The Kouk: Gold is a Novelty, Useless & Bubble to Burst

Back in December I wrote a post about some views that Stephen Koukoulas (aka The Kouk) had shared via Twitter:

Stephen Koukoulas on Gold, beans & vending machines

His comments included claims that Gold was a dud investment, expensive to hold, no different to every other commodity and that it was in a bubble, soon to deflate to less than $1000. I countered these claims in my post and sought further clarification on his bubble and sub $1000 call via Twitter to which he replied an article would be on the way.

Yesterday in Business Spectator he wrote an article on Gold which outlines his views on the metal (would recommend a read through in original form before I cherry pick pieces below):

A gold bubble still waiting to burst

While I agree with some of his comments, I disagree with most. From the way he writes about Gold, referring to it as useless and a novelty in the first few lines, this talks to the shallow level of analysis the metal is going to get from his article. It reminds me of a quote from Bob Dylan "Don't criticize what you can't understand".

After calling Gold useless in the opening paragraph and openly admitting that he finds it difficult to comprehend why people consider it a viable asset class he writes:

To be sure, gold was first seen as a valuable metal a few thousand years ago when it was used to make coins and thus it became a medium of exchange. This trend has continued to this day where some coins are made from gold although very few of them are in circulation anywhere in the world. In other words, its value is as a novelty, not a medium of exchange.

I agree that Gold is no longer a medium of exchange (for the majority). However, the functions of money are as a medium of exchange, a unit of account and a store of value. While Gold has lost it's place as a medium of exchange, once depegged from Gold (it's link to something of intrinsic value) and after a substantial increase in monetary base, the US Dollar (and other fiat currencies) have lost their place as a store of value (over the long term). 

Gold may fluctuate in price wildly at times, but when measured over the long term we can see that Gold tends to retain a similar amount of purchasing power. Of course there is the overused "fine suit" example:

"With an ounce of gold a man could buy a fine suit of clothes in the time of Shakespeare, in that of Beethoven and Jefferson, in the Depression of the 1930s." Forbes

But one of the better examples I have encountered was the Australian weekly wage measured in Gold (see my post here) which shows it oscillating from overvalued to undervalued, but staying within a reasonably tight range (over 100 years and perhaps longer).

This divide we've seen in money where fiat currencies are no longer a store of value and where the ultimate store of value (Gold) no longer plays a role as a medium of exchange lends quite nicely to the theory that we might one day have a more officially recognised dual monetary system such as Freegold where the two functions are split (fiat currencies are used transactionally and Gold used as a store of value by the people and it's flow between nations to settle balance of trade).

If Koukoulas thinks Gold only has value as a novelty, I would love to hear some more serious thoughts on why he thinks that some of the most powerful nations on earth keep a majority of their foreign reserves in the metal (for example United States and Germany who both hold greater than 70% in Gold)? Perhaps he can explain why China, world's largest Gold producer, is not only hoarding their mined Gold, but are also a net importer? Perhaps he can explain why Russia has been aggressively adding Gold reserves over the past 5 years?

Koukoulas continues:

The price of gold is underpinned because it is reasonably scarce or rather, it is currently difficult and therefore expensive to mine. The price is also supported by the demand from people who want to buy it and lock it up in a vault or an exchange traded fund, hide it in their undies drawer or bury it in a biscuit tin in the back yard. It serves no purpose in this form.

To suggest hoarded Gold doesn't serve purpose (because it sits unused) is like saying building and contents insurance for your home serves no purpose. It serves purpose, you just hope you never have to use it in a practical fashion. The person burying their tin in the backyard probably holds it as last resort insurance. It's probably a stretch to consider needing something like this in Australia, but in less stable countries, hidden & portable wealth which could be dug out of the ground or drawer and relocated easily obviously could have purpose.

Gold serves purpose in different ways depending on who owns it and in what form:

"If we could get everyone in the West to vote in this poll, I think "gold is an investment" would win in a landslide. If we could get everyone in the precious metals blogosphere to vote, then "gold is money" would probably win. So, to most Westerners, gold is an investment. To the gold bugs and HMS crowd, gold is money. And to the bullion banks, gold is a currency (ISO code XAU) upon which credit is issued and traded. So what did A/FOA mean by the statement that gold is wealth, not any of these other things? I mean, surely gold is whatever its users think it is, subjective use value and all, right?

Actually, that's exactly right! Gold is whatever its users think it is. And the point A/FOA was driving at was that the vast majority of the above-ground gold, today somewhere around 165,000 tonnes, is held by people who understand it as wealth." FOFOA

Koukoulas continues:

The massively inflated price for gold is a reflection of it being fashionable on the one hand, which seems legitimate, but in recent years there has been the ongoing perception that it is a store of wealth and while enough suckers believe this, its price is likely to stay high.

Koukoulas talks about Gold's role as a store of wealth and says it's a recent development, but in his earlier paragraphs has already talked about the many thousands of years that Gold has played a role as money... so which is it?

Dropping labels such as "suckers" to those who hold some Gold in their portfolio is just childish. I guess all the Central Banks and prominent billionaires who've bought Gold are all suckers.

Koukoulas continues:

As with any item, the price of gold is determined by demand and supply. It is just another commodity and to that extent, it is little different from soya beans, tin or other commodities.

Already covered in the last post... there are many ways that Gold is different to other commodities, here is just one:

Gold acts more like a currency than a commodity (and it's attributes such as high stock to flow support this likeness, even if it's not used regularly as a medium of exchange).

Koukoulas continues:

One issue the gold bugs rarely if ever deal with is what happens to its underpinning, hedge against inflation or store of wealth if there is a massive discovery of cheap and easy to mine gold?

Even if such a discovery were made it would take years before the resource was properly defined through extensive sampling and drilling programs, following which it would take years and many resources (energy, labour, money) to build the infrastructure required to dig it out of the ground. Let's fantasize a massive discovery which once developed manages to double annual Gold production within 5 years. New Gold mine production is but only a small addition to the Gold market each year so even a doubling to around 5000 tonnes mined per year is only adding around an additional 3% to the existing 170,000 tonne stockpile which already exists. Compare that to Japan who has recently announced they will be doubling their currency supply within the next couple of years... should our investment actions be swayed by the highly unlikely or from the events that are taking place now?

Koukoulas gets downright silly when he writes:

It is hard to say how much the price would fall if the US Fed sold even half of its 8,133 tonnes of gold, or if the Bundesbank in Germany sold half of its 3,391 tonnes of gold holdings. It would be a bursting a bubble that would make the Nasdaq tech-bubble crash look like a picnic.

Sure, if the Fed or Bundesbank dumped half of their Gold onto the market (or even threatened to) it would likely result massive downward pressure on price, but equally if China decided to dump half a trillion worth of US Treasuries onto the market it would probably be the end of the USD unless the Fed was able to step in and buy the lot and many more being sold in the resulting panic... such fantasy scenarios are best left to ones imagination than written in an article we are supposed to take seriously. 

Koukoulas would do himself a favour by trying to understand why those Central Banks still hold their Gold and why Central Banks have turned into net buyers from sellers over the past couple of years:

Click Chart To Enlarge - Central Banks Buying Gold, Just For The Novelty?

Late in the article Koukoulas does make a case for holding physical (although probably without realising he's done so):

Making the gold price issue all the more complex, is that much of the turnover in gold is on paper – its traded in a futures market where the turnover is many multiples of all the gold ever mined. Its price can be influenced and distorted by derivative traders and punters and has nothing to do with its true value.

Does that sound familiar with other derivatives blowing up from time to time?

Mentioned is the futures market, which not only turns over huge volume, but operates in a similar way to the fractional reserve banking system. The COMEX doesn't have enough physical in the warehouse to cover a situation where all open longs sought delivery. The below are comments from Kyle Bass in 2011:

"And then we went and looked at the COMEX. The COMEX at the time they had about $80 billion in open interest between futures and futures options. In the warehouse they had $2.7 billion of deliverables. So $80 billion in open interest — $2.7 billion in deliverables. We're gonna own it a long time. You're on the board, as a fiduciary, what do you do? That's an easy one. You go get it. So you go take a billion of $2.7 billion and you let them worry about the rest."

"When I talked to the head of deliveries at COMEX NYMEX, I was like, 'What if 4% of the people want deliveries?' He said, 'Oh Kyle, that never happens. We rarely ever get a 1% delivery.' And I asked, 'Well what if it does happen?' And he said, 'Price will solve everything' and I said, 'Thanks, give me the gold.'"

If we were ever to see the paper or derivatives Gold market "blow up" as Koukoulas speculates, it would be beneficial for the physical price of Gold as everyone scrambled out of their "paper Gold" and into the real stuff. Perhaps unbeknown to Koukoulas, such an event is the wet dream of many Goldbugs.

Koukoulas finishes on this note:

If you want to buy gold and hold it – go for it!

I would say the same for those wanting to buy soya beans, pork bellies, iron ore, wine or fine art. Good luck to you – I hope you make lots of money. But for me, I’ll be sticking to something that has a stronger underpinning and is an important part of the real economy.

While I concentrate on Gold and Silver mostly in a speculative fashion on this blog, the investor with a diversified portfolio should perhaps only hold a maximum of 5-10% in the metals. The more adventurous might consider a 25% position in Gold as part of a Permanent Portfolio or similar. It's not necessarily about making lots of money, but ensuring that you have exposure to an asset class which plays an important role in various types of portfolios.

The other night on Twitter we agreed to a little wager, with Gold at roughly $1500 (now more than $100 lower!), if the price drops to US$999.99 (before reaching $2000.01) then I will send him a bottle of Mount Mary Cabernet or alternatively if it reaches $2000.01 before US$999.99, then he will owe me 3 ounces of Silver. No need for headline grabbing $100m bets or dropping of pants, just a gentleman's agreement which will be kept (as all my bets are).

While there is the possibility that Gold could drop to US$1000 (briefly) and remain in a secular bull market (the price of Gold halved in the middle of the 1970s decade) it would certainly challenge my belief that it remains so. Perhaps Gold above $2000 will challenge Mr Koukoulas' view that Gold is just a useless lump of metal with only novelty purposes (but probably not).

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BB.

 

Michael Pascoe Refers to Pascometer / Pascoe Indicator

Unfortunately the Pascometer (contrarian Gold price indicator) has remained broken for the last 18 months as several articles from Michael Pascoe on Gold have failed to generate a sustained rally to take the price to new highs. Is it possible that, by discovering this self monitoring tool, Michael Pascoe has actually thrown off its accuracy? He writes today:

There are unkind gold bugs about who believe every time I write something negative about their favourite metal, its price subsequently rallies, so time to throw them a bone: a decade after the launch of the first gold exchange traded fund, the yellow metal is going nowhere, it’s Australian price of $1,507 an ounce is where it was 20 months ago without a dividend or interest payment to soften the under performance.

And it could be worse – anyone buying gold at the peak in August, 2011, is carrying a capital loss of $291 an ounce at the time of writing, never mind the opportunity cost of not being in, say, appreciating and high-yielding bank shares over that period.

Of course the five-and-a-half years before that were very fine indeed for gold, running up from about $600 to $1800 when stock markets were not happy places – an expensive time to be wrong about gold’s appeal, as I was. Yahoo Finance

Well, thanks for the bone, here's hoping that it kicks along the price as it has been a very boring correction then sideways consolidation over the last year and a half. Although not as deep as some other corrections, the tedious nature of the sideways grind has been enough to generate bull market lows in sentiment and oversold levels as discussed recently on the blog.

To Pascoe's credit the last article he penned titled "Sell gold, buy base metals at the End of Fear" has worked out well (at least so far) with Gold priced in AUD falling around 5% since published and base metals (measured by the GFMS Base Metals Index) having traded higher:

Click Chart To Enlarge: GFMS Base Metals 6 Month Chart

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.

 

Bitcoin Bubble or New Virtual Currency Paradigm?

Will speculating on the Bitcoin mania make you rich?

Bitcoins have been making headlines on mainstream news sites, on blogs and even on precious metal forums recently and with good reason given the vertical rise in price per Bitcoin:

Bitcoin: Market Price (USD)

But is this rise part of a bubble or a new paradigm for virtual currencies as their utility increases and becomes more mainstream?

There is a lot of speculation that the Bitcoin mania has been a result of the recent Cyrpus crisis, however much of this speculation was due to an increase in app downloads in a single country where iPhones do not have a large market share:

This was spotted by BGR writer Tero Kuittinen, who noted that three iOS apps -- Bitcoin Gold, Bitcoin Ticker and Bitcoin App -- each jumped up the App Store charts in Spain, all on the same day, as the news broke from Cyprus. Compare their download histories to those from a country like the UK and it's clear that the upward trend is more pronounced in the more at-risk nation. Bitcoin Gold's all-time high ranking of 83 in Spain came on 17 March; for Bitcoin Ticker, 68 on 17 March; Bitcoin App reached a high of 147 on 19 March. The highest rankings for those apps in the UK are lower -- 293, 201 and 48 -- and they were all records set months or even years ago. Indeed, there hasn't been any kind of correlation between the Cyprus news and an uptick in Bitcoin app interest in the UK, going from this.

The huge caveat to this, though, is that the iPhone's market share in Spain is tiny, at roughly four percent of the total smartphone market as of mid-2012. Only a percentage of people who trade Bitcoins will trade or keep up to date with prices on their smartphones, too. A spike in iOS app downloads in one Eurozone country is a terribly small sample from which to draw conclusions about whether the Eurozone crisis is driving more people across the continent to Bitcoins. Wired

It seems more likely to me that the increase in Bitcoin app activity was a result of the surge in Bitcoin price that had recently taken the price to all new highs by the 17th of March, the further rally which took the price to levels above US$50 (which probably sparked even more interest) & the crash that had occurred several days earlier due to a glitch in the blocks/programming.

Click to Enlarge: Timeline of Events, 2 Months

With this number of events all occurring in unison, it's not hard to see there were other reasons for the increase in Bitcoin activity, other than finding a safe haven currency to avoid depositor haircuts as some have speculated was the case.

For those who are not familiar with Bitcoins, they are a virtual currency. First created in 2009, they can be transacted peer to peer and through exchanges such as the most popular Mt.Gox. Their creation is not controlled by a central authority, their supply is expanded with the use of a mathematical algorithm.

The price of a Bitcoin has risen from around US$10 to over US$70 in the space of 4 months. Some might call that a bubble with little more thought given, but scratch under the surface of the price and there could be valid reasons for the increase in price.

One of the reasons for the large rise in price is a combination of a slowing number of them being added to circulation:

Bitcoin: Total Bitcoins in Circulation

Starting from 2009 the number of Bitcoins generated every 10 minutes was roughly 50, every 210,000 generations (approximately 4 years) the creation rate drops in half (50, 25, 12.5, etc), the number of Bitcoins in circulation will never number more than 21 million:

Total Bitcoins Over Time

As is evident from the above charts, the first halving of Bitcoin inflation has taken place toward the end of 2012, near the recent price lows and start of the rally which culminated in the parabolic spike. Plenty of speculation on what would happen (including expectations of a rising price) was taking place last year:

The implications to this are huge and for the most part unknowable.  There are two ways I can see it going;-

    - Mining is a delicate balance of difficulty vs electricity costs, the price of bitcoin depends on the electricity cost to generate those coins so if the cost to generate a bitcoin increases the price of a bitcoin rises to match.
    - People stop mining bitcoin because the cost outweighs the return and the difficulty of generating a bitcoin (currently at 3368767) plummets until it is once again profitable to mine.

I believe that it will be a mix of both, I think the price will rise and the difficulty will drop but that is just me speculating.  The truth is we are in for an interesting time, I don’t even want to factor in the new bitcoin mining hardware (ASIC) that seem to be about to hit the market. MineForeman

Can the halving of creation rate alone justify a 7x rise in the price of Bitcoins? Probably not by itself.

Along with the halving of creation rate, we've also seen the number of transactions and unique addresses used for transactions rise (together these numbers indicate an increasing number of people using Bitcoin rather than increase in number of addresses used per person):

Bitcoin: Number of Transactions Per Day

Bitcoin: Number of Unique Bitcoin Addresses Used

An increased number of people using Bitcoin has resulted in a "network effect" where it's value has risen as demand increases:

In economics and business, a network effect (also called network externality or demand-side economies of scale) is the effect that one user of a good or service has on the value of that product to other people. When network effect is present, the value of a product or service is dependent on the number of others using it.

The classic example is the telephone. The more people own telephones, the more valuable the telephone is to each owner. This creates a positive externality because a user may purchase a telephone without intending to create value for other users, but does so in any case. Online social networks work in the same way, with sites like Twitter, Facebook, and Google+ becoming more useful as more users join.

The expression "network effect" is applied most commonly to positive network externalities as in the case of the telephone. Negative network externalities can also occur, where more users make a product less valuable, but are more commonly referred to as "congestion" (as in traffic congestion or network congestion).

Over time, positive network effects can create a bandwagon effect as the network becomes more valuable and more people join, in a positive feedback loop. Wikipedia

The network effect can very much apply to currencies, especially so where the Government/central banks can't increase the number of currency units to meet demand, so Gold has also benefited from the network effect over the bull market as an increasing number of people want to own it, but where there is no easy way to increase the amount (while Gold doesn't have a known limit like Bitcoin, there are other reasons we can't dig more up on a whim including declining grades available to mine).

Despite the positives for Bitcoin, there are still risks which have the potential to impact on price.

ASIC(s) - Application Specific Integrated Circuits are essentially specialised computer chips designed for mining Bitcoins in the most efficient way possible. To date much of the Bitcoin mining that occurs has been via powerful computers which also have a high running cost (e.g. gaming rigs with specific graphics cards which lend themselves to the process), but with these new systems comes lower entry& running costs which will result in more competition... how much effect this will have on the price of Bitcoins is yet to be seen as consumer ASICs have only started shipping early this year (read more here). They could have a dampening effect on the price in the short term (lower cost to mine), but then as they become more common the competition will force a reduction in the profits for the early adopters, driving the cost to mine higher again.

Regulation -  Recent news out of the US includes threats of regulation of the BitCoin market:

The U.S. is applying money-laundering rules to "virtual currencies," amid growing concern that new forms of cash bought on the Internet are being used to fund illicit activities.

The move means that firms that issue or exchange the increasingly popular online cash will now be regulated in a similar manner as traditional money-order providers such as Western Union Co. WU +1.04% They would have new bookkeeping requirements and mandatory reporting for transactions of more than $10,000.

Moreover, firms that receive legal tender in exchange for online currencies or anyone conducting a transaction on someone else's behalf would be subject to new scrutiny, said proponents of Internet currencies. Wall Street Journal

As transacting the currency can occur peer to peer, there is little any one Government could do to stamp out use, however if the large exchanges (where currency for Bitcoin swaps take place) were targeted, there is the potential for it to have a negative effect on the ease of use and market for Bitcoins.

Hacking - The most obvious risk to a virtual currency is the risk of storing them. Hold them on your local computer and they are at risk if you accidentally delete them or your hard drive crashes. There is also the potential someone could hack into your computer and transfer them out if you haven't stored them securely enough. The problem is that all transactions are irreversible and difficult to trace, so once they are gone it's unlikely you will see them again. Not only are criminals targeting individuals who hold Bitcoins, but also exchanges and sites offering online stored wallets/Bitcoins. As the value of Bitcoins increases so will the sophistication and efforts of criminals to steal them. It was a hacked exchange which resulted in the 2011 crash in price (from a peak just above US$30):

Click to Enlarge: Bitcoin Chart Showing 2011 Crash and Today's Boom

The Bitcoin community faced another crisis on Sunday afternoon as the price of the currency on the most popular exchange, Mt.Gox, fell from $17 to pennies in a matter of minutes. Trading was quickly suspended and visitors to the home page were redirected to a statement blaming the crash on a compromised user account. Mt.Gox's Mark Karpeles said that the exchange would be taken offline to give administrators time to roll back the suspect transactions.

The extent of the compromise became clear when a copy of Mt.Gox's user database began circulating online. The file included username, email addres, and hashed password for thousands of Mt.Gox users. Karpeles's statement was updated to acknowledge the breach. He warned users who have re-used the Mt.Gox passwords on other sites to change them. Ars Technica

The increase in value of Bitcoins (market capitalisation of all Bitcoins rose from just over $100m to almost $800m with the recent price rise) is likely to paint a larger target on the Bitcoin exchanges and people with a large number of Bitcoins in their virtual wallets. Who knows what sort of exchange hacks or malicious code could end up affecting the Bitcoin market in a negative way.

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So all this said, with rational reasons for an increase in price (although perhaps not to the extent it has) is the Bullion Baron about to run out and purchase some Bitcoins and hope their utility and in turn value continues to increase? Not likely. The main problem I see for the investor/speculator (see this post for my definitions) is that there is no accurate way to value the Bitcoin and while precious metals are much the same, there are several key differences:

• Precious metals are a physical commodity, Bitcoins are a virtual currency.
• Precious metals have history spanning thousands of years as money and a store of value, Bitcoins have a few short & volatile years as a virtual currency.
• Precious metals have utility outside of monetary use (industrial, jewellery, etc), Bitcoins are only useful as a currency used in transactions.
• Precious metals are more easily purchased (at least that is the case in Australia, from my experience).
• Precious metals have a history of cycling in value against other assets such as oil, stocks & land, Bitcoins have no such history.

They do also have some similarities:

• Neither have a governing body/central authority that can produce them in unlimited quantities.  
• They are both a limited resource (Gold by it's natural occurrence in the earths crust and Bitcoins by the algorithm which controls the number created).
• Both will be harder and more expensive to mine over time (Gold due to decreasing grades and rising input costs, Bitcoins due to increased competition, technology advances and the reducing number created until peak 21m reached).
• Precious metals and Bitcoins are both seen as a threat to official currencies and are likely to see action as a result (more regulation).

There is no reason to expect that Bitcoins will act as a store of value over the long term, but then if their popularity continues to increase then likely so will their price over the long term. The number of sites and services that can be used with Bitcoins is increasing regularly, there is quite an extensive list here: Spend Bitcoins and there has even been news of Bitcoin ATMs to make funding your account even easier:

Zach Harvey has an ambitious plan to accelerate adoption of the Internet's favorite alternative currency: installing in thousands of bars, restaurants, and grocery stores ATMs that will let you buy Bitcoins anonymously.

It's the opposite of a traditional automated teller that dispenses currency. Instead, these Bitcoin ATMs will accept dollar bills -- using the same validation mechanism as vending machines -- and instantly convert the amount to Bitcoins and deposit the result in your account. CNET

My gut tells me that at US$70 Bitcoins are probably closer to a short term bubble peak (given the short term nature of the rise) than at the base of an immediate move to $150 or other high price targets I have seen thrown around ($500+), but that doesn't mean they can't head higher (in the short or long term). 

I think to a degree the price in the short term will depend a lot on who is holding Bitcoins and for what purpose. If there are a lot of speculators or people storing large amounts with no reason to transact then a move to sell and take profit could drive the price lower. If there are few of these types though and the price is being driven higher by a genuine need for Bitcoins for use in transactions then the price could keep moving higher.

Personally though even if I thought Bitcoins were undervalued, after rising 700%, their risks and weaknesses would stop me from putting any significant amount of money into them, a couple of thousand dollars maybe for a punt, but nothing serious. Although they have similarities to precious metals, they are far from a replacement.

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.

 

Russia Buying Up Global Gold Companies & Assets: Stratfor via Global Intelligence Files

For those not familiar with the Global Intelligence Files, here is the description provided by WikiLeaks:

The Global Intelligence Files, over five million e-mails from the Texas headquartered "global intelligence" company Stratfor. The e-mails date between July 2004 and late December 2011. They reveal the inner workings of a company that fronts as an intelligence publisher, but provides confidential intelligence services to large corporations, such as Bhopal's Dow Chemical Co., Lockheed Martin, Northrop Grumman, Raytheon and government agencies, including the US Department of Homeland Security, the US Marines and the US Defence Intelligence Agency. The emails show Stratfor's web of informers, pay-off structure, payment laundering techniques and psychological methods.

They have been staggering the release of these emails over time and there are some interesting emails that I found in one of the latest batches (released February 13th, 2013). While the conversations in these emails were not held recently I have not yet seen any discussion of this information on Gold news sites and blogs, so this is potentially breaking news despite the age of the emails themselves. The millions of emails are no easy feat to search and digest, I have cut and paste excerpts to provide the core message and you can hit the links to read the emails in full.

5514250     2010-11-09 19:52:41

The gold Russia takes from Kazakhstan and Kyrgyzstan is sold on the open market. Russia only hordes its own supplies, that way they can keep it secret on how much they are actually putting in their mountain caves.

So I would assume that Russia will sell what it extracts in Venezuela too. I'll ask around to see if anyone has estimates on how much VZ is making out of this deal, if anything.

From what I am starting to gather is that Russia wants to control global supplies. As for VZ, I would assume this means controlling how much is extracted and where the gold can be sold. But there is that possibility that Russia may not want to extract any gold in the first place. My assumption is that they are determined to be in the driver seat on world gold prices, letting them skyrocket.

Kevin is looking into this part to see if it is possible to impact the gold markets this way. Rodger and Mark both said they are hearing similar rumblings of Russians in their region's gold sectors. So they are poking into what Russia is doing in South Africa, Angola, Guinea, Mongolia, Indonesia, Malaysia & Vietnam's gold groups.

5411465     2010-11-09 20:07:26

So the only way Russia can really drive the gold markets is if it is sitting on a huge chunk of global supplies. Do we know roughly what percentage Russia has and how much they are trying to take over in all these places?

--------------

We are not sure they can impact supplies this way. It is a conspiracy theory thus far that Kevin is looking into. He had heard rumors of being able to do this, but no one ever has, so he is looking more into it. We don't know what Russia has really taken over yet. It is a massive research project we're just starting to form between your info, me, Kevin, Mark & Rodger that will most likely take a few months, bc it seems like the Russians are:

* buying a large set of 2nd tier companies under a hundred different non-Russian entities in order to not tip anyone off
* using private Russian firms to buy foreign firms and assets
* buying up gold traders
* buying up gold assets (mines, networks)

So each has to be researched and broken down & you know how shady and tangled Russia can be.

5489729     2010-11-03 19:12:45

Attached are my thoughts, notes & the intel-ling I did yesterday and today....
Then we can map out the holes...
I think we may have a larger issue once we're done with Russia-Venezuela as I am learning that Russia is buying up gold companies & assets around the world. But this is something I am really going to have to do some heavy lifting research and intel-ling on.

In attachment: 9524_Russia - Gold.doc

Table of Contents:

1) How Russia's gold and diamond sectors domestically work
a. Diamonds
b. Gold
c. The Kremlin's secret gold and diamond stockpiles
d. Kremlin folklore on gold (for fun)
2) Rusoro - Russia's gold company in Venezuela
a. Who, what, where, etc.
b. How Rusoro works
c. Crystallex & Russia
3) Russia's other moves in Gold

Selections from above document (9524_Russia - Gold.doc), I would recommend reading in it's entirety as quite interesting:

Russia’s gold industry is also all over the place. Russia most likely has the largest gold reserves in the world – but no one knows for sure (supposedly even the Kremlin, which I doubt). There are estimates that Russia has between 25-40% of the world’s reserves – so estimates are all over the place. But Russia is only the 6th largest producer.

Russia uses gold very differently than most governments. Gold + diamonds does not make up 1% of the budget or revenues.

The Kremlin started in 2008 diversifying its reserves portfolio (meaning its piggy bank funds) with Gold, so that their reserves were mostly dollars and euros with 10% gold.

However, it is rumored that the Kremlin holds incredibly massive amounts of gold and diamonds in stockpiles – I mean seriously huge amounts.

This allows the Kremlin to sell it to make cash when needed or have the “doom’s day” threat where it could flood both markets should it want to.

For example, when the government needed some cash on very short notice, they sold $1b worth of gold they had lying in the stockpiles… but this is a “secret”

It is an incredibly high-level state secret to how much they have in stockpiles.

For those interested in searching for more Gold (or Silver!) related content in the Stratfor emails, you can have a play with the search page here.

Finally, here's another email that I found which asks some interesting questions for which I couldn't find a response in the email database:
 
2321975     1970-01-01 01:00:00 Date wrong (from August 2011)

Hey Jacob

Not sure if you are the person to pester with this - but I think this could make a really interesting piece for s4. Gold is shooting through the roof right now and VZ's move is to bring the gold home (and the cash, but let's focus on the gold for now). How is this gold used in the European banks who have had it for forever? I'm certain that unless Bank of England just locked it in a dusty vault and forgot about it, the gold has been used on deposit for outside loans. How leveraged is the gold in its European hands? VZ is small potatoes, but a rich oil country. What would be the exposure risk for European banks if everybody did as VZ is doing?

If everybody (or just enough somebodies) pulled their gold home, how would European banks recover? (and how much money would they need to borrow from Berlin and Brussels to meet that withdrawal call?) What would be the long term geopolitical dangers/changes?
Maybe Research could find out where most of the world's sovereign gold is deposited - see where the exposure is most great (my guess is Europe, shaky, shaky government-dictated European banks). Sovereign gold is interesting (to me, at least) and I'm not sure there is much out there about that. It fits into G's economic guidance in that it's about commodities trading and transport. Does the global economy benefit from having sovereign gold stored in European vaults or will a mass exodus of gold from Europe cause a realignment of world banking?

May be totally off base but this is a really interesting article and thought I'd toss the thought your way, solo OpsCenter Man!

Cheers,

Bonnie

FYI- I'm more interested in sovereign gold deposits as a whole, not VZ specifically. As the rest of this article highlights beautifully, VZ's move could signal everything from escaping Libya-like sanctions, collateral for Moscow and China to easy cash for the pillaging that comes with a coup. VZ is just what made me think about sovereign gold and what it means for the global markets and who will be vulnerable to a run on this. It'd been small beans for Russia or China to have 3-4 or maybe 5-6 small-to-medium sized countries to start withdrawing their gold, slowly and surely, bleeding Europe liquidity when it's already hemorrhaging Spanish and Italian blood. Perhaps China is stockpiling gold as a bulwark for the yuan, moving it towards a reserve currency (long way to go with that, I know).

It would seem that speculation over leasing foreign owned Gold held by the Bank of England isn't only the concern of Gold Bugs, but also members of the global intelligence community! And you wonder why I'm campaigning to bring home Australia's Gold from the Bank of England?

Sign the petition!

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 Speculator, Investor, Trader, Saver or Gambler?

I recently had an interesting discussion with a few individuals in the comments section of a subscription site (so can’t provide a link) where we argued whether certain members were investing, speculating or trading (based on their strategy) in the precious metals sector.

The word speculator generally has some negative connotations, but I think many in the precious metals space who think they are investing are in fact speculating (myself included, but I’ve never had any issues with that label).

Here are the five labels I would give to those with capital invested in the precious metals space (more than one may apply to each individual):

Precious Metals Trader

The precious metals trader is someone looking for short term opportunity in the market based on chart and other technical indicators which suggest the future price direction of the metal. They might trade short or long on the metal (betting on the price moving lower or higher). They might have a view on the long term prospects for Gold/Silver, but this doesn’t (or at least it shouldn’t) affect their short term decisions. This means when the metals are overbought the trader will either sell short or close their long positions (some may follow the rule “Never short a bull market”).

Precious Metals Saver

The precious metals saver is a regular buyer of Gold &/or Silver. They buy the metals not to speculate on a rising price, but because they choose to hold their savings in ounces instead of dollars. Precious metal savers will generally not concern themselves with the price when they buy, rather they purchase at regular intervals (e.g. every pay day or once a month) and this is referred to as dollar cost averaging. In some cases they are doing so because they believe it will protect their capital from the effects of inflation or some save in Gold/Silver as they believe a new monetary system is likely in the near future and the savings in precious metals will allow them to safely carry their capital from the current monetary system to the next. The precious metals saver might be considered conservative even if they have heavy exposure to precious metals.

Precious Metals Speculator

The precious metals speculator is someone who is heavily exposed to precious metals with the intention of making spectacular gains as the bull market continues. They would have a solid understanding of the market and ensure the fundamentals support their decision. Their heavy exposure means that if something were to change dramatically in the market without warning this could impact the value of their portfolio substantially, a risk they are aware of and prepared for. Unlike the trader they may be prepared to weather significant price corrections with the intention of riding the longer term trend.

Precious Metals Gambler

The precious metals gambler is probably similar to the speculator in many ways; ultimately they are looking for a significant gain in their portfolio, but in attempting to achieve these gains they make poor decisions which might include: using too much leverage, blindly following the actions of a speculator without understanding reason for their choices or buying without knowing their own limits (for example they might buy high without the necessary patience to weather a long correction & sell out at the bottom).

Precious Metals Investor

The precious metals investor is someone who holds Gold/Silver as part of a balanced portfolio (for example they might hold 25% as per Harry Browne’s Permanent Portfolio, with the other 75% held in stocks, cash & bonds, evenly split). They will not be overweight in precious metals and their exposure is likely to be mixed, for example they might hold some physical along with dividend paying Gold & Silver mining stocks. If the goal of the individual is a modest and consistent return over a long period of time (of which the precious metals plays a part) then they are an investor. If they are using precious metals to multiply the value of their portfolio over the short to medium term, then chances are they are a precious metals speculator.

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Several of the above labels may overlap at times. For example the precious metals saver might occasionally trade some Silver for Gold (or visa versa) in order to play the Gold:Silver Ratio (GSR), but ultimately their goal would be to stack more ounces using this strategy (just the same as you might swap from one term deposit account to another with a better rate).

To a degree I would consider myself as having worn the first three hats (Trader, Saver & Speculator) at various times over the last five years.

I have a core position in physical Gold which is unlikely to be sold regardless of the prices we reach over the short to medium term. This core position will be held with the expectation we see a new monetary system at some point (perhaps something similar to Freegold, a concept previously covered on the blog or maybe it will be completely different). I would consider this core position as “savings”.

At times I have sought to benefit from short term moves in the price of Gold and Silver, including when I sold a portion of my Silver between $38 and $46 in early 2011 when I assumed we were nearing a major peak (but held the majority for continued bull market trend).

Primarily though I consider myself a precious metals speculator. I am heavily geared towards a continued rise in precious metals and it should be obvious to most longer term readers that the vehicles I’ve used can be inherently risky (for example junior mining stocks & options). My investment capital is positioned heavily (100% more or less) toward the expectation for a continued rise in the precious metals and while I think there is good reason to expect the bull market will continue, if the environment changes quickly and without warning (for example the US starts raising interest rates and tightening monetary policy) then there is the potential for significant loss.

The above descriptions and definitions are mine only. I have no doubt there are some whose opinion would clash with mine and I would encourage you to speak up in the comments below. Also if you think there is a group who hold precious metals but aren't covered by the above labels I would also value your input.

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.