Royal Silver Company Bonds: Ponzi or Plodding?

Royal Silver Club - World's First Silver Bond from Royal Silver Company

You might not be familiar with Royal Silver Company if you don't follow the Silver coin market, but over the last 24 months this company has built quite a name amongst coin collectors for their .99999 (5 x 9s) Silver coin products (technically they are rounds as they aren't legal tender). Most Silver coins are produced in a lower finesse such as the American Silver Eagle (.999) or Canadian Silver Maple (.9999), so these new coins from Royal Silver Company became somewhat a novelty for collectors, chasing the finest Silver coin available on the market.

This is a blurb available on the Royal Silver Company's website:

Royal Silver Company is Bolivia's only silver refinery and custom smelter. We sell a retail product: the world s first .99999 pure silver coins. Our retail product is sought after by collectors and silver coin investors, for its unique purity and limited availability. We charge a high premium over spot silver, limiting sales to match our production capacity.

In mid 2010 they released their first coin in this fine grade, the 2010 Andean Cat:

Royal Silver Company 2010 Andean Cat 1oz Silver Coin

While I can appreciate the novelty of owning the finest Silver coin I must admit their first coin certainly didn't do much for me from an aesthetic point of view. However their designs have improved over the course of the past two years:

Royal Silver Company 2011 Blue Throated Macaw & 2012 Anaconda

Around 12 months ago (July/August 2011) the Royal Silver Company started offering (reportedly the world's first) "Silver Bonds" in order to expand their operation in Bolivia. A total of 400 certificated were/are on offer at a cost of $5000 (potentially raising up to 2 Million Dollars). 

This Royal Silver Company Silver Bonds made news on Yahoo Finance:

Royal Silver Company is a Panama corporation with a wholly-owned subsidiary in Bolivia.  The company uses an advanced hydro-metallurgical method for producing silver from mined ores.  Furthermore, the company uses zero emission technology in order to produce certified .99999 silver.  The company currently employs about 75 people.

The company has a new limited membership opportunity for silver.  Royal Silver Company is offering 400 memberships at a cost of $5,000 each, as long as spot silver is between $35 and $40.  The cost of membership climbs to $5,625 if spot silver is between $40 and $45.  Each membership acts like a bond, a silver bond.  Each silver bond entitles the holder to receive a 1 oz silver coin each month until the silver bond matures in 2 years (24 total silver coins).  Upon maturity, the holder receives their initial dollar investment back.  This may appeal to investors, because it is rare to find an investment that pays you interest or dividends in physical  silver .  However, the downside of course is that the initial payment is paid back after two years in U.S. Dollars .  The company’s website contains more details and even explains that investors can sell their membership back to Royal Silver Company anytime before the 2 year maturity is due. Yahoo Finance

Well known YouTube personality stellaconcepts (aka John Christian, online entrepreneur behind Top Stocks & Spotmex) also plugged these Silver Bonds on his YouTube channel:

These paper certificates were to provide bond holders (/club members) with a regular stream of Silver coins paid (in place of cash interest a bond would normally pay), with the redemption of the bond possible at any time over it's life or otherwise paid out in full at the end of the 2 year term (in US Dollars). As stellaconcepts points out in the above video, it's possible to hedge your exposure to currency movements for those who were concerned about loss from a change in the exchange rate.

Being a member of the club also allowed you to purchase coins wholesale up to the value of your bond ownership (e.g. owning a single $5000 bond allowed you to purchase up to $5000 in Royal Silver Company coins at wholesale prices, $3 over spot), meaning return on investment would be quite significant (should everything go to plan):

Royal Silver Company - Silver Club Projected Return

You can read more about the bonds on the Royal Silver Company website (they call the program Royal Silver Club): Link to Brochure.

The brochure outlines risks associated with the investment including the following warning:

LOSS OF CAPITAL
Risk: Royal Silver Company could become insolvent and unable to pay back Royal Silver Club members.

Management response: Royal Silver Club membership funds will be used to buy silver concentrates, crude silver, and crude gold. Club funds will be liquid, either as concentrates, silver, silver coins, or gold and gold coins. Only 400 memberships will be sold. Management will do everything possible to build a loyal investor base for future projects. Our best interest is served by making The Royal Silver Club an outstanding success.

There was little said about the program (from those who invested) for some months. Some positive feedback from a member on Silver Stackers was reported in January:

"I just want to give some good feedback about Royal Silver Company. 6 months ago I bought into the Royal Silver Company Clubmembership (1 bond) and to date I have 6 coins as promised with no dramas." Link

It seemed that all was on track. 

The CEO of the company (Brian McConnell) posted every now and again on the Silver Stackers forum, including this in April this year:

What a difference 9 months makes.  If a person had invested $5K in physical silver at $41.66 and purchased 120 ounces, he or she would be losing 26%--a $1,300 loss on a $5,000 investment.  But those who advised buying silver and who said Royal Silver Company would not honor its bond, don't post in hindsight to say they were wrong.  So I thought I'd point out the obvious answer to the original post--buying a Membership was the best decision.  From the time of the post, Members of the Royal Silver Club have received 6 to 9 free coins per Membership and their investment has increased in value against the AUD.  All Members wishing refunds have received them, so their investment has been proven liquid.  Some Members make money buying our coins for wholesale and re-selling at higher prices.  In all, Members have received the benefits of free silver, wholesale silver, and capital preservation.  Buying the world's first silver bond--The Royal Silver Club--has proven to be a sound investment with a good return--and most important--no loss of capital.  Obviously the skeptics will have something negative to post as soon as I put this up, but facts are difficult to deny.  Oh, yes, in case it is not obvious, I am the CEO of Royal Silver Company.  I am grateful to this forum for helping to develop our world-wide reputation for producing nice rounds.  And I thank forum members who have invested with our company. Link

However on June 13th this year Silver Stackers forum member Dusty posted discontent with the service he had received from the Royal Silver Company (relating to timely delivery of coins as part of the Royal Silver Club of which he had 3 memberships) and advising us that he had cancelled his memberships to this program (and in turn expecting return of his capital within 30 days as per conditions outlines by the company). You can read the post in it's entirety here (Link) and Dusty is also organising a sorted timeline of events for me which I will post on the blog at a later date.

The thread also highlighted other poor turn around times which customers of the company had received (although not all explicitly the fault of Royal Silver Company):

1. "I too am having problems with RSC. I placed an order on June 5 and wired out the money. As of right now, they still do not show the wired funds in my account and they have not responded to my email from the other day."

2. "I had a serious wait to get the 2010 cats. I ordered them late November '10 and got them April '11. Sounds like the communication system hasn't improved from the time I ordered to the OP's experience. I recall sending numerous emails and although I got responses promising they'd be sent soon, at the end it went silent until I received a  PM here that my coins might be in a lot this person received from Brian and indeed they were."

3. "Same experience when I did the first group buy for Andean Cats a year or so ago. Between the wire fees, delays, dealing with FedEx/Customs, was a terrible experience. Despite many many requests to do another group buy, I just didn't want to deal with the hassle."

Brian McConnell (CEO, Royal Silver Company) also responded in this thread (here), part of which is below:

Royal Silver Company has successfully delivered coins around the world for 2 years, since we first started minting.  EVERY order on our books has been delivered or will be delivered.   Anybody who has ever canceled an order has received a refund.  Anybody who wanted a coin replaced has received a replacement.  (We replaced hundreds of early coins, at our cost, with higher-quality strikes). We do this from the most challenging business environment in the Western Hemisphere, from a land-locked, impoverished country high in the Andes Mountains--a country with little industrial development, expensive transportation to world markets, no access to capital markets, governed by people who do not share our free-enterprise values, where the rule of law is a foreign concept, and where people speak Spanish, not English.  Holidays are many, strikes are common, blockades are the order of the day.  Bolivia is the Wild West in every sense of the word. Continues

Later in the thread Dusty says his refund was supposedly being processed on June 13th, the day he posted the thread, however as of July 26th he was yet to receive a refund or be kept filled in on it's progress (and was also missing several dividend coins).

On August 6th Dusty advised members on Silver Stackers that the CEO of Royal Silver Company had promised the return of his $15,000 (for 3 Royal Silver Club memberships) by the 15th of August. The date came and went and Dusty still hasn't received a refund of his $15,000 invested into the Silver Bonds. 73 days later when the company claims they will repay within 30.

Another member on Silver Stackers (Wiowi) who private messaged me said the following about his experience with Royal Silver Company:

I too have come against a blank wall with responses from RSC/Brian MCConnell.  I have one membership, the certificate was signed on 3/01/2012.  I received 3 coins at that same time, but none since then.  I thought this was a poor performance from RSC and Brian, and after reading about your (Dusty's) misfortune I decided to ask a few questions too.  During the last 10 days I have sent emails to RSC via their "contact us" on the website, to Brian directly and to the Commercial Registry of Bolivia (FUNDEMPRESA).  In those emails I requested return of my $US5000.00 (giving 30 days notice) and that they forward me my outstanding membership coins.  I also requested acknowledgement of my emails, but I have not received a reply.

The last communication I had from Brian was this on 14/07/2012....

"(my name):
We have been delayed to all customers and Members on silver coins for refining issues that have been resolved, finally.  Australian Members are behind by 6 months.  We will be sending coins to Australia shortly to bring everybody up to date.  Thank you for your patience.
Regards
Brian"

This brings us to the question posed in the post title: Are the Royal Silver Company (Royal Silver Club) Silver Bonds a ponzi scheme or is the company just plodding (slow) with delivering what they promise?

My read of the situation (given most customers appear to eventually receive their products) is that the company most likely just has cash flow issues, rather than it being intentional purpose to deceive and retain customer funds. However an investment like this can go bad even the most well intentioned people at the head of the company.

These events are likely to leave a bad taste in the mouths of those involved and who have read the experiences of those affected, so it makes me wonder how easy the next company with an innovative investment opportunity might fare in the precious metals coin market...

My advice if you want a guaranteed investment in the precious metals market, then forget mining companies, forget unallocated accounts, forget bonds or any other form of paper investment and stick with purchasing physical Gold and Silver!

Addendum (added October 18th, 2012):  

As of late September Dusty had received a full refund for his bond holdings (Royal Silver Club), but others I'm aware of who had also submitted requests for refund are still waiting (Edit December 31st, since confirm received). In short I don't think Royal Silver Company is trying to "scam" any bond holders, but these liquidity issues should make readers think about the risks associated with investing in the Royal Silver Club (Silver Bond Program).

Response from Royal Silver Company CEO Brian McConnell (added December 31st, 2012):

Dear Bullion Baron--thank you for being fair minded.  Of course, you have only heard one side of the story, since dissatisfied customers are quick to complain on the internet, but slow (or never) to write that their issues have been resolved, which leads the average reader of your posts to assume that our company is a scam, which it is not.  Please take the time to read this response to the negative things you have posted against Royal Silver Company.

Here are the facts:  except for 3 recent requests, all Membership refunds have been wired to the Members requesting refunds, and we most-times include extra to cover their bank fees.  The remaining 3 refund requests will be wired after the New Year’s break (around January 7).  Yes, it is true that we were delayed with refunds beginning May of 2012, as one irate Australian customer frightened other Members into asking for refunds as he flamed us on the Silver Stackers forum to such an extent that the moderators closed his posts, only to have him continue his rants on YouTube, other forums, and other threads on the same forum.  Only reluctantly and only when asked directly by other Silver Stackers did he admit that yes, he had received his refund.  After that, his credibility was called into question.  However, he did cause a “run-on-the-bank” that saw us refunding over $400,000 in Memberships.  For a modest-sized company such as Royal Silver Company, this reversal in cash flow took a while to resolve.  We stand behind our promise to Members that their investment is liquid and that we will refund their investment, when asked.  If I can plug my own product for a moment, please bear in mind that The Royal Silver Club was the world’s first silver bond and that it proved a good investment during 2011 and 2012 as silver declined in price.  Our investors did well, since their capital is safe and they have received silver coins with no cost basis (free), such that they now own 15 to 18 silver coins (or less, depending on when they purchased a Membership) that are basically free.  Even at today’s silver price, this is a better return than a typical bond--plus our coins do not re-sell for the price of silver, but for much more, so the return on investment is much higher than any other corporate bond.  Besides being an unique investment, The Royal Silver Club has proven to be a profitable and safe investment--considering how many corporate and sovereign bonds have become worthless since last year, I feel we offered our customers a good return in a product that means more to them than the few dollars that the normal bond or savings account pays these days.

Regarding delays in the delivery of coins.  Yes, it is also true that Members in Australia in particular suffered long delays in receiving their free coins as we developed distribution channels.  I admit that delivering coins free of charge to customers on every continent from the land-locked country of Bolivia proved to be more of a challenge than I first expected, but as I write this, most free coins have been delivered already, with more on the way the first week of January.  All Members will be brought up-to-date by January.  What most complainers fail to mention is that I voluntarily added one extra free coin to the 12 free coins per year that we contracted.  In other words, Members received or will receive an additional coin, even though that was never part of the original contract.  We added the additional coin because the decline in the price of silver went in our favor, so I decided to give our customers something extra.  What other company have you ever heard of that voluntarily pays their bond-holders more than originally contracted?  None, except Royal Silver Company.

Coin customers who pay for their orders receive them within our Terms of Service, with few exceptions.  Yes, there were some exceptions in 2012, especially as our ability to make silver was hampered by the “run-on-the-bank” that impacted our cash flow.  However, all credit card customers receive their orders within our Terms of Service (most people fail to read the fine print, but they agree to our Terms of Service with each and every coin order), and most cash customers also receive their shipments within our Terms or shortly thereafter. 

Please understand that we are the only mint in the world to take raw rock, extract the silver with zero-emissions patented technology (US Patent 7,892,505), refine the silver to the highest purity, and mint proof-like finish coins, all under one roof and with no pollution to the environment whatsoever.  Then we ship each order to the customer, no matter where in the world they live, from the impoverished country of Bolivia (one of the most challenging business environments in the Western Hemisphere).  Also, we are the only mint to offer customers an independent certification of the purity of each and every batch of silver we refine.  Other mints offer absolutely no assay of purity, or only an in-house assay signed by their own assayer.  SGS, the largest standards and testing organization in the world, independently certifies cuttings we take from each batch of silver coins.  So customers can be sure that Royal Silver Company truly offers the purest silver coins in all of human history.  It may take longer, but we refine each batch of silver to 5x9, even if we have to re-refine several times.  This sort of extraordinary craftsmanship takes time and effort.  For the modest premium we ask, we offer the most unique silver coins in the world, that in all parts of the world re-sell for much more than our store premium.  And Club Members receive our coins for wholesale price, less than the cost of the average generic rounds that have no re-sell premium at all.

Regarding me being slow to respond to emails, please be fair.  I receive about 200 emails per day, most of which require some response.  At times I travel to remote parts of Bolivia and my inbox fills beyond my ability to go through it quickly.  I defy you or anybody to write to Bart Kitner of Kitco about a coin order and receive a personal reply, or to the Director of the Perth Mint, or US Mint, or Chinese Mint about a small coins order and receive a personal reply, yet I try and respond to everybody who writes, no matter if they only ordered one coin.  All you ever see is “Brian does not return my emails.”  Wow.  If people would write to us using their Royal Silver Company store account, then our English-speaking customer service rep will see their mail and respond quickly, but many customers write to me directly on my personal email and expect an immediate reply.  That is unrealistic to say the least.  Yet I do respond eventually.  Please believe me when I say that dealing with the retail public around the world requires the patience of the biblical Job.  I am not complaining, just explaining.

In 2013 Royal Silver Company will expand operations to become Bolivia’s largest zinc and silver smelter.  We hit a speed-bump in 2012, but have overcome the difficulties of working from Bolivia to build our company into one of the largest.  You and others will read about us in the popular press as we become the most important zinc and silver producer (metallic silver and zinc, not just minerals) in our region of the world.  It takes guts and courage to invest in Bolivia these days, let me tell you, but we are committed to the industrialization of Bolivia more than any other company I know.

Finally, if customers would apply a reasonable amount of patience, they will receive the most ethical, and purest silver coins on Earth.  Every order on our books has been or will be shipped.  Period.  If you and your readers will just look at the YouTube videos of satisfied customers opening their packages and displaying their Royal Silver Company coins, you will see a level of enjoyment and awe that is rarely shown for other silver coins.  These days, a modest amount of money rarely buys the sort of satisfaction you see expressed by our customers as they proudly show off their silver coins from Royal Silver Company.  I can’t offer the fastest, but I do offer the world’s best.

Thank you again for reading this post.

Best regards,
Brian McConnell, CEO Royal Silver Company

---

 
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Does Australia have a housing affordability problem?

There are a few key words that get thrown around time and time again when it comes to property in Australia. 

Take "shortage" for example. Someone bearish on Australian property as a whole might argue that with 10% of Australian homes empty (according to the latest Census statistics) we don't have a shortage of property in Australia (this level of empty homes has been relatively consistent for the last several decades). Another person who invests specifically in some Perth or Sydney suburbs where prices are rising sharply might argue that a shortage of homes in this specific area is driving rents and/or prices higher. Both of these individuals might be right (in the context of their own views), but they will probably squabble with each other for hours if you lock them both in the same room and tell them to discuss whether or not we have a shortage of property in Australia.

Another one of these key words is "affordability". It has been a very hot key word as prices rocketed to their peak on a national scale in early 2010 (using the RP Data/Rismark indices) and have slowly deflated since.

Some would go to the dictionary and grab the first definition of the word and throw that into the face of the property detractors who say Australian property isn't affordable:

"Afford: To have the financial means for; bear the cost of."

The "affordability problem" deniers will say things like "If Gen Y stopped spending all their money on iPods, LCD televisions, laptops, overseas holidays and widgets, then they would be able to afford a property" (and sadly this is almost a direct quote of the sort of rhetoric I see get thrown around). 

The "affordability problem" deniers will argue that younger generations are expecting too much for their first home. They will argue that living 40km out from the CBD is a reasonable expectation for First Home Buyers, when outer suburbs at the time they purchased meant 8km out from the CBD instead of 5km. They will argue that First Home Buyers should just buy whatever they can (even if it's a run down 2 bedroom hovel which the buyers will grow out of in a few years) to use it as a stepping stone in order to build equity and buy a larger home later down the track. 

The "affordability problem" deniers will argue black and blue that if a buyer can live off two minute noodles, take a cash handout from the government, leverage their savings (and handout) 20:1 (95% LVR) in an environment where interest rates are near historical lows, to buy the worst house on the worst street in the worst suburb of the city they live in then property is still affordable.

Personally I would use this definition for affordability of housing:

"Afford: To manage or bear without disadvantage or risk to oneself."

Both of the above definitions were from the same dictionary, yet both put a fairly different spin on what affordability means in the context of buying a home.

The first definition suggests that if it is financially possible then it is affordable, the second if you can manage it without putting yourself at risk then it's affordable.

Affordability of Australian property cannot be calculated on a mathematical equation alone. 

Some historical measures of affordability have attempted to formulate an affordability measurement based on the percentage of your income which is taken by housing costs. Typically 30% has been a level to gauge affordability (e.g. if you're having to spend more than 30% of your income on housing then it's not affordable), but the problem with this is spending 30%+ on housing could have a much larger detrimental effect on someone with a low income.

Another issue I see with this type of measurement is that the calculations today are being made in an environment where interest rates are near historical lows and pose a pretty big risk if/when they start to increase again.

Take a mortgage holder in the mid 1990s for example who may have had a mortgage rate of 12%. A 1% increase in rates for this borrower is an 8.3% increase on interest costs for the loan. With current low rates a 1% move higher where the borrower is on 6% is a 16.6% increase in cost of interest. For a new borrower this will increase the repayment by a significant amount and poses a significant risk, especially where they have borrowed with a high LVR.

One of the arguments made by housing commentators such as Chris Joye is that the low interest rate environment has allowed for appreciation of house prices and that the price rise can be justified almost completely by the fall in interest rates. Take for example this quote from an article he posted on Property Observer yesterday:

There is a sound explanation for this innovation: the long-term cost of mortgage debt in Australia declined by north of 40% between 1980 and 1995, and 1995 and today. This was largely a function of the long-term reduction in realised inflation and measured inflation expectations, which in turn allowed Australia’s central bank, the RBA, to permanently lower its cash rate.

The radical reduction in the day-to-day cost of mortgage debt permitted Australian households to significantly increase the amount of debt they were servicing without a noticeable rise in underlying mortgage default rates.

Although this argument holds water on a serviceability level, if we look at the effects that a doubling price and halving interest rates have on a mortgage holder over the term of their loan it's a real eye opener (use this mortgage calculator to run your own scenario):

$300,000 borrowed @ 6%

Repayments of $2000 per month

23 years, 2 months to payoff loan

Total repayments = $555,903

$150,000 borrowed @ 12%

Repayments of $2000 per month

11 years, 7 months to payoff

Total repayments = $278,643

The initial interest costs on a $300k loan at 6% is the same as a $150k loan at 12%, however the smaller loan is repaid at a much faster rate if the borrower has the capacity to repay either loan at the same rate.

So are lower interest rates making property more affordable? Not if prices rise to fill the serviceability gap.

By taking on a larger amount of debt, even if the interest rate is half of some historical levels, borrowers are taking on significantly larger amounts of risk and hence by the second definition perhaps can't be considered as affordable as some would make them out to be.

Many bullish housing commentators have been talking about falling interest rates bringing back buyers to the market, but I think that buyers are starting to smarten up on the whole "lower interest rates makes property affordable" lie. Even following two cuts in late 2011 and two more this year (including a 50 point cut in May) we have buyers sitting on the sidelines waiting for lower prices. As Leith points out on MacroBusiness today:

CLICK CHART TO ENLARGE

What is most worrying about this result is that it follows the RBA’s -0.5% cut in official interest rates in early-May. While it is only one-month’s data, these figures imply that this rate cut had absolutely no impact on mortgage demand which, in fact, took another leg down over the month.

Housing credit growth continues to remain at very subdued levels, which ties in with the very low volumes of sale (from RP Data):

CLICK CHART TO ENLARGE

It seems that even if buyers could continue to buy prices at current levels, they are choosing not to afford property (given the risks). A wise choice in my opinion as the short term downside is a much greater risk than missing out on upside.

In my opinion the best thing that Government could do to help any perceived affordability problem is to step back and stop meddling with the markets, let them deflate.

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AUD Gold Price Exceeds Weekly Aussie Wage

The case is often made that Gold is an inflation hedge. However the volatile and cyclical nature of the metal shows that it doesn't practically work as such unless measuring over a long time frame.

For example suppose an individual had purchased some Gold in January 1980 right at the peak for US$850... did Gold keep up with inflation if this individual needed to sell some in 2001 at Gold's low point (US$250)? Of course not, in fact Gold hasn't even yet reached the inflation adjusted high after rising more than 600% from the lows (inflation adjusted high from 1980 is over US$2000). Gold is not practical as an inflation hedge over short time frames. However over long periods of time Gold does hold value in comparison to fiat currencies which continuously deflate in value as the supply is increased at unhealthily high rates.

There are examples from other commentators and authors showing that Gold has retained similar value over very long time frames (hundreds and even thousands of years) against livestock and against objects such as a fine suit. However the problem with this is you are taking two specific points in time to reach a conclusion that may differ if you varied the time frame selected by as little as a decade.

The reality is that Gold cycles in value against assets from overvalued to undervalued and back again (some would argue that it's other assets which cycle against Gold). Some of these cycles might be short term (such as the Gold/Oil ratio which I covered here) or medium term (such as the Australian property priced in Gold ounces, covered here). There are other (non-tangible) things that Gold cycles in value against as well. One of the most interesting I have covered on the blog before was an average Australian wage (see previous post here).

You can see the previous post for the data sources I have used (have spliced RBA/ABS data for wages). For wages I have taken the printed number from the last quarter in each year (as it's not volatile and generally is consistently rising), for Gold I have averaged monthly prices (AUD price) across the year due to price volatility.

Here is the average weekly wage of an adult Australian plotted against the annual (average) price of Gold in Australian Dollars since 1972:

Click Chart To Enlarge

As you can see on the above chart, the spot price of Gold in Australian Dollars has surpassed the weekly Australian wage for the first time since 1989.

Chart in log form (requested by obakesan):

Click Chart To Enlarge

And if we divide the price of Gold into the weekly wage we are presented with this ratio which shows Gold cycling in value against Australian wages (Gold undervalued as the ratio peaks and overvalued in the troughs):

Click Chart To Enlarge

As I pointed out the last time I calculated this ratio, the weekly wage has cycled between around 1/2 and 2 ounces of Gold for the best part of the last 100 years.

1901:

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

1920:

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. Source

If we took the peak monthly price (instead of averaging over the year) the ratio actually dropped to around .37 in January 1980 rather than the .42 by averaging the Gold price over the year. To get back to these ratio levels we would need to see Gold climb to AUD$3750 or AUD$3300 respectively, assuming the average weekly wage remained at $1391 where it is today. In my opinion either of these ratios is possible (I would suggest likely) within the next few years as Gold shoots to overvalued status against Australian wages.

Despite that I blog on a site which might suggest I am a permabull on precious metals, that is certainly not the case and when I believe that the metals have reached a cyclical high against other assets (and other indicators such over valuation against wages) I will be looking to move a majority of my positions from Gold and Silver related assets into income producing/productive assets.

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Soundtrack to the Global Financial Crisis

And now for something a little different :)

A recent comment from obakesan got me thinking... if I could pick a song per year for the last several to form a soundtrack (backdrop to the major events in each year), what would they be? I came up with the below:

2006: Lilly Allen - The Fear

The US housing market was already seeing volumes drop in early 2006, however the peak national price was achieved in mid 2006. Consumers were spending their new found wealth by drawing equity out of their homes and putting everything on plastic. This level of spending was not sustainable, although few realised it at the time.

Lilly Allen catches some of that consumerist attitude in her song "The Fear":

Life's about film stars and less about mothers
It's all about fast cars and cussing each other
But it doesn't matter cause I'm packing plastic
And that's what makes my life so fucking fantastic

And I am a weapon of massive consumption
And its not my fault it's how I'm programmed to function
I'll look at the sun and I'll look in the mirror
I'm on the right track, yeah we're on to a winner

2007: Freestylers feat. Belle Humble - Cracks

In 2007 the cracks really started to show in the US subprime market. Ben Bernanke famously said in March 2007: "At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained". How wrong he was.

The lyrics from this Freestylers song "Cracks" could almost be a reference to the subprime borrowers, forced to leave their past behind, handing back the keys to the house they couldn't afford and just walking away (following which we saw cracks appear in subprime and the western debt bubble).

Leave the past behind
Just walk away
When it's over
And my heart breaks
And the cracks begin to show

2008: Basement Jaxx - Red Alert

We saw the financial crisis reach it's darkest moments in late 2008 as some of the largest US banks were allowed to fail, while others were gobbled up by larger competitors. The markets started to crash and we may never know just how close we came to a complete financial system meltdown.

The simple lyrics in this track "Red Alert" by Basement Jaxx perhaps sum up the fear seen in the markets at this time:

Red alert! Red alert!
It's a catastrophe
Don't worry.....Don't panic
Ain't nothin' goin' on but history, yeah
But it's alright, don't panic

2009: Hayek vs. Keynes - Fear the Boom and Bust

This song could be considered a bit of a cheat entry, given that it's worded specifically around some of the actions taken by central banks over late 2008 and 2009 to combat the financial crisis, dropping their rates, increasing their spending/stimulus... it's all here in this tune.

Here are some lyrics from the rap:

You see it’s all about spending, hear the register cha-ching
Circular flow, the dough is everything
So if that flow is getting low, doesn’t matter the reason
We need more government spending, now it’s stimulus season

2010: Muse - Uprising

Riots in Tunisia started during December 2010 and were in part fueled by high food inflation, many would argue this was a direct result of Fed stimulus (but this was denied by Bernanke). The revolution spread to Egypt, Libya, Yemen, Bahrain and elsewhere over 2011 and became known as "Arab Spring".

The Muse song "Uprising" works well with this video of Egyptians at a battle over the Nile:

Rise up and take the power back, it's time that
The fat cats had a heart attack, you know that
Their time is coming to an end, we have to
Unify and watch our flag ascend, so come on

They will not force us
They will stop degrading us
They will not control us
We will be victorious, so come on

2011: Spandau Ballet - Gold

2011 was an exciting year for Gold and Silver. Silver seeing it's peak early in the year, putting in a top around the same level as the January 1980 peak (US$50).

Later in the year Gold had a strong rally and peaked over US$1900. There's probably a better song to capture the metals performance in 2011, but for now "Gold" from Spandau Ballet will have to do:

Gold (gold)
Always believe in your soul
You've got the power to know
You're indestructible
Always believe in, that you are
Gold (gold)
Glad that you're bound to return
There's something I could have learned
You're indestructible, always believe in...

2012: Open to suggestions?

We're not even half way into what has already been a turbulent year for the markets. The debt crisis in the Eurozone is already underrepresented in the above themes, perhaps something from Rage Against the Machine "Killing in the name" or "Township Rebellion" in reference to the rebellion against austerity measures? I'm open to any ideas...

Perhaps you have your own version of a soundtrack to the GFC, if so feel free to share!



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Tax free threshold allows tax free golden retirement

Note: I’m not a licensed financial advisor, taxation specialist or an accountant, so this information should be considered as an FYI only (NOT FINANCIAL ADVICE).

It’s been known for sometime that significant changes are coming to the tax free threshold for Australians in 2012 and it was confirmed again the other night in Swan’s budget.

From July 1st 2012 the tax free threshold will be increased to $18,200 (up from $6000 for the financial year 2011/2012) and will be bumped up to $19,400 by 2015-2016.

One of the biggest concerns for those saving for retirement in physical Gold is the potential for large amounts of capital gains tax to be payable in the likely event they sell at much higher nominal prices than today, even if the real value has simply kept pace with rising costs.

A high tax free threshold (coupled with the existing 50% capital gains tax discount for assets held longer than 12 months) opens up the potential for those saving for retirement using Gold to deplete their Gold savings during retirement sans tax.

Take the example of someone (let’s call him John) who has been saving in Gold for retirement since 1990 and has purchased Gold every month in equal quantities since that point in time. John’s dollar cost average is around $690 (AUD). With Gold currently trading around AUD $1600 each of John's ounces of Gold are sitting on $910 profit (average).

How does he avoid paying tax on the profit during retirement while keeping within the bounds of the law?

To calculate the maximum which John could liquidate in 2012/2013 for retirement we take his profit per ounce ($910) divide it into the tax free threshold ($18,200) which equals 20 ounces, we then double the ounces as tax is only paid on half of the capital gain (due to 50% CGT discount), so John could potentially liquidate 40 ounces for $64,000 and pay no tax on the proceeds.

Further explanation: Of the $64,000 funded by the sale of 20oz of Gold, $36,400 is profit, but he only needs to pay tax on half the profit ($18,200) and because this is below the tax free threshold he pays no tax.

It wouldn’t matter if he’d purchased the Gold at $1 an ounce and sold it at $1600 for $1599 profit…. as long as John:

- Holds the Gold longer than 12 months allowing 50% CGT discount

- Is comfortable retiring on double the tax free threshold (max)

Based on a $1 purchase price for Gold and $1600 liquidation price John could sell up to $36,400 worth of Gold and avoid tax using the same method. So for those worried about how high Gold might get in the future and the tax payable, as long as you can live comfortably from double the tax free threshold (whatever it is at the time of Gold liquidation) then you can avoid paying tax.

Warren Buffet once said “If you own one ounce of gold for an eternity, you will still own one ounce at its end”. Funnily enough this was in an argument to suggest reasons not to hold Gold, but those who save in Gold are often doing so for this very reason, to preserve purchasing power, with the expectation that over the long term Gold will be able to fulfill this need.

How much Gold would you need to save in order to retire? A little while ago I looked at the average weekly wage (before tax) priced in Gold ounces, here is the chart:

Average Weekly Wage Priced in Gold Ounces (Click Image to Enlarge)

Basically an average weeks wage has fluctuated between ½ and 2 ounces of Gold even dating back over 100 years. This example from the previous article, showing the ratio was .51 (number of Gold ounces the average weekly wage would buy) 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

If we take the midpoint (1.25oz), minus tax we would have paid on the equivalent income (-30%) and multiply it by .7 (as we will assume John has a freehold home resulting in lower living expenses) and we get around .6125oz per week required x 52 (31.85oz Gold per annum) x 15 years of retirement = 477.75oz Gold required to fund John's retirement. Your figures may vary depending on inputs.

I wouldn’t advocate relying on a single asset class to fund retirement. Personally I will be looking to build a portfolio of income producing assets (which also rise in value), but it’s an interesting exercise nonetheless.

Of course there are any number of risks that could void tax free retirement working in this way such as Gold confiscation, a windfall tax being applied to Gold, changes to the tax free threshold, changes to the 50% CGT discount. Or perhaps Gold doesn't retain a similar value against Australian wages/goods/services as it has over the last 100 years. Anything is possible and the turbulent times we have ahead are likely to result in significant changes to the way we live today...

This above post was inspired by the following from projack on Silver Stackers:

If you buy gold for retirement you do not have to worry much about CGT as an average person. Selling $40,000 value gold a year for your lifestyle for example even if the original purchase price was only $10,000 means $30,000 "profit" and only half of that amount is counted as CGT and used as assessable income, and that is 15,000. With the new $18,200 tax fee limit from the 2012/2013 financial year (and will go up further) this is no problem and you do not have to pay any CGT.

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