>When Gold Becomes Money Again?

>

Addison Wiggin for The Daily Reckoning

On the night our documentary I.O.U.S.A. made its nationwide premiere in August 2008, the film was followed up by a live panel discussion, broadcast via satellite. Our friend David Walker, the former US comptroller general and “star” of the film, took part…along with several other luminaries.
At one point, the question was asked: Might America’s trading partners one day sell off their US Treasury holdings?
Impossible, said Warren Buffett. In fact, he insisted, they couldn’t…because they’d need to convert it into some other currency, which would be little better than the dollar. No one else chimed in to challenge the assertion.

“Buffett’s answer assumes that there is no alternative,” author, friend and local Baltimore resident Bill Baker writes in his 2009 book Endless Money: The Moral Hazards of Socialism, “because for generations, all the world’s currencies have been backed only by the promise that governments would accept them in payment of taxes.
“But that ignores a currency that has been used effectively by man for thousands of years: gold. China and other countries might exchange their US dollars for it now.”
Indeed, China is quietly building its gold reserves. They totaled 600 metric tons in 2004. Then in April 2009 came an announcement they’d grown to 1,054 metric tons. And the buzz from Beijing is that the central bankers want to grow that stash another tenfold.
Meanwhile, China has trimmed its US Treasury holdings for three months in a row. The January total was $1.15 trillion – down 1.75% from October.
These are the first steps toward what Baker sees as the “remonetization” of gold – coming soon to a country near you.
History is a pendulum.
“Once gold and silver had been written into the Constitution,” Baker says, “no one might have thought that it would be replaced by paper within 60 years.” But the pendulum swung, the Union issuing its infamous greenbacks during the Civil War.
Then the pendulum swung back, the greenbacks’ critics were “able to successfully push for an agenda of gold resumption. But before the London Economic Conference of 1933, the world would be shocked by Roosevelt’s rejection of the gold standard.” The pendulum swung again.
Now, “a series of crises such as was the case in Rome might ultimately bring the pendulum back toward gold,” Baker writes.
In other words, we’re approaching the end of the Great Dollar Standard we wrote about in The Demise of the Dollar. The only world anyone below the age of 40 has ever known – in which all the world’s currencies float freely against each other – is nearly over.
And Baker is investing accordingly.
In late 2010, he began accumulating shares of a tiny gold miner called Orezone. “Our cost basis is 78 cents, and now it’s $3.61,” Baker tells us on a wintry afternoon in his office on the outskirts of Baltimore. “I’ve sold off two-thirds of the shares that I own, and it’s still one of our largest positions. I can’t keep it down!”
It’s a good problem to have. And Baker has it because he’s willing to go further afield than your typical money manager…as far afield as Burkina Faso.
We’ll pause here to place it on a map, so you can get your bearings. (If you were a geography geek growing up, you might remember it as Upper Volta.)
“I read these other quarterlies from these hedge fund managers,” Baker tells us, surrounded by family pictures, CDs of composers like Brahms and rafts of company research. “They’ll get really absorbed in the macroeconomic picture, but they don’t really know what they’re doing, so they just buy GLD [the gold ETF].
“Or they’ll hire two all-star Canadian analysts. Then I look at what they own, and they own Gabriel Resources because John Paulson owns it. It’s safe. Or they bought some big South African company because it’s cheap based on reserves in the ground when they ran it through their stock screener.
“They don’t have a coherent philosophy about really kicking the tires and really finding these companies that people don’t know about.”
Baker does. His firm, Gaineswood Investment Management, has taken sizeable positions in tiny gold miners working well off the beaten paths of the Americas, Australia and South Africa.
Burkina Faso is smack in the middle of a geological formation called the Birimian Trend…the richest source of growth for gold miners in recent years.
Even better is how many miners in West Africa have consolidated their holdings. “In Canada, you might have a district filled up with 12 companies. One company might have each block, or half a block. But in West Africa, these guys own all of it. They’ve got a lot of time, a lot of land, and now they’ve raised a lot more money, so they can keep going after it…and we’ll keep getting these upside surprises.
“That’s our philosophy, to find opportunity where, for example, this one outfit has found 1.2 million ounces of gold. But with all the new discoveries they’re making, they’ll probably come out and say we have 2, 2.5, and next year they’ll say, well, we have 3, 3.5, 4… and it isn’t over yet, because of this whole giant region that’s been unexplored.”
Before we go any further, we’d better make something clear: Bill Baker isn’t your typical gold bug. Nor is he your typical stock market bear.
“The timing or eventuality of financial calamity is unable to be forecast,” Baker writes in Endless Money. “At best, it might be like a hurricane warning: The tempest may strike here, it may hit there, it may be downgraded to a tropical storm or it may go elsewhere entirely.”
But that doesn’t mean investors should fail to prepare for financial calamities…or the demise of paper currencies. Financial calamities are becoming increasingly likely in this overly indebted world of ours…and the death of paper currencies is becoming increasingly certain. The best time to prepare is ahead of time.

Addison Wiggin
for The Daily Reckoning

>The Gold Report

>

Atwell: Mideast Mayhem to Drive Gold Higher

Brian Sylvester of The Gold Report
Friday, Feb 25, 2011
As Casimir Capital Managing Director Wayne Atwell sees it, further political unrest in the Middle East could push gold higher, while inflation risk and sovereign debt issues in Europe are longer-term price catalysts. He also shares his insights on small-cap investment in this exclusive interview with The Gold Report.

The Gold Report: In a recent interview with Bloomberg you said, “Gold’s gotten stronger because it’s no longer weak.” Can you explain that concept to our readers?

Wayne Atwell: Commodities and securities tend to trade on momentum. Gold had been exceptionally strong, but a lot of investors became nervous because gold appeared too strong and people started taking profits. Then the dollar strengthened and we received some more good economic news, which drove gold down again. Gold has corrected about 7% from its high late last year. Once it breaks through its support level, it could go meaningfully lower. It was in a negative technical pattern and once there is a certain technical pattern on the charts investors start dumping gold and go short. Some people don’t believe it, but many people invest based on charts and technical patterns. If enough people invest enough money, then it works.
Gold was on the verge of breaking down further when the Middle East uprisings began and investors became a bit anxious. So far, the citizens of two Arab countries have overthrown their governments. It’s been relatively peaceful, which is great, but you can envision a scenario in which it wouldn’t be peaceful. Saudi Arabia is likely to have some difficulties that may or may not result in a change of government, and now we’re hearing about protests in Iran. The probability is high that both those countries are going to have additional issues. They may not, but unrest in the Middle East has turned the gold price around.
TGR: That parallels what you’ve described in the past as an “event-driven market” for gold. Would further unrest in Arab countries push the gold price back above $1,400/oz.?
WA: I tend to think so, I guess it depends on what form that unrest takes. Obviously, the government changes in Egypt and Tunisia were relatively peaceful. But the uprising has already spread to Yemen and Saudi Arabia—and now there’s talk of revolts in Jordan and Iran. Saudi Arabia, as you’re probably aware, is responsible for about 11%–12% of global oil production. God forbid that country has a problem—that could cause a real crisis. Fighting in the Middle East is certainly an event that could push gold meaningfully higher. You will remember what happened in October 1973 when the Arabs cut off oil to the West and the oil price went through the roof. It caused massive anxiety and a very serious recession.
TGR: What are some other events that you anticipate could move the gold price this year?
WA: In terms of events, I’m worried about the sovereign debt situation in Europe. The European Union (EU) has dealt with liquidity issues for both Iceland and Greece into 2013, but it hasn’t solved the underlying problem; it’s just dealt with the short-term issue. Unless these countries start balancing their budgets, which is unlikely—come 2013, the same problem will resurface. A sovereign default in Europe is highly probable. Spain has an unemployment rate of +20%, which is just huge. That’s an issue, too.
In the U.S. a number of municipal governments are very deeply in the red. They haven’t funded their pensions and healthcare for their municipal workers. There’s a reasonably high chance that one or more of these municipalities could fail, which would cause a high degree of anxiety and force investors to dump municipal bonds, which again would result in investors’ flight to gold as a safe haven.
TGR: In an interview with BNN, you talked about the Chinese and American economies “laying the groundwork for inflation.” How are these countries doing that and what do you believe is the timeframe for dramatic inflation increases in both countries?
WA: I’ve been going to China for 30 years and I have seen a phenomenal change. I’ll just throw out a few numbers to put the country in perspective. China consumed about 3%–4% of the world’s commodities in 1985 and now consumes 35%–45% of global commodities, which is astounding. To put that in context, from 2000–2010, global steel consumption grew at a rate of 5% a year. Chinese steel consumption has grown at a compound rate of 17%. So, in 2000, China actually produced 127 million tons (Mt.) of steel; in 2010, it produced 626 Mt. of steel. Basically, the country grew its steel industry by 500 Mt. in 10 years, providing the bulk of global growth.
On average, commodity-consumption growth averages 2.5%, yet here we have steel growing at 5% over a 10-year period and China’s steel consumption growing at 17%. It’s unprecedented. That, in turn, has caused a shortage of metallurgical coal. Met coal is breaking out and will probably reach a new high shortly because China has gone from being an exporter to an importer. Iron ore is now within about $10 of its all-time high. About 10 years ago, China was about 70% self-sufficient in terms of iron ore; now it’s 30% self-sufficient, so China is driving up the iron ore price, as well.
TGR: It’s a similar story with copper.
WA: Yes, copper made a new high last week and China consumes 38% of the world’s copper; it’s only 15% self-sufficient, so 85% of its copper comes from offshore. The rapid growth in China is being driven by the need to move people from the country into the cities, and the country consumes a lot of material when it constructs new buildings, rail lines, power facilities, bridges and ports. China is transforming from an agrarian to an urban society, having moved about 15 million people per year into cities over the last 15 years. It’ll likely have to do that for another 10, maybe 20 years.
China is only 43% urban but it will likely become at least 60%, maybe even 70% urban within 20 years. This is putting a strain on the global supply of industrial materials—prices for many of which are at or close to all-time highs, which is inflationary. The mining industry has a pattern of looking for new mines and developing new properties but when you grow at a rate that’s faster than the historical norm, it puts extra strain on the industry. We’re not going to run out of these materials but we must go look in more remote locations to find the materials.
TGR: What about inflation in the U.S.?
WA: Here in the U.S., the government is out of control. Our government spending is frightening. Last year, we had a $1.6 trillion deficit. It’s coming down a bit this year, but it’s still going to be very high. The deficit is about 10% of GDP; historically, it peaked at 4%. Government spending is about 25% of GDP. We haven’t seen these numbers since the end World War II. We’re in uncharted territory—the government is spending too large a share of our GDP. The interest on our debt, as forecast by government budget office, is going to go from $350 billion this year to $900 billion within five years. Forget healthcare, social security, Medicare or Medicaid—we’re going to add +$500 billion to the interest expense. This will drive the dollar down and result in serious inflation.
In the case of China, industrial demand is pushing up commodity prices and creating inflation. As far as the U.S. is concerned, you can’t have this pattern of government spending in the reserve currency of the world without causing serious problems. There is every reason for investors to go into the gold market to put a certain percentage of their assets in gold for protection against super inflation.
TGR: Do you think these factors will push gold to an all-time nominal high in 2011?
WA: Gold made a new high late last year. It has made a new high 10 years in a row. We think it will make a new high of $1,600 this year and $2,000 within the next one to three years. We suggest buying on a correction; it probably won’t go much lower. We believe holding 5%–10% of one’s assets in gold makes sense.
TGR: Among other financial services, Casimir Capital puts together financings for companies, many of which are junior miners. Why does Casimir focus on the junior mining segment of the market?
WA: I wrote a piece on the junior gold industry recently, which makes a number of points. One is that the denominator is obviously much smaller for the gold juniors. If both a major and a junior gold exploration company find a 1 million-ounce (Moz.) gold deposit, it’s going to have a much more significant impact on the junior explorer’s share price. Only about 5 out of every 100 exploration discoveries is really of interest to majors because most of the very large gold properties have already been found.
It’s extremely difficult to find an exciting new gold property. So, if you’re spending money on gold exploration, the probability is you’re going to find a small gold deposit. But in many cases, the gold majors are prospecting for new exploration properties in their corporate finance department. They’re looking at and frequently buying intermediate or small gold companies with substantial gold deposits that the majors can develop themselves.
TGR: Yes, the gold majors essentially use the junior explorers as their exploration arm.
WA: Exactly. It’s like their exploration department. Gold deposits will be in production anywhere from 5–20 years. They’re generally small. Majors have to replace their depleting resources, plus people expect growth. It’s very expensive for a major to go out and find, and then develop gold properties. If, however, a junior develops a 0.5 Moz. deposit, it doesn’t have to build as much infrastructure. Developing a property as a junior is just a lot less expensive than it is as a major.
TGR: But they’re selling the gold for the same price.
WA: Exactly. The index we put together last year showed the juniors appreciated about 49% in 2010, whereas the majors were up roughly 27%.
TGR: Before we let you go, could you give us your outlook for gold over the next few months?
WA: Let’s go back to the event-driven motivation for moving the gold price. The events we don’t yet know about will likely determine the direction of the gold price. The underlying momentum is positive when you look at the U.S. budget, government spending and Europe’s sovereign debt problems. And the problems that governments have created will only get worse as populations age and Social Security obligations become greater—that’s certainly a problem. We’re all aware of those slower-moving issues, but I think what drives gold in the short term are events in the Middle East and any sovereign debt default. Unless there’s a major unexpected event, we’ll probably see the gold price break out to a new high in the second quarter. We’re roughly halfway through the first quarter now, so we look for the gold price to be rangebound the next two to six weeks before breaking out in the second quarter. But it’s subject to material impact by unexpected events, which always have a way of happening.
TGR: Thank you for talking with us today, Wayne.
Mr. Atwell has more than 35 years of experience in the field of investment analysis for the metals and mining industries. He currently serves as a managing director of Casimir Capital L.P. From 1991–2006, Mr. Atwell was a managing director at Morgan Stanley where he was the Global Group Team leader in equity research and built and managed a 12-member global metal and mining team of analysts. From 1983–1991, Mr. Atwell was a VP at Goldman Sachs covering the metals and mining industries. He was also a VP and principal in the privately held Davis Skaggs, a regional research firm, from 1977–1983. And from 1969–1977, he worked for Merrill Lynch as a senior metals and mining analyst. Mr. Atwell has toured 200 mines and 300 steel mills on six continents. He was selected as one of the 10 best buy-side stock pickers by Institutional Investor magazine several times and was rated as one of the top analysts in metals and mining by Institutional Investor and Greenwich Associates for more than 20 years. Mr. Atwell graduated from Pennsylvania State University in 1969 with a degree in mineral economics. He earned his MBA from the Stern School of Business at New York University in 1974.

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>Currency Chaos: Where Do We Go From Here?

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‘The most important initiative you could take to improve the world economy would be to stabilize the dollar-euro rate.’

By JUDY SHELTON

Global monetary relations are in disarray. Exchange rates fluctuate wildly among the world’s major trade partners, spawning talk of protectionism and a currency war. Gold is soaring as the dollar slides, and economists debate whether the biggest threat to U.S. recovery is deflation or inflation.
We need a giant of economics to help explain all this and recommend a remedy. Where in the world is Robert Mundell when you need him?
As it turns out, Mr. Mundell—the Columbia University professor who advocated the hard-money, low-tax policy mix that broke stagflation in the early 1980s, and who received the Nobel Prize in 1999 for his work on exchange rates—happened to be in New York this week. It’s a lucky break. When he’s not at his 500-year-old castle in Italy, the “father of the euro” is usually en route to his next lecture somewhere in the world.
“What is wrong with the global economy today?” I ask him. “How do we fix this monetary mess?” We are sitting on a comfortably worn sofa in the parlor of his apartment near campus, drinking tea. Plush fabrics drape the walls, along with Baroque paintings in ornately-gilded frames. And there are piles of books in the adjoining rooms. Really. Thick piles of books are stacked in corners, heaped against walls, balanced on short wooden tables.
“The problem started before World War I,” Mr. Mundell commences. “The gold standard was working fairly well. But it broke down because of the war and what happened in the 1920s. And then the U.S. started to become so dominant in the world, with the dollar becoming the central currency after the 1930s, the whole world economy shifted.
“Think of it like the solar system: It started with gold at the center, as the sun, but then Jupiter got bigger and bigger until all the planets started circulating Jupiter instead.”
“And the U.S. is Jupiter?” I deduce.
“Yes,” he affirms, “and the spread of the dollar was just miraculous as it became the anchor for the Bretton Woods fixed exchange rate system after World War II. The price of gold was fixed at $35 an ounce in 1934, but by the time the U.S. got through the Korean War, the Vietnam war, with all the associated secular inflation, the price level had gone up nearly three times.
“Gold became very undervalued; European countries traded in dollars for gold until the U.S. lost more than half its stock. The U.S. went off gold in 1971, under Nixon, and nobody else has gone on it again.”
Mr. Mundell, 77, is clearly in his element as he traces the monetary history of the last century. Like his apartment, he radiates a charmingly disheveled elegance, jaunty in jeans and an open-necked cream shirt.
“So our problems today,” I posit, “are related to the fact that the Bretton Woods system of fixed exchange-rates linked to gold broke down?”
“The system broke down,” he hastens to explain, “not because of fixed rates. Fixed exchange rates operate between California and New York . . . the system broke down because there was no mechanism to keep the world price level in line with the price of gold.”
Atop the closest mound of books is a volume titled: “Shaping the Post-War World: The Clearing Union.” It features the collected writings of John Maynard Keynes from 1940-1944, when the famous British economist was helping to design a new international monetary order to provide a stable foundation for a world economy devastated by war.
“Are you thinking,” I venture, “that maybe it’s time to start figuring out the design for a new international monetary order? Should the U.S. offer new proposals regarding exchange rates and monetary policy?”
Mr. Mundell, who is Canadian, looks troubled. “I don’t think the U.S. has any ideas, they don’t have strong leadership on the international economic side,” he replies. “There hasn’t been anyone in the administration for a long time who really knows much about the international monetary system.”
He elaborates that it would not be possible today to forge a monetary system with the dollar as the key reserve currency, as President Franklin Roosevelt and Treasury Secretary Henry Morganthau did in the 1940s. “To be fair, America’s position is not nearly as strong now,” he concedes. “But what has disappointed me is the reluctance of the U.S. to take into account this big movement in the rest of the world to do something about restoring stability to the international monetary system.” He frowns. “They ignore it, as if the dollar’s exchange rate is a mere domestic matter.”
I take a sip of tea. “Do you think it has to do with our relationship with China?” The U.S. is threatening to impose tariffs on Chinese goods if Beijing doesn’t make them more expensive by revaluing its currency.
“The U.S. berates China for its exchange rate policy, which Washington doesn’t like,” Mr. Mundell says, noting that discriminatory tariffs against China might not be legal under the treaty provisions of the World Trade Organization. “But one-sided pressure on China to change its exchange rate is misplaced.”
Shaking his head, Mr. Mundell asserts: “The issue should not be treated as a bilateral dispute between the U.S. and China. It’s a multilateral issue because the U.S. deficit itself is a multilateral issue that is connected with the international role of the dollar.”
He goes on to explain that the dollar bloc includes China and other Asian countries—except Japan—but that the euro now constitutes the rest of the world. “The euro today is the counter-dollar,” he says. “The most important initiative you could take to improve the world economy would be to stabilize the dollar-euro rate.”
He thinks the European Central Bank, along with the Federal Reserve, should intervene in currency markets to limit movement in the world’s single most important exchange rate, pointing out that the dollar and euro together represent 40% of the world economy.
“If the U.S. demurs, are we headed toward a global currency war?” I ask.
Mr. Mundell looks tentative. “I don’t think it will come to a currency war,” he says. “The U.S. is still very powerful; it would be an unequal battle. But it’s important to have a high-level conference to explore opinions for reforming the world monetary system. The Europeans should be involved, as well as emerging countries.” He mentions that French President Nicolas Sarkozy recently spoke about the need to bring experts together for an intellectual discussion on the issue, perhaps in China.
“So you think a fixed exchange-rate system is more conducive to global free trade and global economic recovery than floating rates?” I ask.
Mr. Mundell registers surprise that I would even inquire. “The whole idea of having a free trade area when you have gyrating exchange rates doesn’t make sense at all. It just spoils the effect of any kind of free trade agreement.”
oming from the man who helped design Europe’s single currency, it makes perfect sense. Since its introduction in 1999, the euro has eliminated exchange-rate fluctuations among the 16 trade partners who have adopted it. In just over a decade, the euro has become the world’s second largest reserve currency after the dollar, and the second most-traded currency in foreign-exchange markets.
Which brings to mind another question. “What do you think about the rise in currency trading by banks, with some $4 trillion now turning over daily in global currency markets?”
Mr. Mundell thrusts out his arms. “It’s part of the sickness of the system! These currencies should be fixed, as they were under Bretton Woods or the gold standard. All this unnecessary noise, unnecessary uncertainty; it just confuses the ability to evaluate market prices.”
Mr. Mundell has a knack for boiling things down to simple terms. He grew up on a four-acre farm in Ontario, went on to earn a Ph.D. from the Massachusetts Institute of Technology, and would ultimately challenge the renowned Milton Friedman at the University of Chicago during the late 1960s. Both economists were strong proponents of free markets, but Mr. Mundell disagreed with Mr. Friedman’s advocacy of floating exchange rates.
The sound of a buzzer indicates lunch has arrived. Mr. Mundell suggests that we continue our discussion at the table and politely invites his assistant Ivy Ng, who has been taking careful notes, to join us.
“We’ve been talking about the possibility of global monetary reform,” I continue, deciding to switch gears. “Let’s talk a bit about domestic monetary policy. What do you think the Federal Reserve should be doing right now?”
It’s a seamless transition for Mr. Mundell. “The Fed is making a big mistake by ignoring movements in the price of the dollar, movements in the price of gold, in favor of inflation-targeting, which is a bad idea. The Fed has always had the wrong view about the dollar exchange rate; they think the exchange rate doesn’t matter. They don’t say that publicly, but that is their view.”
“Well,” I counter, not particularly savoring the role of devil’s advocate, “I suppose Fed officials would argue that their mandate is to try to achieve stable prices and maximum levels of employment.”
Mr. Mundell looks annoyed. “Well, it’s stupid. It’s just stupid.” He tries to walk it back somewhat. “I don’t mean Fed officials are stupid; it’s just this idea they have that exchange-rate effects will eventually be taken into account through the inflation-targeting approach. In the long run, it’s not incorrect—it takes about a year. But why ignore the instant barometer that something is happening? The exchange rate is the immediate reaction to pending inflation. Look what happened a couple weeks ago: The Fed started to say, we’ve got to print more money, inflate the economy a little bit. The dollar plummeted! You won’t get a change in the inflation index for months, but a falling exchange rate—that’s the first signal.” Clearly on a roll, I press a bit. “You mentioned gold?”
‘The price of gold is an index of inflation expectations,” Mr. Mundell says without hesitation. “The rising price of gold shows that people see huge amounts of debt being accumulated and they expect more money to be pumped out.” He purses his lips. “They might not necessarily be right; gold could be overvalued right now.”
Sensing that the soup is getting cold, I decide to cut to the chase: “What would be your winning formula today? What advice would you give to Washington that would help turn around our moribund economy?”
He pauses to think, but only for a moment. “Pro-growth tax policies, stable exchange rates.”
And then, with his spoon poised over his own bowl, he smiles sweetly and beckons for us to begin. “Buon appetito.” Ms. Shelton, an economist, is author of “Money Meltdown: Restoring Order to the Global Monetary System” (Free Press, 1994). She is co-director of the Sound Money Project at the Atlas Economic Research Foundation.

>Coin Buying Essentials

>

Why Purchase Precious Metals?

The Comparative Advantage of Physical Possession

Precious metals have long been treasured both for their beauty and rarity. As a result, these metals have been used by many civilizations as a store of wealth, and in some cases, a foundation for currency.
Historically speaking, these stores of wealth have not experienced the kind of boom and bust cycles present in other forms of investment. This observed stability exists for several reasons. First, precious metals such as modern bullion have intrinsic value. The fact that precious metals consist of something that actually has value makes them more stable than fiat currency which is made of near-worthless paper.
In addition, these metals in many cases have practical applications. Moreover, in times of economic instability,  investors wisely turn to the stability of precious metals. This increased demand has the effect of increasing their values, making them an even better investment.

Assessing Your Options

There are many ways to accumulate precious metals. When considering the acquisition of physical precious metals however, one is able to choose from the purchase of either modern bullion or numismatic coins. The single most important step in purchasing precious metals is learning first what the relative advantages and disadvantages to each type are. Besides that, your purchase should suit your preferences and interests. Accumulating coins should be interesting and fun. Coins are, after all, works of art expressed in precious metal!
Modern Bullion
The larger of the two markets for physical precious metals is that of modern bullion.

If considering bullion bars there are a few things to keep in mind. Generally speaking, the price of a modern bullion bar is dictated primarily by the spot price of its respective metal, and not a numismatic value. In addition, the bar, if issued by a minting authority, is likely to be guaranteed as to its quality and composition. These two facts greatly simplify the evaluation process whether you’re looking to buy or sell the asset. For this reason, modern bullion bars enjoy great liquidity on the market. If your eventual goal is to sell your precious metal purchase, and you’re not concerned with the asset earning collectible status, it may be prove wisest to go with a bullion bar.

If modern coins better suit your tastes however, slightly different conditions apply. While most modern coins minted by a government authority are certified as to their quality and composition, and are therefore relatively easy for which to establish some base price, there is the added potential benefit of numismatic value. Each minting of a particular coin is done in some fixed supply. This supply can never be expanded, which means that in the event of an increased demand for a particular issue, the numismatic value of the coin will increase, in some cases over and above the intrinsic value of the coin. The flip side to this is that some precious metals investors will be particular as to which coin they would like to buy. This can decrease marginally the liquidity of your investment.
.
Lastly, there are purely numismatic coins. While these assets usually contain a high level of precious metals, they are valued primarily for their numismatic value. It is for this reason that when purchasing such a coin, one will pay far above the intrinsic value of the coin, and when selling it, can expect to collect much more than the intrinsic value of the coin. As should be expected, the market for such investments is smaller than that of the precious metals market on the whole. Depending on market conditions, it may be difficult to find either a buyer for such a coin; if you do however, you can expect to make great returns on your initial investment.

Determining How Much to Buy

The question of how much precious metal to buy boils down to one question: for which reason are you purchasing them? If coin collecting is a hobby of yours, and you enjoy spending the time it takes to learn the intricacies of the numismatic market, it may behoove you to purchase as much bullion as you can afford. You are certainly in the best position to evaluate how much of your time and money is worth investing in this market. If on the other hand, you are purchasing precious metals for the express purpose of investment, there are several factors you ought to take into consideration. Ultimately, how much of your portfolio you decide to dedicate to bullion should be determined by several price levels.

Price of Precious Metals
Perhaps the ultimate indicator dictating how much of any one metal to purchase is its price. How much of the metal can you actually afford? But being able to buy a quantity of an asset is no reason you should. Identifying trends within the price level of the commodity in which you are interested may be helpful in determining whether you want to buy or not. If you expect, based on the trend you have noticed, that the price of the particular metal will rise after you purchase and before you sell, you’ll likely want to purchase as much as you can.

Price of the Dollar
Gold, and to a lesser extent other precious metals, has often been referred to as “the anti-dollar.” Rather than being some ominous suggestion as to the role of these assets in times of economic turmoil, the term outlines quite simply the relationship precious metals have with the U.S. dollar.
In general, the price of these assets is observed to make moves of proportional magnitude in an inverse direction. That is, if the value of the dollar against other trade-weighted currencies falls, one can expect the value of precious metals to rise, and vice versa. This is thought to be the result of a multitude of investors enjoying the comparative liquidity and robustness of dollar-denominated assets during times of a strong dollar, but taking refuge in the comparative safety of precious metals during times of a weak dollar.
The simple principle of supply and demand is at work here, stating that as more investors move to a particular asset, demand for the other will fall, and so will its price. Determining, based on trends in the value of the Dollar, how much of a particular asset to buy can be tricky. Experiment with smaller fractions of your portfolio until you’re confident you have a handle on common price-altering mechanisms.

Quality Concerns
Regardless of which form of modern bullion you decided to purchase, quality ought to be of concern. Coins, even those of the same grade, often show significant variation in eye appeal. This is true because some characteristics of a coin, such as light copper spots or reduced luster, do not necessarily affect a coin’s grade.
Determining the quality of a potential purchase is an imperative step in deciding how much to purchase. Not only will this affect the purchase price of your investment, but it will almost certainly affect its re-sale value as well.

>Silver Hits 31-Year High as Mints Ration Silver Coins

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By TSX Gold

 

Intense investor demand for bullion pushed silver to a new record today, touching a 31-year high of $31.77 an ounce before settling at $3.57, up 94.1 cents (+3.07%) on the day.
Mints in several countries, including Austria, Canada and the USA, sold record numbers of silver coins in January, and selling has reached such a fever pitch that these mints have had to ration their selling. In a Financial Times interview, Royal Canadian Mint head of bullion sales David Madge said, “We have sold everything we can produce in silver, and have demand for at least twice that volume.”
The price of silver increased by an impressive 84 percent in 2010 (outperformed only by palladium’s 96 percent rise), and with the fundamentals that drove silver up last year still in place, many analysts see silver growing substantially in 2011, although a repeat of last year’s 84 percent rise is unlikely.
Silver continues to out-perform gold, as illustrated by the silver-gold ratio (the number of ounces of silver that buys an ounce of gold) falling under 44, its lowest point in almost five years. Gold is currently down 2.5 percent from its 2010 close, although its price appears to be back on the upswing.
Silver, like gold, is currently reaping the benefits of investor anxiety over the heightening turmoil in the Middle East, as well as a declining U.S. dollar, which is taking a hard hit from rising U.S. unemployment, rising inflation, and the U.S. Federal Reserve’s ongoing quantitative easing program, which is printing $75 billion in new greenbacks each month.

Source: Gold Investor & Jay Taylor

More on this topic  

 

Why I’m Buying Silver at $30 (Learn Mining News, 2/22/11)

Silver Headed to $50 an Ounce in 2011 (Wealth Daily, 2/25/11)

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>Precious metals >> Top investment

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Precious metals were the top performing investment for the second consecutive year during 2010 with their value soaring by 42% as people sought a safe haven from inflation, research indicates.
It is the fourth time in the past five years that precious metals have topped the tables for the best asset class, as continuing uncertainty over the prospects for the global economy caused investors to flock to gold, silver and platinum, according to Lloyds TSB.
The value of precious metals has surged by 365% during the past 10 years, nearly double the increase for the next best performing asset during the same period – residential property, which made a gain of 198%.
The steep increase in precious metal prices seen during 2010 was driven by silver, with its value jumping by 80%, significantly outstripping the 29% rise in the price of gold and the 20% increase for platinum.
The group said the price of silver had been boosted by pressure on the supply of the metal, as demand remained high from both investors and industries which use it.
Commodities were the second best performing asset class during 2010, offering returns of 30%, while they were the third best during the past decade, with a 176% increase in value.
They were also the best performing asset during the first two months of 2011, driven by a 38% jump in the price of cotton since the start of the year, due to a combination of rising demand from Asia and falling supply as some of the major cotton producing countries were hit by flooding.
All nine asset classes produced a positive return during the past year, although people who held their money in cash would have seen it rise by just 0.6%, while residential property did little better with a gain of 1.2%.
UK shares and commercial property both returned 14.5%, while the value of international shares increased by 10.6%.
Suren Thiru, economist at Lloyds TSB, said: “Going forward, the level of demand from emerging economies, particularly from China and India, is likely to remain an important determinant of many assets prices as well as the pace at which the global economic recovery continues.”

Copyright © 2011 The Press Association. All rights reserved.

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  The Press Association – Mar 7, 2011
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  MyFinances.co.uk (press release) – Mar 8, 2011
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  Financial Times – Mar 7, 2011

>Gold and Silver Break Out as Political Unrest persists

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By ROBERT LENZNER

Gold bullion closed at $1438 after hitting $1442, and will rise as  investors try to protect themselves  in  a world gone mad with chaos and blood. Silver actually hit a new 35  year peak  at $37.19, and  getting closer to the $40-$50  goal we set last fall.
Gold is no longer  just a  hedge against QE2  and  inflation– or a  hedge against deflation. Or a hedge against a declining dollar. Today, gold  has become an expression of the instability spreading from Tunisia to Egypt to Libya  to Syria, to Yemen, to Saudi Arabia, to Iran, to Bahrain– and those  street  dissensions to come, conceivably in Kuwait, UAE, and elsewhere. Oil supplies  are threatened. Buy gold and silver.
You don’t believe? Look at a chart of gold against silver. They are  moving in  absolute tandem now.  Any Sheikh trying to preserve  his fortune must own gold and silver.
In the US the price  of GLD, the largest gold ETF, hit a peak of $140 and looks set to breakthrough that mark tomorrow or the  next day. Let’s see if net selling turns  into net  buying. Are you listening Soros and Paulson, and their camp followers?
Then, there’s the Wikileak’s impact on gold and silver. The FT reported a few days ago, via  cables  released by  Wikileaks,  that  more central banks are plowing into gold, playing catch up with China, Russia  and India.
Listen up!. Iran,says the Bank of England via the FT, is making “a significant move… to purchase gold. Likewise, the Qatar  Investment Authority, no slouches, and Jordan’s central bank are  putting   reserves into gold. I must call my friend at  the Bank of Israel to find out what he’s doing. I’m sure I won’t get anywhere.
Imagine; gold and silver at new peak prices. While oil is only at $106– high for sure, and going higher in fits and starts, and copper has eased recently  as the Chinese reduced their purchases. A  shocking development. Goldman Sachs is still bullish.