Can the United States pull off a beautiful deleveraging?

As Ray Dalio points out in a recent video, "borrowers debt levels have simply gotten too big and can't be relieved by lowering interest rates", he explains that there are several ways to tackle a deleveraging which has to occur once we reach this point (cut spending, reduce debt, redistribute wealth & print money):

Dalio's video suggests that in a 'beautiful deleveraging' it takes a decade or more for debt burdens to fall and economic activity to get back to normal (2-3 years of deleveraging/depression, followed by 7-10 years of reflation).

Others believe that the deleveraging will occur over longer period of time, for example David Llewellyn-Smith of MacroBusiness recently wrote:

The GFC was and is the pivot point in a structural adjustment that has only just begun, probably has decades yet to run, and before it’s over will likely change our world to something that looks more like the nineteenth century than our super fast modern version (in the sense of slower moving capital not widespread typhous!).

Put simply, we’re in a long term deleveraging phase for the global economy following a long term leveraging phase. What this means is that pretty much for the rest of your working life, the world is going to be regularly convulsed as its debts are saved against, inflated away, defaulted upon, and even sometimes repaid! It will shake both private and public sectors repeatedly and will afflict both developed and developing economies.

This is neither good nor bad. It is neither bearish nor bullish. It just is.

My response to this post, in the comments below was:

The view that we will see decades worth of readjustment makes the assumption that we don’t see a major event (planned or unplanned) change the entire financial / monetary system as we know it. It makes the assumption that after half a century of imbalances building we will be able to rebalance slowly, but surely, with only the odd crisis to contend with (none of which will spin out of control resulting in a larger collapse or a change to the status quo). I simply don’t buy it.

I think it's very unlikely that the US (or in fact many western economies which have a high level of debt to GDP) will be able to delever so easily this time around. US total credit market debt to GDP is down from the 2009 peak, however has a long way to fall before returning to levels that could be considered sustainable if interest rates were to normalise:

In 1933 US total debt credit market GDP topped at 300% (assisted by a 46% decline in GDP starting in 1929) and took roughly 20 years to bottom:

At the beginning of the Great Depression in 1929, the bulk of US debt was corporate debt tied to the investment bubble in auto manufacturing, electric utilities, household appliances, radio and other sectors that made up the "new economy" of the Roaring Twenties. Corporate debt to GDP collapsed from over 100% in 1933 to under 30% by the mid-1940s. Household debt fell from 50% of GDP in 1933 to roughly 15% in the same time period. Much of the drop in total debt to GDP came during the 1933-1936 period, when the dollar was devalued by 50% and economic growth was very high (albeit from an extremely low base). The ratio rose again when the economy relapsed in 1937-38, but resumed its decline when the economy recovered modestly in the pre-war years. The Dynamist

Today, the US is in an even more precarious position than during The Great Depression. The level of debt to GDP is much higher and more importantly the US is not able to easily devalue the dollar as they did in 1933 when they adjusted the Gold price from $20.67 per ounce to $35 per ounce.

Many other countries left the Gold standard in the 1930's in order to devalue their currencies along with the US. It's not so easy today, the US isn't able to devalue their currency against a reserve asset like Gold as their currency is the defacto global reserve currency. They are only able to compete with other countries to devalue their currency all the while putting on the facade that they have a "strong dollar policy".

The US faces the challenge of trying to reduce their debt burden at the same time as receiving criticism from China and elsewhere over attempts to kick start economic growth & inflation to reduce their massive debt burden (the below just one example of many where they have been criticised for their actions):

A senior Chinese official said on Friday that the United States should cut back on printing money to stimulate its economy if the world is to have confidence in the dollar.

Asked whether he was worried about the dollar, the chairman of China's sovereign wealth fund, the China Investment Corporation, Jin Liqun, told the World Economic Forum in Davos: "I am a little bit worried."

Jin said he was confident that the Obama administration and Congress would ultimately solve the debate over the so-called fiscal cliff, "but of course the printing machine will have to slow down for people to have full confidence in the dollar". Jan 2013, Reuters

It seems to me that the US faces an impossible situation, as they attempt to reduce their significant debt burden, while retaining the US dollar as global reserve currency, a luxury which has allowed them to over spend as long as they have.

It seems to me what the US and the rest of the world could do with is a global reserve asset against which to devalue fiat currencies & extinguish their debt.

You can follow me on Twitter. I'm usually sharing links and opinions daily (@BullionBaron). You can also CLICK HERE to signup for free email updates.

 

BB.

 

A Bullion Company In Australia Hiding $130M Liability

This story slipped past my radar around a week ago... the Australian Tax Office, Australian Federal Police and Australian Crime Commission recently executed search warrants on premises associated with companies operating in the gold bullion and precious metals industries. The following is an excerpt from the AFP media release:

It is alleged the companies fraudulently claimed GST credits and failed to report GST correctly. They formed syndicates to conceal the true nature of their activities and to avoid detection.

As a result of the investigation the ATO has issued garnishee notices and GST amended assessments with liabilities of more than $130 million.

ATO Deputy Commissioner Greg Williams said the ATO takes GST fraud seriously.

“The majority of businesses do the right thing, however the ATO will pursue those that choose to engage in illegal behaviour.”

“Further audits of industry participants will be undertaken in the near future and we will continue to work closely with other government and law enforcement agencies to pursue those suspected of abusing the system,” Mr Williams said.

Bron Suchecki provided brief comment on his personal blog:

GST is a Australian sales tax of 10% that applies to precious metals that do not meet the definition of investment. It likely that the fraud involves scrap gold or silver where GST is payable. Note that it is being classified as "organised crime" which allows the police to invoke proceeds of crime laws so the people behind it can't hide behind the bankruptcy of the companies involved.

One thing I found interesting about the story is that the media release refers to investigating "companies". The explanation that the companies formed syndicates to conceal the nature of the activities suggests to me they are probably linked through ownership/mutual interest. So while the fraud may involve scrap metal (as Bron points out), the group of companies hiding the activities could very well include bullion dealer/s who provide services to the retail buying public.

There has been a little follow up in mainstream media, the state these companies are from has not been identified (The West), the AFP did not respond to requests for further information (ABC News).

Given that the ATO has issued garnishee notices it's possible they wish the companies to continue operating and have the money owed returned over time:

We can issue a garnishee notice to a person or business that holds money for you, or may hold money for you in the future. The garnishee notice requires them to make payments directly to us to reduce your debt. The payments may be a percentage of your wages or we may issue a notice for a lump sum amount. The notice will also specify when payments are to be made. ATO 

While this might be the best outcome for the ATO who is seeking to recover the funds (what are the chances they receive payment if the companies are publicly disclosed), it leaves bullion buying Australians in a precarious position. I know I wouldn't feel comfortable placing a large (or for that matter any sized) order with a company who has $130,000,000 in outstanding liabilities and what if these companies offer storage facilities for their clients? I'd suspect any customers holding unallocated bullion with these companies (assuming they offered such services), would be behind the ATO when lining up for a payout (in the event they were liquidated).

If the companies involved in the investigation were prepared to defraud the tax office of $65 million, then in my mind they shouldn't be allowed to continue operating, they are a risk to small time investors who are just looking for a safe asset, free of counterparty risk (ironic we often bear such risks in the purchase, delivery and storage of precious metals).

If anyone has any information that could lead to the confirmed identification of a company or companies involved in this investigation, please drop me an email (bullionbaron@gmail.com).

I welcome comments on this post, but in the interest of avoiding any lawsuits please do not speculate on the identity of the companies in question. And until the identity of these companies is revealed, tread carefully when buying or storing precious metals in Australia (care you should be taking anyway!).

You can follow me on Twitter. I'm usually sharing links and opinions daily (@BullionBaron). You can also CLICK HERE to signup for free email updates.

 

BB.

 

Gold As Instrument Of International Settlement

Peter Schiff posted a recent article called 'A Green Light for Gold?' where he explored whether we might be nearing the end of the US Dollar as world reserve currency (and explained this should benefit the price of precious metals):

The reality is that Washington has now committed itself to a policy of permanent debt increase and QE infinity that can only possibly end in one way: a currency crisis. While the dollar's status as reserve currency, and America's position as both the world's largest economy and its largest debtor, will create a difficult and unpredictable path towards that destination, the ultimate arrival can't be doubted.

He started and ended the article referring to a road map:

It is rare that investors are given a road map. It is rarer still that the vast majority of those who get it are unable to understand the clear signs and directions it contains. When this happens the few who can actually read the map find themselves in an enviable position. Such is currently the case with gold and gold-related investments.

Sometimes maps can be very easy to read. If the dollar is doomed, gold should rise.

The article implies that the free markets will take the price of Gold higher. However an interesting find in the WikiLeaks cables by Frank Knopers and shared by Koos Jansen on his blog points to a (1974) road map for a post USD (as reserve currency) world where Gold could be used for international settlement. Is this map still relevant (at the time it was just a discussion rather than proposal)? Could we see Gold used in this fashion and at what price would Gold need to be in order to facilitate international settlement?

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FOLLOWING IS TEXT OF STATEMENT MADE TO C-20 DEPUTIES' MEETING ON MAY 7 BY DUTCH TREASURER-GENERAL OORT RE ZEIST MEETING OF EC FINANCE MINISTERS APRIL 22 AND 23 ON GOLD:

I HAVE BEEN ASKED TO REPORT ON AN INFORMAL DIS- CUSSION - AND I EMPHASIZE THE WORD INFORMAL, REPEAT INFORMAL DISCUSSION - WHICH THE MINISTERS OF FINANCE OF THE EEC HAVE HELD ON APRIL 22 AND 23 AT ZEIST ON THE SUBJECT OF GOLD.

BEFORE I REPORT TO YOU ON THE OUTCOME OF THE DISCUSSION I WOULD LIKE TO MAKE CLEAR THAT IT HAS RESULTED NEITHER IN A FORMAL DECISION ON THE PART OF THE EEC COUNTRIES NOR EVEN IN A FIRM PROPOSAL.

MADE IN A WIDER INTERNATIONAL CONTEXT, WHAT CAME OUT OF ZEIST WAS A CONSENSUS ON CERTAIN SUBSTANTIVE PROPOSITIONS THAT ARE TO BE FURTHER EXPLORED BEFORE THEY ARE SUBMITTED TO A NEXT MEETING OF THE COUNCIL OF MINISTERS OF THE EEC. IF AT A LATER STAGE THE COUNCIL REACHES AGREEMENT ON A CERTAIN POSITION, THE FURTHER PROCEDURE COULD BE THAT THE EUROPEAN COMMUNITY FORMULATES A FORMAL PROPOSAL ON HOW TO DEAL WITH THE PROBLEM OF GOLD IN THE PERIOD BEFORE THE REFORM OF THE INTERNATIONAL MONETARY SYSTEM.

IN ZEIST, MINISTERS HAVE AGREED ON TWO GENERAL PROPOSITIONS. FIRST, THEY HAVE RE-ASSERTED THAT THE SDR SHOULD BECOME THE PRINCIPAL RESERVE ASSET IN THE FUTURE SYSTEM, AND THAT ARRANGEMENTS FOR GOLD IN THE INTERIM PERIOD SHOULD NOT BE INCONSISTENT WITH THAT GOAL. SECOND, THEY HAVE AGREED THAT SUCH INTERIM ARRANGEMENTS SHOULD ENABLE MONETARY AUTHORITIES TO EFFECTIVELY UTILIZE THE MONETARY GOLD STOCKS AS INSTRUMENTS OF INTERNATIONAL SETTLEMENT.

THERE WAS A CONSENSUS AMONG MINISTERS THAT AN INCREASE OF THE OFFICIAL GOLD PRICE, ALTHOUGH IT MIGHT SERVE THE SECOND OBJECTIVE, WOULD BE INCONSISTENT WITH THE FIRST. IN ORDER TO MOBILIZE MONETARY GOLD AS AN INTERNATIONAL RESERVE ASSET, THEY HAVE AGREED THAT:

1. MONETARY AUTHORITIES SHOULD BE PERMITTED TO BUY AND TO SELL GOLD BOTH AMONG THEMSELVES, AT A MARKED-RELATED PRICE, AND ON THE FREE MARKET. THE MONETARY AUTHORITIES WOULD HAVE COMPLETE FREEDOM TO BUY OR TO SELL GOLD, AND WOULD HAVE NO OBLIGATION WHATEVER TO ENTER INTO ANY PARTICULAR TRANSACTION.

2. CERTAIN DELEGATIONS ARE OF THE OPINION THAT GOLD TRANSACTIONS WITH THE FREE MARKET SHOULD NOT, OVER A CERTAIN PERIOD OF TIME, LEAD TO A NET INCREASE OF THE COMBINED OFFICIAL GOLD STOCKS.

3. IN ORDER TO APPLY THESE PRINCIPLES, VARIOUS PRACTICAL SOLUTIONS CAN BE ENVISAGED. TWO WERE MENTIONED IN PARTICULAR. ONE IS THAT MONETARY AUTHORITIES PERIODICALLY FIX A MINIMUM AND A MAXIMUM PRICE BELOW OR ABOVE WHICH THEY WOULD NOT SELL OR BUY ON THE MARKET. THE OTHER CONSISTS IN CREATING A BUFFER STOCK TO BE MANAGED BY AN AGENT WHO WOULD BE CHARGED BY THE MONETARY AUTHORITIES TO INTERVENE ON THE MARKET SUCH AS TO ENSURE ORDERLY CONDITIONS ON THE FREE MARKET FOR GOLD.

4. THESE ARRANGEMENTS WOULD BE ADOPTED PROVISIONALLY AND WOULD BE REVIEWED IN THE LIGHT OF EXPERIENCE.

IN CONCLUDING, MR. CHAIRMAN, I WOULD LIKE TO EMPHASIZE ONCE MORE THAT WHAT I HAVE JUST SAID IS NOT REPEAT NOT A PROPOSAL BY THE EEC, BUT A REPORT ON AN INTERIM-STAGE IN THE DISCUSSIONS. MINISTERS HAVE PER- MITTED US TO MAKE THIS REPORT IN ORDER TO INFORM YOU AS EARLY AS POSSIBLE OF THE DIRECTION IN WHICH A CONSENSUS AMONG THE EEC COUNTRIES IS EMERGING. THEY EXPECT DEPUTIES TO INTERPRET THE STATUS OF THE INFORMATION IN THE LIGHT OF WHAT I HAVE JUST SAID.

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Your views welcome in the comments section below.

You can follow me on Twitter. I'm usually sharing links and opinions daily (@BullionBaron). You can also CLICK HERE to signup for free email updates.

 

BB.

 

Let Australians Save in Gold Instead of Debt

A hundred years ago, in 1913, the first Australian currency note (10 Shillings) was issued (as a blue banknote). Payable in Gold, the note was equal to a half sovereign gold coin (3.99g of 22k Gold, roughly A$165 spot value today). Australia formally departed from the Gold standard during the great depression in the early 1930s when the Commonwealth Bank Act of 1932 made Australian currency notes no longer convertible into Gold. In 1931 the Australian currency was pegged to the British Pound, in the 1970s it was pegged to the US Dollar, followed by a basket of trade weighted currencies before being floated in 1983.

Today the Australian dollar is not redeemable for Gold, it is not pegged at a fixed exchange rate against other currencies and the number created doesn't have a fixed limit (a la Bitcoin), today most Australian dollars are borrowed into existence.

I have seen it suggested that a bank must receive a deposit from which it can then lend a majority portion. In fact when someone borrows money from a bank, the bank can create new money (or credit) out of thin air. It will credit the borrower with a deposit (which might be paid in form of a cheque or deposit into the borrowers account) and will also create a loan account for which the bank charges interest on the created money (this is an asset for the bank, earning it income). 

When a bank lends money, the deposit ends up in the hands of the borrower without anybody else having less, hence we have just seen an increase in the total money available. In today's monetary system 'money is debt', it is backed by the ability of borrowers to repay their loans, that is something that should strike fear into the hearts of savers given the reckless abandon with which banks lend today.

Australian dollars can be borrowed into existence by the government running a deficit (borrowing to spend more than it receives in revenue) or via the private sector. Government debt today is relatively low, but has been on the rise since the GFC:

Increases in the government debt to GDP ratio are typically due to two occurrences: world wars (1914 to 1918 and 1939 to 1945) and responses to economic downturns caused by private debt-financed speculation: the 1890s, 1930s, mid-1970s, early 1980s, early 1990s and the GFC in 2008. The rise in the ratio before the 1890s was due to colonial government mass construction of public infrastructure. Philip Soos, Prosper

As can be seen in the above chart, private debt has been a much larger contributor to money growth over the last 40 years. Private sector debt includes household borrowing (primarily for mortgages), investment & business loans amongst other sources.

With private debt having increased at an alarming rate over the last two decades to levels not yet seen in Australia's history (relative to GDP) it should be no surprise that the government and banks are making preparations to socialise the losses across all bank depositors, should the need ever arise.
 

It's not hard to work out where most of the money created by the private sector has flowed...

By any measure Australian land valuations are at nose bleed levels relative to historical norms using several measures, with The Economist indicating our house prices are overvalued 46% relative to rents and 24% relative to incomes:

So where does this massive push of money (debt) into land values leave savers?

Many savers probably point to an increasing bank balance every year and think that their savings are growing, but if we look at real returns after inflation and tax, even the official story shows they are lucky to be breaking even:

That wouldn't be so bad (breaking even, maintaining purchasing power with the money they put aside for spending later), that is if CPI was an accurate measure of the rate at which their purchasing power was declining. For those intending to save money and purchase property in the future, their purchasing power has been eroded more significantly. The removal of land costs for owner-occupiers from the CPI in 1998 assists with hiding the loss of purchasing power in the above chart:

The resulting MacroStats cost-of-living index is plotted below against the headline CPI... We can again see how this measure tracks the official CPI very closely until 1998. Since 1998 it is 0.73 percentage points higher on average (or 3.8%), and in the period 2001-2008, it averaged 1.3 percentage points higher (or 4.4%pa). That gives you some idea of how significant the 1998 methodological shift in the CPI was in disguising housing inflation and creating a feedback loop with lower monetary policy. Rumplestatskin, MacroBusiness

To measure loss of purchasing power you really need to have a look at how the value of your savings has performed relative to what you intended to purchase with those savings. Those saving in Australian dollars over the last 15 years, with the intention to purchase property, have been severely disadvantaged by the drop in their purchasing power.

Money is primarily understood as a unit of account, a store of value and a medium of exchange, but there doesn't necessarily need to be one monetary asset to perform all these roles. The below is an extract from a Freegold blog called 'Flow of Value':

Which tool is best for which job is a subjective decision, best left to the sovereign entity (whether individual or state) evaluating their own money. The criteria used in making this subjective assessment may be infinite, but the most important of these is time: how long does one anticipate holding this money? If the answer is short term (ie. "spending money", used for current expenses), then the best form to hold it in is a fiat currency. If the answer is longer term (ie. "savings", a surplus over and above what is required as shorter term "spending money"), then the best form is gold, to protect ones buying power.

In my opinion individuals should have a choice in what money/currency they choose to save in (and/or transact with).

In the United States some libertarians have proposed to allow Gold & Silver to act as a 'competing currency' to fiat, as explained in this bill (H.R. 4248 (111th): Free Competition in Currency Act of 2009):

Free Competition in Currency Act of 2009 - Repeals the federal law establishing U.S. coins, currency, and reserve notes as legal tender for all debts, public charges, taxes, and dues. Prohibits any tax on any coin, medal, token, or gold, silver, platinum, palladium, or rhodium bullion issued by a state, the United States, a foreign government, or any other person. Prohibits states from assessing any tax or fee on any currency or other monetary instrument that is used in interstate or foreign commerce and that has legal tender status under the Constitution. Repeals provisions of the federal criminal code relating to uttering coins of gold, silver, or other metal for use as current money and making or possessing likenesses of such coins. Abates any current prosecution under such provisions and nullifies any previous convictions.

Many Gold bugs make the argument for a return to a Gold standard, however one has to question the need for this if individuals are able to maintain their own personal Gold reserves to protect their purchasing power. The need for fiat currency to be backed by Gold becomes irrelevant if anyone can save or exchange Gold freely with no red tape and taxes.

What attributes make Gold the best monetary asset to free up for individuals use to protect purchasing power? Jordan Eliseo touches on one of the most important in a recent market update:

Apart from the critique about its lack of yield, the second most commonly heard objection to investing in gold, or valuing gold at all, is that it has ‘no use’.

But what does this criticism really mean? Certainly it is accurate that gold has no (or at least minimal) industrial use. But it is an incomplete observation, for whilst gold ‘lacks use’ from the standpoint of a traditional commodity, this ‘drawback’ is of course precisely gold’s virtue.

Any commodity that did have an industrial use (and was the refore consumable), would by nature suffer from an uncertain overall supply, making it unfit as a monetary asset as unarguably the most important pre-condition for good money is stability. 

The short term price of Gold is dictated on an exchange where paper based contracts trade in place of physical metal, so price stability is not something afforded to Gold in the present climate. However, Gold does offer long term stability in price as shown by consistently returning to similar valuations relative to goods and other asset classes (including, but not limited to house prices, oil & stocks).
 
Another way Gold offers stability is in it's new supply, in fact the low increase in overall supply each year has resulted in a remarkably stable amount of Gold per capita over the last century (as previously covered on the blog):
 

1900: 1.65 billion people / 1.54 billion ounces = 0.935 oz Gold per capita
2010: 6.97 billion people / 5.46 billion ounces = 0.783 oz Gold per capita

One of the main barriers holding back people from having the freedom to use Gold as money today (either as a store of value, medium of exchange or both) is the crippling paperwork and gains/losses that would arise in the current environment, Keith Weiner expanded on this in a recent article (US centric, but same principal applies in Australia):

The capital gains tax renders it inconvenient to use gold and silver as currency.

We should repeal the capital gains tax on gold and silver. If the paper dollar serves our modern economy better than gold then people will continue to choose it. Most economists, notably Nobel Prize winner Paul Krugman, are opposed to any form of gold standard. They think that a purely paper money is good for us, and that gold won’t work. However even without coercive laws, people choose cars over horses and mobile phones over telegraphs. There is no need to force people to do what’s good for them.

So most economists have it backwards. It is the fiat dollar that does not suit a modern free market economy. People will migrate toward gold and silver when we remove the artificial barriers. This experiment will solve the mystery, and liberate people to hold and spend their money as they choose.

Capital gains tax (and in some cases GST) would make it near impossible for Australians to use Gold (and/or other precious metals) as a competing currency. Purpose should play a part in whether an asset is taxed. Consider the following scenarios...

First scenario: A family buys a $300k property in Suburb A, prices rise to $400k and they want to move to Suburb B which is also $400k and risen by the same amount. Should they have to pay tax on the $100k profit (when they sell the first house to buy the next) even though they are not better as a result (and in fact will be worse off only due to moving suburbs)?

Second scenario: A business man intends on buying an $800 laptop from overseas. While saving to purchase the laptop the Australian dollar plunges in value and as a result he is able to purchase the laptop for $80 less, should he have to pay tax on this material gain? What about if the Australian dollar had strengthened and he had to pay $80 more, should he be able to claim that as a capital loss or tax deduction?

Third scenario: A family is saving for a home in Australian dollars from 1998 to 2013, their purchasing power in order to buy a home has been decimated due to prices rising well above the level of official inflation and the after tax return on their savings. Once they have purchased the home should they be able to claim the purchasing power they've lost as a deduction/capital loss?

Fourth scenario: A family is saving in Gold (with intent to purchase a home) from 2005 to 2013 and as a result of doing so their purchasing power has increased due to a strong gain in Gold relative to house prices. Should they have to pay tax on the gain when they sell their Gold to buy the house?

Hopefully you can see the point I am trying to make. Tax isn't always appropriate, especially in a situation where people are using Gold (or another currency for that matter) as a medium of exchange or savings vehicle.

Give Australians a choice, let us save in Gold instead of debt.

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At the start of the year I posed a suggestion to the Liberal Democratic Party (forum link, requires registration to view) that they consider a precious metals policy to attract a group of voters who are disenchanted with Australia's political landscape and have a mostly libertarian philosophy. The suggestion was initially met with positive feedback:

"The LDP is always interested in attracting new members / voters to its platform, so any policy idea that achieves that aim and accords with our principles would be welcome.

I'll need to educate myself on the subject before I can add to your discussion, but your thread is definitely not pointless and I hope we can develop a meaningful policy that meets the aims stated in your original post."

However, after spending several hours collaborating with the Australian precious metals community, writing a policy and then clearing up some finer points with questions posed on the LDP forum I was provided the following disappointing response (from another senior member of the site/party):

"What you are arguing is a variation of a return to a gold standard.  There are plenty in the party who agree with that, and also advocate an end to fiat currency.

We have discussed whether we should do anything about it in policy terms. The conclusion is that there are no votes to be won and the major parties would not pinch the policy, so it's not really worth the trouble.

The only way I can see it gaining acceptance is if you made it very easy to understand and implement. Consider also how our members would explain it to their friends."

So the above post aimed to bring some focus to to the reasons it might be a good idea to allow Gold to act as a competing currency to the Australian dollar.

The core policies I would like to see a political party adopt in order to enable the above (and to tidy up some other precious metals related inconsistencies):

1. Repatriate Australia's Gold Reserves (99.9% are held overseas at the Bank of England).

Australia's Gold is stored with the Bank of England (as previously discussed on this blog). With only 1 tonne (of 80) on loan there seems little point leaving the Gold on foreign soil. Bringing it back to Australia would also act as a deterrent to the Reserve Bank of Australia (RBA) selling our Gold, a move which would not surprise given light of recent comments from the RBA's Assistant Governor, Guy Debelle: “If you think about the intrinsic value of gold, there’s not a lot. Gold often has a high price because people believe that other people believe that it’s worth a lot. When you describe other markets like that, the word ‘bubble’ gets thrown about.”

2. Increase the scope of the definitions "precious metal" & "investment grade bullion" (for taxation purposes) to include all four precious metals in the ISO 4217 currency code standard.

There are four precious metals with a currency code; Gold (XAU), Silver (XAG), Platinum (XPT) & Palladium (XPD). The first three are specifically defined for taxation purposes in Australia as "investment grade bullion" (providing they meet required finesse). Palladium is not listed, however wording in Australian tax law leaves the potential for Palladium to be included: "Any other substance (in an investment form) specified in the regulations of a particular fineness specified in the regulations." This change would specifically add Palladium to the definition of "investment grade bullion" for taxation purposes (aligning it with the other three precious metals) for uniformity.

3. Increase the scope of the definitions "precious metal" & "investment grade bullion" for taxation purposes to include coins containing Gold, Silver, Platinum or Palladium (any finesse) which are now or once were legal tender of Australia or any other nation and which trade as a function of the spot price.

Precious metals are often traded in widely recognised investment forms which don't meet the strict scope defined by the Australian Taxation Office. Investment grade bullion below 99% for Platinum, 99.5% for Gold and 99.9% for Silver is subject to Goods and Services Tax (GST). This means dealers are required to charge GST on coins which many hold for investment purposes, but aren't exempt from GST, for example American Gold Eagles (91.6% Gold), Gold Sovereigns (91.6% Gold) and Round Australian 1966 50 Cent Pieces (80% Silver). Such legal tender coins which trade as a function of spot price (consistently trade at spot + x% premium) would be made exempt from GST.

4. Repeal Part IV (currently suspended) of the BANKING ACT 1959 which allows for the confiscation of Gold from Australian citizens by requiring them to return personal Gold Holdings to the Reserve Bank of Australia at a price set by the Reserve Bank.

While this section in the Banking Act 1959 has been suspended since 1976, there are provisions in Part IV to confiscate Gold from Australian citizens (as described in detail here by Bron Suchecki). Even though suspended, repealing this part of the Banking Act would be a show of good will that the government has no intention of confiscating the Gold of Australian citizens in the future.

5. Introduce an exemption for Capital Gains Tax on "precious metal" & "investment grade bullion" and securities fully backed by investment grade bullion.

Where an individual is using Gold (or any other investment grade bullion) as a savings vehicle or medium of exchange, no capital gains tax would be applicable.

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You can follow me on Twitter. I'm usually sharing links and opinions daily (@BullionBaron). You can also CLICK HERE to signup for free email updates.

 

BB.

 

What's next for Adelaide property prices?

Long term readers of the blog would be aware that my opinion of Australian property is that it represents poor value at today's prices (relative to historical norms measured against rent and incomes). My medium term expectations for property led to the sale of my (Adelaide) home in early 2010. The property was purchased with intent to live in it for a few years and then later develop it, but wanting a change of scenery my wife and I were presented with the choice to move and then rent it out (hold for investment / future development) or sell it, we chose the latter and have since rented for the past 3.5 years (with lease recently negotiated through mid 2014). We have no regrets.
 

Adelaide house prices have been falling since a few months after we sold and are still tracking below their 2010 peak while rental price increases have been minimal. While renting is suitable and preferable in my situation, I would never discourage others who want the stability of ownership and are prepared to treat housing as a consumable (rather than an investment) from buying. If you have a healthy deposit (preferably one that will help you avoid LMI), fixed interest rate (or able to service higher interest rates), protect yourself (income protection, cash buffer, etc) and expect to stay in the property you purchase for the long term (until mortgage paid off), then it shouldn't matter what prices do (rise, fall or stagnate).

Some people are happy to pay a premium for the stability and enjoyment they get from home ownership, perhaps down the track when starting a family my priorities will change and I will make the same decision. For now I will continue renting, it is far cheaper than the interest repayments would be for a mortgage if buying the equivalent, it provides more flexibility and there is a good chance that my housing requirements will change at some point in the next few years (so it's pointless buying now if I will only be looking to upgrade in a few years).

From an investment point of view I think 'buy and hold' property will continue to be a poor investment choice for a majority over the medium term (3-5 years). Of course there will always be cities, suburbs or even specific deals which can buck the trend as the exception and exceptional people who can turn a dollar in the property market no matter what the 'median' is doing. It may not be beneficial for long term investors to sell (given high transaction costs for property), but any investors looking to buy in today's market would do well to ensure they understand the risks that Australia's property market faces as we unwind from the resources boom. It is highly unlikely that the next 15 years will replicate the property price growth we have seen over the last 15.

Last year on the blog I covered the conditions and my expectations for the Melbourne and Perth property markets. 

Melbourne has surprised me having bounced strongly from the mid 2012 lows, still around 4% below the peak, but 8% higher than the lows (as measured by RP Data's daily price index). Many of the data points (high stock on market, poor yields, low number of transfers) that led to my expectation of a further decline in Melbourne prices remain in place. It's my expectation that the Melbourne price rally is a dead cat bounce driven by falling interest rates and that lower prices will be seen in the future (lower nominal prices than the mid 2012 "bottom"). I still think there is a chance of a 30-40% decline in prices in real terms, perhaps it plays out over a long time frame than I expected or perhaps I will be wrong. One thing is for sure, Melbourne property represents very poor value for money if purchasing for yield, but markets can remain irrational for long periods of time, especially when tax laws are favourable for those speculating on higher prices.

Perth has followed my expected trajectory with prices growing strongly (to the surprise of some). Flat prices for 6 years, rents growing strongly, healthy employment statistics and with the added support of falling interest rates resulted in a large push higher for prices over the last 12 months. While I think prices in Perth could continue rising into the end of the year and maybe even into next year, the strong fundamentals are already starting to wane with unemployment rising, rental prices stalling and increasing vacancy rates. The end of the mining capex boom could have implications for Perth property prices, as I wrote in the comments under last years article, "I think there is good potential for prices short term, but with the eventual commodity bust I think we will see prices in Perth reverse again, perhaps even to lower levels than today (e.g. could grow by 15% over 2 years and then fall by 20% following)." In other words I expected strong growth, but think there is a risk this growth reverses as Perth fundamentals turn south with the end of the resources boom.

So that brings me to the question in the title, what do I expect to see from Adelaide prices over the short to medium term?

Here is a quick overview of some data points that may have an effect on the Adelaide housing market...

Stock on market (SQM Research) is still at elevated levels reminiscent of during the GFC, they have remained elevated for the past 3 years, during which time we've seen prices decline. Although the last few months show a reduction in the stock on market, we have seen similar seasonal declines in the middle months of 2011 & 2012 (who wants to venture out to open homes during our cold winters!), which makes me think we could see similar this year with a rise in stock seeming likely into October/November.

Vacancy rates (SQM Research), although not as high as the worst of the GFC, are also elevated around the same levels we've seen over the last 3 years as prices declined:

Yields for Adelaide property remains low (sourced from Residex) with houses at 4.69% (below national average) and 5.19% for units (same as national average). Even with mortgage interest rates coming down these yields don't do much to wet the appetite given the risk of further price falls. Asking rents haven't increased in Adelaide over the last 12 months according to APM's June rental report.

While other states experienced a noticeable pickup in the population growth rate (MacroBusiness) into the end of 2012, Adelaide was the exception, even showing signs of rolling over to the downside (statistics for first half of this year are due late September):

South Australian unemployment (via Mark the Graph) is on the rise with an unusually large spike in the last months data, this may prove to be an anomaly, but the trend from early 2012 is still ugly:

Only Tasmania has a higher unemployment rate than South Australia now:

And with job vacancies back to levels not seen in a decade, it doesn't look like this unemployment rate is about to get better anytime soon (MacroBusiness):

With poor unemployment figures it's not surprising to see that retail appears to be doing poorly in and around Adelaide with the latest report from Herron Todd White discussing Rundle Mall (CBD) vacancies:

"There are still concerns in the Mall with several large tenancies still remaining vacant."

Further on the CBD:

"Few sales have been recorded this year, however we expect yields at best should remain stable given that rents have softened. Capital values within the CBD overall may therefore have weakened during the first half of 2013. It remains to be seen whether once the redevelopment works are completed in 2014 if there will be stronger overall retail activity in the Mall Precinct."

Glenelg (Adelaide's popular beach side suburb) not doing much better:

"While vacancy rates are still low in this precinct they are ever present and increasing with few new leasing’s evident this year. This is far cry from a decade ago where there was virtually full occupancy along Jetty Road."

King William Road and the Parade (located inner suburbs) sound similar:

"Similarly, King William Road is experiencing some weakness in new leasing activity although part of this is due to some speculative developments and part due to the general weakening of retail conditions. The Parade at Norwood retail sector is generally remaining quite strong although there are some signs of weakening conditions and some vacancies."

The report finishes on this sour note:

"The overall outlook for retail is for subdued activity with the possibility of increasing vacancies and softer rentals for many centres. The trading conditions for tenants are heavily dependent on the economy which is showing further signs of deterioration."

Other commercial real estate is also showing weakness with the office vacancy rate having risen from 9.5% to 12.1% over the last 6 months in Adelaide (Property Council of Australia), not really surprising given the rising level of unemployment:

The residential construction sector is also looking unhealthy with dwelling completions having trended lower the past couple of years (MacroBusiness):

And approvals off the lows, but still very subdued (3-month moving average via MacroBusiness):

First Home Buyer finance commitments have ticked up toward the middle of this year (but remain subdued relative to levels seen in the past):

Dwelling approvals and first home buyer commitments have likely seen their small increase in numbers due to the states Housing Construction Grant (which has now been extended through to the end of this year):

CASH payments of $8500 for people building homes will be extended until the end of the year to stimulate the construction industry.

Premier Jay Weatherill will commit $38.7 million in the State Budget to retain the Housing Construction Grant.

It was first announced last October and was due to expire on June 30. Mr Weatherill said offering the grant for longer would help remove barriers to home ownership and stimulate the construction sector.

More than 1100 people have received the grant in the seven months since it was introduced. Adelaide Now

If the Housing Construction Grant (ending December 2013) and First Home Owners Grant for established homes (ending mid 2014) wind up as scheduled, then we could see downward pressure on Adelaide house prices as a result of this stimulus removal.

Weakness in the South Australian economy has not gone unnoticed with a recent article in the AFR highlighting a report from the SA Centre for Economic Studies:

The Economic Briefing Report found real state final demand decreased by 2.6 per cent from the previous year, which was the largest annual SFD fall in the period covered by the modern National Accounts data.

Centre for Economic Studies executive director Michael O’Neil said this “sustained decline” indicated the state was in recession…

The state has come under enormous financial pressure over the last year with the government forced to grapple a bulging public sector wage bill, revenue writedowns and the loss of BHP’s $25 billion Olympic Dam expansion project.

Confidence is also low in the state’s manufacturing sector with the future of car maker Holden’s Elizabeth factory in doubt.

Like most of the country, Adelaide house prices have seen a significant rise over the last couple of decades resulting in prices which are out of reach for many, the following from Bob Beaumont (of Adelaide based Beaumont Tiles):

Australian house prices have increased 150 per cent in a decade, while incomes have grown by just under 60 per cent. In 2013 in Adelaide, the median house price is now more than six times the median income.

Since its inception in 1973, the South Australian Land Commission has watched land prices rise from $15,000 per block (in current dollars) to $160,000 per block. By comparison, the cost of building a 135sq m house increased from $97,000 in current dollars to just $102,000 over the same period. The Australian

However, Adelaide's house price index as measured by the ABS shows a sideways to lower market over the last 3.5 years and in my opinion the poor economic fundamentals for the state as outlined above point to further price weakness ahead:

Both Sydney and Perth have experienced 5-6 year sideways markets (as discussed in my article on Perth) at different times within the last decade and that is the sort of scenario I could see playing out in Adelaide, that would mean little to no price growth over the next 2-3 years.

Adelaide has a history of moderate price changes when compared with the likes of Perth or Melbourne and I think the future will be no different. I don't expect a massive bust in Adelaide real estate, but I think that prices are likely to continue tracking sideways or lower for some years to come, meaning that those saving for a deposit should feel comfortable the market is not likely runaway from them quickly, at least not until we see a significant pickup in the economic fundamentals for the city and state.

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BB.