Both precious metals continued their rise over the past week although with a much stronger kiwi dollar overnight, local prices are down today on yesterday. Looking at the charts, of note is that both are well above their 200 day moving averages (MA) (the red wiggly line). Silver noticeably for the first time in almost a year.
Gold too is again above this indicator as well as having broken out of the down trend it’s been in since November last year.
We’ve discussed many times in the past how buying when the price is near the 200 day MA is generally a decent bet in the long run. This morning we read some actual quantification of this on dailywealth.com – albeit in US dollar gold so the numbers likely aren’t quite so large in kiwi dollar gold.
“Since late 1971, gold has increased at a compound annual rate of 9% a year. But when gold is in an uptrend (when it’s trading above the moving average), your wealth compounds at 18% a year.”
That’s quite a difference.
Unless you’ve been lucky enough to be on an island somewhere with no TV and internet access, you’ll have heard Super Mario’s announcement that the ECB will buy unlimited bonds of weak Eruro nations if required, which helped get gold and silver moving even higher over the past week. As we told our daily price alert readers on Friday…
“European Central Bank (ECB) head “Super” Mario Draghi announced overnight their new abbreviation OMTs or Outright Monetary Transactions which “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro.”
Unfounded fears huh? Seems if fears were unfounded they wouldn’t have to keep coming up with one announcement after another.
Anyway their theory is unlimited and open ended purchase of European Government Bonds by the ECB, will drive down the rates of the target country. The country has to ask for the help first and agree to various things in exchange.
Mario and Co’s theory is also that these bond purchases won’t lead to inflation as they will be “sterilized”. No they don’t boil the bonds in hot water. The theory goes that the ECB will sell some other assets on its books at the same time as it buys the bonds of the troubled nation. So they’ll force down long term interest rates, restore confidence and not cause any loss of purchasing power. Sharemarkets seem to agree today as everything is up. Hmmm – we’ll wait and see. Odds are there will be more announcements from Mario to come. Probably with unsterilized surgical tools eventually.”
In the next couple of days will also be the German Constitutional Court ruling on the legality of the European Stability Mechanism. Seems like they might agree to go along as Germany has much to lose from a Euro break up. Then the Fed will tell us whether more QE is coming now or merely later.
So what exactly will the “Bernank” do? We think the following could be a good bet based upon the writings of Jon Hilsenrath of the Wall Street Journal, who has been referred to as the Bernanke’s Mouthpiece. As what he has written about has often come to pass – i.e. they leak info to him.
“Another possibility, which is more controversial internally and might not happen, is a small reduction in the 0.25% interest rate that the Fed pays banks for reserves held at the central bank.”
The result of this would be to send short term yields negative, which would likely get money moving, as who wants a negative return? This could translate into much of the “money” that has been dormant in banks reserves actually finding its way into markets and gold and silver will price this in. With rising raw food prices of late still to filter through to retail markets, this rate reduction could also lead to even higher soft commodity prices down the line.
We’ll know in a couple of days anyway but even if Benny Boy holds off now and disappoints everyone it won’t be forever.
There was a news piece on TV3 over the weekend, well actually it was probably more of an ad for NZ Mint, but nonetheless gold getting some airtime on mainstream TV.
In it they pointed out that gold has outperformed property in New Zealand over the past 10 years. The piece stated that gold went up 300% while property went up 200%. It didn’t state how the calculations were done and we know there is an argument for property in terms of using leverage and obviously gaining cashflow (of course leverage can also be a downside). But it did remind us of the housing to gold ratio we’ve reported on a few times in the past.
We haven’t busted out our spreadsheet and crunched the numbers again but a quick check on the last figures we could find brought the ratio in at about 190. So 190 ounces of gold to buy the medium NZ house. As the above articles state in 1980 the ratio bottomed out at about 50 ounces so potentially gold still has some ground to make up versus property here.
There’s also the NZ Housing to Silver Ratio to look at.
At a quick glance the ratio is currently sitting at around 9000 ozs so still a long way off the 1980 low of about 1000 ozs it took to buy the medium home.
Actually mentioning the above older articles made us think about what other articles have been reader favourites over the past 3 years. So if you’ve only just joined us or even if you’ve been around for a while, here’s a selection of some of our most popular reads:
Actually, on that last one about bank failures in NZ we just read a story on the NBR site this morning related to this topic.
Chiefly it was about upcoming changes in capital adequacy ratios to be set by the RBNZ in line with the “so-called Basel III framework, named for the Bank of International Settlements in Basel, Switzerland”. And the fact that this,” is being imposed early in New Zealand, from January 2014”, which is 2 years ahead of Australia.
Interestingly Basel III also looks likely, as we’ve mentioned many times previously, to change gold from a tier 2 to a tier 1 asset, meaning banks can value it at full market value not the 50% of value they must currently. This should encourage banks to actually own gold as opposed to the current rules which effectively discourage it versus the likes of US Treasuries. Wonder if any NZ banks will start to add some gold to their reserves to improve their capital ratios? Hmmm.
Also though, right at the end was a mention that “further announcements are due in coming weeks on the RBNZ’s approach to the controversial issue of “open bank resolution” – a proposal to require depositors and bond-holders to take a financial “hair-cut” in the event of a bank failure.” So we’ll be keeping a close eye on this issue that we commented on last year in Bank Failures: Could they happen in NZ? – The Reserve Bank thinks so
We’ll let you know when we learn more.
We’ve got 3 new articles posted on the website this week.
The first up deals with news that Bill Gross the “bond king” backs gold over stocks or bonds. In a Bloomberg interview he talked up the benefits of holding gold:
“Gold cannot be reproduced. It can be taken out of the ground at an increasing rate, but there is a limited amount of gold. There has been an unlimited amount of paper money over the past 20 years to 30 years…
“Central banks got out of the gold trade a few years ago. Just recently, they are coming back into that market…I think for the most part it is not a crowded trade yet even though the price has accelerated in recent quarters and recent years.”
Darryl Schoon comments on this and more in Gold versus Bonds.
For a double header of Darryl, we also have more from Mr Schoon with Golds Coming Rise. He discusses the “gold basis” and how it has been a useful indicator of the rise in gold.
Earlier on we touched briefly on rising food prices or at least how the raw costs have risen of late. Well, this is a very useful analysis that we haven’t seen done before. It features useful tables showing how much gold and silver you would need to own based upon different durations of high inflation and different monthly expenses. So you can compare your monthly expenses and see how much gold or silver you’d need to cover high inflation of varying lengths of time. Quite an eye opener we found.
So if your gold and silver supplies aren’t sufficient to cover what might lay ahead and you think Bill Gross the Bond King might be onto something get in contact for a quote.
1. Email: firstname.lastname@example.org
2. Phone: 0800 888 GOLD ( 0800 888 465 )
Have a golden week!
This Weeks Articles:
Double Whammy for Buyers of Gold and Silver in NZ
This week: Double Whammy for Buyers of Gold and Silver in NZ The Gold standard – What Do We think About it? Bernanke: Printing Money Already? Too Late to Get on Board the Silver Train Now? Double Whammy for Buyers of Gold and Silver in NZ It’s been a double whammy for precious metals […] read more…
What to Do When – Not If – Inflation Gets Out of Hand
We’ve read many theories on just how much gold and silver you should own. They vary significantly, from as little as say 5% right up to numbers like 50% of your liquid net worth. However we haven’t seen an argument laid out like this before. This piece includes some useful tables showing how much gold […] read more…
Gold’s Coming Rise
Actually the “Coming Rise” may have already begun. We’re only a few weeks past the mid August date of The Gold Basis report that Darryl Schoon refers to below, but gold (and silver even more so) have already broken out of sideways trading ranges… Never make predictions, especially about the future. Casey Stengel Last year […] read more…
Gold Versus Bonds
Darryl Schoon outlines why he thinks we are nearing the endgame and how the treasuries or bond markets will be the indicator of this. Smarter people than us think shorting the US Treasuries market will be the trade of the decade. However the difficulty is in timing, perhaps the bond market can stay afloat much longer […] read more…
The Legal stuff – Disclaimer:
We are not financial advisors, accountants or lawyers. Any information we provide is not intended as investment or financial advice. It is merely information based upon our own experiences. The information we discuss is of a general nature and should merely be used as a place to start your own research and you definitely should conduct your own due diligence. You should seek professional investment or financial advice before making any decisions.