Even Now Few Own Gold
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Even Now Few Own Gold
By Patrick A. Heller, Market Update
From 1933 to the end of 1974, it was illegal for Americans to buy and own physical gold as an investment. It was more illegal than heroin: an American purchasing gold in Switzerland broke a U.S. law, while a purchase of heroin outside of the U.S. did not break American laws.
As a consequence, Americans got out of the habit practiced in many areas of the world of owning gold as an investment and store of value.
Once it again became legal to purchase gold, it took some time for the commercial sector to stock it and make it available to the retail public. Prior to 1933, anyone wanting to own some gold coins merely had to go to the local bank to get all they wanted.
For the past 35 years, no American bank has been ready to supply gold to any customer that walked up to a random teller's window. Trust departments have been able to handle such transactions, but only by making the customer endure fees, paperwork hassle and time delay that buyers in other parts of the world usually don't have. The gold market today is largely handled by coin dealers, which are far less common than bank branches.
So, one reason why few Americans own gold is just being out of practice.
However, a more important reason has to do with how investment firms make money. They depend on turnover of account assets for fees and also derive a surprising amount of interest income off the float of customer money. I believe (but I don't have data to prove this) that the typical physical gold buyer is a much longer-term holder of the asset than those who purchase paper assets like stocks and bonds.
The reason for my judgment is the number of customers of my business who flatly state that they plan to never sell their precious metals, but pass it along to their heirs when they die.
In order for investment firms to make money, they have to discourage ownership of gold, silver and other tangible assets. Although they may pretend to offer unbiased research reports, it's hard to imagine that their own financial well being doesn't influence their analyses.
I have in hand an 11-page report from one of the large national stock brokerage firms that is dated June 11, 2009. The title is "Industrials & Materials: Gold Supply and Demand: Bullish on Bullion?"
The report contains several accurate bits of data. It also includes information accurately picked up from other sources, but these sources have huge flaws in their data. The report also includes expectations that are contradicted by existing facts.
I don't want to identify the particular brokerage as I suspect that the nature of errors and distortions could be found in gold reports from pretty much any U.S. brokerage.
The report starts off in deep trouble by quoting demand and supply statistics from the World Gold Council for 2007, 2008 and the beginning of 2009. The brokerage probably needed to cite a "mainstream" source for the data to protect itself.
However, even I have already shown that the World Gold Council reports (prepared for them by GFMS Ltd.) severely understate both supply and demand totals. For 2008, as one example, the WGC reports only 3,518 tons of gold supply and just 3,805 tons of demand. The report totally missed the net export from the US of 2,800 tons of gold in 2008, as reported by the US Geological Survey using data from the Census Bureau. Not only did the WGC report miss this supply, it also missed where the supply was absorbed in the market. When China recently revealed that it had added 454 tons of gold to its reserves since the end of 2002, it also turns out that the WGC reports totally missed this supply and demand as well.
In discussing the relatively accurate mine production from 2007 through the first quarter of 2009, the report missed that gold mine production has been declining for more than a decade. It is falling in ways that higher gold prices cannot overcome. There are greater political risks, higher environmental burdens, an extreme shortage of geologists available to do the needed exploration and test drilling, and now even the virtual unavailability of credit to finance mine development. Today it realistically takes 10 years from the beginning of exploration until a mine will be operational, a lengthy time frame that presents more risk factors for potential investors to consider.
The report makes a big deal out of rising scrap gold jewelry as a source of gold supplies. What the report didn't do is go inside this total to analyze where the gold scrap comes from. The largest portion in 2009 came from India once the price of gold exceeded $900. India, long the world's largest gold consuming nation, actually exported gold earlier this year. That trend halted in April when the price of gold fell below $900. Since then there have been some imports of gold into India, but not really any exports. By understating the size of total gold supplies, and trying to make it seem that there is a continuing large stream of scrap gold being liquidated, this report is misleading its readers about the facts.
The report further cites the cash inflow of $11.8 billion in the first five months of 2009 to the gold exchange traded fund with the symbol GLD, and notes the second highest cash inflow to any ETF during that time was only $751 million. Without saying so explicitly, that gives an indication the gold market may be overbought. Nowhere in this report does it mention the signal from China that it is looking to purchase another 4,000 tons of gold (current value about $115 billion). Had the report accurately stated that there was continuing demand for gold far in excess of what was being absorbed today, that would have changed the whole tenor of this segment of the report.
The discussion of official sector sales omits a lot of relevant information. The Central Bank Gold Agreement had only 15 signatories, who together hold about 30 percent of all official reserves. What isn't mentioned is that there are a number of non-signatories, including the United States, which have announced they will abide by the agreement. In total, more than 80 percent of official reserves are subject to this agreement.
The current agreement expires in late September. This report says the expiration of this agreement "could very well result in unprecedented levels of gold supply hitting the market." The negative connotation is contradicted by the facts, not all of which are disclosed in the report.
The agreement establishes a quota of 500 tons (16.1 million ounces) of gold that can be sold each year. Even when the price of gold topped $1,000 per ounce in the spring of the last two years, central banks and governments were unwilling to sell gold. Total sales have been far under the limit. A price of $1,000 gold obviously did not increase that activity, so what is the reason why the expiration of the agreement could result in an unprecedented higher level of gold sales?
There are other significant errors, omissions and distortions in this analysis, but I think you get the point. The summary of the report suggests that the price of gold may rise in the immediate future but is at great risk of huge supplies flooding the market later this year. With analyses like this, I would not expect many novice gold buyers to be eager to purchase. Even if they do, there is a good prospect they would cut their purchases. I'm not accusing this company of deliberately misleading their customers, just of doing a very poor job at presenting the real statistics.
The report refers to demand as being only an "inch thick." I beg to differ. The continuing strong purchases by China since the end of 2002, their indication that they want to purchase more than eight times this amount in the future and the report from their buying agents that they are buyers of gold in the $940-960 level does not sound like thin support.
When you consider that investors far and wide are being fed this disinformation, it isn't much of a surprise that a relatively low percentage of investors own gold. One report I read said that 48 percent of American adults own corporate stocks, either directly or through mutual funds or retirement accounts. The only guesses I can find for the percentage of adult Americans who own investment gold range from three percent to nine percent. There is much more room for an expansion of demand for gold than there is for US paper assets.
Other news notes:
Rep. Paul's, R-Texas, bill calling for an audit of the Federal Reserve has 222 co-sponsors, a majority of the House of Representatives.
Last week, the Federal Reserve and the U.S. Treasury declined to comply with the Freedom of Information Act requests that the Gold Anti-Trust Action Committee had filed seeking information on these agencies' activities and policies for gold swaps. If the Fed and the Treasury really wanted to put an end to the rumors that much of the U.S. gold reserves now belongs to other parties, all they would have to do is open up the books for audit.
The scandal over the missing gold and other precious metals at the Royal Canadian Mint is getting larger and more mysterious. Apparently the missing metal may be valued at as much as $20 million. After a four-month internal audit was not able to come up with the answer of what happened, it looks like the Royal Canadian Mounted Police will be brought in, making this a police matter.
Kitco, a Montreal-based company that is the largest seller of precious metals stored at the Royal Canadian Mint insists that the holdings of all of their customers are safe. However, Kitco has apparently suspended all further sales of precious metals stored at the Royal Canadian Mint until the "products can be improved."
Since the RCM shortage has been reported, there have been some precious metals analysts who have stridently advocated that, for their own protection, everyone take delivery of such accounts from the RCM and other vendors of storage programs.
Jon Nadler, the senior market analyst for Kitco, is attacking such recommendations and insulting the analysts who make them. As I see it, if all of the metal is really still there for investors, then delivering it to the buyers should not be a problem. Therefore, there is no reason to attack those who advocate taking delivery. It would only be a problem if there wasn't enough metal to cover all customer accounts.
As an historical aside, the CEOs and spokespeople for Enron, Bear Stearns, Lehman Brothers, and the like all stated, shortly before these firms collapsed that their company was solid and investors didn't have to worry.
For some time I have advocated not storing your precious metals with the company from whom they were purchased. My recommendation still stands.
Even Now Few Own Gold
By Patrick A. Heller, Market Update
From 1933 to the end of 1974, it was illegal for Americans to buy and own physical gold as an investment. It was more illegal than heroin: an American purchasing gold in Switzerland broke a U.S. law, while a purchase of heroin outside of the U.S. did not break American laws.
As a consequence, Americans got out of the habit practiced in many areas of the world of owning gold as an investment and store of value.
Once it again became legal to purchase gold, it took some time for the commercial sector to stock it and make it available to the retail public. Prior to 1933, anyone wanting to own some gold coins merely had to go to the local bank to get all they wanted.
For the past 35 years, no American bank has been ready to supply gold to any customer that walked up to a random teller's window. Trust departments have been able to handle such transactions, but only by making the customer endure fees, paperwork hassle and time delay that buyers in other parts of the world usually don't have. The gold market today is largely handled by coin dealers, which are far less common than bank branches.
So, one reason why few Americans own gold is just being out of practice.
However, a more important reason has to do with how investment firms make money. They depend on turnover of account assets for fees and also derive a surprising amount of interest income off the float of customer money. I believe (but I don't have data to prove this) that the typical physical gold buyer is a much longer-term holder of the asset than those who purchase paper assets like stocks and bonds.
The reason for my judgment is the number of customers of my business who flatly state that they plan to never sell their precious metals, but pass it along to their heirs when they die.
In order for investment firms to make money, they have to discourage ownership of gold, silver and other tangible assets. Although they may pretend to offer unbiased research reports, it's hard to imagine that their own financial well being doesn't influence their analyses.
I have in hand an 11-page report from one of the large national stock brokerage firms that is dated June 11, 2009. The title is "Industrials & Materials: Gold Supply and Demand: Bullish on Bullion?"
The report contains several accurate bits of data. It also includes information accurately picked up from other sources, but these sources have huge flaws in their data. The report also includes expectations that are contradicted by existing facts.
I don't want to identify the particular brokerage as I suspect that the nature of errors and distortions could be found in gold reports from pretty much any U.S. brokerage.
The report starts off in deep trouble by quoting demand and supply statistics from the World Gold Council for 2007, 2008 and the beginning of 2009. The brokerage probably needed to cite a "mainstream" source for the data to protect itself.
However, even I have already shown that the World Gold Council reports (prepared for them by GFMS Ltd.) severely understate both supply and demand totals. For 2008, as one example, the WGC reports only 3,518 tons of gold supply and just 3,805 tons of demand. The report totally missed the net export from the US of 2,800 tons of gold in 2008, as reported by the US Geological Survey using data from the Census Bureau. Not only did the WGC report miss this supply, it also missed where the supply was absorbed in the market. When China recently revealed that it had added 454 tons of gold to its reserves since the end of 2002, it also turns out that the WGC reports totally missed this supply and demand as well.
In discussing the relatively accurate mine production from 2007 through the first quarter of 2009, the report missed that gold mine production has been declining for more than a decade. It is falling in ways that higher gold prices cannot overcome. There are greater political risks, higher environmental burdens, an extreme shortage of geologists available to do the needed exploration and test drilling, and now even the virtual unavailability of credit to finance mine development. Today it realistically takes 10 years from the beginning of exploration until a mine will be operational, a lengthy time frame that presents more risk factors for potential investors to consider.
The report makes a big deal out of rising scrap gold jewelry as a source of gold supplies. What the report didn't do is go inside this total to analyze where the gold scrap comes from. The largest portion in 2009 came from India once the price of gold exceeded $900. India, long the world's largest gold consuming nation, actually exported gold earlier this year. That trend halted in April when the price of gold fell below $900. Since then there have been some imports of gold into India, but not really any exports. By understating the size of total gold supplies, and trying to make it seem that there is a continuing large stream of scrap gold being liquidated, this report is misleading its readers about the facts.
The report further cites the cash inflow of $11.8 billion in the first five months of 2009 to the gold exchange traded fund with the symbol GLD, and notes the second highest cash inflow to any ETF during that time was only $751 million. Without saying so explicitly, that gives an indication the gold market may be overbought. Nowhere in this report does it mention the signal from China that it is looking to purchase another 4,000 tons of gold (current value about $115 billion). Had the report accurately stated that there was continuing demand for gold far in excess of what was being absorbed today, that would have changed the whole tenor of this segment of the report.
The discussion of official sector sales omits a lot of relevant information. The Central Bank Gold Agreement had only 15 signatories, who together hold about 30 percent of all official reserves. What isn't mentioned is that there are a number of non-signatories, including the United States, which have announced they will abide by the agreement. In total, more than 80 percent of official reserves are subject to this agreement.
The current agreement expires in late September. This report says the expiration of this agreement "could very well result in unprecedented levels of gold supply hitting the market." The negative connotation is contradicted by the facts, not all of which are disclosed in the report.
The agreement establishes a quota of 500 tons (16.1 million ounces) of gold that can be sold each year. Even when the price of gold topped $1,000 per ounce in the spring of the last two years, central banks and governments were unwilling to sell gold. Total sales have been far under the limit. A price of $1,000 gold obviously did not increase that activity, so what is the reason why the expiration of the agreement could result in an unprecedented higher level of gold sales?
There are other significant errors, omissions and distortions in this analysis, but I think you get the point. The summary of the report suggests that the price of gold may rise in the immediate future but is at great risk of huge supplies flooding the market later this year. With analyses like this, I would not expect many novice gold buyers to be eager to purchase. Even if they do, there is a good prospect they would cut their purchases. I'm not accusing this company of deliberately misleading their customers, just of doing a very poor job at presenting the real statistics.
The report refers to demand as being only an "inch thick." I beg to differ. The continuing strong purchases by China since the end of 2002, their indication that they want to purchase more than eight times this amount in the future and the report from their buying agents that they are buyers of gold in the $940-960 level does not sound like thin support.
When you consider that investors far and wide are being fed this disinformation, it isn't much of a surprise that a relatively low percentage of investors own gold. One report I read said that 48 percent of American adults own corporate stocks, either directly or through mutual funds or retirement accounts. The only guesses I can find for the percentage of adult Americans who own investment gold range from three percent to nine percent. There is much more room for an expansion of demand for gold than there is for US paper assets.
Other news notes:
Rep. Paul's, R-Texas, bill calling for an audit of the Federal Reserve has 222 co-sponsors, a majority of the House of Representatives.
Last week, the Federal Reserve and the U.S. Treasury declined to comply with the Freedom of Information Act requests that the Gold Anti-Trust Action Committee had filed seeking information on these agencies' activities and policies for gold swaps. If the Fed and the Treasury really wanted to put an end to the rumors that much of the U.S. gold reserves now belongs to other parties, all they would have to do is open up the books for audit.
The scandal over the missing gold and other precious metals at the Royal Canadian Mint is getting larger and more mysterious. Apparently the missing metal may be valued at as much as $20 million. After a four-month internal audit was not able to come up with the answer of what happened, it looks like the Royal Canadian Mounted Police will be brought in, making this a police matter.
Kitco, a Montreal-based company that is the largest seller of precious metals stored at the Royal Canadian Mint insists that the holdings of all of their customers are safe. However, Kitco has apparently suspended all further sales of precious metals stored at the Royal Canadian Mint until the "products can be improved."
Since the RCM shortage has been reported, there have been some precious metals analysts who have stridently advocated that, for their own protection, everyone take delivery of such accounts from the RCM and other vendors of storage programs.
Jon Nadler, the senior market analyst for Kitco, is attacking such recommendations and insulting the analysts who make them. As I see it, if all of the metal is really still there for investors, then delivering it to the buyers should not be a problem. Therefore, there is no reason to attack those who advocate taking delivery. It would only be a problem if there wasn't enough metal to cover all customer accounts.
As an historical aside, the CEOs and spokespeople for Enron, Bear Stearns, Lehman Brothers, and the like all stated, shortly before these firms collapsed that their company was solid and investors didn't have to worry.
For some time I have advocated not storing your precious metals with the company from whom they were purchased. My recommendation still stands.
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