Commentary for Monday, June 22, 2015 (www.golddealer.com)

Gold Market Newsletter  with Richard Schwary

By Ken Edwards and Richard Schwary of California Numismatic Investments Inc….
 

Gold closed down $17.80 today on the Comex at $1183.70 giving up the important $1200.00 mark yet again. This latest weakness in gold is because Germany seems to like Greece’s latest story about debt reduction. This will supposedly lead to resolution in the debt impasse and put the European Central Bank in a position to bless the next bailout payment

I think gold’s recent move above $1200.00 was more related to last week’s Yellen comments -but the problem in Greece did support higher numbers. Or at least gave traders a reason to push lower as Europe breathed a collective sigh and Greece promised to be good.

The European stock market also found footing over the possibility that Greece would be able to pay its owed 1.6 billion euros by June 30. At any rate the EU big shots are meeting now in emergency session to decide if this newest revelation will hold water.

The interesting part about all this Greek drama is how easily it is forgotten as long as they are making impossible payments on borrowed money. It’s almost like the collective European consciousness fears even the hint of a contagion in the financial markets. It’s hard for me to imagine that a small country like Greece can create any tension at all – unless the Europeans know that Greece is not the only EU member in deep water.

shred_dollarKeep your eye on the dollar – the Dollar Index these past five days has supported higher gold prices – moving from over 95.00 to 94.21 as of this writing. Also remember that our government is desperate for a weaker dollar for two reasons. First it will keep the Wall Street earning train on the tracks (earnings have not been exactly stellar – but stock prices are solid, the NASDEX making a new all-time high today). A stronger dollar is murder for our manufacturers selling overseas. And second, a weaker dollar will help in relation to the euro and ultimately the recovery in Europe which is good for everyone in today’s smaller world.

A weaker dollar especially in the longer term is of the two big factors which will eventually push gold prices higher – the second factor of course being physical demand. The gold trade believes physical demand will take care of itself between India and China, supplanting the missing speculative or “hot” money which made its exit from the gold and silver market since they began to move sideways in the summer of 2013 between $1200.00 and $1400.00 an ounce.

Silver closed up $0.03 at $16.13. For some reason a big jump in $1000 face 90% silver bags and premiums are rising. This metric of variable premiums on 90% silver bags is not well understood by the new investing public. Most of the time the amount you pay over melt for 90% silver bags is between $1.20 and $1.60 – today’s premium has moved to $1.90.

What is interesting is that this premium number is a direct result of demand – no demand and premiums over melt move lower – if demand gets crazy premiums can approach $3.00 or even $4.00 over melt because unlike other forms of silver bullion higher demand does not increase production – the mint stopped producing 90% silver coins for general production in 1964.

Silver short positions have been increasing of late – so the paper trade is pushing for lower prices. This is not new both silver and gold traders remain bearish based on the technical picture. However this latest CFTC information could be very positive for the physical market if this paper short trade does not prevail and must be covered.

Platinum closed down $25.00 at $1061.00 and palladium was also lower by $12.00 at $694.00. Unfortunately this makes for new recent lows in both metals today. Platinum is making new 5 year lows after touching $2000.00 an ounce in 2011/2012. Palladium is coming off of $900.00 levels made in August of 2014. Traders cite a slowdown in Chinese car sales and increasing palladium scrap recovery as reasons for the decline.

With all the talk of quantitative easing now worldwide it might be the perfect time to honor a woman of historical importance on our currency. This according to Coin World (Joe O’Donnell) “U.S. Treasury Secretary Jacob Lew announced on June 17 that the department is planning to place a woman’s portrait on the $10 bill beginning in 2020.

Though many details of the development–such as where on the bill the to-be-determined woman would appear and whether she would completely replace current resident Alexander Hamilton or accompany him–have yet to be hashed out, there are plenty of opinions about putting a historical lady on U.S. paper money.”

According to Coin World – “The U.S. Mint’s authorized purchasers bought 29 percent fewer American Eagle 1 ounce silver bullion coins in May than in April. Sales of American Eagle gold bullion coins dropped 27 percent over the same period.

The Mint has yet to begin offering any 2015 American Eagle 1 ounce platinum coins for sale. The platinum bullion coins were last offered in October 2014.”

The governments of China and India are forever tinkering with the idea that their citizens want to own real gold. And from time to time they come up with a scheme to promote the idea that those holding gold bullion should do something else with their money because, according to those in charge this gold bullion stuff screws up government plans to “help the masses work their way out of poverty”.

Of course the average citizen wants little to do with these monetization plans because they see them as just another way of controlling the population. But China and India continue and in the process offer reasons why their efforts are very successful.

The real reason none of these clever ideas will ever bear much fruit is because citizens everywhere don’t completely trust government edict. And if you have a problem with fiat paper currency gold bullion is the ideal surrogate.

Buying gold bullion for cash eliminates the need for government oversight – no one knows you have the stuff and it is the perfect anti-government anecdote. In countries like India and China this reason alone reigns supreme – this axiom also holds true in the United States. Not for the same reasons – not many believe the dollar will evaporate – but gold does supply simple insurance against unwarranted government intervention in any country.

This from Divakar Vijayasarthy (Business Standard) – Gold monetization not viable for investors in the yellow metal – Gold monetization is not new to India. In the past we have had schemes like the 6.5 per cent Gold Bonds, 1977; 7 per cent Gold bonds, 1980; National Defence Gold Bonds and Gold Deposit Bonds, 1999.

These schemes never met the extent of predicted success or mobilization. For instance, it is estimated that the Gold Deposit Scheme of 1999 collected a meagre 15 tonnes of gold.

These schemes had some common features: interest exempt from tax, no wealth tax, no octroi or sales tax on transfer of bonds and no capital gains on transfer. But the schemes failed chiefly because of a low rate of interest of 0.75-1 per cent, lack of an amnesty scheme for undisclosed gold and a minimum threshold of 500 gms of gold per investment lot.

While most of the concerns still continue under the proposed draft of the monetization scheme, the minimum threshold for investment is proposed to be reduced to 30 gms from the prevailing 500 gms. In simple terms, gold monetization refers to surrendering gold jewelry, coins, bars, etc to designated banks in return for bonds/deposit certificates. For example, if you surrender 100 gms of gold coins you will receive a bond or a deposit certificate for 100 gms.

You will also receive interest in grams of gold for the duration of the deposit/bond. The gold jewelry to be deposited will be melted at designated agencies and converted to equivalent 24 carat gold. Your deposit certificate shall be issued for the 24-carat gold. The rate of interest is to be decided by the banks.

Does the scheme benefit individuals? It all depends on the nature of holding and purpose. For persons holding bullion as an investment for their daughter’s wedding or as a natural hedge or as part of portfolio diversification, the scheme is a boon. You are relieved of the burden of safeguarding gold and can save on locker rent charges.

There’s also the advantage of earning tax-free returns. Even if the rate of return is as low as 2-3 per cent per annum it is still better than bearing costs for holding gold. The same situation applies to someone holding ancestral jewelry, which would invariably be exchanged for new models at the time of consumption. Here, too, the scheme is attractive as you can monetize the jewelry upfront and redeem it for gold at the time of consumption.

If the individual holds gold jewelry for both consumption and investment, the scheme may not be a viable option since the cost of making charges and wastage need to be foregone at the time of monetization. Further, subsequent reconversion into jewelry at the time of redemption would entail another 15-20 per cent of wastage and making charges, making it extremely inefficient. Although this section of the population forms a significant chunk of gold buyers, the former category of individuals also possess huge quantities of gold deposits/reserves which, if tapped into the scheme, could make a significant impact in achieving the intended objective. However, for the real success of the scheme, the government should not insist on knowing the source of income for acquiring the gold and also assure investors that no action will be initiated against them under the Income Tax Act or any other legislation.

Has gold monetization succeeded in other countries? Let’s try and understand the impact of a similar scheme in Turkey, its outcome and learnings for India.

The Turkish model – The Turkish model is a classic case of a comprehensive and integrated approach to monetize domestic gold as well as an attempt to strengthen the entire supply chain mechanism to make the initiative a sustainable success. With close coordination with the central bank and the gold industry, the Turkish government improved market infrastructure and encouraged banks to develop suitable gold investment products. Some of the key features of the scheme are as follows:

Creation of supply chain infrastructure: Since its creation in 2002, the Istanbul Gold Refinery has three world-class London Bullion Market Association (LBMA) certified refineries that produce gold bars and coins.

Setting up of accredited assaying units: Turkey has established accredited assaying units where non-standardized gold are converted to appropriate tradable assay certificates which are considered as valuable as the underlying gold.

Branded coins and standardized pricing: The Turkish government launched its own branded coin which can be purchased by the retail investors. This is the only form of gold coin sold at authorized outlets.

Gold permitted as reserve assets: The Central Bank of Turkey permitted commercial banks to consider gold (owned as well as deposited) as a reserve asset. Launch of gold deposit accounts: This is similar to a savings account where nationals can deposit gold, receive coins/bullion in return and earn interest in gold.

Introduction of gold-based investment products: To propel the gold market, several gold-based investment products such as Gold Demat Account, Gold Time Account, Gold- based mutual fund and Gold Pension Fund were launched. Gold collateral loans, credit cards and credit for customers backed by gold deposit were launched by commercial banks.

Outcome and learnings – Over the past two years, Turkey has successfully monetized around 300 tonnes of gold. India, too, should develop an effective gold infrastructure with a focus on gold refineries and gold accreditation centers.

Turkiye Is Bankasi AS (ISCTR), Turkey’s largest bank, has increased its gold deposits 10-fold in the last two years. Back home, there is a need to encourage and incentivize banks and financial institutions to create and aggressively promote gold-based products

Turkey’s domestic gold production rose from 1.4 tonnes to 33.5 tonnes between 2001 and 2013. The launch of innovative gold products has reduced dependence on imports and helped in narrowing Turkey’s current account deficit.

This from Gold Core posted on Zero-Hedge – Hold “Physical Cash,” “Including Gold and Silver” To Protect Against “Systemic Risk” – Fidelity – A fund manager for one of the largest mutual fund and investment groups in the world, Fidelity, has warned investors and savers to have an allocation to “physical cash,” “including precious metals” to protect against “systemic risk”.

“Ian Spreadbury, who oversees the investment of over £4 billion of clients’ money in bond markets for Fidelity, told Telegraph Money “Systemic risk is in the system and as an investor you have to be aware of that.”

He believes that the record debt that has been ballooning since the crisis of ’08 due to interest rates being forced down to near zero by central banks. This debt, particularly where mortgages are concerned, would likely become unsustainable if, and when, rates rise to realistic levels.

“We have rock-bottom rates and QE is still going on – this is all experimental policy and means we are in uncharted territory.”

He points out that in such an environment banks would be unable to sustain the losses caused by defaults on unserviceable debt which would lead to a systemic crisis.

Spreadbury is not the first high profile financial expert to warn of an impending systemic crisis. We recently covered how Stephen King, chief economist at the world’s third largest bank, HSBC, likened the global economy to the Titanic. Andrew Wilson, Goldman Sachs Asset Management’s chief executive in Europe recently gave similar warnings.

Spreadbury highlights that the £85,000 guarantee to UK depositors by the Financial Services Compensation Scheme is largely unfunded and that the government has said it will not intervene to rescue failing banks in the future – leaving deposits to be bailed-in.

The EU and other supra-national institutions have been agreeing the architecture for bail-ins in recent years. Just this month, at the start of June, the European Commission has ordered 11 EU countries to enact the Bank Recovery and Resolution Directive (BRRD) within two months or be hauled before the EU Court of Justice.

11 countries are under pressure from the EC and had yet “to fall in line”. The countries were Bulgaria, the Czech Republic, Lithuania, Malta, Poland, Romania, Sweden, Luxembourg, the Netherlands, France and Italy.

The new bail-in system is largely in place and emergency resolutions can be brought forward in the event of banks failing in the interim period. The “bail-in” will require that shareholders, bondholders and importantly now depositors will all suffer ‘haircuts’ or be burnt if a financial institution is in trouble.

The European parliament confirmed that depositors with more than 100,000 euros ($137,000) would be bailed in after shareholders and bondholders. It is important to note that the 100,000 figure is an arbitrary figure and there is a possibility that this figure could be reduced by an insolvent government faced with an imploding banking system.

To deal with these risks Spreadbury advocates a well-diversified portfolio. Cash should be spread out in different banks. Savers should hold physical cash outside the banking system – a remarkable suggestion coming from somebody so well acquainted with the workings of the financial system.

He also suggests that investors hold gold and silver. He says that the unraveling he foresees is more likely to happen in “the next five years rather than ten”.

Fidelity’s bond manager echoes what we have been advising clients and the wider public for some years now. Mr Spreadbury concluded “The message is diversification. Think about holding other assets. That could mean precious metals, it could mean physical currencies.”

The walk in trade was busy all day – an interesting mix between buying and selling. The phones were also busy as platinum bullion sales surged on new recent lows.

The GoldDealer.com Unscientific Activity Scale is a “ 5” for Monday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Tuesday – 4) (last Wednesday – 3) (last Thursday – 4) (last Friday – 4). The scale (1 through 10) is a reliable way to understand our volume numbers. The Activity Scale is weighted and is not necessarily real time – meaning we could be busy and see a low number – or be slow and see a high number. This is true because of the way our computer runs what we call the “book”. Our “activity” is better understood from a wider point of view. If the numbers are generally increasing – it would indicate things are busier – decreasing numbers over a longer period would indicate volume is moving lower.

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