What Goldman Sachs is Saying About Gold

Please Note: This article was first published at sunsoflibertymint.com

Should we trust what Goldman Sachs is saying about gold?

Should we even care what Goldman Sachs is saying?

Recently, Goldman Sachs, one of the premier investment banks in the world, announced to investors that gold prices would be dropping and that selling gold and other precious metals would be a “slam dunk.” (1) But just six days after this announcement Gold futures for December delivery added 0.7 percent on the Comex. In addition, silver futures for December delivery rose 0.4 percent; platinum futures for January delivery increased 0.6 percent; and palladium futures for December delivery climbed 0.3 percent (2).

So what happened?

Well earlier this year, in April, Goldman Sachs made a very similar call to sell gold, specifically the Gold ETF (GLD). At the end of August the details of the second quarter holdings were released showing that while Goldman Sachs was telling its clients to sell, the investment bank was buying into the Gold ETF to the tune of a record 3.7 million shares of GLD. This buy made Goldman the ETF’s 7th largest shareholder(3).

Why would Goldman Sachs clearly instruct investors to do one thing and act to do the opposite?

Perhaps this is because Goldman is aware that outside of the United States gold is being accumulated. The central banks of Europe (specifically Italy, France, and Germany) don’t plan to sell their gold holdings(4). In addition, as pointed out previously gold fever has broken out in the world’s second largest economy, China. China’s consumption of gold is more than double that of the United States and it, like many developing countries, is an advocate for “the return to increased gold reserves in its central bank” (5).

But maybe I’m being paranoid here. Or maybe not.

How is Goldman’s track record regarding gold recommendations?

Let’s go back to November 2007 when the investment bank previously advised to sell gold. According to Mark O’Byrne (Goldcore.com):

On November 29, 2007, Goldman recommended that investors sell gold in 2008 and it named the strategy as one of its ‘Top 10 Tips’ for the year. Gold subsequently rose nearly 6.4% in December 2007 alone – from $783.75/oz to $833.92/oz. Gold then rose another 5.8% in 2008 – from $833.92/oz at the close on December 31, 2007, to close at $882.05/oz on December 31, 2008. Gold rose 12.2% in the 13 months after Goldman’s sell gold call. Gold then rose 23.4% in 2009, 27.1% in 2010, 10.1% in 2011 and 7% in 2012.(6)

Goldman’s prediction ended up being abysmally wrong and potentially cost their clients, and the public-at-large significant amounts of money because of it. Goldman slashed its projected gold price 8.6% from $810/oz to $740/oz on a 12 month basis. By the end of 2008, gold closed at $882.05/oz – more than 19% above Goldman’s prediction.

But these could all just be innocent mistakes, right?

Maybe we should ask Carmen Segarra.

Who in the world is Carmen Segarra, you ask?

Good question. Carmen Segarra is a former senior bank examiner for the Federal Reserve Bank of New York. She is a former bank examiner because she was recently fired from the Fed. She is suing the Fed for wrongful termination. Ms. Segarra contends that she was fired after refusing to alter her findings during a critical examination of Goldman Sachs Group Inc. As was reported in Reuters:

The former employee, Carmen Segarra, said that in her seven months of examining Goldman’s legal and compliance divisions, she found the bank did not have policies to prevent conflicts of interest as required by regulation, a conclusion that might have caused a downgrade of the Wall Street bank’s regulatory rating. (7)

It should be noted that Ms. Segarra’s findings focused on three specific controversial transactions related to Solyndra, Capmark and the merger of El Paso and Kinder Morgan, and had nothing to do specifically with precious metal policies. But Ms. Segarra’s lawyer said in an interview that “Goldman executives in charge of conflicts told Segarra and other Fed examiners that they did not have a firmwide conflicts policy” (7). So it is possible that conflicts of interest could exist throughout Goldman Sachs and not just in the specific areas that Ms. Segarra was investigating.

To answer the questions I started this article with:

Should we care what Goldman Sachs is saying?

Yes, absolutely. Anytime a major investment bank makes a statement of this type we should all pay attention.

Should we trust what Goldman Sachs is saying?

Look to the evidence. I think this is a case where actions speak louder than words.

Sources

(1)http://www.bloomberg.com/news/2013-10-08/goldman-s-currie-says-gold-is-slam-dunk-sell-after-shutdown.html

(2)http://www.bloomberg.com/news/2013-10-13/gold-rebounds-from-three-month-low-as-u-s-debt-talks-drag-on.html

(3)http://www.zerohedge.com/news/2013-08-30/guess-which-bearish-bank-bought-record-amount-gld-q2

(4)http://www.profitconfidential.com/gold-investments/what-the-elephant-trying-to-get-into-the-pool-said-about-gold/

(5)http://investmentwatchblog.com/gold-fever-in-china-a-signal-of-the-next-financial-crisis/

(6)http://www.goldcore.com/goldcore_blog/goldman-tell-clients-sell-gold-did-same-nov-2007-gold-then-rose-12

(7)http://mobilebeta.reuters.com/former-examiner-sues-ny-fed-for-alleged-goldman

The History and Future of Silver

Please Note: This article was originally published at sunsoflibertymint.com

The First in an Occasional Series

In the six-thousand year history of humans valuing silver, there are two periods that could be called true turning points. Events that forever changed history and the value and the use of silver. The first was the discovery and subsequent colonization of the Americas, and the second was the advent of the Industrial Revolution.

While silver was well know in the ancient world, its use has been documented archaeologically (as well as through historical records) from Dynastic China and Vedic India, to Pharonic Egypt and especially in the Greek City-States and Roman Empire. Production of silver was limited to the available geographic distributions, and the prevailing technologies of the times. These technologies relied mostly on human labor and changed very slowly over the first five-thousand years.

With Columbus’ successful voyages to the Americas, Spain gained the first and greatest foot hold in what would come to be called Latin America. Silver (and gold) deposits were located and mined from: Bolivia, Columbia, Peru, and Mexico. Spain dominated precious metals production from the end of the fifteenth through the beginning of the nineteenth centuries. Some estimates say that from 1500 to 1800 Bolivia, Peru and Mexico accounted for over 85 percent of world silver production and trade.

Spain’s real de a ocho (aka piece of eight or Spanish Dollar) became the de facto world currency during this time period, partially because of the near monopoly they had on silver mining, and partially on the other sovereign nations of Europe debasing their own currencies. The Spanish Dollar was even legal tender in the United States until 1857.

Spain lost dominance as the Spanish Empire broke apart through revolution in its colonies and wars with other nations.

As the sun set on the Spanish Imperial silver, the Industrial Revolution began in earnest. The new technologies begat by the revolution provided the second great leap forward in silver production. Major breakthroughs included steam-powered drilling, hydraulic pumps for dewatering mines, and increased haulage with the improvements in transportation including steamships, canal construction and, most importantly the railroad locomotive. Breakthroughs in mining techniques also enabled silver to be separated from other ores allowing larger volumes of ore that contained silver to be exploited.

These types of advances coincided with newly located silver deposits in countries including: Canada, Australia, and the United States especially with the discovery of the Comstock Lode in Nevada. Silver production grew worldwide from 40 to 80 million troy ounces annually by the 1870s. Silver production over the last twenty years of the 19th century increased to a total of nearly 120 million troy ounces annually. Additional deposits located in Eastern Europe, Australia, and Central America amplified world silver production. Between 1900 and 1920, world silver production reached nearly 190 million troy ounces annually.

The future of silver production may lie in combing these two time-tested strategies; locating new deposits, and utilizing the latest technologies. Two previously unexplored areas for new deposits could include near-Earth asteroids and the floors of the Earth’s oceans. If the technology needed for deep sea and space exploration becomes cheap enough, and the value of the silver and other ores continue to increase, then ventures of this sort may not just be science fiction.

What Kind of Silverbug are You?

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While all silverbugs have some things in common, not everyone who is into silver is into it for the same exact reasons. This is not meant to be an exhaustive list and some people may fall into more than one category. Here are eight of the most common type of silver enthusiasts:

The Collector

The silver collector probably started out as a coin collector. They appreciate, not just the metal value, but also the numismatic or collector value. They enjoy the rarity of mintage, and can often name all the years when a type of coin was produced. They may specialize in coins from a specific country, or may enjoy foreign and domestic silver. Depending on how long they’ve been collecting, they probably have a number of officially graded and slabbed items. And they will be the first to tell you never to clean your coins. Collectors are more likely than not to sell small parts of their collection to fund new purchases, or else trade with other collectors to fill the gaps in their inventory. They may belong to coin clubs, frequent coin shows, and be on a first name basis with their local coin shop owner. Collectors may being more willing than most to pay larger premiums for items, figuring the collector value will appreciate and add to the over all value of a piece.

The Stacker

The silver stacker is all about getting the biggest, shiniest stack. They tend to stay away from junk silver and fractional silver leaning toward five or ten troy ounce bars. The smallest denomination they acquire is typically one troy ounce’s (be they coins, rounds or bars). Stackers tend to find something they like and stick with it. They don’t usually diversify. They may like to show off their stacks. They try to find the lowest premiums, and if they order from online resources may look free shipping/minimum order deals.

The Hobbyist

The silver hobbyist is probably the most laid back type of silver enthusiast. As the designation implies, hobbyists treat acquiring silver like a hobby. They don’t obsessively check the spot price, nor are they on a first name basis with their local coin shop owner. They tend to buy silver irregularly, and may buy whatever happens to catch their eye at a particular time. Hobbyists may favor buying what is new or novel at the moment. This can include latest releases of government bullion, and new privately minted rounds and bars. They tend not to mind premiums or shipping charges, but they do expect prompt delivery and excellent customer service.

The Saver

The silver saver considers their silver to be a home bound savings account. Savers are always on the lookout for deals and may turn to places like Craigslist or ebay looking to score as close to spot as they can. Some savers may have gotten started working retail and checking their register drawer for silver. Some may even have gotten into coin roll hunting. Savers may not ever sell their savings unless they really need to do so.

The Hedger

The silver hedger is similar to the saver, but more aggressive in amassing a hoard. They tend to have a better understanding of economics and look to silver (and potentially other precious metals) as a hedge or protective barrier against inflation. The hedger is most likely to use a strategy such as dollar cost averaging to limit their risk and exposure. Hedgers are always on the lookout for good deals, and lean towards finding the best price for the metal content, and not necessarily care about what particular types coins or bars they are accumulating.

The Investor

Silver investors treat silver just like any another financial instrument. Along with their stocks, bonds, and other commodities, silver is sought at the lowest possible price, and could be sold when the price rises so that a decent profit can be realized. Though many investors look at silver as long-term investments. Silver investors may or may not ever have physical possession of their silver. They are just as likely to turn to “paper silver” contracts or utilize precious metals backed “Exchange Traded Funds” (ETFs). Like the silver hedger, the investors may have a better understanding of economics; but unlike hedgers (and others) they don’t necessarily believe in the silverbug credo “If you don’t hold it, you don’t own it.” Investors care more about spot price and profit potential than the aesthetic aspects of silver which may appeal to other types of silver enthusiasts.

The Speculator

Silver speculators are somewhat like the silver investors, except they are not in it for the long haul. The most famous modern silver speculators were the Hunt Brothers of Texas, who attempted to corner the silver market through leveraged margin buying on the COMEX in 1980. Silver speculators almost never have physical possession and rely entirely on paper contracts and ETFs. They look to make quick profits, and may move in and out of the market fluidly. Speculators maybe be partially responsible for the perceived disconnect between paper and physical silver values.

The Prepper

Preppers stockpile silver along with ammunition, canned food, water, medical supplies, fuel, and anything else that may prove useful after a major disaster, governmental fall, or financial collapse. Preppers tend to like 90% junk silver, and government bullion or privately minted fractional silver. They don’t mind paying something of a premium for their silver, because they may plan to use it as a supplement to a barter economy. The believe their fiat currency won’t be worth the paper its printed on. They may store their silver in their gun safe, or may have it strategically buried on their property.

So what kind of silverbug are you?  As for me, my designation has evolved through the years.   I started as a saver from my days working as a cashier in a supermarket.  As time marched on, and I learned more, I became a hedger.  These days I would say I am part hobbyist and part collector.

Talking to Your Children About Precious Metals

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The first time I took my youngest daughter to a coin show, I’m not sure what either of us were thinking. I had been going to a local coin show every month for about six months and I would pick up some silver bullion or some 90% silver coinage. I would show my family what I purchased when I got back home, and the kids seemed genuinely interested. I asked my oldest daughter if she wanted to go with me to the next show, but she politely declined. My youngest daughter jumped at the opportunity.

So the next month rolls around, and one sunny Sunday morning we take a ride out to the local chain motel where the show was held. On the way there, we talked about why I liked to go to show and what I was looking. “Mostly I’m looking for some old silver coins, or maybe even a small gold coin.” I said. She turned and looked at with me with her head tilted to one side. I knew that I would have to start to provide some context to what I was doing, and why I was doing it. These points proved useful to talking to my grade school aged children:

Teach History

You don’t have to go into microscopic detail about Franklin Roosevelt’s gold confiscation order, or Richard Nixon taking the United States off of the gold standard. Start with something simple, like explaining that coins in the U.S. used to be made of real silver: dimes, quarters, half dollars, and dollar coins all contained silver. The government stopped in 1964. That’s when they started making ‘silver colored’ coins (which are really made from copper and nickel). But you can tell by looking at the edge. Kids love puzzles, and patterns. Its difficult to find 90% silver coins in pocket change, but you can have them practice finding pre-1982 pennies in their piggy banks and showing the differences in weight. At the coin show I showed my daughter some Silver Certificate dollar bills and explained that you used to be able to exchange one of those for a silver dollar, but those days ended long ago.

Define Debasement

Debasement is not the room under the first floor of the house. Debasement means the practice of lowering the value of money. I like to use the lemonade mix analogy. I asked my girls (and demonstrated with three glasses of water) “If the instructions say to use one tablespoon of lemonade mix for each glass of water, what happens if you use half as much or a quarter as much?” They very quickly understood that the less mix used, the weaker the lemonade would be. This is what happened to the half dollar coin in 1965. In 1964 the half dollar was 9/10′s silver, and in 1965 and for the for the following five years the half dollar was only 4/10′s silver. I asked them which they would rather have: a coin with more silver, or one with less. They quickly caught on picking the one with more silver.

Appeal to What They Already Know

Children have all been read stories or seen movies where wealth, treasure, money is in the form of gold and silver. What they might not realize is that gold and silver was real money from antiquity to the not so distant past. Its important to reinforce that precious metals have never completely lost value. A silver coin from the Roman Empire is still worth its weight in silver, despite the fact that the Roman Empire has been gone for more than 1500 years. Precious metals out last political entities, and require no faith nor credit any government.

Teach Diversification

Even children will recognize the foolishness of keeping all their eggs in one basket. So while you teach the advantages of purchasing precious metals, explain the importance of mixing it up. Diversification can be done among different precious metals. Diversification can also mean to keep some cash handy (like in piggy banks), and some in bank accounts. While precious metals are an important store of wealth, quick access to cash is never a bad idea for immediate needs. I explained that when I purchase silver, its a small part of our total income, and I hope to pass everything on to my children and their children one day.

Keep it Secret Keep it Safe

Holding physical metal is the best way to keep the wealth under your control. But it does come with some risks. Children love to brag and tell teachers, friends, and neighbors just about everything. You need to explain that while purchasing and storing precious metals can be a fun family activity, not everyone needs to know about it. I prefer to let the kids talk about ‘coin collecting’. When we go to the coin show, I give them a small amount to spend on Wheat Pennies or Buffalo Nickels or even some bargain foreign coins. My daughters can still talk about their hobby and show off parts of their collections without worrying about exposing too much information. All the precious metal is kept separate from their collections, safely locked away and even they don’t know where it is.

Dollar Cost Averaging

This article was originally published at Suns Of Liberty Mint

So you are new to precious metals, and you would like to start purchasing physical silver, but you are not sure how to get started. Or maybe you already have some silver, and now you would like to add to your stack. But silver is expensive and its price fluctuates. What’s a silver stacker to do?

Dollar Cost Averaging or DCA may be a strategy to consider. What’s DCA you ask? Simply put, you dedicate a defined amount of money to purchase silver at regular intervals for a specified period of time. For example, you save fifty dollars a week and purchase silver every week for six months. If you can’t spend exactly fifty dollars, spend as much as you can without going over (something I like to refer to as The Price Is Right rule). Add the remainder to the next week’s amount. This strategy allows you to purchase more silver when the price is low, and less when it is high, but the continued purchasing over time averages the low and high prices giving you a better value for your money over an extended period of time.

There are three components that each person has to decide for themselves: the amount of money to be spent each time (the expenditure); how often it will be spent (the frequency); and how long the process will last (the duration). Each component is important to the process. While determining the expenditure and frequency may seem paramount, establishing a workable time period for the duration is just as important. At the end of the duration you should review your progress, and modify your specific components as needed. Perhaps you think you should spent less, or buy more frequently. The beauty in this system is its flexibility and the power that you have over every piece.

DCA takes some amount of discipline, but this discipline is to your advantage. It can be used to ameliorate the emotions that crop up in purchasing precious metals (e.g. breaking your budget to buy at a perceived low price, or fearing to buy at a high price) Everyone wants to buy low and sell high, but no one has a crystal ball. Trying to time any market can be frustrating and ultimately futile.

Precious metals, and silver in particular, can vary widely in spot price over time. While the price over silver doesn’t change as widely as gold in dollars over time, the percentage at which it fluctuates can sometimes be double that of gold. DCA can be used to help mitigate some of the inherent volatility associated with purchasing silver. With DCA you will never be guaranteed buying at the lowest price, but generally speaking you also avoid buying at the highest price.

If you don’t have access to a lump some of cash to get you started, but you have a steady source of income and you can budget even a small amount of money over time the savings can really start to add up. DCA has been used to purchase paper investment instruments such as stocks and bonds for many years. Financial gurus, like Suze Orman, have advocated DCA as a good strategy for long term investors. Using DCA to purchase physical precious metals has the advantage that while prices may fluctuate there has never been a time in human history when precious metals have had no value. The same cannot be said for paper investments. Just ask anyone who owned stock in Bear Stearns or Lehman Brothers.