Learn Gold Coins

And This is Why You Shouldn’t Buy Corporate Bonds Right Now

admin — Mon, 06 Sep 2010 19:04:42 +0000

Webmaster’s Note: The following is a guest post by the editors of Casey Research. Want to publish a guest post? Just contact me, and we can work something in.

The other day, I came across an article that said, while individuals may be moving their money out of equities, they have been moving into bond funds – and in a big way.

It’s called jumping from the frying fan into the fire.

Based on my experience as a co-founder of a mutual fund group, I can tell you that if there is one sure thing in this world, it’s that when investors rush en masse into an investment category, it is invariably at almost exactly the wrong time to do so. Is that the case with today’s rush into bonds?

To shed some light on that point, Casey Research Switzerland-based editor Kevin Brekke volunteered to look into the correlation between bond flows and performance. Here’s his report…

Thinking About Bonds

By Kevin Brekke

With the great bond stampede that began in 2009 continuing, giving rise to the very real possibility of a bond bubble, we decided to check the relationship between bond returns and bond fund inflows to see if there might be a correlation. Take a look at this chart:

(1) Measured as the year-over-year change in the Citigroup Broad Investment Grade Bond Index.

(2) Plotted as the three-month moving average of net new cash flow as a percentage of previous month-end assets. The data exclude flows to high-yield bond funds.

As suspected, the rise and fall in total return from bond funds is accompanied by an influx or exodus of bond investors. Data to construct the chart were taken from the Investment Company Institute’s (ICI) 2010 Fact Book where they state,

In 2009, investors added a record $376 billion to their bond fund holdings, up substantially from the $28 billion pace of net investment in the previous year. Traditionally, cash flow into bond funds is highly correlated with the performance of bonds. The U.S. interest rate environment typically has played a prominent role in the demand for bond funds. Movements in short- and long-term interest rates can significantly impact the returns offered by these types of funds and, in turn, influence retail and institutional investor demand for bond funds.”

ICI continues by noting that secular and demographic trends have tempered the appetite for equities. An aging population tends to become risk averse, and the Baby Boomers are entering retirement and seeking a safer alternative to the stock market. This occurrence is clearly shown on the right side of the chart. Following the stock market crash in 2008, investors exited stocks and bonds as general panic prevailed. As investor calm returned, a tidal wave of new money flowed into bond funds, turning 2009 into a record year.

And the popularity of bond funds continues. So far this year, investors have funneled $200 billion in new money into bond funds. 2009 was also a record year for total assets and net new capital in bond funds from retirement accounts.

That is the view through the macro lens. Switching to a wide-angle lens gives one pause.

We can’t help but draw similarities to the housing bubble that began inflating at the start of the new century. As home prices started escalating, they drew the attention of a growing pool of investors. And soon this becomes a self-reinforcing phenomenon; higher prices attract greater numbers of investors that drive prices higher. Likewise for bonds. Bond returns are rising because bond returns are rising. Got it?

We have entered the terminal phase of a bond bull market ushered in thirty years ago by Paul Volcker, who drove interest rates over 20%. With 30-year U.S. government paper now under 4%, the easy profits have been made and the low-hanging fruit consumed. Investors today are shimmying out on a very tall and thin branch in search of higher “total return.” The snapping of the branch – sending investors big losses – may not be imminent, but it is inevitable.

As we at Casey Research have discussed and warned about often, the fiscal misadventures of the U.S. government will have their consequences. And one of the first victims will be bond investors as interest rates are forced higher, much higher, to attract buyers, particularly foreign buyers. When this happens, the total return on bond funds will be smashed.

The sad and pathetic irony: to escape the beatings endured in the stock markets, millions have sought safety in bonds. The punishment is not over.

We are afraid an awful lot of investors will be left asking, “What was I thinking?”

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If you want true protection from the ongoing economic turmoil, investing in precious metals and major precious metal stocks is the way to go. Even in the Great Depression, those who held physical gold and large-cap gold stocks like Homestake Mining gained… while most other investors lost everything they had. Read here why those investments will become even more valuable in the near future.

What Collectible Gold Coins Are Also Good Investments

Jerry McConway — Thu, 26 Aug 2010 09:20:47 +0000

There are different gold coins more suitable for investment purposes than for collection reasons. Collector, or numismatic, gold coins often sell at high premiums over their gold content. Investors who want to buy gold coins as a hedge against inflation or financial security in the face of a potential economic collapse should not invest in this type of coin. Instead, they should purchase gold bullion coins.

A gold bullion coin sells at a small premium over the price of its gold content so it makes a much wiser investment. Since December 31, 1974, U.S. investors have had the ability to own such coins. Between 1933 and that date, Americans were only permitted to own numismatic coins. This presented a frustrating situation for investors who were not eager to pay the markups on numismatic gold coins.

The South African Krugerrand is largely responsible for stimulating the market in gold bullion coins. The Austrian 100 Corona and Mexican 50 Peso restrikes were also popular after 1974. Today, the American Gold Eagle is the best selling gold bullion coin for investment purposes. The Krugerrand is no longer imported for investment purposes but it does still trade daily on the U.S. market. Krugerrands have smaller premiums over gold prices than do the American Gold Eagles but they are still not as popular.

Canadian Maple Leafs were once almost as popular as the Gold Eagles. For investment purposes, they waned in popularity because they can easily be damaged or scratched. Other gold coins that make good investments are the coins that traded successfully early on, the Austrian 100 Coronas and Mexican 50 Pesos. These coins contain less than one ounce of gold, making them more suitable for investors with small budgets.

Lesser-known gold coins that make good investments are the Austrian Philharmonics, Hungarian 100 Koronas, and Australian Kangaroo/Nuggets. The Hungarian Korona is the sister coin to the Austrian 100 Corona. Investors should explore these coins and avoid purchasing numismatic gold coins and old European gold coins that are not stamped with their gold content.

How To Preserve Your Gold Coins To Retain Their Value

Jerry McConway — Thu, 26 Aug 2010 09:19:20 +0000

Individuals often buy gold coins from an investment perspective, with the goal of selling them when the price of gold climbs higher. To get the highest price for these items, the objects must be in pristine condition. This requires that they be well cared for and not exposed to anything that may damage, scratch, or harm them in any way.

To properly preserve gold coins, place each one in a separate plastic case. There are plastic sleeves sold online and in stores but these can sometimes stick to a coin after a certain period of storage. They tend to leave a film on the coin once they are removed so the plastic case is a better alternative. The case should be lined with Styrofoam, satin, or cloth to protect the coin.

A collection of plastic cases can be placed in a wooden box that is left open for display, if desired. If a large collection is amassed, the owner can purchase a coin display box. This allows a large number of coins to be displayed at once, while they remain protected. There are also coin roll boxes available that provide even more room for storage but are not designed for display purposes.

When handling the coins, the individual should wear gloves. This prevents oils from the skin from coming in contact with the coins. Solutions for cleaning the coins can be used if the coins become dirty. Coin conditioners help to keep the gold coins in the best condition. Individuals should carefully follow the usage directions on these products to prevent any damage to the coin or surrounding areas.

Keeping a coin in tip-top shape will result in more money in the pocket when the coin is sold. Individuals who take care of these coins just as they would any other investment will not be sorry. Gold coins are beautiful to look at but must be preserved if the goal is to retain their value.

Gold Imports In India May Reach Annual 2009 Level In August

Jerry McConway — Thu, 26 Aug 2010 09:17:45 +0000

The amount of gold imported into India may reach the level of the entire 2009 calendar year as early as the end of August. India is the largest buyer of gold bullion in the world and has recently experienced “robust” demand, in the words of the World Gold Council. The desire for gold jewelry and sales for investment were largely responsible for the increase.

As of June 2010, India had purchased 348 metric tons of gold for the calendar year. This is impressive, considering the country bought 559 tons during the entire 2009 calendar year. During these first six months of 2010, the demand for gold jewelry grew 67 percent and the amount of gold sold for investment purposes more than tripled.

According to Ajay Mitra, Middle East and India Managing Director at the World Gold Council, “The imports, if the trend continues, should cross last year’s figure any time in July-August.” The country’s demand for gold bullion almost doubled during the first half of the year. This occurred despite gold prices rising to record levels and was likely due to higher incomes within the country.

The trend is not expected to abate because the second half of the year is historically the time when jewelry purchases increase due to weddings and festivals. The festival season begins next month and the peak in bullion sales usually occurs during the Diwali festival, which is on Nov. 5. The marriage season, which runs from November until December and again from late in March through early May, is also a popular time to purchase gold. Some form of gold is usually included in the Indian bridal trousseau.

Mr. Mitra comments that the Indian festivals seem to get “louder and bigger” each year, a good sign for gold sales. Despite all of this, the 150 metric tons of gold imported by India during the three-month period ending in June was less than the 159 tons imported during the same period one year earlier. The total demand for gold did not change significantly during this period in 2010 but demand for gold jewelry declined by two percent.

Source: Pearson, Madelene. Bloomberg Businessweek. India Gold Imports May Reach 2009 Level This Month.

Demand For Commodities Slows, Causing Gold To Fluctuate

Jerry McConway — Tue, 24 Aug 2010 11:50:37 +0000

On Monday, the price of gold fluctuated on the NYSE as investors sought it as a safe haven due to concern regarding a faltering economic recovery. On August 19, gold futures reached their seven-week peak of $1,239.50, three percent below breaking a record. The gold price on Monday swung between a 0.2 percent loss and 0.4 percent gain.

The 19-commodity Reuters/Jefferies CRB Index has experienced a 5.5 percent decline this year. This reflects the continued attempts by the U.S. to dig its way out of the worst recession in recent history. According to Frank McGhee, head dealer with Integrated Brokerage Services LLC, “Gold will hold its bid, but it will start working sideways. There’s overall weakness in the markets on a slowing of the economy. You sell everything in this scenario, but the fear will come back and gold will catch a bid.”

Anne-Laure Tremblay, London analyst with BNP Paribas SA, stated, “Investors are increasingly worried about how much steam the economic recovery still has left. This uncertainty is supportive of gold at the moment.” She went on to say that though higher prices cause demand to subside, the prime season for gold jewelry is fast approaching.

During the week ending August 17, hedge fund managers increased their bets that the gold price will rise. Their predictions reflected the biggest estimated increase since April, 7.1 percent. The assets in the largest exchange traded fund with gold bullion backing, the SPDR Gold Trust, remained unchanged as of August 20. Current holdings are just 1.6 percent under the June figure of 1,320.44 tons, which was a record.

In other precious metals news, silver futures scheduled for December delivery rose 0.1 percent on the Comex on Monday. Platinum futures scheduled for delivery in October fell 0.1 percent and palladium futures scheduled for September delivery rose by the same amount. As word of a possible second dip in the economy gets out, it will be interesting to see how these precious metals react.

Source: Larkin, Nicholas and Pham-Duy Nguyen. Bloomberg Businessweek. Gold Fluctuates as Economic Outlook Slows Commodities Demand.

Buying Gold Coins on eBay

Jerry McConway — Tue, 24 Aug 2010 11:48:35 +0000

If people want to buy gold coins, they can do so by visiting a coin dealer, flea market, or antique shop or they can shop online. Purchasing gold coins from an online auction site is a convenient way to get a good deal, if the buyer knows what he or she is doing. There are some things to know about buying gold coins on eBay before getting started.

Verifying the reputation of the dealer is crucial to make sure that one does not fall victim to a scam. The dealer should provide some form of contact information and have a positive customer satisfaction rating. eBay provides its top-rated seller seal to sellers with the highest buyer ratings who ship items quickly and have a history of excellent service. Users should read the feedback provided by consumers to make sure that it is positive.

Sellers should provide a money-back return policy outside of the eBay Buyer Protection program. Look for the return policy on the item description page and make sure it clearly states the accepted time period for returns as well as whether the entire purchase price will be refunded and via what method. It is risky to purchase a product for which the buyer will not accept a return.

The acceptable forms of payment should include PayPal because this provides additional buyer protection. This information can be found on the shipping and payments tab of the item description page, in the payment details section. With PayPal, consumers link a bank account, credit card, or debit card to their PayPal account. This way, the financial information will not need to be entered each time an item is purchased, increasing the security of the data.

Checking to make sure the eBay gold coin seller is legitimate, is an eBay top rated seller, has positive customer feedback, provides a money back guarantee, and accepts PayPal transactions will provide the consumer with peace of mind. There is always some level of anonymity when it comes to online transactions, so taking these steps increases the odds of a satisfying purchase. If the experience is positive, the consumer should leave good feedback for the seller.

Is The Price Of Gold Being Manipulated

Jerry McConway — Fri, 20 Aug 2010 20:39:16 +0000

As the price of gold shoots toward the moon, some people question whether someone is behind the scenes pulling its puppet strings. The theory of manipulation regarding the gold price is nothing new. Those who believe in conspiracy theories have often said that governments and central banks have illegally kept the price of gold low during the past 20 years.

One of the largest entities to complain about this issue is GATA, the Gold Anti-Trust Action Committee. According to official reports, the world’s central banks hold 32,000 tons of the precious metal. The Washington Agreement on Gold stipulates that members may sell up to 400 tons per year. This restricts the amount of gold present on the open market at all times. GATA claims that central banks hold under 15,000 tons of gold.

The group goes on to say that the missing gold was sold into the market in a secret fashion. This action has prevented the gold price from rising to the appropriate level, in turn making the situation regarding bonds, interest rates, and paper currency appear more attractive. What this theory equates to is that the world economies are far worse off financially than anyone is aware. GATA promotes purchasing gold as a safe haven against this worsening situation.

Is there any truth to this theory? That remains to be seen, but the issue has come into the spotlight recently due to the U.S. economic recession and near-failure of several foreign financial systems. According to the New York Post, the Department of Justice and Commodities Futures Trade Commission are investigating JP Morgan’s silver trading practices. The purpose of the civil and criminal investigation is to determine whether this well-known investment bank depressed the price of silver for its advantage.

According to Chris Powell, GATA secretary and treasurer, the government is currently manipulating the gold market by selling or leasing gold reserves held by central banks, thus supplying gold to the market. It is also selling options and futures from large investment banks. These banks have special relationships with the Federal Reserve and other central banks. The central banks will provide the gold necessary when someone wants to liquidate a position. The problem arises because there is more gold paper than there is actually gold behind it.

The Appeal Of Gold During Deflationary Times

Jerry McConway — Fri, 20 Aug 2010 20:37:43 +0000

Despite conventional thinking, the price of gold can rise outside of increasing inflation rates. Gold’s history as currency shows this to be the case. During periods of substantial deflation or inflation, a government reacts either too slowly or by creating policies and either situation is positive for gold.

When 90-day Treasury bill interest rates are lower than the inflation rate, governments attempt to stop deflation. This is the current situation in the U.S. and it makes gold attractive. Governments increase borrowings, adding to their deficits. People turn to gold for its attractive quality of providing a safe haven investment.

Research done by Deutsche bank reveals that over the past forty years, silver and gold do well when a country experiences negative or low real interest rates. At the current time, the main interest rate of the Federal Reserve is close to zero and the inflation rate is just over one percent. This has created a negative real interest rate environment and it seems the Fed will not change this in the near future by raising the interest rate.

Deutsche Bank analysts believe that the U.S. dollar will depreciate more rapidly to stop pressures from deflation. According to these experts, “the road map to resolve deflation is therefore bearish for the U.S. dollar and another factor which will propel gold prices to new highs.” The Federal Reserve plans to inject more money into the economy and there is pressure for additional federal stimulus spending. Both factors will increase the deficit in the federal budget.

Deficit spending devalues the dollar, leading investors to turn to gold for refuge. Not to mention that September, historically a banner month for gold equities and bullion, is fast approaching. When the world money supply grows, interest rates are low, and the stock market is volatile, things look promising for the most valuable of the precious metals.

Source: Holmes, Frank. U.S. Global Investors. Gold and Deflation.

What Is Gold Swapping

Jerry McConway — Fri, 20 Aug 2010 11:40:27 +0000

Financial experts and analysts predict that the price of gold will explode over the next eighteen months. Investors are being advised to buy gold coins and other physical forms of gold as well as diversify their stock portfolios to include gold holdings. There are gloom and doom predictions of a second dip in the economy and an impending collapse of the U.S. currency system. If all of these things are to be believed, it is time to cash in everything for some gold bars and head to Fiji to ride out the economic storm.

Most people are a lot more cautious in their approach and they view the reports and advice with skepticism. However, when a commercial bank engages in a gold swap the magnitude of 380 tons, it might be time to start paying attention. That is just the amount of gold that the Bank of International Settlements (BIS) recently received in exchange for foreign currencies. It represents 20 percent of the annual gold production on the planet.

A gold swap is similar to a sophisticated pawn ticket transaction. The owner of the gold gives the precious metal to a pawn broker. The pawn broker provides the owner with a certain amount of cash, at a reasonable rate of interest, based on the perceived value of the gold. If the owner does not reclaim the gold within a certain period, the pawn broker becomes the new owner of the gold. The gold is used as leverage for money that is needed at the current time.

The media received word of the recent gold swap involving the BIS and publicized it as a threat to the market for gold. The fear is that a potential sale of this supply will flood the market with liquidity. Perhaps the bigger issue is what this transaction foretells for the country in which the seller is located. In terms of the gold market, there are regulations that the BIS must adhere to, namely the Washington Agreement.

Whoever entered into this transaction most certainly did not want to swap its gold, putting a most secure asset at risk. It was likely forced to do so due to lack of other options. Though it cannot provide the money directly to its government, it can use the money to bail out one of its major commercial banks. In transactions like this, the gold market signals larger economic issues, which can actually prove beneficial for gold.

Goldman Sachs Raises Its Price Target On Gold While Telling Some Clients To Sell

Jerry McConway — Fri, 20 Aug 2010 11:36:58 +0000

Goldman Sachs raised its gold price target to $1,300 per ounce last week. In one of its recent reports, it gave a strong buy signal for the precious metal. This latest advice caused a brief increase in the spot price of gold due to unaware investors making purchases. Unaware because they are not familiar with the fact that the firm tends to put its client’s interests in last place.

Some analysts were wise to this fact and claimed that the signal from Goldman meant that the firm was offloading. They advised investors to be wary regarding market dynamics during the next four weeks. Unfortunately for those who invested, their prediction turned out to be true.

There is a small note in the fixed income strategy section of the latest installment of Perspectives from Goldman Sachs Asset Management, which is intended for broker-dealer, financial institution, or institutional investor use only. It is not for distribution to clients or the general public. It states, “Shifted our stance on gold after years of being long; see gold as vulnerable to Central Bank inactivity in the face of rising deflation risk.”

It seems that betting on the fact that Goldman Sachs will do the opposite of what it advises its clients to do results in a win. This is unfortunate for the clients not considered “special” by the firm. One could reason that those clients are the ones who get hurt the most by advice such as this because they tend to have less money invested overall, so any hit is proportionately bigger for them.

The two opposing views issued by Goldman allow it to always claim that it is right. Eventually, investors may catch onto this and stop seeking the firm’s advice. It would be interesting to see what would happen to Goldman Sachs if all those non-special clients took their business elsewhere.

Source: Durden, Tyler. Zerohedge. Goldman Tells Its “Special” Clients To Sell Gold Even As It Raises Its Price Target On The Shiny Metal.