Gold prices slipped below $1700 an ounce on Monday after China lowered its economic growth target and data on business activity in the Eurozone showed a contraction in the region. At the annual meeting of the National People's Congress in Beijing, China's Premier Wen Jiabao announced that China’s economic growth target has been revised down to 7.5% for this year while inflation target will stay at 4%. This is the first time since 2005 that China sees its growth at below 8%. The statements made by Wen Jiabo impacted on global equity markets and the price of gold slipped a few dollars an ounce.
Recently, the price of gold was enjoying strong upward momentum. However, this trend quickly reversed when US Fed Chairman, Ben Bernanke gave his testimony to the House Financial Services Committee to Congress, last Wednesday.
For several weeks, the Greek debt crisis was the main focus of global markets, but all this seems to have already been forgotten by investors.
In order to avert a default, and in what will be the largest debt restructuring deal in recent history, investors who own bonds governed by Greek law, which covers 92% of bonds outstanding will incur a loss of as much as 75%, thereby erasing some 107 billion euros ($144 billion) of Greek debt from its total debt burden of 373 billion euros ($496 billion). The losses of these bond holders which include banks, hedge funds, financial institutions and private investors may be used as a reminder to potential investors that holding sovereign debt is not necessarily a sure and safe thing. In 2006 Iraq imposed an 89% loss on its bondholders in 2005 investors lost 76.8%. As far as I am concerned these investors do not deserve any sympathy at all, as they were consumed by greed and stupidity when they originally purchased this debt. At the time of purchasing they all thought that Greek bonds were a sure bet and an easy way to earn a high interest on their money. I can recall certain European bankers touting these bonds to their clients due their high returns. And, when I urged clients not to be tempted by these high yields and to rather invest in gold, their response implied I was being ridiculous because gold was a waste of time as it did not pay any interest. Two years ago, the gold price was around $1100 an ounce. Now, perhaps those investors will understand that investing is not only about seeking high yields. What would you rather be holding now, Greek bonds or gold? Regardless of this restructuring deal, the fact remains that the debt crisis in the Eurozone is far from being resolved and these latest measures to “save” Greece will only buy time. Italy, Spain and Belgium remain active international borrowers, and Portugal is hoping to return to the bond market in the coming years. But after the Greek experience, investors might think twice before investing in those local-law bonds, no matter how high the yield. It was only a little more than a week ago, when finance leaders from the Group of 20, met in Mexico City to discuss ways they can prevent the Eurozone's problems spreading to other European countries and from dampening any signs of economic recovery. It was their intention to secure a further $2 trillion in funds by merging Europe's temporary and permanent bailout funds, the European Financial Stability Fund and the European Stability Mechanism to create one 750 billion-euro ($1 trillion) fund which would be backed up by increased IMF funding. However in order for this to work, as Europe's richest economy, Germany's support for a larger European fund is critical. And, as was expected, nothing much was accomplished at the meeting. The two main events impacting on gold last week were Bernanke’s testimony and the ECB’s second round of loans under their current Long-Term Refinancing Operation LTRO. On Wednesday, the Frankfurt-based ECB said it will lend banks 529.5 billion euros ($712.2 billion) for 1,092 days, topping the 489 billion euros handed out to 523 institutions in the first three-year operation in December.
While the action of the ECB, designed to avert a credit crunch, has improved liquidity and eased concerns that Europe’s banks would run out of cash or curb lending as the region’s sovereign-debt crisis drove up borrowing costs, it still remains to be seen if this money will be used to assist in an economic recovery. Although the ECB's loans are intended to provide liquidity and pump some money to households and businesses, boosting growth, I doubt much of the money will flow into either households or businesses and the bulk of the money will be used by the banks themselves.
The loans are the biggest single refinancing operation in the ECB's history. The total three-year lending is now above 1 trillion euros. The ECB lends banks as much as they want against eligible collateral. More than a third of the 2,267 financial institutions registered to borrow from the ECB took part.
As a result of the first operation, the ECB's balance sheet ballooned to a record 2.74 trillion euros. After the ECB announcement, gold prices rallied, but later in the day, and after edging its way to a key resistance level of $1800 an ounce, the price of gold came under some massive selling pressure almost as soon as US Fed Chairman, Ben Bernanke began his speech before the House Financial Services Committee to Congress. At one time the price tumbled around $100 an ounce, but later rebounded to trade back above the key support level of $1700 an ounce. Of course, and as usual all the damage was done on the paper market of Comex which is designed to favour the actions of the bullion banks who merely use this market to manipulate prices. Later on the in the day, the sell-off in gold was attributed to one massive sell trade of 31 tons on the Chicago Mercantile Exchange during Bernanke’s speech.
After the price had dropped, the next day in Asian markets, the lower price of gold attracted buyers and there was some good buying of physical bullion. And, as I continue to explain to my clients, we have seen this type of action many times during the last ten years. The only difference this time was that the CME did not collude with the seller or sellers as they usually do and suddenly increase margins. Absolutely nothing has changed regarding the fundamentals of gold which remain as sound as ever with broad based demand from store of wealth buyers, institutions and central banks internationally, and especially in Asia. The financial crisis in Europe has not been resolved and the staggering level of debt in the USA will ultimately become unsustainable. While I have no doubt there are many traders out there who got burned by the latest price take down, prices will soon recover and test $1800 an ounce level.
In 1976, Nobel laureate economist Friedrich Hayek wrote that with the exception only of the 200-year period of the gold standard (1714 to 1914 in Britain), practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people.
According to Hayek's research, history proved two things: 1) that all representative governments eventually abuse their money-issuing privileges, which results in inflation; and 2) that people with access to various types of money always look for the most stable kind -- usually gold or silver.
Why should it be different this time around?
After the drop in prices last week, the price of gold is being supported above $1700/oz. The 50 day MA and 200 day MA remain positive and the long-term upward trend remains intact.
Very few people know much about silver, and since we have some interesting video clips that I believe are very informative, in this edition of The Delaire Report, I would like to share this information with you in these various videos.
VIDEO # 1
In this video FutureMoney Trends shows some fascinating facts about the supply and demand of silver.
VIDEO # 2
Often, new comers wanting to buy silver bullion expect to pay the spot price. Unfortunately, this is a total misconception as there are costs involved in making and distributing bullion items. And, unless you are a major player such as a central bank, producer, refiner, fabricator etc., that is able to trade massive quantities on the London bullion market, where minimum traded amounts for clients are generally 1,000 ounces of gold and 50,000 ounces of silver, then you must expect to pay the dealer a premium above spot. And, when it comes to coins, there are manufacturing costs in making these items as you can see in this video.
VIDEO # 3
When US Fed Chairman, Ben Bernanke gave his testimony to the House Financial Services Committee to Congress, last Wednesday, Ron Paul brought out a silver eagle to emphasise the value of real money compared to the value of fiat money.
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For more than 20 years, most central banks diversified out of gold into currencies, especially the US dollar as well as US Treasuries. All these Keynesian thinkers scorned any banker who dared to consider gold anything other than some “barbaric relic.” And, in order to earn some income from the yellow metal they either leased their gold or sold it. I wonder what these individuals have to say now.
In what can easily go down in history as the worst timed gold sale ever, bbetween 1999 and 2002, Mr Gordon Brown then the Chancellor of the Exchequer ordered the sale of almost 400 tons of UK’s gold reserves when the price was at a 20-year low. Since then, the price has increased more than six times costing taxpayers billions of pounds. The decision to sell the gold, taken by Brown, is regarded as one of the Treasury's worst financial mistakes in its history. Mr Brown and the Treasury have repeatedly refused to disclose information about the gold sale amid allegations that warnings were ignored.
It is understood that Brown pushed ahead with the sale despite serious misgivings at the Bank of England. It is believed that senior Bank experts were not even consulted about the decision, which was driven through by a small group of senior Treasury aides close to Brown. The Treasury has been officially censured by the Information Commissioner over its attempts to block the release of information about the gold sales. Evidently the proceeds from the sales were invested in dollars, euros and yen. In last two years, this desperate need to rid themselves of their gold has changed completely and numerous other countries have begun buying gold again in large quantities. In 2011 central banks purchased some 439 tons of gold, the highest figure since 1964! This net buying trend by central banks which began in 2009 has proliferated as central banks diversify out of their foreign exchange holdings and accumulate gold. The key buyers of gold in 2011 included Russia, Mexico, Thailand, South Korea, Bolivia, Venezuela, Turkey, Kazakhstan and Tajikistan. And, according the World Gold Council (WGC), while the purchases of gold from the central banks accelerated, sales among signatories to the third Central Bank Gold Agreement all but dried up, with a 5 ton sale by Germany. One of the reasons cited by the WGC is “a continued desire among central banks to diversify their sizeable reserves in light of credit downgrades which have brought into question the safety of holding massive amounts of US dollar and euro denominated reserves.” As more central bankers turn back to gold as a store of value, some of these “ geniuses” don’t even know where their current gold is being stored. Recently, the German Federal Audit Office has criticized the Bundesbank auditing and inventory controls regarding Germany’s gold holdings reported at around 3,400 tons. Evidently, the last time the Bundesbank did an audit of their gold which is held in high-security vaults in Frankfurt, Paris, London and New York was 2007.
But, perhaps even more alarming is the fact that almost 60% of Germany’s gold is stored outside of Germany with the majority of it being held by the Federal Reserve Bank of New York. One of the major concerns of German lawmakers is the question of what would happen if they needed to access their gold holdings urgently. I would not be surprised if Germany follows in Hugo Chavez’ footsteps and have their gold repatriated to Germany.
In the event of a US dollar meltdown, any gold held by the US Federal Reserve on behalf of foreign central banks could suddenly “disappear.” Towards the end of last year, Venezuelan leader Hugo Chavez ordered the repatriation of the country's gold reserves held in North America and Europe. Before the move Venezuela held around 211 tons out of its 365 tons of its gold reserves in U.S., Canadian, and European banks. Evidently, the Bank of England held about 99 tons of Venezuela's gold, with smaller amounts stored by the Bank for International Settlements in Switzerland, Britain-based Barclays Bank, J.P. Morgan Chase & Co. in the United States, and Canada's Bank of Nova Scotia. According to Venezuelan officials the reason why they did this was to reduce exposure to debt-laden economies like the U.S. and those of Europe, while also taking advantage of the precious metal's rising price. Venezuela also said it aims to diversify by investing in faster-growing allied nations like Russia and China, both of which recently have been making large investments into the oil-rich South American country. And, by repatriating the bullion, Venezuela has prevented the seizure of any gold that may arise due to arbitration cases including those linked to the nationalization of multibillion-dollar oil projects run by big U.S. companies. More than 60% of Venezuela's international reserves are in gold. That is nearly eight times the regional average of just over 8% and twice that of the second highest in Latin America, Ecuador. In January this year, the Dutch government admitted that only 10% of its 612.5 tons of the tenth- largest official gold reserve is held in the Netherlands. When questioned, the Dutch Treasury replied that the Dutch gold is located in Ottawa, New York, London, and Amsterdam, but did not specify how much is in each place.
Until 10 years ago, the gold Reserves of the Swiss National Bank (SNB) were regarded as the “property of the Swiss people.” But, during the last decade the central bank disposed of nearly 50% of its gold reserves in order to buy foreign currencies. And, recently, four members of the Swiss parliament presented the Gold Initiative in order to secure the SNB’s gold reserves. If accepted, this initiative would mean that a portion of the Swiss Franc would be backed by gold, and it would also force the SNB to reveal the location of where the gold is stored.
The simple message of these actions is that there are certain political leaders who recognise gold as an alternative to the fiat currencies of the world. They are also concerned about the whereabouts of their gold, especially any holdings held in the USA because of the possible confiscation of foreign gold reserves by their custodian, the US government.
As the price of gold consolidates around the $1700/oz level, it also signals a neutral direction with a slight upward bias. I expect to see more consolidation before the next upward move.
For many people, silver is an inflation hedge or a safe haven. They buy the metal because the purchasing power of their money is rapidly eroding. Instead of holding cash, they protect their wealth in a product whose value isn’t likely to deteriorate. Many also view silver as a universal currency that can be used as money or exchanged for fiat currency if a particular monetary system fails. Then, there are some investors who simply see profit in the metal. They buy in at one price with the intention of cashing in at a higher price. Whatever one’s motives, plans to invest in physical silver should begin with an understanding that the metal’s spot price is like a base cost. Investors should not expect to buy silver at these prices. Instead, the spot price provides a gauge for how much investors should pay for a particular product at a given time. The mark up above the spot price is the premium. Premiums are part of the game, but all are not created equally. The same product from two different sources can be two different prices, so it is in investors’ best interests to protect their profits by doing comparison shopping.
On March 12, The Silver Institute put out this small report.
Silver Proving its Mettle in 2012
Sturdy investment demand has pushed the silver price up 20% in the first ten weeks of 2012, outperforming platinum, palladium and gold during the period.
Investors are increasingly acquiring silver in many forms. Globally, silver-based exchange-traded-funds (ETFs) account for 586 million ounces (Moz) of silver, up from 576 Moz at the end of 2011. Demand for physical silver bars is also strong. According to several precious metals dealers silver bar sales continue to be brisk.
Moreover, investor demand on the Commodity Mercantile Exchange (a division of the CME Group) has been strong this year. As of February 28, net long silver positions, which are the difference between total long positions and total short positions, had increased by more than two-fold from end-2011. If investors are net long they are bullish on prices and expect further price strength. Total net long positions on February 28 were at their highest level since September 13, 2011.
Also contributing to a strong silver price over the course of this year will be strengthening global silver industrial demand after a record 2011. According to “The Future of Silver Industrial Demand,” a report commissioned by the Silver Institute and released last March, silver industrial demand is forecast to grow by 36% to 666 Moz from 2010 through 2015. Silver industrial demand remains positive primarily because of the lack of substitution and the wide range of established and ever-growing new uses of silver that are vital to industry.
The Silver Institute is a non-profit international industry association headquartered in Washington, D.C. Established in 1971, the Institute serves as the industry’s voice in increasing public understanding of the value and many uses of silver. For more information on silver please visit www.silverinstitute.org.
Silver needs to break and hold above $35/oz in order to break this key resistance level. However, once it does, we may see a rapid move to the upside and a re-test of the previous high.
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Recently, I read an article about how Congo born, Dikembe Mutombo, an all-star NBA defender, was nicely scammed in a fake gold deal. Evidently, he and Houston based oil executive Kase Lawal were beguiled into believing that they could purchase around $30 million worth of the precious metal at a hugely discounted price to the prevailing global market price from dealers in the African country of Kenya. It just goes to show how even two intelligent men can be duped by what is such a common gold scam. I mean who wouldn’t want to buy gold at a huge discount to the prevailing price, pick up the metal and then dump it onto some bullion dealer and get paid the market price thus making an absolute killing. This story inspired me to write about several common gold scams that have been around for a while and should be avoided. But, even though they may be well documented, there is a sucker born every minute. It is surprising how the lure of making quick easy money can fool any greedy, well intentioned individual.
In the case of Mutombo and Lawal, of course they never got a gram of gold and instead lost millions of dollars. The link to their entire story is here:
In 2010 several tons of gold imported into the UAE by traders and investors turned out to be fake resulting in millions of dirhams in losses. According to, Mohamad Shakarchi, Managing Director of Emirates Gold, “a lot of people in the UAE who tried to import gold at lower prices or through dubious overseas companies have been cheated. We have inspected many consignments from African countries, especially Ghana, and found that there is not an ounce of gold in them.”
At the time, Mohammed said that at least five tons of fake yellow metal was lying with Dubai Customs, and merchants estimated that the minimum loss of fake gold imported by local traders was nothing less than $200 million. Gold was trading at around $1200 an ounce.
Most of these gold scams are coming from Africa. The gold scammers claim to be established gold merchants or mining companies. They claim to be in possession of large quantities of gold dust or gold bars, which they offer to sell at below market prices.
These so called dealers often claim to be registered with government agencies such as the Precious Mineral Marketing Company (PMMC) in Ghana in order to gain the trust of potential victims.
In the event that the buyer is not prepared to travel to see the “gold,” the would-be buyer is made to send money for travel of the seller, for insurance, for shipping and for refinery assays. The buyers are always shown samples, which are usually real gold. But, when the actual consignment is sent, it will be only mud or sand.
And, of course, the seller can walk away at any point with virtually no risk of being caught as all contacts are via anonymous free webmail accounts accessed from Internet cafes and via prepaid mobile phones.
Typically these offers to sell gold dust or gold Dore bars come from some dealer located in Kenya, Ghana, Sierra Leone, Republic of Mali, Senegal and Ivory Coast.
An example of such an offer usually begins something like this: I am Kwassi Mensah from the family of his royal highness NANA APAI MENSAH of the AshantiKingdom in Ghana. As part of our royalty, we, the royal family is entitle to some % of the total gold mined in the Ashanti kingdom, in view of this, we have in stock 280kg of a Alluvial Gold Dust 22 Karats, we are looking for a serious buyer.
Another example may look like this.
We are group of miners located in Africa presently in tarkwa Ghana. We are the best in local mining in the history of mining in Ghana, we can supply up to 100kg per month, and we do CIF with no upfront payments needed by our LMO which is the local mining organization, all transaction to be closed via our UK Partners “Alliance Brokers UK or GMM “Ghana ministry of Mines.
Our AU is noted for its prolific purity of 96.7%- 98.9% Purity and can be refined up to 23 carat plus, 100% POP of merchandise will be provided to seller while buyer provides POF and transaction to be closed via Alliance Brokers.
We are ready to work with any mandate/Broker with a qualified certified Buyer with legal rights to Buy AU gold from Ghana/Africa.
No matter the format, as soon as you receive one of these letters you have to believe that there is no gold on offer and you are being set up by some unscrupulous group of thieves who will have no hesitation in taking you and your money. It is simply another version of the old and ubiquitous Nigerian 419 scam.
The sellers will try and lure you to coming to see them just as long as you bring some money with you. Then, in an elaborate web of false documentation and well-greased government individuals you will be quickly separated from your money and lucky to be allowed to leave the country.
I remember an incident that happened to me several years ago, while driving from South Africa to Harare the capital of Zimbabwe. On my way to Harare I stopped to fill my car with petrol (gasoline). Suddenly, from nowhere, this polite black man approached me and asked if I could give him a ride to a mine which he claimed was roughly 40 kilometres from where we were. At the time I was a bit sceptical, but nevertheless, I agreed. As I climbed into the drivers’ seat, and just as my passenger got into the car, two other black men unexpectedly jumped into the rear seat. When my passenger sensed my reluctance to start my car, he assured me that the two other black men were friends of his who also worked at the same mine. To cut a long story short, I decided, to proceed.
When we were about ten kilometres from the mine, my passenger pulled out a small bottle filled with gold granules, and offered them to me at, a ridiculously low price. When I told him I had no interest in gold, he pulled out a small gold bar and told me that I could buy it from him for a fraction of the market price….. sound familiar? The closer we got to the entrance of the mine, the more persistent he became. Finally, I relented, only to get them off my back and knowing full well that I was about to be scammed. So, I claimed that I could only offer them a few Rand being the balance of the money that I had left. I pulled out my wallet while driving and handed it to him saying that he could take whatever was in there. When I travelled in Africa, I was always well prepared for such eventualities, and in this case the bulk of my money was safely hidden elsewhere). My newly acquainted gold bullion dealer did not protest, and took the money. He also handed me the “gold” bar. And, at the entrance to the mine, they all got out the car, and wished me a safe journey. I knew that I had not bought 300 grams of gold for a few hundred rand but was relieved that I was on my own again. When I got to Harare and related the event to a business associate of mine he had the bar assayed, and as expected there was not a bit of gold in the bar. I had bought about 300 grams of gold painted lead. But, since I had only paid about R200 for it, I didn’t feel so bad and considered it to be a curio from Zimbabwe.
When I entered this business in 1979, there was a particular gold scam that is still going strong to this day. And, it is constant reminder to me how naïve, or stupid or greedy people can be. The pattern is exactly the same each time. Some nobody from nowhere contacts me because they have an order to buy a huge quantity of gold. It usually runs into several hundred kilograms per month, and in most cases it emanates from some buyer in the Middle East or more recently a buyer in Russia. The person contacting me always swears that it is a legitimate deal and that they “know” the buyer. All they want is a small percentage of the deal. Now if anyone truly believes that a legitimate buyer is going to entrust some nobody to buy several hundred million dollars’ worth of gold on their behalf, then you are really an idiot. In the last 33 years, I have never ever seen one of these deals materialise and we simply don’t waste our time with such enquiries. Usually, the seller will demand some form of good faith deposit from you before the deal is concluded and if you are dumb enough to pay, this will be the last you will see of your money.
While these are outright scams that can end up costing buyers millions of dollars, there is another form of gold scam to avoid. It is the one that involves coin dealers who use the old “Bait and Switch,” tactic. In South Africa they advertise Krugerrands at highly competitive prices to attract customers. But, as soon as a customer walks into their showroom, or shops, the dealer tries to persuade the buyer into buying a limited edition or commemorative medallion that is not a rare coin. It is simply a gold medallion that has been made by some mint on behalf of the company promoting them. Perhaps one day they may become rare but to tell investors that they will become worth a fortune in years to come simply because of the limited number minted is completely false. But, since these medallions have massive margins, the company promoting these medallions as well their brokers selling them stand to make themselves some good money.
In South Africa, many individuals are beguiled into believing that the various Mandela medallions are rare coins which they are not. The South African Gold Coin Exchange, the official distributor set the prices of the new issues they regularly introduce to the market. They often infer that due to the limited mintage, demand exceeds the supply which bodes very, very well for future growth.
At the beginning of February they introduced a 5oz Bimetal (2oz gold: 3oz silver) Mandela medallion with a mintage of “only” 1000. They even offered clients a Prelaunch Price of R79 500. At the time, the Rand price of gold was around R13, 500 per ounce and the silver price was around R270 an ounce. So, the intrinsic value of this item was around R28, 000. And, yes, there are manufacturing costs, marketing costs, and other costs involved, but at the end of the day, there is one huge margin in these medallions.
A numismatic coin is a collector coin that has value in excess of its metal content because it is historical or rare.
But, you cannot create rarity or claim an item to be rare simply because you restrict the quantity being minted. Rarity is determined by a coin’s surviving population from the original mintage, and not because you say it is.
Frankly, I do not see any investor value in these medallions. However, if you are a collector, then this is a different matter. A collector might purchase a rare coin for many multiples of the value of the metal it contains, but for the average investor numismatic coins and medallions are on a par with rare stamps, art, ceramics etc. You must also bear in mind that in most instances it is not all that easy to liquidate numismatic coins and in contrast most bullion coins are easy to sell anywhere in the world.
My message is very simple. If a deal looks too good to believe, it probably is worse than you can imagine, and when adding precious metals to your investment portfolio stick with bullion bars and coins.
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