Mike Maloney Presents "Debt Collapse"

Let me just start by saying that I'm a Mike Maloney (MM) fan. I do agree with a lot of what he has to say.

To some degree I am riding this precious metals bull market as I believe (cyclically) it's time for the metals to shine (as MM is always keen to point out, he is not a gold bug, but a cycles guy), however I also stack physical metals as I believe there is a strong possibility of monetary changes that may require a transitionary asset which will allow a shift of wealth through to whatever system comes next (perhaps a monetary system in which some way is partially backed or measured with Gold).

I do however have concerns about the way in which Mike presents some of his arguments and the people that he is putting across his arguments to.

If you aren't going to watch the entire presentation then just for my sake, skip to minute 55:00. At this point MM asks the crowd "how many here know what a P/E ratio is?", in a crowd of probably 100-200 people there are barely a few (maybe 5-10) that raise their hand and the next question is "how many do not?" gets a much larger show of hands (probably at least half the audience). It's at this point that I realised that MM is not speaking to a group of seasoned investors...

At minute 5:35 into the clip MM says "My company has a mission to get as much Gold and Silver into the hands of the middle class as quickly as possible". Given the response to the P/E question and the type of event that he is presenting at (Wealth Masters International M2 Conference) it looks very much like he is talking to his targeted audience.

There is nothing wrong with the middle class buying precious metals. I would be considered middle class. However, it will be late comers in this class that will likely drive the mania phase of this bull market and get burned if they don't exit before any collapse that could come following the peak.

Whether MM would like to admit it or not he is probably speaking in front of a crowd, some of which will leave, think about buying metals, but not actively purchase them until they are in a run away move at which point they will chase the price all the way to the top.

MM talks about trying to stop people from being slaughtered because we are about to see a huge transfer of wealth, his famous quote being:

This is the greatest wealth transfer in history. Therefore it is the greatest opportunity in history.

But what he fails to point out on most occasions is that we are already well into and possibly coming near to the end of this wealth transfer.

Those getting into the precious metals ahead of the trend where those buying in 2001-2003, not those that started buying in 2009, not those that started buying in April 2011. I started buying/investing in precious metals through 2008 and while I was ahead of some, I was certainly not early to the bull market.

The investor who was ahead of the trend, who was aware of cycles and moved all their wealth from stocks or real estate into Gold back around US$250-300oz is now sitting on a huge profit. Infact speaking of which those investors (specifically in the US) may want to consider moving some of their assets back into real estate (even if simply to purchase their own home to live in) as the ratio (HOME:GOLD) is currently the lowest it's been since the 1980 peak in Gold (as reported by Zero Hedge):


Those who traded out of the Dow into Gold back in 2001 have multiplied their income by 6-7 times (where someone that stuck with the Dow over the same period is barely break even). Sure there is still the potential for them to make a lot more if we do get the much anticipated 1:1 (Dow:Gold), however it's likely that those early to the Gold trade will also make an early (smart) exit.

Most of the wealth transfer that Mike Maloney talks about has already occurred.

Time wise we are probably at least 3/4 of the way through this bull market with only a few short years left to play out (maybe even less).

Any middle class investors getting on the Gold gravy train at this point should be very wary that they are entering the trade so late. If you are getting on now thinking it's the road to riches based on a 'wealth cycle' you need to understand that we are entering the final stage of the precious metal cycle and it's going to be hard to exit when parabola truly sets in. In the final 24 months of the last Gold cycle/bubble Gold rose a factor of 5 times (from $170 to $850) with most of the gains made in the last few months leading into the January 1980 peak.

Gold has risen roughly $450 over the past 5 months (US$1400 to $1850). A move this large (in dollar terms) in such a short time is unprecedented in the bull market to date. Clearly things are heating up. I am still of the belief that we recently entered the 3rd phase of this bull market (as I originally suggested 8 months ago: Gold/Silver entering the 3rd phase of the bullmarket?) so further fireworks should be expected.

Just keep in mind when watching material like Mike Maloney's presentations that we are well into the bull market. There are still fortunes that will be made, but also potentially fortunes will be lost if you leave your exit too late.

BB.


For a free gram of Gold signup and trade metals on BullionVault.com (CLICK ME).

Silver bullion coins - Which should you buy?

You can now buy Perth Mint 2012 Lunar Year of the Dragon Silver & Gold Coins at Bullion Money:

Click this banner or the one at the top of the page to visit.

A new sub-forum (Panda Forum) on Silver Stackers has sparked some worthwhile debate on which Silver coins investors should be buying. The debate is generally around 1oz Silver bullion coins, some of which come with a mintage limit and others without (although those without usually cease production at the end of the issued year).

First up I would like to point out that I do not consider myself a numismatic coin collector. However I am happy to pay a small premium to purchase bullion grade coins that have an obvious advantage over their peers. I look for those that might bring a numismatic premium in the future to amplify gains on top of that achieved from an increasing Silver price.

I think it's worth noting that while numismatic coins performed well during the last precious metals bull market, the real bull run gone bubble actually came several years after the peak in metals (which is illustrated in the below chart from PCGS). The Professional Coin Grading Service produces a long-term rare coin index, the PCGS 3000 Index:


There is no guarantee that the numismatic bull run will once again follow the precious metals peak, but I think it's important to identify in your own mind when buying metals whether you are a 'coin investor' or a 'precious metals investor'. Note: I will be using the term 'investor' throughout this post, but ultimately buying coins based on an outlook that the underlying metal or demand for a specific coin will push the price higher is speculation, not investing.

A precious metals investor might be buying metals for several different reasons or suspected economic/monetary outcomes, but they should always be following one of the fundamental rules to investing:

"Don't fall in love with your investments"

A coin investor may do so for the love of the coins themselves in which case the monetary value of the coins (or the price they pay for them) may not matter so much. They might also be buying to speculate on the demand for a specific coin pushing the price higher.

Now there is no reason that you can't be both a coin investor and a precious metals investor, but if that's the case then you need to be brutally honest with each purchase and label each buy as either part of your collection or an investment. Mix these two together and you are walking a dangerous line which will likely result with you being unable to sell the metals when you should be doing so.

An example of someone who is both a coin and precious metal investor might be someone who buys some rolls of a bullion coin for a few dollars over spot as well as some proof versions of the same coin for twice spot price or maybe they buy some of last years version of the series for 50% over spot.

With that out of the way I would like to take a look at the options that investors have for purchasing 1oz Silver bullion coins.

One of the options that will soon be available (likely only for a very limited time) is the 2012 Perth Mint Lunar Dragon, which I previously discussed on my blog around a month ago (LINK).

Note: Mock-up design. Official pictures yet to be released.

Some of the most heated debate on Silver Stackers has been comparisons between the Perth Mint Lunar series and the PBoC Panda series.

The coins in these two series:

- Both have Chinese influence to their designs
- Both are well recognised world wide
- Both have aesthetically pleasing designs

The Lunar coin has a set mintage of 300,000 (which will be in place until Series 2 concludes) whereas the Panda mintage is increasing (900k in 2009, 1.5m in 2010, 6m in 2011, how many in 2012?).

It seems the PBoC is happy to increase mintages of the Panda mid year to meet demand (which they have done in both 2010/2011), which means you can't be sure of the final mintage until the next years design is being sold. In my opinion this is a huge disadvantage for those who are buying the coins for their rarity.

The Lunar is more readily available in Australia from a greater number of dealers.

The Lunar coins come in a much more convenient form from the mint, in rolls of 20, whereas the Panda comes in hard to stack plastic sheets.

The Lunar can be bought at a lower premium to the Panda on release (before they sell out at the Perth Mint), which means more Silver for your dollar and you are better exposed the the price movement in the underlying metal.

Fake Panda's are common and the counterfeits are becoming increasingly harder to spot. As someone who has been caught out buying fake Panda's in the past this is probably somewhat influencing on my personal decision to avoid them. I have never seen (or heard of) a fake Perth Mint Lunar series coin.

It has been identified by members on Silver Stackers (as well as by Peter Anthony, Panda Collector) that there are several varieties (e.g. slight differences in coin by coin comparison) of some Panda designs (up to 5 in 2003!), making it even more difficult to identify genuine Pandas over counterfeits.

Some Panda enthusiasts argue that although the mintage on the Panda is higher there is a much larger local population to support this, however I would argue that Australians have much higher salaries and net worth than the Chinese which might also be taken into account in such an argument. Further to this with eBay and other ways of selling coins around the world I think the local population of the coins 'country of origin' is largely irrelevant.

Another argument put forward for the Panda is the performance of the previous years coins which have risen much higher than the price of Silver and many other coins, however over the last several years we have seen the mintages of the Silver Panda series increase almost exponentially:

2008 - 600,000
2009 - 600,000 (+ 300,000 commemorative coins)
2010 - 1,500,000
2011 - 6,000,000

So we have seen it increase by a factor of 10 over the past few years, whereas the Lunar series (Silver BU) is fixed at a guaranteed 300,000 maximum (although this doesn't stop the Perth Mint from producing a much larger number in alternative sizes and designs some of which don't have limits).

The new Panda coins now have a larger mintage than some other series, such as the Canadian Wildlife series which has a mintage limit of 1,000,000 per coin with two released so far (Timberwolf and Grizzly), although the Panda still has a smaller mintage than other coins such as the American Silver Eagle and Canadian Maple.

Earlier Pandas (especially those with small mintages) have performed extremely well over the last few years as Gold and Silver investment increases in China, however it remains to be seen whether the later years (2010 onwards) with much larger mintages will see the same performance. As it stands today the 2010 Panda vs the 2010 Lunar (Tiger) has the two coins priced pretty much neck and neck (Panda slightly higher, but the Lunar coin was generally slightly cheaper to buy for us in Australia to begin with). That was when the Panda had a 1.5m mintage (vs the Lunar 300k), what bearing will the quadrupling to 6m Pandas in 2011 have? How many more millions will the 2012 mintage be?

Of course the coin mintage isn't the only factor weighing in on future price. The design has some bearing (as well as popularity of the specific animal portrayed in the case of the Lunar coin which changes every year). The 2010 Lunar Tiger has outperformed the 2009 Series 2 Ox for example. The Tiger proving to be a much more favorable design.

In my opinion the 2012 Perth Mint Lunar Dragon (Silver 1oz BU coin) will be the pick (over Panda or any other bullion prices 1oz variety) if you can get your hands on any this coming September. However a mix can never hurt and if you have a sharp eye (to avoid fake coins) and can obtain the 2011/2012 Panda for a reasonable premium to the price of Silver then it's also probably not a bad coin to buy as well.

While other coins (Maples, ASEs and others) might come with a slightly lower premium to the Lunars and Pandas, I believe it is worth the extra couple of dollars per ounce to purchase the coins that have the potential for numismatic premiums in the future.

BB.

Buy 2012 Perth Mint Lunar Dragon Coins at Bullion Money.

Wage/Gold Ounce Ratio - Australia

In the comments section on Macro Business earlier today there was a suggestion to draw a chart showing the price of Gold relative to wages in Australia (after Macro Business published my charts showing Australian houses priced in Gold/Silver). With some time on my hands this evening I decided to see what the results were.

I couldn’t find a single data set which provided Australian wage data that extended over more than around 20 years, so I have spliced together two different sets of data before graphing them (they were relatively in sync). From 1972 to 1994 I have used the total (weekly) full time average earnings (for an adult) from the RBA (LINK, see item 4.18) and for the period 1995 to 2010 I have used the total (weekly) earnings for a full time adult from the ABS (LINK, see Table 3).

The AUD price of Gold was achieved by averaging monthly figures (to get an average price for the year) provided in a spreadsheet by the World Gold Council (LINK).

The chart simply shows the number of Gold ounces the average weekly wage would buy (technically it would be a fair bit less after tax and living expenses!):

CLICK CHART TO ENLARGE

This chart shows the last 40 years, but how expensive was Gold relative to wages before that?

Here is some information from the ABS on wages and the Gold price in 1901:

In 1901, the average weekly wage for an adult male was about $4.35 for a working week of almost 50 hours, which after inflation equates to $217.50. However, wages have grown much faster than inflation, with the average weekly ordinary time earnings for adult males in May 2000 being about $830.00 for around 37 hours work, in far better conditions.

The price of gold has often been used as a measure of inflation. At Federation, the price of gold was $8.50 an ounce, or $425.00 in today's money. The actual price of gold in 1999-2000 averaged about $460.00 an ounce, showing that it has generally maintained pace with inflation. ABS

While the ABS has shown that Gold has kept up with the pace of inflation, it’s not necessarily a good tool to use as an inflation hedge unless held over very long periods of time. The 30 year bear market after the last nominal peak in 1980 to 2000 is proof of that.

Based on the above figures from the ABS the Wage/Ounce ratio was around .51 ($4.35 wage / $8.50 oz) in 1901.

20 years later and the ratio had changed quite significantly.

In 1919, Billy Hughes appointed a commission to reconsider the basic wage of the worker - a family with three children needed £5 16s which was 30s more than the current minimum wage. For most of the 1920s, the average wage for an Australian worker was £9 30s. Skwirk

At this time the price of Gold was fixed in USD at $20.67 an ounce. In 1920 the Pound was valued at USD$3.66, so in USD an Australian weekly wage was around $38.43 and bought 1.86 ounces of Gold.

To get back to the .42 ratio seen in 1980 (remembering that is with the price of Gold averaged over the year) we would have to see Gold at AUD$3200 and obviously even higher assuming wages rose while Gold climbed to that level.

Will we see the ratio fall back to the level seen in 1980? What are your thoughts?


BB.

For a free gram of Gold signup and trade metals on BullionVault.com (CLICK ME).

Five reasons FHBs should avoid buying now!

A couple of days ago Chris Zappone wrote a follow up piece to his article on the First Home Buyers Strike (I posted about the original here):

The buyers' strike of Australian property sought by a tax reform group last month has proven to be a fizzer, precisely because some people don't like the idea of lower house prices.

Online activist group GetUp! decided not to pursue a strike of home purchases to protest at the lack of affordability in the housing market because its own members did not like the idea.

"While the issue of housing affordability is clearly an issue that resonates with plenty of people, GetUp! members don't support a boycott campaign," wrote Kelsey Cooke, online community co-ordinator for GetUp! late last week. SMH

Chris is a little late to the party with the news that GetUp! rejected the suggestion, they did so over 3 weeks ago. 

The first comment on the article really says it all though:

The Buyers' Strike is "on", it just doesn't need an official movement to promote what is blatantly obvious to everyone in the market: Prices are falling, and will do so for quite some time to come.

The smart property investors sold up last year. Time is well and truly on the buyers' side now.

I don't think there was ever any doubt that they would reject it, but regardless the strike lives on. Prosper Australia continue to cover related news on their website and social media sites:

Facebook - Don't Buy Now
Twitter - Don't Buy Now

There is some great interest and involvement from the public on the Facebook page and I would encourage you to 'Like' the page in support of the movement.

I think regardless of who is supporting or not supporting the strike, young Australians should make their own decisions about when to buy. Ignore all those with property interests (including parents, colleagues and friends) and do your own research into whether today would be the best time for you to buy.

Here are five reasons you should avoid buying right now:

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1. Renting is around half the cost of buying

As I recently covered in another post (Rent vs Buy: Cost Comparison) the cost of renting is significantly lower than it is to buy. With mortgage rates at 7% and yields at 4% the cost of renting is almost half that of maintaining the interest on the mortgage interest, let alone rates, building insurance, borrowing costs and maintenance.

Think about the money you could save by renting instead! In a situation where it might cost $500pw to buy, you could expect equivalent rent to be around $250pw. $250pw x 52 weeks in a year = $13,000pa. What could you do with that sort of extra money? That's an overseas holiday every year, a brand new car every 2 years or you could even just squirrel the money away into a term deposit or investments until a time comes that it makes financial sense to buy.

Have you heard the phrase before "rent money is dead money"? Well so is the interest on a mortgage and if the interest exceeds the rent you would pay for an equivalent home then you are paying more "dead money" to buy than you are to rent!

2. Falling prices will continue

The Herald Sun recently reported that, "Melbourne's property bubble is bursting, with $400 a day wiped off the average house price in the past three months."

There is no guarantee that prices will continue to fall that quickly, however even after a 6 percent slump (according to the REIV) in the first quarter of 2011, Melbourne prices and in capital cities all over the country continue to sit at ridiculous levels.

The credit bubble has inflated prices to a point where First Home Buyers are even struggling to afford prices in the new fringe suburbs. That begs the question, who is buying? With volumes having dipped significantly and stock on market up 50% on last years levels the answer is "not many".

Eventually vendors will realise they are going to have to start discounting more heavily to sell, that's when the real declines begin. This is likely to suck in even more sellers who have speculated on house prices increasing, they will leap frog over eachother on the way down just as they did on the way up, putting further pressure on prices and adding even more stock to the already over saturated market.

3. You may quickly outgrow your first home

One idea that I seem to hear repeated often is that you should just 'buy whatever you can afford' when it comes to your first home, just 'get your foot in the door' they say and work your way up the property ladder. What the older generations might be failing to remember is that you may outgrow your first home very quickly.

Imagine the situation where you've bought a 2 bedroom unit as your first home. Two years down the track and the casual relationship with your partner has taken a serious turn and you are looking to start a family (have kids). You may then be in a situation where you have to sell the existing property to fund the larger one. That likely means real estate commission costs (usually around 2% of sales price), stamp duty on the new home, possibly LMI (Lenders Mortgage Insurance) on the new loan if you will be borrowing on a LVR greater than 80% again. Not only that, but as per reason 1, you've possibly been paying a great deal more than renting to buy.

Do the sums. Make sure you consider all possibilities that arise. You may be a lot better off by renting until you can afford a home that will last years no matter what life throws at you.

4. Ownership ain't all it's cracked up to be

What are the benefits of owning? I mean besides bragging to your friends that you're now a proud home owner... can you really justify the extra cost?

The answer may be yes for some. For those that like to get hands on with their home, landscaping the garden, painting and renovations, extending the house & for those that need the security ownership (not relying on the landlord to renew a lease) then buying may be the best option. For me personally (and I'm sure many others) the benefits of ownership just do not outweigh the extra cost that comes with buying.

Personally I love the peace of mind that comes with renting. I know that if something breaks (aircon, heating, stove, plumbing, etc) then it's just a matter of calling the landlord to organise a fix.

Having owned before I know that owning isn't all it's cracked up to be. Council rates, water rates, building insurance, emergency levies, maintenance costs, fixing things when they break... it all adds up!

5. Living at home/renting = Freedom

Taking out a large mortgage is a yoke around the neck of the young. You should enjoy the freedom that renting/living at home provides while you can. Of course it would be prudent to put some of your income away for a rainy day or making a house purchase later in life, but don't give up your youth just so that you can say you own property.

Travel. See the world! You will find this much more difficult to do once you have a 30 year binding commitment to pay the mortgage on a house. You've got youth, money and an opportunity you may never have again in your life. Don't waste it!

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All that said, if you understand the risks associated with buying at the peak of the market, the excessive cost of buying over renting is no bother, you've got long term plans to stay in the property, you've got a large deposit and you aren't stretching the budget to buy then I wouldn't discourage you from buying, just make sure you know what you are getting yourself into.

So there you have it, my top five reasons Australians should put off buying their first house. Of course this doesn't only relate to First Home Buyers. I've been there and done that (owning my first home) and most of the reasons above are core to why I am yet to buy again after renting for the last 18 months.

When it makes financial sense again to buy I will be cashed up and ready having saved a fortune by renting and investing in appreciating assets. This reminds me of a Dilbert cartoon that I saw sometime ago:

BB.

The AUD Gold 'Pascoe Indicator'

Michael Pascoe is an Australian financial journalist. Well known and respected with more than 30 years reporting in Newspapers, on TV, Radio and Online.

Something he has made obvious over the last several years is that he's a Gold hater!

All the way up the bull market Pascoe has continued to berate and ridicule Gold and it's investors (or 'Gold bugs', a term he uses to paint us in a negative light).

Of course anyone following his articles might note that many have come around low points in the AUD price of Gold, so much so that his articles could almost be seen as a contrarian indicator (e.g. time to buy AUD Gold when he posts a negative Gold article), see the chart below:

Here is a list of the 5 points labeled on the chart and the article written by Pascoe at the time.

1. On September 27th, 2007, Pascoe had the following to say about Gold:

Gold bugs losing their bite

Of course, you can still find bugs who think the rally above US$1000 an ounce is only a stock market away – but other commentators don't think there's any meaningful correlation between the metal's price and wobbly equity markets.

The more reliable truth is that gold is really just another commodity, albeit one with a rich history. The good news is that demand for gold continues to rise and production doesn't keep up – but there's still a big overhang, thanks mainly to European central banks that still want to sell down their holdings. Super Living

2. This was followed by the below, 2 years later on September 14th, 2009:

Gold drops 25%!

Gold did finish in New York at a record high of $US1006.50 an ounce – which is all very entertaining if you happen to be American or have most of your assets in US dollars or a currency more-or-less pegged to the greenback.

But if your assets are Australian dollar denominated, it doesn't really mean much at all. Our overwhelmingly American-centric media tends to ignore that.

As gold sceptics know, the yellow stuff occasionally has a day in the sun when there's fear and loathing in the financial system or when the herd decides to make gold the next candidate for a speculative bubble, but its price is mainly a reflex currency play for the US dollar. The Age

3. Pascoe was still talking Gold down 10 months later on July 28th, 2010:

Time for gold bulls to feel a little fear

Nearly three years of fear and loathing have been very kind to gold bugs as worry about financial crises helped drive investors into the alleged safety of the yellow metal, whereupon the gold price rose further because the gold price was rising – the momentum players chiming in.

But there are signs that the tide of fear might be about to turn – an event that would be precipitous for the gold price and all who ride on her. It could be the gold bulls' turn to feel fear as pain instead of pleasure. The Age

 4. New year, another negative Gold articlefrom Pascoe. March 18th, 2011:

Buy iodine, sell gold and forget the Aussie

With all the present volatility in the markets, what’s perhaps most surprising is how very little gold has done. If I was a gold bug – and I’m clearly not – that might be a worry. Of course, the hard-core gold believers think life as we know it is coming to an end anyway and therefore are unshakeable in their strange faith.

I have been wrong about the gold price for the past several years [At least he's honest! BB], but that still remains more a matter of timing than fundamentals. The major leg of the gold rally was based on a reasonable reason – the need for those with US dollars to get out of them as the American economy and the greenback plunged.

Since that first leg, gold has risen primarily because gold had risen. The momentum trade kicked in, the exchange traded funds (ETFs) took off to capitalise on that and the great gold bubble bubbled on. There’s an entire industry devoted to justifying the rise – at any one time you can find people who will tell you that gold is a great hedge against inflation, a great hedge against deflation, a safe haven and a cure for baldness. Well, maybe not a safe haven. The Age

5. Only a month later and Pascoe is again laying in the boot. April 27th, 2011:

Rich rust beats dull old gold

Don't know why there's been so much excitement over the price of gold in US dollars - it's even better in Vietnamese Dong or Ugandan Shillings. The Australian dollar gold price though is terribly boring, but don't try telling gold bugs that they would have been much better off falling in love with rust than the yellow metal.

The uninvolved might be under the impression that the price of gold has been soaring to record highs lately, some using that as an excuse to bid up the price of shares in Australian gold miners in the hope that higher gold price might flow through to them.

Wrong. Gold actually has been doing nothing much for the best part of a year and remains well below its record high. That's gold in Australian dollars, of course – the only measurement that means something if you're wealth is in Australian dollars to start with. SMH

The above examples are just some of Pascoe's articles that highlight his negative outlook for Gold. There are others that can be found with a Google search, many of those also in dips or at lows as Gold in AUD continues to inch along it's long term trend line (marked on the chart above).

 

Pascoe is right in his latest article though, Gold in AUD has been boring for sometime, but one can't help but wonder whether the overvalued (in my opinion) AUD will correct back below parity against the USD at some stage in the near future. A move like this could give Gold a quick 10%+ boost in price and take us to new highs, surpassing the last high set 2 years ago in February 2009.

 

With any luck Silver's recent rise might also catch Pascoe's eye so he can start commenting negatively on this metal at it's lows as well. Keep some dry powder for that purchase point just in case!

BB.

 

Disclosure: Positions held in Gold. Not investment advice. Do your own research.

Thanks goes to user SaturnV on the Hot Copper forums (suspect registration required to view) for this posts inspiration.