signals.

– Two year rates for Greece exceed 25% for the first time ever. It means that Greece is perhaps only a few days away from a re-scheduling of its debt over which inevitably world banks, starting with French banks, will ruffle a few feathers. For information purposes, it is the Crédit Agricole which is the most exposed to the Greek risk, with all banks being nevertheless concerned.
Yet “experts” previously thought that this was unimaginable and impossible!

The monitoring of the US debt by the credit rating agency Standard and Poor’s,

For those who have not yet understood or who really do not wish to understand, the US economy remains the leading global economy. A US default in payment would lead the world into an economic chaos without precedent. Inveterate optimists tell us that they do not believe in it. The very same people who did not believe in a seism of a magnitude higher than 9, followed by a tsunami of more than 15 metres in height, coming to destroy 6 reactors of a nuclear plant… and which exposed a whole country to radiation if not making people tremble with fear over the prospect of the entire contamination of the Northern hemisphere.

Yet “experts” previously thought that this was unimaginable and impossible!

– So what else have we learnt? –  that the Morgan Stanley Bank has just made a voluntary default in payment of $3.3 billion on a 32 storey tower building which it owns in Tokyo. This repayment failure is significant because it was the largest of its kind in Japan and marked the latest fallout from a series of highly leveraged investments by Morgan Stanley, one of the most aggressive investors in worldwide property markets before the global financial crisis In short their loss seems of little importance to them because the value had plummeted and they just had to get rid of this building. What can be the motive of such a decision which is a historical first for this “venerable” institution?

Yet “experts” previously thought that this was unimaginable and impossible!

– To this we can add that CDSs (Credit Default Swaps) currently reflect an anticipation of cancellation of debt of some European countries able to reach 75% (CDSs act as “insurance” against the risk of bankruptcy).

Yet “experts” previously thought that this was unimaginable and impossible!

And then there is China which wishes to diversify its foreign-exchange reserves and significantly reduce its holding in American dollars. Indeed, the depreciation of a currency is a means of refunding one’s debts only in devaluated monopoly currency. But it is done at the cost of the currency holder. Our Chinese friends no longer seem to want to be the guinea pigs and are looking to diversify into the Euro.

Yet “experts” previously thought that this was unimaginable and impossible!

– More dramatically, Mc Donald’s (the restaurant chain) launched a big campaign to recruit  50,000 jobs in a single day. Pathetic scenes showed to what extent the situation of many American families is disastrous. Almost 3 million people turned up to get work, some even camping the day before just to be sure of being interviewed. The situation simply turned to drama in Cleveland (click here to see video ) when a crazed driver ran over 4 people in the car park!.

Yet “experts” previously thought that this was unimaginable and impossible!

– And finally, on a lighter note, after the initiative by ex-footballer Eric Cantona even Mayors are having a go, at least the Mayor of the city of Ghent in Belgium for one, who has just taken  the decision to withdraw his funds from two banks, namely Dexia and KBC, in order to protest against the policies of these two institutions and has invited all cities to follow his example…

Yet “experts” previously thought that this was unimaginable and impossible!

It is now obvious that more than ever before how vital it is to adopt a particularly defensive investment strategy.

I invite all private investors to take their potential profits out of the share market and to quit the financial markets. Particular caution is advised with regards to all the securities of insurance companies and banks.
A share in gold of approximately 10% of the total financial assets is to be seriously considered in order to protect one’s financial assets.
It is also strongly advised to get out of bond investments, except from a speculative point of view, starting first with Euro funds in life insurance contracts. These Euro funds are overwhelmingly made-up (approximately 75%) of sovereign debt, i.e. government bonds. Imagine how vulnerable they are to default and complete collapse.

and remember this is NOT impossible, unimaginable or unthinkable – it is highly likely to the point of being inevitable.

I do not know if you have noticed, but I find that lately we can see more and more black swans.

Yet, as everyone knows, swans are white…. until proved otherwise.

Translated and Adapted from an original article by Charles Sannat

The German Mark: a gold coin steeped in history

Saturday, May 7th, 2011
20 Marks - Obverse

20 Marks - Obverse

The German mark, created in 1873, is a coin with multiple facets. Closely linked to the political history of Germany, this often forgotten coin nevertheless has many other benefits.

The German Mark: the story behind it

In 1861, after the years of the Napoleonic Wars, Wilhelm I accedes to the throne of Prussia, which at the time dominated the German Confederation. Prussia had annexed several German States, namely Hanover. In the war opposing Prussia and France, all the German States offered their armies under Prussian command. After the victory of Prussia over France in 1870, the German States were united under the same policy: the Second German Empire. The King of Prussia was proclaimed Emperor, or “Kaiser”. From 1873, a new currency, the Reichsmark, was introduced in all the member states of the Empire: 54 kingdoms, 6 Grand-Duchies, 5 duchies, 7 principalities and 3 free towns.

Each independent German State struck its own gold Reichsmarks.

The Deutsche Marks struck by Prussia are the most common: on them one can see the bust of the Emperor Wilhelm II in the uniform of a cavalry officer, with the inscription “DEUTSCHER KAISER KONIG VON PREUSSEN” (German Emperor, King of Prussia). Among the most common gold coins of 20 Marks, one can also find coins struck by Bavaria, the city of Hamburg, Wurttemberg, Baden and Saxony. Each coin includes a letter representing the issuing Mint:
– A: Berlin;
– B: Hanover;
– C: Frankfurt;
– D: München;
– E: Dresden;
– F: Stuttgart;
– G: Karlsruhe;
– H: Darmstadt;
– J: Hamburg.
The war of 1914 marked the end of German gold coins, and the German defeat of 1918, which caused the abdication of the Emperor Wilhelm II, was followed by the proclamation of the Republic.

List of heads shown on the listed gold coins of gold German Marks

– Prussia: Wilhelm I, Frederic III, Wilhelm II, Wilhelm II in uniform
– Baden: Frederic I
– Hamburg: coat of arms
– Saxony: George of Saxony
– Bavaria: Louis II
– Württemberg: Wilhelm II

20 Gold Marks coin: description

20 Marks - Reverse

20 Marks - Reverse

On the reverse side of the 20 Gold Marks, one can see an imperial crown, under which an eagle with the collar of the Black Eagle can be seen: this order was the supreme honorary order of the Kingdom of Prussia, founded by Frederic III of Brandenburg in 1701. On the chest of the bird a shield is engraved bearing the arms of Hohenzollern, a European royal family which reigned over Brandenburg and the Duchy of Prussia from 1525 onwards.
In 1871, the German Empire is proclaimed: the family members added to their titles that of German Emperor which they kept until 1918, when Wilhelm II abdicated. The inscription “DEUTSCHES REICH”, “German Empire”, is shown on all German Marks struck between 1890 and 1914. On the edge of the 20 Mark, one can read “GOTT MIT UNS” (God is with us).
– Weight: 7,9650 grams
– Diameter: 22,5 mm
– Standard of fineness: 900/1000th
– Issued: 1871-1915

The 10 Gold Marks coin

The obverse and reverse sides are identical to the 20 Marks: showing the eagle and the heads of the Emperors. On the other hand, along the edge of the gold coin, one can see grapes and stars.
– Weight: 3.97 grams
– Diameter: 19.5 mm
– Standard of fineness: 900/1000th
– Issued: 1871-1915

The Gold Mark: interest for the investor

Although the German coin is not particularly sought-after, the variety in types still makes it attractive: indeed, the German political structure of the pre-war period allowed a great diversity in the coins struck on the same module. One can thus switch from common-place examples to very rare gold coins. At the time, Prussia was the largest and richest of the provinces of the Prussian Empire: the 20 Marks of Prussia in particular remain interesting coins to go after, for their history, as well as for investment purposes.



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"For a mountaineer, the important things are the effort, the posture and the muscles. The rope that holds him serves no purpose when everything works but it gives him a sense of security. In the same way, all gold does is ensure confidence; it's a safe haven."