Bullion Baron

20 Months, 2 Weeks (Addendum)

2020-05-04T16:35:00.000+09:30

Bullion... who?

It has been nearly 2 years (20 month, 2 weeks) since my last post on this site (Fin). A short time after writing that post I cleaned up the blog, removing a lot of the content that wasn't 'timeless'. The rest will remain live until I decide I no longer want to pay to retain the domain or until Google does away with Blogger which is hosting this content.

If you weren't already aware, I did shortly after that last post de-anonymise myself and I am now posting under my real name on Twitter.

I am writing this addendum for 2 reasons.

The first is to share the startups I have been working on.

I wanted to share these ventures because if you previously read my articles as Bullion Baron, perhaps you may be interested in what I am writing about and spending my time on now.

Secure Nest: I have been working on Secure Nest for over 4 years. The platform is designed to support people with mental health problems. People who haven't had all their needs met in childhood (many of us!), resulting in long term unhealthy patterns in thinking and behaviour. Our mission is to increase the accessibility of schema therapy (a therapy designed to resolve these long standing patterns) to enrich the wellbeing of individuals. You can signup for the newsletter here, which I write a considerable portion of.

SOCIETY2: I started working on SOCIETY2 this year. I was looking to build a new venture and found myself excited by the prospect of working in the distributed ledger technology (DLT) space. I have long had an interest in cryptocurrencies, since discovering and buying my first Bitcoin in 2012 (selling way too early, doh!) and writing about it here and on Twitter since 2013. More than anything the opportunity that excites me about DLT is enabling choice, in much the same way as precious metals do. Gold and Bitcoin, while very different assets (in my opinion), enable investors a choice to own a monetary asset which isn't controlled by a single third party. People have the ability to 'opt out of the system'. I think at the heart of it that is driving my passion to work on SOCIETY2. I can see a framework for decentralised social media (DeSM) providing choice to those using social and communication platforms. This is not an easy concept to explain and we are just getting started, but if you are interested in reading my posts again I would recommend signing up for the newsletter on our site. I have an article coming out soon on the current landscape of DeSM and where I see SOCIETY2 fitting into the future.

The second reason I wanted to make this post was to share an investment opportunity with readers.

Since entering the startup sector through my own ventures I have taken a keen interest in investing in other startups too, which are speculative early-stage companies, with potentially lucrative returns if you back one which finds product-market fit and scales rapidly. I really like Jason Calacanis' approach to investing in startups (see his book Angel) which includes distributing your capital across a number of companies. Before I started networking in this space though, I had no idea how to find these early, but risky companies to assess and invest in. One of the early startup companies I invested in last year (along with a number of other readers) is now raising a pre-seed round of funding and preparing to launch their service after rigorously testing it for the past couple of years. Unlike many companies who would struggle in the current (COVID) environment, this one is likely to thrive in it and they've bought on some exceptional talent in preparation for the launch. If you have investment capital, where A$10k wouldn't be too significant a portion to put into a single company and you are interested, but locked out of investing in early-stage startups send me an email at bullionbaron@gmail.com or DM me on Twitter and I'm happy to share a bit more and introduce you to the founder / chairman of this company (remotely of course!).

That's it, that's the post.

It feels a bit self-promotional on reflection (sorry!), but given my new foray into a second startup venture I wanted to share the news with past readers in case you wanted to see what I am writing about now and join me there.

For the record... gold and related miners have been performing quite spectacularly over the time since my last post. I am still very bullish on them over the medium term, though my interest will be in cycling out from such a heavy position in the years ahead as I diversify across other assets. I will continue to hold a core position in physical precious metals though, there's no other asset, digital or otherwise, that can provide the insurance and SANF as safely stored physical bars and coins.

Cheers,
Joseph (aka Bullion Baron)

Fin (The End)

2018-08-15T15:02:00.002+09:30

When I started writing at BullionBaron.com in 2010, more than anything it was a place to collect my thoughts. I was often commenting about finance / property / precious metals across various forums and found myself repeating many of the same points, so the blog was a way of centralising these ideas for reference. Later as my readership increased it became a platform to share my ideas, investment decisions, opinions and research.

Looking back at some of the posts, there were many predictions made, many terribly wrong, some very right. I hope I provided interesting commentary that prompted you to think for yourself and consider the role alternative assets might play in your portfolio.

A lot of my spare time over the past couple of years has been absorbed by a startup I co-founded (not related to the topics I write about here). It's not likely that my time will free up to come back and write again in the foreseeable future.

Over the last couple of years I have posted much less regularly and at this point it has been ~9 months since my last post. I won't rule it out, but it is unlikely this site will see a resurgence of posts (even with the return of a bull market in precious metals), so I have decided at this point to retire it. I am not sure what that means just yet, I might make the entire blog private or I might unpublish posts that are irrelevant or that I disagree with today and leave up some of the timeless pieces. This will likely occur within a few weeks.

I expect to continue tweeting from @BullionBaron, so feel free to connect there. I am considering to drop the pseudonym and tweet under my real name sometime soon.

A contrarian might be inclined to see the site closure as a sign of a bottom in precious metals. Let's hope that might be the case ;)

Cheers,

Bullion Baron

An Honest Look At USI TECH

2017-11-21T12:47:00.000+10:30

Disclosure: Most articles which publish 'reviews' of a MLM scheme are in fact not honest, but rather a sales pitch dressed up as an independent article. This is not the case here. You will not find any referral links (hidden or otherwise) to USI TECH in this post.

I have no problem with people advertising a service or product that they don't own and taking a cut, referral fee/bonus or affiliate commission when a genuine product is being sold and the process is fair and transparent. This is typical in the sales industry.

There are some multi-level marketing (MLM) sales systems which take this a step further and allow you to not only take a single cut of a products sale, but also allow you to bring in other participants where you would take a small cut of their sales too and of those they recruit (typically receiving a smaller share with each level down the chain).

At this point such a sales system can start to become risky and detrimental to the end buyer. The more people who are receiving a cut, the more profit you need to pad into the price. So chances are the end buyer is not receiving a very good deal if the cost of the product they purchase is paying a commission to a number of parties further up the chain (see image above). Also the end buyer is often recruited into the structure to try and sell the product themselves. It is not very different to a pyramid scheme, however there is a product or service involved even if it doesn't represent good value.

Have you heard of cryptocurrencies (referred to from here on as cryptos)?

Cryptos already have a number of very real risks for investors:

Their performance can be very volatile with regular 30%+ falls.
Exchanges have collapsed taking investor funds with them.
Code has gone wrong making it impossible to sell cryptos in a wallet.
If you forget your private key the value is lost forever.
Many of them are poorly coded or offer no real advantage over their peers.

And this is barely scratching the surface of the risks involved with buying or owning them (though I do believe the technology will be used in everyday life down the track, so there are reasons to speculatively own some).

$CRYPTO will be like the tech bubble when it bursts:

💥 Many are useless, overvalued projects & will fall to 0 (https://t.co/NUzSl6OtSg)

📈 Some will last long term, but could fall 90%+ as it pops (eg $AMZN)

👨‍💻 Long term, we will use much of the tech created in daily life
— Bullion Baron 👑 (@BullionBaron) November 15, 2017

Now imagine an MLM sales system was applied over the top of this highly speculative financial sector (cryptos). There are a number of 'opportunities' popping up in this space (another example is BitConnect), including one that seems to be increasingly popular in Australia, USI TECH. I have now been approached by at least half a dozen individuals to check this out and thought I'd take an opportunity to share some research I have done and my thoughts. I also welcome your comments below if there is anything I have missed or misrepresented (I am only using publicly available information).

What does USI TECH offer? Earlier in the year and last year they were selling a software package for automatic FX trading, but in March 2017 started offering 'Bitcoin Packages'. Effectively my understanding is that you transfer 50 Euro worth of Bitcoin (the first crypto) to their system and then they start trading it on your behalf. The claim is that their trading can return 140% return on capital at ~1% per day (advert spotted at a supermarket):

Typically such a return would be indicative that it is a HYIP (high-yield investment program), basically a type of ponzi scheme.

It is very unlikely they will be able to return such a consistent figure over the long term. There is no magic automatic trading system that can make you a fortune like this.

"There seems to be a never ending stream of investing scams that are rolling out these days. Automated investing combined with FOREX seems to be the sweet spot. Add a dash of Bitcoin and the story is complete. Take something that few people understand and automate it. What could possibly go wrong?" USI-Tech Scam? Yes It Is In My Opinion! - Ethan-Vanderbuilt

In fact, Bitcoin has actually risen 6 fold since they launched their Bitcoin packages, so chances are you would have outperformed their system simply by buying and holding Bitcoin directly (at least over the last 9 months).

USI TECH attracts people to this platform not only through the return, but also by offering very attractive commissions to those who want to sell these Bitcoin packages (and a recently announced 'token') to others through their referral system.

The token they are selling is dubious at best. They intend on turning the token into an ICO (initial coin offering) in the future. They have dubbed it TechCoin (Code: UTC), despite there already being a crypto by that name and another using that code.

Typically when an ICO launches they will release a whitepaper beforehand, which will detail how they intend on spending the funds, why their particular brand of crypto is superior or what it is for. To date there has been no whitepaper released publicly by USI TECH. I read they were going to release it after 500 million of their tokens are sold... why wait? Why would anyone buy this token without understanding any value it provides or what it will ultimately be used for?

The way they have structured the token sale is to incentivise both a large purchase by the buyer as well as for the referrer to push for large sales as they receive higher commissions.

The largest package you see above is Diamond for a cost of 10 Bitcoins (roughly A$109,000 at today's price).

USI TECH is suggesting they have a lot of other activity going on in the background such as the purchase (or hire?) of crypto mining rigs that are generating them income and the patenting of a machine that is supposed to reduce their mining costs substantially, but scratch under the surface and this looks like absolute nonsense (via Scam Hilarity: Suspect ponzi claims to be mining bitcoin w/ perpetual motion engine):

Being presented by people who simply don't have the qualifications or public history to confirm they know what they are talking about.

Further red flags appear with the business being based out of Dubai:

"A PO Box corporate address in Dubai is provided by USI-Tech. However beyond laundering investor funds, it’s doubtful USI-Tech has any physical operations in Dubai." - USI-Tech Review 2.0: Forex auto-trading dropped for bitcoin Ponzi

They also have some questionable people involved, for example one of the founders:

"Jao Severino (JOÃO FILIPE FERNANDES SEVERINO) has been barred from financial activity in Portugal because he was involved with another scam called AMC INVEST. AMC Invest offered 10% interest per month on investments and it ended up scamming hundreds of people before it was taken down by the authorities. People were arrested for this scam."

To wrap up:

* As far as I can tell the people involved don't have the appropriate experience (e.g. equipment rental manager presenting ‘revolutionary power technologies’) or have been involved in HYIP/pyramid schemes in the past.

* They have made outrageous claims about the technology they own... think about it, if they really had a machine patented to reduce the cost of electricity for crypto mining as they've described, why would they waste their time with doing so when it would have real world applications that could be worth a lot more.

* They're selling tokens which will eventually be exchanged for coins.. so they say. Which exchange is going to accept them? What real value will these coins provide? How does it differ to other crypto out there? Which reputable crypto specialists do they have designing the coin? Where is the whitepaper?

* They are promising returns that simply can't be replicated over the long term. My expectation is that they are paying out any current returns from new investors' money or from money collected from selling the tokens and from their mining rigs. They are probably relying on a lot of investors "reinvesting" their returns. These schemes (HYIP) can operate as long as they have enough new money coming in to cover any money going out. If the incoming money stops/slows, it will eventually collapse.

* The smallest Bitcoin packages are not that expensive, but this TechCoin is trying to bring in investments of tens of thousands of dollars through the way they have structured the bonuses.

Some further questions to ask USI-Tech if you are considering an investment in their scheme:

Why are they using this patented power technology for such a low potential opportunity, why not just sell it for billions of dollars if it works as they describe?

Why can't they release the whitepaper for the ICO before launch like any reputable crypto operation?

What are the names of the crypto specialists working on TechCoin and how can they be contacted?

When can we expect an external audit of the trading they are doing?

USI TECH is likely to go the way of the last ponzi I covered on this site, Royal Silver Company. Buyer beware.

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MacroBusiness Censors Comments At Odds With Narrative

2016-12-26T13:20:00.000+10:30

The comments section at MacroBusiness, once a lively space for robust economic discussion, now often acts as little more than an echo chamber.

If the response from readers is strong enough in disagreement with the site authors, then those commenting are belittled and ignored (as I wrote in MacroBusiness Persists with War on Cash in Australia). If there is an alternative view or statistics put forward which don't fit the MacroBusiness narrative, then they are ignored, name calling begins or in some cases the comments are edited or deleted altogether.

The most recent example of the latter was in the comments section of their recently released report 'Can the great “can kick” save Australia?' (paid subscriber only content). Basically the report amalgamates a range of charts and narrative which supports an outlook that several dark clouds on the horizon (end of car manufacturing, slow down in construction and mining, etc) will converge in a short space of time and crater Australia's economy. They have been writing to this script for a number of years now, slowly pushing out the timing as unexpected economic circumstances have impacted their predictions.

The report was released late Christmas Eve and I happened to be up at the time. After reading their report and having seen some statistics on manufacturing employment at Pete Wargent's blog around the same time, I decided to post these numbers under the report:

Click Image to Enlarge

The report posited that there is basically no hope that these converging economic headwinds might be offset by some other factor which hasn't been considered. I was simply suggesting that if the Australian Dollar is smashed to 50c or lower (against the USD), as has been predicted on MacroBusiness, then perhaps a resurgence in Australian manufacturing could be one positive factor to keep an eye on:

Click Image to Enlarge

My comment was met with a ridiculous level of hostility (particularly from David Llewellyn-Smith):

My original comment (first screenshot above) was later deleted along with a number of replies.

It's a real shame that the editors / owners of MacroBusiness feel the need to use personal insults and name calling to push their agenda. It's also ironic that they attack others for 'selective analysis' while censoring current or potential future positive economic developments (that they've ignored in their own analysis) from being posted in the comment section of their site.

Note: A number of my comments have been edited and/or deleted recently on MacroBusiness. To date I have only noticed edits which remove part of the content rather than add to it (this can still distort context). Be skeptical of my comments there if something looks amiss or I don't respond to your replies. You can always reach out via Twitter or email.

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MacroBusiness Persists with War on Cash in Australia

2016-12-18T22:49:00.000+10:30

I'm a regular reader, subscriber and intermittent commenter at MacroBusiness (less frequently since my comments started getting trapped in their spam filter or outright deleted when disagreed with). They often produce well thought out arguments on finance and economic topics, which aren't being covered adequately by the mainstream media.

However, these quality pieces containing mostly original content are interwoven with myopic 'filler' articles which often appear rushed, copy and pasting swathes of text from other sources, adding a few lines of comment and then posted to the site, acting as an aggregator of news. One such example recently had blogger Leith van Onselen writing about the elimination of large denomination bank notes, it ended on this note:

"Personally I believe Australia should phase-out both $50 and $100 notes. We are turning into a cashless society anyway, so phrasing-out these bills wouldn’t create much of a burden to the ordinary law-abiding person."

The article included a quote from UBS analyst Jonathan Mott, "Removing large denomination notes in Australia would be good for the economy and good for the banks" and this corker from Peter Martin, "Phasing out high denomination notes would be painless, for those of us with nothing to hide" (eerily similar to a quote often attributed to Nazi propagandist, Joseph Goebbels).

The post on MacroBusiness generated hundreds of comments from readers who disagreed with the blogger. Many of them putting forward solid arguments against his conclusions, which included the following:

“..legalising all drugs would do much more to stamp out organised crime than removing large bills.”

“I don’t see why a digital record of every transaction I make should be kept and intercepted and stored by an all seeing government. There are some cases where cash makes sense and where you don’t necessarily want certain individuals to know what you’re buying, when and why. Not all of it is illegal.”

“How are banks held accountable in your cashless society? If banks (let’s say all of them), take undue risks, how is a depositor to “opt out”?”

“Let’s make it so no small market can exist. We can’t have farmers growing good food and selling it straight to people who want it. We MUST force everyone into the big supermarkets. Let’s make it so when all these mad elitist bastards want negative nominal IR’s there is no way to avoid their lunatic scheme for the world.”

“Moving to a cashless economy presently means that you must use a bank as an intermediate. The banks are private corporations that are so powerful they can’t be investigated.”

“..removing 50’s and 100’s has no impact on the black economy. It just becomes an inconvenience for everyone else.”

“We can’t trust the banks to give us financial advice, and we need a Royal Commission into them just to try and get them honest (unlikely to happen), but it’s okay to eliminate high-denomination notes and keep that money in banks instead?”

“..If we real see yields on bank deposits head to/below zero and stay there…….why would you keep your money in a bank in that environment”

“The problem with non cash transactions is the simply ridiculous amount of information (data) that’s being collected (and permanently stored) about individuals and what they buy, when and where. Big data is the corporate gold mine that industry is just starting to really use, most governments are still in the clueless category but they’re learning quick AND they are being sold different service packets by big-database owners. So it’s not simply about the government storing purchase information information about you tomorrows big data is a global corporation and provides a 100% clear picture of each and every individuals life, who they associate with and when and where this happens. Transactions are the glue that ties it all together, the purchase that links you personally with all the available data.”

“China only has 100 RMB notes (about $20 AUD). It didn’t stop tax evasion. It didn’t stop money laundering. It didn’t stop drug dealing’. Of course, having high denominations will make it easier, but to say all of this will magically disappear when the $100 is phased out is wrong.”“Eliminating cash eliminates the option of using cash to protect oneself in various difficult circumstances – some legal, some quasi-legal and some no doubt illegal…. but all *ethical*. The most obvious one is trying to survive when your government falsely believes you are a criminal. This happens all too often now and is probably only more likely in future. Removing cash without providing an alternative for people who might face these challenges is a VERY F*CKING BIG DEAL.”

Leith's response in the comments included praising India for their recent demonetisation of "large" denomination notes (value of which are in the vicinity of A$10-20), calling those who disagreed with him tin foil hatters, suggesting that removal of the $100 note would "certainly interrupt the black economy" and finally bowing out of the comments without addressing many of the valid arguments raised by his readers.

I had considered writing this post after this first article, but thought I would give Leith the benefit of the doubt, perhaps his brain fart would not be repeated and he would not broach the subject again. I was wrong. In the last week Leith published a follow up article supporting comments from Kelly O’Dwyer (oft referred to as Kelly O'Liar in MacroBusiness headlines when she says something they don't agree with), vilifying the $100 note. Leith failed to address any of the reasoned comments which followed his last article.

The article generated more comments worthy of consideration, which included the below:

"What on earth is wrong with people holding cash if they choose to? As many have noted – criminals will readily find some other way of settling their transactions. Opposition to cash usually boils down to the latest efforts by the private banks and their minion neoliberal cheerleaders wishing to extend the already virtual private monopoly over money creation to a complete monopoly."

"I’m still in Vietnam at present and took cash with me to exchange while here for spending money. Every money exchanger I have come across has $100 notes, I only brought $50 notes as I withdrew them from the ATM. How many other money exchangers and foreign banks have pools of Aussie $100 for exchange purposes across the world? Maybe instead of blaming criminals they should be considering this?"

The second comment in particular makes a lot of sense and explains one reason we may be seeing an increase in demand for high denomination notes, for tourists traveling to our country (in the 12 months to October 2016, the annual number of arrivals increased by 11.1% relative to the corresponding period of the prior year):

A recent RBA Bulletin (The Future of Cash) points to similar reasoning:

..liaison with major cash industry participants indicates that increases in overseas demand are a fairly usual occurrence when the Australian dollar depreciates. Part of this demand is likely to stem from the increased attractiveness of Australia as a destination for tourism and education, with both of these groups of visitors tending to be large users of cash.

The bulletin highlights that due to the anonymous and untraceable form of cash, it is impossible to calculate how frequently cash is used in facilitating illegal activities:

A potential source of currency demand that has attracted international attention recently is the use of cash, particularly high-denomination banknotes, to avoid reporting income to the authorities, or to finance illicit activities. Cash may be valued by those engaged in such activities because it is anonymous and untraceable. By definition, however, this also means that it is not possible to assess the demand for cash for these purposes accurately.

However, it does highlight that phasing out the $100 note is unlikely to be disruptive to criminal elements:

As noted, it is not possible to estimate the extent to which cash, or any particular banknote denomination, is used in illegal activities. However, liaison with AUSTRAC (Australian Transaction Reports and Analysis Centre) and the Australian Crime Commission suggests that it is the $50 denomination – rather than the $100 – that tends to be preferred by criminal elements because of its ubiquitous use in legitimate transactions. This suggests that to the extent that the $100 banknote is being used for nefarious purposes, any phase-out may not be particularly disruptive to those engaged in such activities.

This directly contradicts Leith's claim that getting rid of $100 notes would "certainly interrupt the black economy".

And if you thought about it rationally, a lot of the transactions occurring to avoid tax (e.g. tradies performing 'cashies') or buy illegal goods would continue unimpeded using smaller notes as the transaction would typically be only a small handful of notes regardless of whether using $50s or $100s.

The RBA highlights there are many legitimate uses for cash:

Demand for cash in the economy stems from its roles as a means of payment and a store of value.

As a means of payment, cash has a number of attributes that may be valued by end users.

It has near-universal acceptance, facilitates simultaneous exchange and instantaneous settlement, is convenient for person-to-person payments and can still be used at times when electronic payment methods are unavailable due to internet or electricity outages.

Cash transactions are also anonymous and, with low rates of counterfeiting in Australia, fraud may be less of a concern than when using alternative payments.

Cash can also be used as a store of value and, for this purpose, its attributes come to the fore in times of economic/financial uncertainty. In particular, in circumstances in which the viability of banks is under question – as was the case in many countries during the 2008–09 financial crisis – cash may be considered a superior store of value to money held in the form of bank deposits. That is, claims on the central bank are preferred to claims on a commercial bank.

And let's face it, a move to reduce large denominations is really a nudge toward a cashless society, which would have it's own problems as recently highlighted by the BIS:

There are academics and politicians advocating the abolition of cash. What do you think of that?

Negative nominal interest rates, especially if persistent, are already problematic. Quite apart from the problems they generate for the financial system, they can be perceived as a desperate measure, paradoxically undermining confidence. Getting rid of cash would take all this one big step further, as it would signal that there is no limit to how far into negative territory nominal interest rates could be pushed. That would risk undermining the very essence of our monetary economy. It would be playing with fire. Also, it would be quite a challenge for communication, even in simply economic terms. It would be like saying: "We want to abolish cash in order to tax you with lower negative rates in order to - tax you even more in the future."

All things considered phasing out $100 (or large denomination) notes would be a pretty awful policy direction for Australia to take. It would:

Make it more difficult to keep spending private (from government / corporations / banks)
Limit options when trying to protect oneself from risky banks (ironically something MacroBusiness highlights often)
Inconvenience those needing to use cash regularly in transactions, a majority of which would be conducted legally.

And all despite lack of evidence or reasoned argument that doing so would reduce the so called "black economy".

The team at MacroBusiness need to think this one through a little better.

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Gold Exposure For Superannuation Without An SMSF

2016-09-20T21:30:00.001+09:30

I have written on gold exposure in superannuation without the need for a Self Managed Super Fund (SMSF) in past articles here, for example some funds allow direct equity investment. IOOF Employer Super (previously know as Spectrum Super) is one such fund and has a fairly extensive list of direct shares and securities (including gold miners and PMGOLD).

As mentioned in a recent post I have added gold related positions to my super the last couple of years with Silver Lake Resources (SLR), Medusa Mining (MML), Norther Star Resources (NST) and since then Regis Resources Limited (RRL), but not everyone wants to expose themselves to the risks associated with miners. Not everyone wants a level of involvement in their super investments such as that which is required to pick miners or work out what allocation they should have to gold.

What is a conservative allocation to gold in your superannuation fund anyway? 5%? 10%? How does 25% sound...

"The Permanent Portfolio is an investment strategy developed by Harry Browne in the 1970s that advocates splitting your money equally across four assets – cash, gold, equities and bonds – and rebalancing back to that split whenever they diverge too much. Mainstream financial planners would probably balk at a 5% allocation to gold, let alone 25%, but how does such a strategy perform in reality and could you get your financial planner to consider it?

For Australian investors hard numbers on the Permanent Portfolio strategy can be found by looking at the Cor Capital Fund, run by Davin Hood. His latest Quarterly Report is out and his fund’s performance, as summarised in the chart below, I think justifies giving the strategy some consideration."

The above written by Bron Suchecki in 2015 was paired with a chart which I have taken the liberty of updating for this article:

Click Chart to Enlarge

Bron continues:

"It is important to note that the blue line is the theoretical performance of the strategy before the fund started and the white line is its actual performance. What is clear from this chart is the low volatility of the fund’s performance – yes, you don’t get big gains (as the Australian Equities line shows in 2006 & 2007) but nor do you get the big losses (as happened in 2008). For those looking for a consistent and safe investment plan for the long run, this chart shows that the strategy has merit.

Part of the performance comes from not just the choice of asset classes to allocate to but the disciplined rebalancing between those asset classes. Unless you are willing to hold all of these asset classes, and sell those which are up and buy those which are low, the strategy probably will not work as indicated.

Unfortunately, if you are looking for someone else to be that disciplined investor for you, Cor Capital is currently limited to sophisticated/wholesale investors, which means, for example, an initial investment of $500,000."

It has been highlighted to me that this fund is now far more accessible for Australian investors, particularly for those with an interest to buy in through super. You can allocate as little as $1000 to the Cor Capital Fund if you have at least a $5000 super account balance.

As briefly described on the ABC Bullion website:

1). Open a brightday Complete Super Account
2). Transfer some or all of your Superannuation to brightday
3). Invest in the Cor Capital Fund

They have a more in depth brochure available here.

On seeing this, my first thought was to take a look through the Cor Capital Fund PDS (cynical I know). A number of risks associated with gold were listed (price risk, government risk e.g. change in laws), but interestingly saw no mention of custodian risk and the only mention of how the gold was held, "Physical gold is held in professional bullion vaults on our behalf."

I sent an email to enquire how the gold is stored and received a prompt reply from the Portfolio Manager (Davin Hood):

"The Fund precious metals allocation (25% approx.) is currently 99.8% in physical gold and we keep about half in Perth at the Mint and half in Sydney at Custodian Vaults (ABC)."

I do like that the fund has a conservative approach even with the storage of it's gold, diversifying across the two companies and locations.

I don't have any intention in the near future to move a portion of my super into this fund, however it looks like a reasonable option to consider for those who want to have exposure to gold as part of a diversified portfolio in their super.

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Australian House Prices in Gold / Silver Ounces (2016)

2016-08-04T19:48:00.000+09:30

Every 12 months I have been updating the data I keep on Australian house prices measured in ounces of Gold and Silver. Here is the latest update which takes us through to June 2016 (inclusive).

Data for house prices is via Residex (median house price indices).

Data for Gold and Silver prices is via Perth Mint (bid average AUD).

Key Figures:

Adelaide (Ounces to buy a house)

Housing Peak Against Gold (February 2005): 501oz Gold

Latest Figures (June 2016): 258oz Gold, 19,332oz Silver

Based on Current Spot Price: 249oz Gold, 16,389oz Silver

Brisbane (Ounces to buy a house)

Precious Metals Peak (January 1980): 62oz Gold, 1091oz Silver

Housing Peak Against Gold (February 2004): 600oz Gold

Latest Figures (June 2016): 296oz Gold, 22,237oz Silver

Based on Current Spot Price: 286oz Gold, 18,852oz Silver

Melbourne (Ounces to buy a house)

Precious Metals Peak (January 1980): 67oz Gold, 1181oz Silver

Housing Peak Against Gold (February 2004): 661oz Gold

Latest Figures (June 2016): 433oz Gold, 32,460oz Silver

Based on Current Spot Price: 417oz Gold, 27,519oz Silver

Perth (Ounces to buy a house)

Housing Peak Against Gold (July 2007): 642oz Gold

Latest Figures (June 2016): 295oz Gold, 22,128oz Silver

Based on Current Spot Price: 285oz Gold, 18,759oz Silver

Sydney (Ounces to buy a house)

Precious Metals Peak (January 1980): 103oz Gold, 1811oz Silver

Housing Peak Against Gold (February 2004): 1100oz Gold

Latest Figures (June 2016): 625oz Gold, 46,876oz Silver

Based on Current Spot Price: 603oz Gold, 39,741oz Silver

(Spot Price ratio calculated on A$27/oz for Silver, A$1780/oz for Gold)

Gold and Silver (monthly data) outperformed all capital city prices since the last update.

My position remains the same as it has been since 2014:

"Over the same period (next 3-5 years) I expect rising precious metal prices and a lower Australian Dollar, so do think investors stacking ounces for the eventual purchase of a house will be rewarded (even those in Sydney). Only time will tell if I'm right."

That said I purchased my own home again in the past 12 months as recently covered on the site:

"But my advice would be not to live your whole life waiting for, planning for, or even hoping for, the next "big crash" (either of the financial system or housing market, arguably the two are joined at the hip in many modern economies).

That might sound odd coming from someone who's analysis, speculation and investments led them to buy a lot of precious metals and write under a handle like 'Bullion Baron'. Some readers may picture me as a nutter with a bunker full of long life food, guns and Gold, just waiting to live out the financial apocalypse 'doomsday prepper' style, but the reality is far less intense.

I'm not saying you shouldn't be prepared for and insure yourself against financial catastrophe, but once you have done so, go out and live a little. The last significant purchase of Gold I made was in late 2014 (after accumulating in the dips periodically in the 6 years prior). I have recently felt comfortable buying a home again in my local property market, Adelaide."

Here are the charts (click any to enlarge).

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A Common Sense Approach to Picking Gold Miners

2016-07-21T20:47:00.003+09:30

A lot of my early posts on this site were about gold (& silver) mining shares, covering which I owned or was looking at in the precious metals space (& why). Over the years I’ve had a number of people email, ask in person, direct message me (on Facebook/Twitter) about gold mining shares, asking for my advice on which miners they should buy, opinions on specific companies or whether it’s time to re-enter the market. My replies have remained relatively broad (& probably unhelpful), because I haven’t spent very much time researching or keeping track of companies in the precious metals space for around 4-5 years. I held some long term gold miner positions in my super (unfortunately given the price trend!) and in 2013/2015 I spent a little time looking at some options adding NST & SLR/MML. Thankfully the rise in these 3 has far more than made up for the losses in the others I hold.

I thought I would write a quick post on how I narrowed down and compared gold miners in the past (2009-2011), which will hopefully provide some ideas for those interested in the gold miner sector who want to take a punt. I am not a fund manager and have no experience in the mining industry, so most of the below is just a common sense approach I took as an individual investor. A lot of the below was simply learned along the way over several years speculating.

Suffice to say if you do not share my view that the price of gold is headed higher over the next couple of years, it would probably be a waste of time reading past this point. My view is that gold miners will provide leveraged exposure to a continuing secular (& new cyclical) bull market in the price of gold. If you think this is another false move or that the price of gold isn't likely to head much higher, then avoid owning gold mining stocks at all.

I am going to look at what are considered nano/micro-cap (capitalisation) stocks. This is the riskiest end of the market (but also the most potential for lucrative gains), so DYODD and don’t consider any companies I narrow it down to here as an invitation to buy. They should make up only a very small percentage of your portfolio. I don’t own any of the companies listed below, however may buy/sell any of them in the future at various times. I prefer researching this end of the market (<$200M market capitalisation) because their finances are often simpler, they have fewer projects and other moving parts which can make peer comparison easier. You can take a similar approach when comparing larger gold miners, but you probably won't need to dig as deep into the specifics (e.g. if they have a $100M in cash, you probably don’t need to be checking their cash burn rate to see if they have enough to last the next two quarters). To balance your exposure to gold mining companies you may choose a handful of companies in each size range, for example 6-12 nano/micro-cap companies (spread your risk!), 3-4 mid-cap and 1-2 large-cap miners.

Here is the basic agenda:

1. Find a list of gold miners

2. Narrow selection based on quantitative criteria

3. Narrow selection based on qualitative criteria

4. Choose the companies you will consider buying

5. Find a good entry point

6. (…)

7. Take profit (or cut your losses)

And here we go…

Find a list of gold miners

The list of gold miners you want to consider will depend on your situation. You may want to only consider those on your local stock exchange. You may only be able to consider those in the ASX300 if you are in Australia and looking to buy using a superannuation fund which allows direct share investment. As an Australian investor wanting to stick with those available on the ASX I find a Gold Nerds subscription an invaluable time saver and tool (you will see why later as we narrow the selection). If you want to compile your own spreadsheet (making it easier to compare the stocks) Gold Nerds handily has a list of the companies they cover on their website (see here) or try Mining Feeds / Junior Miners for broader lists which cover miners in other countries along with Australia (don’t rely on any list to be 100% complete or accurate).

Narrow selection based on quantitative criteria

Here is where having a spreadsheet like Gold Nerds or having created your own with the relevant information makes things easier. We can narrow down our list in a variety of ways, for example limiting those we look at by market cap, gold reserves or cash. Here is a quick list on what I will be using to narrow the selection of miners (using the Gold Nerds spreadsheet):

Less than $25M market capitalisation (as above, looking for nano/micro-cap stocks)
Cash holdings of more than $1M (looking for cash that will last for at least 2 quarters)
Market cap more than $2M (to avoid absolute bottom of the barrel stocks, probably best avoided)
Share price higher than .001 (to avoid companies whose shareholders may value it less, but can’t price that in)
75%+ in Gold (as opposed to having Gold as a side show to other minerals)

Here's how the list looks after the following factors are taken into account (narrowing a list of 200+ companies to 40):

Click Table to Enlarge

Keep in mind that some of these may change with regular updates. For example sorting based on market capitalisation, you may find that stocks fall into and out of your selection based on share price movement from one day to the next, so you may want to run these checks over a period of days or even weeks to ensure all relevant companies are captured. Another option is to use a buffer approach, for example instead of searching for companies with a market capitalisation under $25M, bump it up to $30-35M.

This isn’t an exhaustive list of quantitative comparisons you might consider. For example some other relevant data to check for:

How many listed shares do they have? (low share price, high number of shares can be indicative of significant past dilution)
How many listed and unlisted options do they have?
If the company is producing, what is their cash costs (per ounce mined)? Total costs? Net profit? Earnings per share?
What size is their JORC mineral resource? Ore reserve? What is the grade?
How long will their cash last?

The relevant questions may depend on the stage of the company (explorer, developer or producer). In the nano/micro-cap space you won’t have many companies producing (or even nearly at that stage), so some of the above questions won’t be relevant.

Remember you are not trying to calculate the absolute best miner/explorer in your list, but typically a group of the best among their peers. So the measures you use here to narrow the field are more about ruling out the worst.

Narrow selection based on qualitative criteria

This is probably the more difficult measure to narrow the selection. Quantitative data can be relatively easy to compare (e.g. Debt too high? Forget it. Not enough cash to fund the next quarter? Too risky.), but qualitative is where you need to review various aspects of the company where it may not be so easy to choose one over the other. Also you may need to review some of the quantitative findings in a qualitative manner.

For example, perhaps they have a high number of shares issued… many junior mining companies have had to issue a lot of shares over the past few years just to survive. Did they raise capital in a responsible manner (minimising dilution of existing shareholders where possible)? Did they provide an opportunity for all shareholders to take part (through a Share Purchase Plan)? Did institutional buyers retain their shares in the company or just flog them off (or still trying to sell them, creating a supply overhang which may keep the share price low)? If they have a low number of shares on issue, is that just because they’ve had a share consolidation recently?

Some of the numbers may not be directly comparable, for example a low-grade body of gold bearing ore close to the surface may be far more lucrative than a deep high-grade vein style deposit which can be costlier and more difficult to mine.

The easiest way to work through this review and selection process would be to come up with a set of questions that you think are important and work through them for each company. Some areas you may look at:

Management/Directors

What relevant experience do they have? (Many small company directors are lawyers/accountants)
How long have they been with the company? (Recent changes in management can be a warning signal)
What are they being paid? (I typically prefer companies where exploration expenditure exceeds administration costs)
How many are there (relative to size of the company)? (Does a small cap company with 1 project need 6 directors?)
Are they looking after the little guy? (SPPs instead of only institutional placements when raising capital)
Are they marketing the company? (Investor presentations, conference appearances)
Do they deliver what they say they will? (Time frames for drilling results or development milestones)
Do they have a significant stake in the company? (If they aren’t prepared to invest their money, why invest yours?)

Mineral Resource/Ore Reserves

Do they have a resource/reserve? Does it comply with the JORC code? (Some may use less reliable international measures)
What is the grade of the resource? How does that grade compare with similar mine types which are currently producing?
Is the resource spread over multiple deposits or in one location?
Are resource upgrades expected?
Is there a large enough resource/reserve to justify development? (Answer often lies in a mining feasibility study)
How long has the company had the resource? (If the resource was defined 10 years ago is there any sign it will be developed?)
Has the discovery cost of existing resource been justifiable? (May give indication of viability to extend resource/reserve)
How many years’ worth of mining will their resource/reserve last?
Is it likely current resources can be converted to reserves?
What other minerals have been detected and of value if mining occurs? (e.g. Silver, lead, copper credits may offset production costs)

Cash/Finance

How much cash do they have? (Check balance from quarterly report then add any $ from placements/minus estimated expenditure)
What’s their rate of cash burn? How long will their cash last? (Less than 2 quarters and you’re at high risk of near term dilution)
If they have a significant cash balance, what are their plans for it?
Do they have any liabilities (loans)? Any outstanding accounts? Hedging?
Do they have a financing facility which dilutes the share base? (Often a bad sign if a company resorts to this type of financing)
If an advanced explorer how will they fund development/plant costs?

Exploration/Drilling Results

What drilling results do they have due soon? (Which could be a catalyst to send the share price higher)
What is the grade, length, depth of past drilling results? Is it open along strike? (Could indicate more positive news to come)
Are they funded for upcoming drilling programs?

Tenement/Project (Including History)

Has the project got a history of mining? Was it successful? (Attempts may have been made by other companies to explore/mine the same project or deposit)
Have any companies gone into administration mining the same project? What will the current company do avoid the same?
Has the price of gold risen enough to consider the project viability again? (Despite any past failings)
Does the company own 100% of each tenement/project or only part of? (May need to split profit or pay royalties)
Where is the project located and does its geographical location pose substantial sovereign risk? (See KCN on the ASX)
Is their tenement/project in a region known for gold exploration, development and production? (i.e. Supportive local government)
Has there been any local protests or concerns raised in relation to the company or project?
Are there underutilized plants nearby? (They may be able to truck ore to process it without incurring mine development costs themselves)

Production

Are they meeting or exceeding projected targets? If not, why not?
If they are exceeding targets, why? Is there room for further improvement along these lines?
Are they returning dividends to shareholders? Is this in their best interest or would they get more value reinvesting into further exploration?

I can’t go through all the questions you need to be looking at (and they will change depending on the stage the company is at). For the most part it’s not about writing down the answer for each of these to compare with their peers, but instead being aware of this type of information to get an understanding of each company to rate and compare their overall quality.

Something else to consider is the liquidity of the company. Some of the small cap resource companies might be tightly held leaving only a small number that can be publicly traded, this can cause liquidity issues in the event you want to sell with large gaps up and down in price when it changes hands. An example of this is RND on the ASX:

Click Table to Enlarge

Not that companies like this aren't worth considering, but it's an additional risk to be aware of and given the choice between this and another gold miner you think will perform similarly as well, you're best to go with the one easiest to buy and sell.

Another method of research I can recommend is to visit online forums and read through the history of discussion on the companies you’re looking at. A good one for ASX listed companies is Hot Copper. You do need to be aware that many users on the site are posting there simply to ramp the company/ies they are holding at any particular time, but you can often get a feel for investor sentiment by reading the threads or discover potential problems (or even positive aspects) that you may have missed when performing the above due diligence.

Choose the companies you will consider buying

If you’ve been over the above and feel out of your depth, don’t worry. If you are new to the stock market or even new specifically to resource companies, then it’s a lot to think about and learn. If you feel uncomfortable selecting companies based on narrowing your selection above, then either keep your position size very small while you continue to learn or you could consider an index which will expose you to a variety of gold miners without needing to pick them specifically. I don’t believe there is any index on the ASX that will give you exposure to those which make up the XGD (S&P/ASX All Ordinaries Gold Index), however I was recently made aware there is a ticker on the ASX (GDX) which attempts to track the performance of the NYSE Arca Gold Miners Index (before fees/expenses), you can read more about the VanEck Vectors Gold Miners ETF here.

Assuming you have been able to narrow down your selection to a smaller number of companies that fit your criteria, you can put them all on to the watch list of your share trading platform (I would hope that you'd narrow down the example list of 40 above to around 10-20 max). From this point forward you just need to watch share price and any market updates provided through announcements which may affect your interest in buying them (for example they may end up outside of your criteria).

Find a good entry point

What do I mean by a good entry point? In my mind you don’t have to be a professional technical analysis trader to apply a common sense approach (or rules) when entering positions in the stocks you are watching. Don’t chase the price. Keep a cool head and don’t get emotional. You may be better off buying a breakout if the stock price has been crawling along at a low price for a period of time. I would recommend taking a look at the trading rules of Assad Tannous of Asenna Wealth published here (also follow him on Twitter, he presents a very cool, calm and collected approach to trading).

The share price of many gold miners has soared over the past 6 months. I expect they will continue to rise over the next couple of years along with the price of gold (hence interest in exposure to the sector), however that doesn’t mean there won’t be corrections along the way or even long boring flat periods. BTFD (Buy The F*cking Dip), don’t BTFP (Buy The F*cking Peak). Average in if you think it may go lower.

With a recent decline in the price of gold, gold mining stocks have taken a beating over the last couple of weeks with the XGD declining around 13% from it's recent peak and the RSI suggesting it's as oversold as other recent corrections (not to say that it can't be longer and deeper on this occasion):

Click Table to Enlarge

There's a chance that a reasonable BTFD opportunity is already upon us, but it's best to look at the charts of those in your watch list for the best opportunities.

(…)

This step is a reference to a South Park meme. In the episode the gnomes are stealing children’s underwear for the purpose of “profit” with no real plan. If you follow the above and below you most certainly do have a plan, so really it’s just a matter of waiting to see what happens at this point. Continue to monitor the companies you own (particularly for any company announcements). If something of substance changes which has the potential to impact on price you may choose to sell and switch into another company that measures up.

Take profit (or cut your losses)

Through trial and error I have found this step is one of the most difficult, but you should always have an exit plan. My plan owning gold miners is to hold them as leveraged exposure to a rising gold price I expect to see in the years ahead. Chances are that any small mistakes will make a negligible difference (if you’ve spread your risk over multiple stocks) with most companies ‘rising with the tide’ and hopefully careful selection results in a few which will significantly outperform.

If you pick a company and unexpected news causes them to tank, consider selling and taking the hit rather than marrying yourself to a company and riding them into the dirt. A bad drill result or three may be worth holding through, but (for example) if you’re holding a company who has begun production where the grades expected are not being achieved through the mill, this can be a precursor to needing to revisit their ore reserves and mining profitability.

Taking profit is also important. As I said at the start, my view is to ride these companies as leverage to a rising gold price, so my time frame to hold may be years in some cases, but that doesn't mean it's not a good idea to take some profit off the table along the way.

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Good luck. I hope providing this structured approach to picking gold mining companies has been of benefit to you. Any commemts, suggestions or feedback (positive or constructive) is welcome in the comments section below. Would be particularly interested to know if any readers invested in this space have any of the stocks in the table above and if so their reasons for owning over peers...

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Screw the Taxpayer: ATO Compels GST on Bullion

2016-06-01T11:04:00.000+09:30

Iceblue's (pseudonym) face screwed up as he read the letter in front of him. It was early March and the Australian Tax Office (ATO) had just written advising of an upcoming audit they intended to conduct on his business, South Gippsland Bullion (SGB). They noted their intent to inspect transactions covering the last several years of trading. He was probably thinking "Why me?" (wouldn't we all under such circumstances), but he may also have been aware that many other bullion dealers have faced similar scrutiny over the past 12-18 months with an industry wide series of audits being performed.

When the audit results arrived in mid May, advising that goods and services tax (GST) should be applied to the bullion products SGB sold, it would leave Iceblue with no choice but to close his doors (figuratively speaking given it was primarily run as an online business). The wording of the letter is ambiguous to say the least. It throws into question an assumed understanding in the bullion industry of what products should have GST applied, as industry veteran Bron Suchecki put it "..the arguments that the ATO now seem to be putting forward do not adhere to the understanding the industry had about what was bullion vs collectible."

GST is not applicable to bullion when sold in investment grade form. "What does that mean?" I hear you ask. Well, it's complicated and the results of this audit make the answers even less clear. You can read the Goods and Services Tax Ruling (GSTR) 2003/10 on what constitutes 'precious metal' for the purposes of sections 38-385 and 40-100 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). In the letter sent to Iceblue finalising the audit the ATO highlighted the following passages of the above ruling:

In paragraph 8 of GSTR 2003/10 (The Ruling) the definition for precious metal identifies the metals and fineness that is set down in section 195-1 of the GST Act. Namely, 'precious metal' means:

(a) gold (in an investment form) of at least 99.5% fineness; or

(b) silver (in an investment form) of at least 99.9% fineness; or

(c) platinum (in an investment form) of at least 99% fineness.

The tradeable form is identified in paragraph 22: Bars, wafers and bullion coins are the physical forms in which the metals gold, silver and platinum are traded on the international bullion market for those metals. These are therefore forms of those metals that are capable of being traded on the international bullion market.

The term 'investment form' is considered in several paragraphs of the Ruling. In paragraph 29 a summary is provided:

- To summarise the above, for gold, silver or platinum to be in an investment form for the purposes of the GST Act, it must be in a form that:

- is capable of being traded on the international bullion market, that is, it must be a bar, wafer or coin;

- bears a mark or characteristic accepted as identifying and guaranteeing its fineness and quality; and

- is usually traded at a price that is determined by reference to the spot price of the metal it contains.

Paragraph 12 of the Ruling refers to items where: 'The price is not determined solely by the metal value of the coin. The price is determined by reference to the spot price and by reference to the quality of the physical characteristics of the coin. The latter indicates that proof coins are not traded for the metal value only and therefore 'indicates that they do not have the character of the metal, but rather the character of manufactured articles, that is, coins made from the metal. This means that proof coins are not precious metal.'

Paragraph 42 of the Ruling differentiates between the retail market and bullion markets: There are coins, such as some commemorative coins, that are marketed in the retail market as 'bullion' coins because they are made from bullion. Such coins are not bullion coins for the purposes of this Ruling. Whether a coin is precious metal does not depend on whether the coin is called a bullion coin or a proof or numismatic coin. The relevant test is not what the coin is called but whether it has the character of the metal. This will be determined, as noted above, by whether it is traded for its metal content or for other reasons.

The ATO's primary focus was on the 'Series of Dissent' (SoD) silver rounds of which SGB had several issues minted through manufacturer SBA Amalgamated. They zeroed in on the marketing used by SGB to sell these rounds, specifically referencing the wording around a strict mintage limit, that they won't be reproduced (with dies destroyed once the mintage was complete) and professionally commissioned artwork which adorned the pieces (among other characteristics).

The ATO also quoted something Iceblue had written on the forum Silver Stackers, pointing out he had called the round a 'collectible piece', however this was done so in the context of explaining that Aussie made rounds can't really compete with bullion pricing (i.e. with bullion products manufactured overseas or in larger quantities).

SGB sold the rounds on an individual basis for around $14 over spot, with a $9 manufacturing cost. The $5 profit was reduced to $1 per round when a buyer purchased in quantities of 100 or greater. The price of the rounds was adjusted in reference to the prevailing spot price. The rounds were priced as bullion, not a proof or collectors coin even if the characteristics or marketing made it attractive to collectors. They just had a higher premium due to the local manufacturing costs.

In my view the SoD rounds met the three criteria required to be considered investment form (and exempt from GST). They were capable of being traded on the international market (once you take the size of the transaction into consideration it's likely many small bullion dealers would purchase the round), they were marked with fineness and quality and traded at a price that was referenced to the spot price.

Perhaps the most worrying aspect of the letter was not even the initial focus on the SoD rounds, but what reads like an afterthought highlighting other products which the ATO does not consider to be GST exempt (explicitly quoted below):

"Coins and bars produced by different mints which also have added characteristics and are in the retail market would not satisfy the definition of 'precious metal'.

Likewise other items sold by [SGB] are sold in a retail market and are differentiated by mint brand and various characteristics including themed year of productions, animals, religious periods, lunar year characters, country."

The ATO goes on to highlight a particular lunar product which is typically sold on the retail market for twice the prevailing spot price, but their wording seems to suggest that any product with 'added characteristics' such as a themed coin may in fact not satisfy the definition of 'precious metal' and be exempt from GST.

Long term readers of my articles would know that I specifically highlight many of the Perth Mint bullion coins as worthwhile investments due to their pleasing designs, low mintage and being individually capsuled. These are many of the same characteristics that the SGB SoD series had. It appears to be these and other characteristics which the ATO is now suggesting should result in GST being applied to bullion products.

In my mind it would make much more sense for the ATO to simplify these rules and remove all ambiguity. Reducing the test to purity of the metal (which should be lowered or exceptions made for 22k gold coins and government issued silver coins) and a maximum premium that can be charged (e.g. less than 100% markup over spot), along with the basic form being a wafer, round/coin or bar. Though my fear is they go the other way and increase the scope of GST on bullion.

There's a good chance this industry crack down and audits stem from the GST gold fraud which has been rife through Australia for some years. I am told (on good authority by industry insiders) that this practice is not only ongoing, but likely the number of people taking advantage of the loophole has increased.

Instead of seeing tangible results from the ATO on the investigation into real fraud costing the country hundreds of millions in lost revenue at a time of focus on fiscal responsibility, we see them putting a small, legitimate and innovative business under the microscope and then crushing them under their proverbial boot. Really the message from the ATO can be summarised from a slogan which was coincidentally minted on one of the SoD rounds... screw the taxpayer (well at least those who are investing in or selling physical bullion).

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Rights and Wrongs of Labor's Negative Gearing Policy

2016-03-23T12:48:00.003+10:30

Last year I wrote a post on negative gearing (The Politics of Negative Gearing), finishing on this note:

"Despite housing affordability being a hot topic at the last federal election, neither of the major parties had any policy specifically directed at tackling it. Though quarantining negative gearing to new builds or removing it completely would only be one part of a solution to tackle the problem, Abbott has made it quite clear that he's not interested in a sensible debate on the matter. Last month Labor released a discussion paper aimed at informing Labor’s Housing Affordability Strategy (to be taken to the next election). I'd expect that with the right mix of policies directed to tackling housing affordability and the right attitude, Labor might just have an edge that could help them secure a win at the next federal election."

Recently Labor released their policy on negative gearing (along with reducing the capital gains tax discount) and it has been making plenty of headlines since.

For a long time negative gearing has been considered a sacred cow, but it was obvious with housing affordability concerns growing that something would need to change and we are nearing a point where even the 'untouchables' of our tax system may end up being manhandled (if not as a result of this election, then perhaps the next). Sentiment and polls have moved in Labor's favour following their policy announcement, but not yet decisively enough to win them an election.

Sadly some of those who have been campaigning for changes to negative gearing for as long as I have are blinded by the shiny coating of Labor's policy and are not interested in looking under the bonnet at the details.

The subject of negative gearing brings out a very black and white argument from most. Both those for and against negative gearing changes seem content spreading any research they can to support their particular side, without any consideration to the accuracy. For example the Liberal Party was quick to highlight the details from a BIS Shrapnel report and connect them to Labor's policy even though the details modeled were not all the same as Labor's policy. Similarly those in support of Labor's policy have suggested independent modeling from Ben Phillips is a 'slam dunk' in support of that policy despite the fact that it doesn't account for behaviour changes, doesn't consider the accounting impacts (such as carrying forward losses) and doesn't differentiate between the types of income investors negatively gear against (i.e. wage vs investment, so at face value it doesn't appear to model Labor's policy either).

I have tried to take a more objective approach even though I am in favour of changes to negative gearing in order to reduce investor demand in the housing market. We do need to take care when changing the rules which govern our $6 trillion housing market. Negative gearing should only be removed or changed with an objective in mind and it should only be changed if we are confident the legislative changes will achieve that objective. With that basis I present what I consider to be the rights and wrongs of Labor's negative gearing policy (because it's far from perfect).

Firstly, what Labor got right...

☑ Making the first move

Changes to negative gearing are something that have been raised regularly in political discourse, but not to the point where a major political party was ready to take a policy to an election (in recent history). Labor released a discussion paper on housing affordability in early 2015 and now have a policy to change negative gearing (and capital gains tax) to improve the same. Whether you agree or disagree with the policy (or parts of it), there is no question that it is a brave move and Labor deserves applause for taking the issue seriously and being the first to bring forward firm policy for consideration.

☑ Tackling housing affordability

Some may be surprised that I support changes to negative gearing, which essentially results in higher taxes for investors (at least in the short term). I come from a position that government controls essentially all levers affecting the housing market (see Who's to Blame for Australia's Expensive Property?), if that degree of control over the market is to continue (and I would be all for a change to that), then government needs to take responsibility for the outcomes of their policy, such as the reduction in housing affordability and home ownership rates (source).

Click Chart to Enlarge

Abolishing (or changes to) negative gearing isn't a one policy fix to housing affordability, but it will reduce investor demand by removing an incentive and reduce the level of debt they can carry/prices they are prepared to pay.

Click Chart to Enlarge

Secondly, what Labor got right/wrong depending on how you view it...

☒ / ☑ Grandfathering existing investors who are negatively geared

As Jordan Eliseo pointed out in a recent post, grandfathering existing investors is unfair:

..it hardly seems fair to say to 1.3 million Australians that they can keep a tax lurk that will be closed forever more to the remaining 20 million plus Australians, the great majority of whom are nowhere near as well off financially as a large portion of those who will get to keep the sweetheart deal in perpetuity.

If it is bad policy it should be junked outright.

It could also pull forward demand as is highlighted by Eliseo, if the policy is introduced at a future date investors may rush out to buy before the cutoff.

However not grandfathering investors is also unfair to those who've made significant decisions based on the current taxation settings.

Also, it's likely a policy change wouldn't get wide enough support without the grandfathering of existing investors.

☒ / ☑ Allowing negative gearing for new builds

There are well-intentioned reasons for allowing negative gearing (against salary/wages) to continue for new construction. It has the potential to encourage investors to provide and drive new supply. That means jobs and a boost to economic growth.

The downside to encouraging more new residential construction is that many say we already have an oversupply, particularly in the apartment market. Such a policy could broaden the oversupply to other types of housing and/or increase the oversupply of apartments, which I expect would lead to a collapse in prices. An oversupply of property has been one characteristic of other global housing bubbles which have collapsed.

Lastly (but not least), what Labor got wrong...

☒ It will help to repair the budget

Labor's policy document states that:

Two specific tax deductions – negative gearing and capital gains subsidies – are both significant calls on the budget and are growing at a rapid rate.

However, negative gearing shouldn't be seen as a budget boon for reasons I have highlighted in the past:

The reality is that an end to negative gearing for property wouldn't be a huge budgetary boon (as these commentators have suggested). Most advocating for it's removal suggest a 'grandfathered' approach, which means properties already owned by investors aren't affected (until the asset is sold). Even when investors make a purchase (following negative gearing's removal), any losses which would have previously been deducted in the same financial year against other income could be carried forward to claim against future income or profit from the same asset class (property). While it might delay when deductions are made (and some investors may not make a future profit in property meaning it never is), improving the government budget in the short term, it's long term impact would be negligible.

Furthermore, it's likely that over time investors would adjust their expectations and reasons for investing in property. Currently a large number of investors buy for the tax advantages that negative gearing (and other tax breaks) offers.

It's removal would result in a lower number of investors prepared to speculatively purchase at higher prices knowing that (as it stands now) low yields (& resulting losses) are partially offset by a tax deduction against other income at the end of the financial year (or as they go for those investors using an Income Tax Withholding Variation). Over time this would likely result in a normalisation of rent to price ratios so that fewer investment property purchases would be loss making from the outset.

Other than the carried forward losses and behaviour changes, we also have to consider that Labor's policy doesn't necessarily stop an investor from negatively gearing an established property if they have other income (that doesn't fall under salary / wages) against which they can claim their property related losses (covered in more detail below).

☒ Only stops losses claimed against salary/wages

Some have tried to claim that negative gearing (as it relates to property) is only those net losses which are claimed against salary / wages, but that is not the case. The ATO makes it quite clear:

A rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the interest on the borrowings.

The overall taxation result of a negatively geared property is that a net rental loss arises. In this case, you may be able to claim a deduction for the full amount of rental expenses against your rental and other income (such as salary, wages or business income) when you complete your tax return for the relevant income year. Where the other income is not sufficient to absorb the loss it is carried forward to the next tax year.

Labor's definition and policy appears to only affect those offsetting losses against salary / wage income:

The investor can deduct any losses associated with the investment from their salary and wage income.

This will mean that taxpayers will continue to be able to deduct net rental losses against their wage income, providing the losses come from newly constructed housing.

This suggests investors will be able to continue buying established homes and negatively gearing those losses against income other than wages. Granted salary and wages are the largest income item, but there is plenty of other income that property losses could be offset against. Look at this table from the ATO (showing 2013-2014), rental losses are minuscule compared to the other income they could be offset against:

Click Table to Enlarge

Based on the information we have available I am not convinced we can conclude (with certainty) that negative gearing of established houses will reduce with Labor's policy.

☒ It could increase rents in desirable (established) suburbs

Some have made the point that negative gearing won't increase rents because even if the pool of rental housing reduces due to fewer investors (in the established market), these houses have to be sold to someone, i.e. one less investor is one new home owner. They also highlight that increased investor participation in new builds will expand the rental supply.

I agree with those comments and would think it unlikely rents in aggregate increase as a result of Labor's policy, however... while median rents may see downward pressure or a lack of growth, the ability for investors to negatively gear new properties could create a distortion where most of that downward pressure on rents is in the outer suburbs (where the number of rental properties will increase), while inner/sought after suburbs with mostly established housing stock see rents rise as natural attrition of existing established investors reduces the pool of available rental properties. Yes that means an increase in owner occupiers in those suburbs, but those who can’t afford to buy in those suburbs may be left to pay higher rents or be forced to move to less desirable suburbs.

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

As you can see, while well intentioned Labor's policy is far from ideal, in fact we can't even be sure it will achieve what it sets out to. Sadly many of those who want negative gearing to go are defending Labor's policy without giving it the careful consideration it needs. Here's hoping that changes as we near the election or if Labor does get into office, then I hope they review their policy and make the changes required to meet an objective of improved housing affordability and a higher home ownership rate.

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Australia's Bullion GST Fraud Still Under Wraps

2016-02-15T20:28:00.000+10:30

More than two years after the Australian Federal Police initially reported serious fraud was occurring in Australia's bullion industry we are yet to see any publicised progress on the investigation or action that has been taken.

In July 2014 there was an article from Chris Vedelago which provided details from two civil lawsuits in Queensland's Supreme Court containing allegations involving a number of businesses in Australia’s precious metals market.

The AFP Annual Report for 2013/2014 briefly mentions the operation (Operation Nosean, no follow up is made in the 2014/2015 Annual Report):

An estimated loss to the Commonwealth of $300 million and growing, which I assume suggests the value of Gold funneled through this type of fraud to be in excess of $3 billion (figures likely higher now we're a couple of years along).

A recent Judgment in the Federal Court of Australia highlights another possible case of this fraud, with GST input tax credits of over $40 million claimed (relating to acquisitions of gold from suppliers who were not registered for GST purposes):

The problem with the lack of publicity around this industry fraud is that eventually a large number of private bullion investors/consumers could get caught in the crossfire should one of the companies involved be a retailer who gets shutdown by the ATO.

The ATO reported in a mid year performance report (2014/2015), h/t SilverPete:

GST litigation casework continues to flow from project work relating to cash economy matters and refund integrity issues. Also, there are a steady number of new cases involving inappropriate input tax credit claims made between associates, often in the context of phoenix activity.

Seven new significant cases were received during December 2014. Six of these cases involve similar issues concerning the purported purchase of gold jewellery and subsequent dealings in gold bullion. The Commissioner’s view is that these cases involve sham transactions. These cases will be progressed in the early part of 2015.

It was announced that the ATO would be provided additional resources in the 2015/2016 budget to tackle GST fraud:

The Government will provide $265.5 million to the Australian Taxation Office (ATO) over three years to extend the GST compliance programme.

While the Government recognises that most taxpayers do the right thing, the ATO will continue a series of compliance actions to make sure honest businesses have a level playing field. This programme will allow the ATO to continue to identify fraudulent GST refunds, under reporting of GST liabilities, failure to lodge GST returns and outstanding GST debts.

Here's hoping the additional funds are used wisely, with those responsible held to account and in the meantime I would recommend if you are buying psychical bullion, you continue to keep your orders to a sensible level in case justice is served while you are mid-transaction:

"Limit the size of any single order with an individual or dealer to an amount you’d be prepared to lose if the deal goes sour." - Bullion Baron

[Addendum]

I found this transcript from an Economics Legislation Committee on the 26/02/2015 which shows Senator John Williams questioned Mr Chris Jordan, Commissioner of Taxation, on the investigation:

I don't know how much detail would normally be shared in this type of committee meeting, but the answers appear evasive to me.

If you can provide any additional information on these investigations, you can email me: bullionbaron@gmail.com

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Don't Live And Die Waiting For The Big Crash

2016-01-04T11:52:00.001+10:30

I saw The Big Short recently and this quote flashed up on the screen:

“Everyone, deep in their hearts, is waiting for the end of the world to come.” ― Haruki Murakami, 1Q84

But my advice would be not to live your whole life waiting for, planning for, or even hoping for, the next "big crash" (either of the financial system or housing market, arguably the two are joined at the hip in many modern economies).

That might sound odd coming from someone who's analysis, speculation and investments led them to buy a lot of precious metals and write under a handle like 'Bullion Baron'. Some readers may picture me as a nutter with a bunker full of long life food, guns and Gold, just waiting to live out the financial apocalypse 'doomsday prepper' style, but the reality is far less intense.

I'm not saying you shouldn't be prepared for and insure yourself against financial catastrophe, but once you have done so, go out and live a little. The last significant purchase of Gold I made was in late 2014 (after accumulating in the dips periodically in the 6 years prior). I have recently felt comfortable buying a home again in my local property market, Adelaide. I have also been spending a fair amount of time and capital over the last several months working on a new business venture (one reason my posts here have been less frequent) and with the recent news that the Australian government will be incentivising investment in startups I may continue to put money in this space.

In a comparison of renting vs buying (Rent vs Buy: An Adelaide "Cost Comparison" Revisted), the financial burden of buying has fallen substantially over the last half a decade as rents have increased (moderately), prices stagnated and interest rates fell. I still think Adelaide property prices have some tough headwinds ahead, the state economy is still struggling (highest unemployment rate in the country) and prices may yet fall again, but I expect them to outperform the likes of Sydney or Melbourne over the next 5 years (even if that means prices fall less in Adelaide).

Sydney house prices grew far more than in Adelaide over the last 7 years

While I'd agree with many housing permabears, that house prices are high in Australia (it is an expensive market, perhaps even a bubble in some cities/regions), they have also remained at elevated levels (relative to incomes) for well over a decade. Whether they correct back to past levels or not should be of no concern if you are treating housing as a consumption good.

I would never discourage others who want the stability of ownership and are prepared to treat housing as a consumable (rather than an investment) from buying. If you have a healthy deposit (preferably one that will help you avoid LMI), fixed interest rate (or able to service higher interest rates), protect yourself (income protection, cash buffer, etc) and expect to stay in the property you purchase for the long term (until mortgage paid off), then it shouldn't matter what prices do (rise, fall or stagnate). - Bullion Baron

Despite buying a home and investing in a new business, I still think the risks to the financial system are immense and I'm in no hurry to reduce my exposure to one of the assets that I still expect to flourish as financial instability returns.

No Gold was harmed (or sold) in the making of this home owner. #StillVaulting
— Bullion Baron (@BullionBaron) December 9, 2015

By the way, I looked up the quote from The Big Short when the movie finished as I was interested to see where it came from and it's context. The book it came from, 1Q84, is a novel originating in Japan. The paragraph reads:

Sometime after that, Aomame happened to see the movie On the Beach on late-night television. It was an American movie made around 1960. Total war broke out between the U.S. and the USSR and a huge number of missiles were launched between the continents like schools of flying fish. The earth was annihilated, and humanity was wiped out in almost every part of the world. Thanks to the prevailing winds or something, however, the ashes of death still hadn’t reached Australia in the Southern Hemisphere, though it was just a matter of time. The extinction of the human race was simply unavoidable. The surviving human beings there could do nothing but wait for the end to come. They chose different ways to live out their final days. That was the plot. It was a dark movie offering no hope of salvation. (Though, watching it, Aomame reconfirmed her belief that everyone, deep in their hearts, is waiting for the end of the world to come.)

Wikipedia describes Aomame (and another character in the story) as 'long-lost lovers who are drawn into a distorted version of reality'. I don't think it would be wise to live by the beliefs of this fictional character, rather you should ensure you are prepared for the worst case scenario, but once you have done so live life to the fullest.

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Defining a Housing Bubble

2015-10-02T11:55:00.000+09:30

When the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely - at which point the bubble "bursts". - Financial Times

A spike in asset values within a particular industry, commodity, or asset class. A speculative bubble is usually caused by exaggerated expectations of future growth, price appreciation, or other events that could cause an increase in asset values. This drives trading volumes higher, and as more investors rally around the heightened expectation, buyers outnumber sellers, pushing prices beyond what an objective analysis of intrinsic value would suggest. The bubble is not completed until prices fall back down to normalized levels; this usually involves a period of steep decline in price during which most investors panic and sell out of their investments. - Investopedia

A bubble is an upward price movement over an extended period of fifteen to forty months that then implodes. - Charles Kindleberger

A lot of people have been using the term ‘bubble’ to describe the Australian housing market, others say we don’t have one and Former Treasury secretary Martin Parkinson recently suggested it was the wrong question to be asking (i.e. do we have a bubble?), a comment I recently agreed with.

The problem with debating whether or not we have a bubble is that, like the term affordability, it’s definition is subjective.

I provided a few definitions of an 'asset bubble' above, one thing they all have in common is the need for the eventual ‘pop’. So analysts, economists, bloggers, property commentators and perma-bears can rave on all they like about a housing bubble in Australia, but the proof of having had one will be when and if it bursts.

That leaves us with a question though, what size and speed of decline do we need to see in order to confirm the bubble? The above definitions use terms that indicate a quick outcome, 'sudden collapse', 'steep decline', 'panic' and 'implodes', these all indicate a fast and substantial decline. I think anyone arguing that the 'Australian housing bubble' will burst by a slow paced, long term decline in price (real or nominal) is not really describing the bursting of a bubble at all, but rather a slow revaluation of the asset based on the deteriorating fundamentals.

Here is a chart I posted on Twitter over the weekend (click to enlarge):

I would suggest one of these cities had an obviously bubble (Las Vegas) which was confirmed by the bursting price, but what of the other two cities? In my opinion Boston's price decline was not a bursting housing bubble (it's decline was not steep and sudden as it was in Las Vegas), but rather was impacted by the conditions caused by the GFC and credit conditions resulting form the bursting of housing bubbles elsewhere in the United States and was probably overdue some sort of correction. That might also be the case for Adelaide (included on the above chart) and some other Australian cities which aren't experiencing strong price growth.

At it's peak the United States had a bifurcated housing market just as we have in Australia now with unsustainable rates of annual price growth in Sydney and Melbourne, but only moderate growth (at best, if not negative) in most other locations. Cameron Kusher posted a great chart on Twitter recently which highlights differences in price growth since the GFC.

Capital city home value growth since GFC - Dec-08 to Sep-15

Is 10-15% growth over (almost) 7 years the sort of price increase you'd expect to see in an 'asset bubble'?

Now I'm not arguing that Australian property (anywhere) is cheap or affordable (see the first few charts in this post), there is no doubt in my mind that it's historically and globally expensive, but that doesn't mean that every Australian capital city is in a bubble (and going to pop), nor that the Australian housing market should be considered a bubble as a whole.

There's a good chance it will be years before we can confirm whether any Australian capitals are in a property bubble right now or simply expensive/somewhat overvalued. My best guess is that Sydney and Melbourne could be in bubbles and peak this year experiencing a steep decline in price over the years ahead, but some other Australian cities like Adelaide and Brisbane I expect may only experience modest declines. For example if Adelaide saw a 10% nominal decline into 2017 (which I think is a possibility given weak economic factors), then it would result in growth having been 0% over the previous 9 years.

Whatever lies ahead I wish more commentators would define what they consider a bubble to be, because it's become clear to me that some individuals have a completely different opinion of what the term means.

Not sure HnH really understands what an asset bubble is (consensus view) given this comment: http://t.co/NPJncrAVRD pic.twitter.com/A3uaZh4K02
— Bullion Baron (@BullionBaron) September 25, 2015

If you have a view on what differentiates expensive or overvalued property to an actual property bubble and what we will need to see from Australian property prices (or in one of the capitals) to confirm we've had one here then I'd be interested to hear your opinion in the comments below...

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The Religion of Gold Hating

2015-08-26T17:04:00.002+09:30

A lot of finance commentators have poked fun at those who own Gold (aka 'Gold Bugs') over the years, likening them to members of a cult or religious group.

Articles such as '5 more reasons why investors shouldn’t worship gold right now' and 'Let’s Be Honest About Gold: It’s a Pet Rock' where the author concludes that owning Gold is "an act of faith", are recent examples of authors trying to portray Gold owners as devotees of the metal. This is nothing new though, one well known Gold hater, Joe Weisenthal, even wrote a post half a decade ago titled '9 Ways That Gold Is A Religion Masquerading As An Asset Class'.

One amusing aspect of all this Gold hating is that (when aggregated) much of it ironically resembles the same culture they are criticising. It has the same comradery, the same obsessiveness and the same unwavering faith (just in the opposite of what Gold stands for: fiat currencies, sensible government or other financial assets, with no allocation to those which are tangible).

Many Gold haters spend a great deal of time trying to convince anyone who will listen not to own Gold. They ridicule those who do own it and usually make no differentiation between those who allocate a small or large portion of their portfolio to Gold. They try and mold any argument for or against Gold to their own nonobjective viewpoint while claiming to be "asset agnostic" as if their view doesn't suffer from the same subjectivity as the rest of us.

Here are some recent examples of Gold hating from one of their favourite pulpits (Twitter).

Cullen Roche (speaks for itself):

Joe Weisenthal (retweeted this link to an August 6th article on the Gold crash costing Russia and China $5.4 Billion, when the price had already rebounded to around the pre-crash level.):

John Aziz (suggesting a price drop in Gold should result in investors who own the metal "rethinking the world", does that mean those who don't own Gold should have been rethinking the world when it was at US$1900?):

Stephen Koukoulas (whose Gold commentary over the years has lacked sense, see here and here):

Barry Ritholtz, is another prolific Gold hater who I've written about recently (here and here).

A lot of the Gold hating is less obvious than this (i.e. snarky tweets on Gold, that most would brush off as attempted humour, but a pattern can be identified when watching over time), but evidence of it exists across the feeds of many Twitter finance 'elites'. It also flooded the mainstream media over July and early August (marking a significant bottom?) until the price started to rise again.

I agree Gold is like a religion to some owners (but not all of them as the Gold haters would have you believe), but even though that's the case, wouldn't it be rational for investors (who recognise this fanatical group of Gold owners and buyers) to hold a position in the metal knowing of this devout participation in the market? Wouldn't it also be rational to own Gold knowing there are billions of people living in a society with deep cultural ties (many based around religion) to the metal and who are likely to be the same people whose wealth is set to increase the most over coming decades?

For me owning Gold is more of an atheistic position (for the most part, among other reasons). Disbelief (or lack of faith) in governments being capable of navigating the excessive debt that's built up in the financial system today to a growth model moving forward without a significant reset, mass default, global crash to restore some resemblance of sustainability. I think Gold will be one of few assets to benefit from such an event or environment so a healthy allocation is warranted.

Gold Bless,

Bullion Baron.

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Is Property More Affordable Today Than 30 Years Ago?

2015-08-06T10:05:00.000+09:30

This is a continuation (that I have written) of a conversation written by fellow Adelaidean Peter Koulizos, see here for the prologue.

[Son enters room]

Son: Hey dad, I just heard you spinning a whole lot of nonsense to sis about housing affordability.

Dad: What do you mean son? I was just telling her how it was back in my day.

Son: Well you know finance and history aren’t her strong points…

Dad: Speak nicely of your sister please.

Son: Ok, as I was saying, you claimed that it took mum and you longer to save a deposit, because a 25 per cent deposit was required to buy, but isn’t it true that some building societies loaned up to 95 per cent, meaning similar loan to value ratios were available even 30 years ago?

Dad: Well, yes, but the interest rates were often higher than the major banks...

Son: But isn’t it also typical today for the lenders offering the easiest credit conditions to have higher interest rates?

Dad: You have me there son.

Son: And isn’t it true that in the early to mid-1980s that the First Home Owners Scheme was far more generous paying up to $7000 in benefits, equalling more than 10% of the purchase price you mentioned?

Dad: That is true. Your mum and I took full advantage of that and the First Home Owners Grant isn’t nearly as generous today.

Son: You did pay 17% interest rates for a short period of time, but isn’t it true that the higher level of inflation at the time reduced the real value of the loan rather quickly with wages rising faster than they are today?

Dad: Yes, but it was tough for the first few years…

Son: Didn’t you brag to me one time that you paid off your first home in less than 10 years because interest rates fell in the years after you purchased allowing you to pay off the mortgage much faster? Do you think that it will be made so easy for sis who would be borrowing at historically low interest rates with rate rises more likely in the future?

Dad: I hadn’t considered that.

Son: You mentioned her trip to Bali, but you know she got those tickets for only $300 return and the accommodation, food and entertainment over there is far cheaper than in Australia. In real terms wouldn’t her week in Bali be cheaper than the long weekend holiday you told us you took to the Gold Coast in the early 1980s while saving for your first home?

Dad: You are probably right.

Son: It’s also the case that a median house in Adelaide today will be on a far smaller block than you got in 1985. In fact if I recall correctly you said your first home was on a subdivisible block once the council changed the zoning, do you think sis will be able to do that with the typical 375sqm blocks of today?

Dad: No, I suppose not.

Son: Look, I know you think you had it tough with the mortgage and for the first couple of years that may have been the case, but if sis takes a larger mortgage today, to buy a smaller block, in a lower wage growth environment, with the possibility that interest rates may rise making it difficult to make the repayments in the future, isn’t she taking a greater amount of risk?

Dad: If you look at it that way...

Son: And shouldn't being able to afford something take into account the level of risk associated with doing so?

Dad: I’ve had enough of this, I am going to watch some TV in the lounge.

Son: Weren’t you going to have some dessert?

Dad: I’m going to put it aside until your sister returns from her friends place so we can sit down and eat it together while I explain that I wasn’t as right as I thought.

Son: You don’t say.

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Martin Armstrong: New Supply Could "Crush Gold"

2015-07-30T22:27:00.000+09:30

I read Martin Armstrong's blog on a near daily basis (I have his site bookmarked in my Feedly reading list). Sometimes he has interesting predictions and theories to share, sometimes he adds some historical perspective, other times he pumps out some absolute garbage. Here is one example of the latter:

"Well, when it rains it pours. A new discovery of gold has been made and the quantity expected is up to 46,000 tons of gold, whose market value is estimated to 298 billion US dollars if the market stays the same. The entire USA gold reserve is 8,000 tons. So we are talking about a sizable discovery in the Sudan. From a supply-demand perspective, this could crush gold." - Martin Armstrong

Armstrong's source? Sputnik News, the BuzzFeed of Russian propaganda. Here are some key points from the Sputnik article and a couple more sites I found carrying the news (none of which I would have any confidence in).

- Feb 2014 Sudan grants 9 Russian companies permission to explore for minerals.

- Sudan's total Gold production during first half of this year reached 43 tons.

- Russian company Siberian for Mining discovers Gold reserves of 46,000 tonnes.

- The market value of this gold is U.S. $298 billion.

- Zhukov (CEO), plant will be €240M and have production capacity of 50t/pa.

A few things I see wrong with this picture.

It would not be possible to firm up 46,000 tonnes of (proven) Gold reserves in 18 months. The mobilisation of drill rigs, geological expertise and utilisation of laboratories for testing would have been breathtaking, like no other mining and exploration venture you had seen before. After all, 46,000 tonnes of Gold is roughly 25% of estimated above ground Gold that we've mined through all history and would almost double the proven Gold reserves we already have waiting to be extracted. Exploration for Gold reserves is an expensive and time consuming process, Gold mining and exploration companies often take years to firm up a 1-2 million ounce (30-60 tonnes) deposit, let alone something of this scale.

Furthermore 46,000 tonnes of Gold (in above ground form) is worth far more than US$298 billion at market value. Try $1.6 Trillion.

My initial though was that perhaps the 46,000 tonnes was a reference to the total volume of dirt containing the $298B in Gold, but that still doesn't make sense as Gold content of the earth would be way too high... maybe the figure was supposed to be $298M (not billion) worth of Gold, but even that by my calculation would have required Gold content of around 200g/t (not a chance, most miners these days operate on mining ore around 1-2g/t).

If anyone else can make sense of the figures or find another source with better information about the find, I'd welcome your input in the comments below.

But just for a moment lets imagine that Martin Armstrong wasn't spreading nonsense that has no basis in reality and that this company had proven up 46,000 of actual reserves ready to mine and "crush Gold" as Armstrong so eloquently puts it... I have had other commentators say "what if" about a massive Gold find in the past.

This company is spending €240M (US$263M) on a Gold plant with production capacity of 50t/pa. How fast are they going to bring that 46,000 tonnes of Gold to the surface and what would the cost be to do so? Even if they spent billions of dollars building new massive plants with the intention of bringing 1,000 tonnes of Gold to the surface each year from this one find (increasing current annual mine supply by around 35%) and assuming global Gold infrastructure expanded to process this additional capacity, it would only add a little over 0.5% to total above ground supply each year.

Meanwhile, global debt has increased by an astounding 40% since 2007, despite having a Global Financial Crisis during the same period.

Somehow I don't think Gold has much to worry about from the discovery of a massive new deposit. Of more concern is the supply / demand of and for existing above ground Gold.

[postscript]

Martin Armstrong has since edited his article. Google cache had most of that I quoted above so took a screenshot comparing old with new (though the old version I found was still missing some paragraphs from the end, so presumably has been edited a couple of times over the last day or two).

So it appears that Sudan will be mining only an additional 20 tonnes of Gold in 2016 (100 tonnes, versus 80 tonnes in 2015). Will that be enough to crush Gold (or "crush gold psychologically" as Armstrong rewrote)? Probably not if sold as mined, although Bron notes in a recent article that it only took 22 tonnes on the Futures market to knock $48 off spot price in the recent price smash.

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Who's to Blame for Australia's Expensive Property?

2015-07-26T21:07:00.003+09:30

Picture a science lab with a square metal table in the centre. On top of the table lies an intricate wooden maze. The maze itself is completely enclosed. In the middle of the maze, at the end of the one way walled passage, is a block of cheese. In a small cage not far from the maze is a rat, who hasn't been fed for a day and whose nose is going haywire smelling the nearby cheese. The three researchers (who were responsible for building the maze) are standing nearby, one of them removes the rodent from the cage and places it into the maze, soon after which the rat finds it's way to the cheese and consumes it.

I would liken this scenario to the Australian property market, where the researchers represent the three levels of government (federal, state and local), the maze walls are policies they've introduced, cheese symbolises investment properties and for the purpose of this exercise the rat is us, investors (though it could also represent other home buyers who are also herded by government policy).

Now you may think human investors are smarter than a rat, but history shows us that time and time again we will rush toward the cheese (investment returns) often foregoing rational thought in order to do so. Just take the recent bubble and crash in the Chinese stock market (Shanghai Stock Exchange Composite Index pictured below), which was largely driven by retail investors and fuelled by margin lending.

Shanghai Stock Exchange Composite Index

If you spoke to the rat, told it not to eat the cheese from the maze, you are about as likely to receive a positive response as if you told investors (as a group, there are some investors who do act rationally as individuals) to only bid the price of an asset to a sensible valuation before stopping.

Historically (at least since the 1960's) home ownership rates have been fairly stable at around 70%, but this has since declined slightly to 68% in the 2011 ABS census and recent investor lending statistics indicate that it's probably getting worse with investor finance overtaking that of owner occupiers (lacking the balance of historical ratios).

The argument over whether Australian property is in a bubble is beside the point, as Former Treasury secretary Martin Parkinson said, "Do we have a bubble? I think that's the wrong question to be asking. The real question is why are house prices so high?"

There's no denying that Australian property is expensive, so who do we hold accountable?

I hold no animosity toward investors who buy property. Sure there are landlords who do the wrong thing from time to time, but as a group they are just acting in unison because it makes sense to them, in an effort to better their personal situation and largely due to the policies implemented by government. Blaming them for making home prices expensive is a bit like getting angry at a rat for navigating the maze and eating the cheese. The stage has been set, barriers and incentives have been put in place for investors to take advantage of the situation, why wouldn’t we expect them to do so?

The invisible influence of government policy, at least much less obvious than solid walls, is controlling almost every aspect of the property market, on both the supply and demand sides.

On the demand side they influence the cost of servicing a mortgage using the Reserve Bank of Australia (RBA) Cash Rate Target, regulate bank lending through the Australian Prudential Regulation Authority (APRA), encourage specific segments of the market to participate in transactions by using incentives (such as the First Home Owners & Downsizing Grants) and set the rules that allow foreign investors to buy our homes.

Tax policy can also contribute to demand, a strong rise in property prices followed the introduction of the 50 per cent capital gains tax discount (having held an asset for 12 months) suggests it was an inflection point for an increase in investor interest in property, also illustrated by the flood of investor finance that followed the change in 2000.

Negative gearing, whilst also available for other assets, further exacerbates demand for property, making it cheaper to service the negative cash flow of a mortgage, allowing investors to pay higher prices, buy sooner than they may have otherwise and carry a larger portfolio of properties.

It’s not only the demand side that government policy affects, supply too is impacted as government controls what land is available to build on, the building types that are allowed on that land, they set the fees and taxes associated with building, as well as on the sale of a newly constructed home and ensure the undertaking meets strict standards and a lengthy application process, all of which can contribute to increasing the cost of and deter bringing new supply to market.

On top of policies they implemented prior, since the Global Finance Crisis (GFC) the government has also intervened at times in ways that have both indirectly and directly boosted the property market. Examples include guarantees that were introduced to protect our banks (e.g. wholesale funding and deposits), the RBA taking on tranches of mortgage backed securities to support lending and the introduction of a temporary First Home Owners Boost which according to Treasury Executive Minutes, “was designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market.”

I've seen investors who've benefited from this generous environment complain that no changes should be made to the status quo, the "free market", the suggestion of which is laughable.

The government can and should act to reduce speculative demand and increase supply (if warranted) in the Australian property market, with a view to lower prices and improving affordability. Even the Liberal Party of Australia's Federal Constitution in Part II (Objectives, section n) says:

"...in which family life is seen as fundamental to the well-being of society, and in which every family is enabled to live in and preferably to own a comfortable home at reasonable cost, and with adequate community amenities."

Not that this objective is embraced by senior members of the Liberal Party such as Prime Minister (Tony Abbott) or Treasurer (Joe Hockey). Joe Hockey recently said “If housing was unaffordable in Sydney no one would be buying it, but people are still purchasing housing,” and Tony Abbott welcomed rising prices, clearly not seeing the contradiction with affordability, "I want housing to be affordable but nevertheless, I also want house prices to be modestly increasing." Neither seem to have a solid grasp of what constitutes 'reasonable cost'.

If you want someone to blame for Australia's expensive property, turn your eye away from the property investor / speculator, they are just another rat in the same maze as the rest of us. It's government policy at fault and that is what needs to change. With change of policy will come a change in investor behaviour.

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How About Fair GST Treatment For Bullion?

2015-07-23T12:44:00.001+09:30

In an article I was reading yesterday about the GST-free threshold for imported goods, which postured support for a lowering the cap from $1000 to $20, there was a video containing this message from Craig James (CommSec's Chief Economist):

"Certainly we believe this is a fair tax because if it is the case that people are traveling overseas and over the net to buy goods, bypassing Australian goods. Well really the same goods should be charged the same price whether you're buying overseas or getting it domestically."

There has also been recent talk of raising the GST in Australia from 10 to 15%.

As a proponent for small(er) government and less taxes I'm not particularly fond of the latter suggestion, but I do concur with James' view that a fair tax should see comparable goods charged the same amount of tax. Not only for consumer goods, but also for investment assets. This is one area that bullion (as an investment asset) is short changed.

A guide I wrote on buying Gold and Silver in Australia describes when bullion is GST free:

GST (Goods & Services Tax): Investment grade Gold (99.5%+ fine) and Silver (99.9%+ fine) bullion is not subject to GST. Bullion products of a lesser grade (for example 22k Gold coins like Sovereigns & Krugerrands or 92.5% sterling Silver coins) do attract GST when sold by a bullion dealer.

That results in some of the most commonly purchased bullion investment coins being burdened with GST as they don't meet the minimum finesse (Gold sovereigns and the 1966 Australian fifty-cent piece are just two examples).

1966 Australian fifty-cent pieces, only have 80% Silver content

This unfair addition of GST to an investment asset is something I would like to see changed as I wrote 2 years ago:

Increase the scope of the definitions "precious metal" & "investment grade bullion" for taxation purposes to include coins containing Gold, Silver, Platinum or Palladium (any finesse) which are now or once were legal tender of Australia or any other nation and which trade as a function of the spot price.

Precious metals are often traded in widely recognised investment forms which don't meet the strict scope defined by the Australian Taxation Office. Investment grade bullion below 99% for Platinum, 99.5% for Gold and 99.9% for Silver is subject to Goods and Services Tax (GST). This means dealers are required to charge GST on coins which many hold for investment purposes, but aren't exempt from GST, for example American Gold Eagles (91.6% Gold), Gold Sovereigns (91.6% Gold) and Round Australian 1966 50 Cent Pieces (80% Silver). Such legal tender coins which trade as a function of spot price (consistently trade at spot + x% premium) would be made exempt from GST.

I was also recently made aware (thanks Bron!) that there are other limitations to the GST free status of bullion (that I wasn't familiar with), such as a requirement for the metal to have been refined by a refiner:

"To have this GST-free status one of the requirements is that the metal has been refined by a refiner of precious metal. To be a refiner of precious metal, an entity has to satisfy the Commissioner that the entity regularly converts or refines precious metal in carrying on its enterprise." ATO (What is 'precious metal' for the purposes of GST?)

That means despite the hallmarking of these hand poured Silver bars I recently purchased, if they'd been sold in Australia by a dealer they may have needed GST applied (I bought them direct from the overseas producer in a package that was lower than the current $1000 GST-free threshold).

Home Made Redwood Poured Silver Bars

I think it would be fair to see GST removed from all bullion that is bought for the purpose of investment and where it trades as a function of spot price as I wrote last year:

Perhaps the exemption could be expanded to cover any precious metal which trades as a function of spot price, so that tax fraud is no longer as simple as defacing investment grade bullion, changing it into a form which can suddenly benefit from input tax credits.

That would put the precious metal asset class on a level playing field with others (such as shares), surely that's something that even Craig James could get behind!

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Rising Prices Aren't Always Good For Home Owners

2015-06-29T12:59:00.000+09:30

Contrary to popular belief that all home owners benefit from rising prices, that is not always the case.

Younger generations who are yet to buy a long term home, who may have purchased a smaller property that suits them for the short term or just to get themselves onto the “property ladder”, may be disadvantaged if they intend to upgrade in the future.

Take the case of a Sydney family who bought a $400k 2 bedroom apartment to tide them over for a few years. They had a 75% LVR to begin with, putting in a 25% deposit, but lower interest rates have assisted them in paying down the principal aggressively and as it stands have an LVR of 60% on purchase price ($240k mortgage). They’ve outgrown the apartment with a new addition to the family and want to now purchase a 3 bedroom house. Let’s look at three scenarios in which they sell their apartment and buy back into the same market.

Inputs:
Original value of 2 bedroom apartment: $400k
Original value of 3 bedroom house: $550k

Sale fee (real estate agency to sell apartment): 1.5%
Stamp duty (to buy house): Calculated on NSW rates

Scenario 1: No Price Change. ($400k apartment, $550k house)

Stamp duty: $20,500

Sale fee: $6000

Cash left for new purchase: $133,500

That’s a 24% deposit leaving a $416,500 mortgage on the new home.

Scenario 2: Prices Rise by 10%. ($440k apartment, $605k house)

Stamp duty: $23,000

Sale fee: $6600

Cash left for new purchase: $170,400

That’s a 28% deposit leaving a $434,600 mortgage on the new home.

Scenario 3: Prices Fall by 10%. ($360k apartment, $495k house)

Stamp duty: $18,000

Sale fee: $5400

Cash left for new purchase: $96,600

That’s a 19.5% deposit leaving a $398,400 mortgage on the new home.

So in the three scenarios above, while the steady or rising prices result in a larger deposit for the new home, allowing a lower LVR, it also sticks the owner with a larger mortgage.

Which of the above 3 mortgages would you prefer to have for the same 3 bedroom house (all else being equal)?

Of course not every situation is the same, a larger fall than 10% may result in Lenders Mortgage Insurance being payable or result in the apartment owner being underwater (mortgage exceeds value of home or is high enough that selling won't leave a large enough deposit) and locked into their unsuitable abode.

The point of this short post was just to highlight the furphy that many spread to suggest that all homeowners benefit from rising prices, when the reality is that it often just means a larger mortgage when they upgrade to their next home.

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Adam Carr Wrong on Australia's Housing Affordability

2015-06-09T11:54:00.000+09:30

Adam Carr had this to say on housing affordability in Australia (via Business Spectator)...

"...housing is still actually very affordable."

Carr was prepared to dive head first into showing how an $800,000 property is affordable on a $100,000 salary.

"A household on $150,000 could afford a $1 million-plus house -- no dramas. Someone on $100,000 could afford anything in the vicinity of $650,000 to $800,000. A lot depends on the loan-to-value ratio they’re taking -- I’ve used 70 per cent -- but it can be done."

Ok, let's break this down. $100,000 would be roughly $73,000 net, $1403/week. Carr is working from a position that they've saved a 30% (+ costs) deposit. Using $32,000 for stamp duty and fees (I went with NSW figures) and ignoring any other transaction costs (such as legals)... that's $272,000 required in savings (the deposit) before we can even start checking the affordability of the remaining mortgage. Based on a savings rate of 30% of net income ($21,900 per year, very generous if you ask me), it has potentially taken this buyer more than 12 years to save the deposit that Carr says they have on hand. That should already be raising alarm bells on this so called "very affordable" property market we have.

Now we could make any number of assumptions about this buyer, maybe he/she had property that appreciated in value before buying this one, maybe they have bank of mum and dad chipping in, maybe they're a gun investor who has turned a little savings into a lot of capital to fund the deposit... but these would be unfair presumptions to make. We could scale back the price and incomes at a comparable ratio and it would still look awful... e.g. someone on $50,000 buying a $400,000 property (for their first home) and using a $135,000 deposit will have to save for 10+ years using the same measure.

The mortgage repayments (on the remaining $560,000 loan) work out to $655 weekly (at 4.5% interest over 30 years). That's over 46% of net pay (34% of gross) and doesn't take into consideration the extra costs of ownership such as council rates, maintenance, insurance and more. It also doesn't take into consideration the possibility of interest rates rising, if they normalised to 7% the repayments would rise to $860 per week (61% of net income, 44% of gross).

Call me mad, but I don't consider Carr's examples to show affordable property any way you cut it (at least not in the way I think the word should be used)...

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Rent vs Buy: An Adelaide "Cost Comparison" Revisted

2015-05-28T11:21:00.002+09:30

One of the very early articles I wrote on this site compared the cost of buying a home with renting one in Adelaide (Rent vs Buy: An Australian "Cost Comparison"). Earlier that year I'd sold a property I owned in Adelaide (returned to renting), I put my money where my mouth is and at the time it made more sense from a financial (and personal) perspective to forgo the security of owning (or more accurately "paying off") my own home.

Almost 5 years later I am still renting the same property, the lower cost of which (less than the mortgage I had) has been an enabler to put away some extra savings and investment. In the meantime property prices have basically gone nowhere (fell around 8-10% over 2010 to 2012 and have since rebounded back to 2010 levels) and interest rates have dropped.

The comparison I did previously using figures in Adelaide, at the time most other Australian capitals were quite comparable (i.e. yields around 4-4.5% for houses), but today Sydney and Melbourne are in a league of their own. The figures I lay out below make owning look quite attractive, but that same argument probably doesn't hold true in Sydney and Melbourne where prices have gone gangbusters and yields are woeful.

I have revisited the figures from the original article and compared them with today.

Rent vs Buy - The Figures

Property: $500k House

Rent (2010): $25,000pa / 52 = $480pw
Rent (2015): $26,520pa / 52 = $510pw

(Residex shows yields have slightly improved for Adelaide over the past 5 years)

Buy (2010):
$500k + $24,000 (stamp duty and transfer fee#) x 7.25% = $37,990
1% of property value for maintenance and insurance = $5000
Council and water rates = $2000
Total = $44,990 / 52 = $865pw (interest only)

Buy (2015):

$500k + $25,000 (stamp duty and transfer fee#) x 4.15% (3 years fixed) = $21,787

1% of property value for maintenance and insurance = $5000
Council and water rates = $2200
Total = $28,987 / 52 = $557pw (interest only)

# Adelaide based figures, this would differ between states

As I pointed out last time, this still doesn't account for all costs of ownership (or for that matter renting), but you can see that there has been a squeeze in the gap between the two. In 2010 the cost difference was $385 per week, in 2015 that has narrowed to $47 per week, mainly as a result of falling interest rates and a small increase in rents. The above example shows a 6.25% jump in rents, in my personal situation I have seen a 13% rise in 5 years (which reflects the local market, different areas in Adelaide may have seen higher or lower). Over the last 5 years I have also seen my income rise which would make servicing the gap easier.

In Adelaide a $500,000 house would actually buy you something quite nice, a modern 3 bedroom house around 10km from the city, maybe even closer or a small house in the city if that is a preference. If you are prepared to look at modest homes you can buy something more dated, 15-20km out from the city, for around $300,000. Assuming a 10% (+ costs) deposit (leaving a $270,000 loan) and 3 year fixed interest rate of 4.15%, the principal and interest repayments would be around $300 per week. Rent for the same house might set you back $320-340 per week. Suddenly a home in Adelaide is looking quite obtainable, maybe even for a household on a single income.

Now I'm not saying Adelaide is cheap, it's still expensive on a global or historical comparison (if we look back at the property to income ratios of the mid 1990s), but it is definitely obtainable for those who've had the capacity to save a reasonable deposit (circa 10-20%).

There are still some risks to the Adelaide property market, as I outlined a couple of years ago (What's next for Adelaide property prices?) the economic conditions are not positive in the state, we already have one of the highest unemployment rates in the country and things may be set to get worse before they get better as the car manufacturing industry shutters. Further to this Adelaide property is at risk of being affected by recent changes to investor lending (that is likely to tighten further), falling wage growth and a crackdown on foreign investment (some of which was well described in a recent article by Callam Pickering). These factors are likely to continue weighing on Adelaide prices, but in my view with prices being the same level as they were 5 years ago, the risk of a substantial correction (i.e. 15%+ nominal) is unlikely barring a complete meltdown of our banking system or huge spike in interest rates (neither of which I consider to be likely).

FT describes an asset bubble like this:

When the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely - at which point the bubble "bursts".

Those referring to all Australian cities as being in a bubble (I do agree Sydney and Melbourne potentially are) are either wrong or have come up with their own definition of the term. Perhaps they think it's likely we see a return to the historical price to income values we had in the mid 1990s (or earlier) and that we've been in a long lasting bubble since that time. I think that is an unlikely scenario (returning to ratios from 20+ years ago) given the political and financial system we have today.

On a personal note I recently started looking at property in Adelaide (to buy) for the first time in 5 years (looking at PPOR and/or investment) and I expect to purchase (perhaps more than once) in the next 12 to 24 months. Price growth may be slow to begin with and won't rule out some negative growth (what a term! e.g. falling prices) in the short term, but there are some reasonable yields out there now and the time to buy will be while sentiment remains poor.

And if GFC 2.0 comes knocking on Australia's door and smashes the price of all Australian property in half... well at least I'll still have my Gold ;)

Martin Armstrong on Australia's Bank Deposit Tax

2015-05-05T10:56:00.000+09:30

Yesterday I spotted an article by Martin Armstrong (Australia First to Introduce a Compulsory Tax on Money Itself) that I think is misleading (no surprise that Zero Hedge was quick to republish it).

Before delving into Armstrong's claims, let us take a look at what he is presumably talking about (I say presumably because his ~~article~~ rant is light on facts & details about the subject at hand).

From the AFR, a tax on bank deposits:

"The federal government is planning a tax on bank deposits at the May budget in a move that will raise about $500 million a year but which bankers warn could be passed on to customers.

Sources have told AFR Weekend that the government is set to proceed with the bank deposits insurance levy, first proposed by the former Labor government, to shore up revenue and to act as an alternative to forcing banks to hold extra capital as insurance against collapse."

What does that mean in practice?

"The money would be put in a Financial Stability Fund and be used to protect depositors against the highly unlikely event of a bank collapse. In the meantime, the fund would also be used to offset gross debt. If the Coalition adopts the same model as Labor and if banks pass the levy on to customers, it would mean a term deposit currently paying 2.6 per cent would pay 2.55 per cent."

So to correctly frame the situation we need to define what this tax is, is it a tax on money (as per the headline) or a tax on savings as Armstrong suggests in his article?

"The new compulsory control is provided in the 2015 Australian budget, so that everyone who has any savings must pay taxes on their savings. The measure is expected to serve as a global test balloon for Europe and North America, who will watch for the outcome in Australia. If there is no massive resistance of Australian savers, the rest of the world should expect this outright confiscation very rapidly."

In my opinion framing it as a tax on money or savings is implying (wrongly) that bank balances will be reduced in order to fund it. Really it's a tax on deposits and it's levied on the banks, not customer balances. Of course any cost to the bank will likely be passed on in the form of higher fees or lower interest rates, but very unlikely to touch balances (i.e. it's not outright confiscation).

The original Labor proposal was for the levy to apply on deposits under $250,000. Why that amount? Probably because that is the deposit size per customer, per Authorised Deposit-taking Institution (ADI), that the government guarantees. Is it fair that depositors insured by the government (taxpayers really) fund the cost of their own bailout should it be needed? I think so (but welcome opposing views in the comments below).

I wrote about Labor's proposal back in 2013 ($250k+ in an Australian bank? Beware the bail-in.):

"The banks are up in arms over who will foot the bill and there has been a media storm over the tiny fraction of a % that this insurance will cost (for example a bank would need only lower the interest rate paid on a deposit from 3.50% to 3.45% in order to recoup the cost). While the media, banks and politicians get into a scuffle over who will fund the minuscule cost of insuring funds under $250k, there seems to be no investigation or reporting by the media on what might happen to funds over the 'guarantee' limit in the case of a bank failure..."

I'm no fan of 'Too Big To Fail' banking institutions and don't pretend to have all the answers on the best way forward from the position we're in. Ideologically I think banks should be allowed to fail and individuals could organise their own insurance against such events, but would it be responsible of the government to just implement a change like this and pull all guarantees in one swoop?

Armstrong continues:

"Take your money and buy tangible assets, even gold, but you just cannot store it in a bank. Movable assets will be the key and buying equities in the USA may be the only real game in town to protect money."

Now anyone reading this blog for some time (or even if you are looking at it for the first time) should be able to deduct that I'm an advocate for Gold ownership, but that doesn't mean I think you should take out all your savings and buy Gold. Also I think keeping your Gold stored in a safe deposit box with a bank is probably just as safe as any private facility (in Australia) as I concluded in a recent article focusing on this very topic (Storing Gold & Silver: Safe Deposit Box In Australia):

"Bank SDB facilities get characterised as unsafe due to their connection to the banking system, but in my opinion there are some pros and some cons that result from this association and on the whole I don't see bank SDBs as less safe than their private counterparts."

Armstrong concludes on this note:

"The introduction of this tax on money in Australia led by Tony Abbott is the trial balloon for the global economy. The IMF’s Christine Lagarde has led the battle to impose French socialism/communism upon the entire world. I have warned that she is the most dangerous woman on the planet. Do not forget, it was the French elite who sold the idea of communism to Marx – not the other way around. Now the French elite have control of the IMF and they have persuaded all other global financial institutions to also require such a compulsory levy for several years because they see it as the only way to resolve the debt crisis – just confiscate the people’s money."

We've already identified that this isn't really a confiscation of people's money, but rather a levy on the banks to fund a Financial Stability Fund in order to support depositors in event of a bank failure. Is Australia really the first country to implement such a scheme as suggested by Armstrong in the paragraph above and even his article's title (Australia First to Introduce a Compulsory Tax on Money Itself)? No. Perhaps Armstrong should take a look at the history of the FDIC, which could be seen as an equivalent to this fund, guarantee & levy, it looks to me as if the US has had something similar implemented for almost 100 years or more (from: A Brief History of Deposit Insurance in the United States):

Assessments on participating banks. All of the insurance programs derived the bulk of their income from assessments. Both regular and special assessments were based on total deposits. The assessments levied ranged from an amount equivalent to an average annual rate of about one-eighth of 1 percent in Kansas to about two-thirds of 1 percent in Texas.

Australia's 0.05% levy looks rather small in comparison. And from the FDIC's website:

"The FDIC receives no Congressional appropriations - it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities. The FDIC insures approximately $9 trillion of deposits in U.S. banks and thrifts - deposits in virtually every bank and thrift in the country."

Australia is hardly the first country to implement such a scheme and we won't be the last.

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The Politics of Negative Gearing (Australian Property)

2015-04-19T19:13:00.000+09:30

Debate over the ability for investors to negatively gear property (claim losses from property against other income) in Australia has been fierce of late.

In a recent news.com.au article Sinclair Davidson (Professor of Institutional Economics at RMIT University) was reported as describing public debate around negative gearing as “a complete load of rubbish” (sadly his comments were no less bin worthy). Rather than tackle the issue with any seriousness he resorted to ad hominem attacks on those making the case against the tax policy, claiming that "ACOSS and other people who don’t actually pay tax themselves don’t understand much about the tax system". He went on to say that other countries (US, NZ, Japan) allow such deductions (so why shouldn't we) and suggested the campaign against negative gearing is just an attempt to raise more revenue.

Jessica Irvine also suggested negative gearing is a budgetary matter (in an article yesterday), calling negative gearing a "loophole" and suggested it's closure would "raise billions".

The reality is that an end to negative gearing for property wouldn't be a huge budgetary boon (as these commentators have suggested). Most advocating for it's removal suggest a 'grandfathered' approach, which means properties already owned by investors aren't affected (until the asset is sold). Even when investors make a purchase (following negative gearing's removal), any losses which would have previously been deducted in the same financial year against other income could be carried forward to claim against future income or profit from the same asset class (property). While it might delay when deductions are made (and some investors may not make a future profit in property meaning it never is), improving the government budget in the short term, it's long term impact would be negligible.

Furthermore, it's likely that over time investors would adjust their expectations and reasons for investing in property. Currently a large number of investors buy for the tax advantages that negative gearing (and other tax breaks) offers (graphic via Digital Finance Analytics):

It's removal would result in a lower number of investors prepared to speculatively purchase at higher prices knowing that (as it stands now) low yields (& resulting losses) are partially offset by a tax deduction against other income at the end of the financial year (or as they go for those investors using an Income Tax Withholding Variation). Over time this would likely result in a normalisation of rent to price ratios so that fewer investment property purchases would be loss making from the outset.

So why support an end or changes to negative gearing if it's impact on the government budget would be minimal?

Some propose that all investment assets should be treated the same when it comes to taxation (losses from shares or business can also be offset against other income in many cases), but not all assets are equal. Like food and water, shelter is one of life's necessities and although one doesn't need to own the land and home they live in to benefit from it's utility, the increasing cost of housing is having an impact on the ability of Australian families to enjoy a lifestyle we've grown accustomed to.

There will never be a day where every household is able to afford to buy (or have an interest in doing so if the flexibility of renting is preferred), but with a historical home ownership rate of 70%, the figures recently coming out suggest that balance is tipping unreasonably in favour of investors.

Being a Senior Fellow at the Institute of Public Affairs, Davidson would probably be an advocate for a free market approach to the property market and affordability problems that arise, but the Australian property market is far from free with government & public institutions involvement in almost every aspect, including where they will allow new construction and approving or rejecting applications, significant fees and taxes added to the cost of building and selling a new home, setting the cost of money to borrow, regulating lender rules, setting the tax policy which makes it attractive, boosting the ability of buyers to purchase using grants and concessions and guaranteeing the financial institutions who would be destined to fail should the property market ever experience a severe bust. The distorted property market that we have today has come from decades of poor policy decisions, any solution will likely need to come from the same place.

Negative gearing is a tax policy that gives investors an unfair advantage in the bid to secure a property. An investor obtaining rent from a property and the ability to deduct any losses made against other income gives them an ability to carry a higher level of debt than they'd be able to otherwise. One of several government based enablers that are driving the demand side of the market to the point we are seeing a speculative investment frenzy in some cities. It's time to wind back these demand driving policies.

Within the next month we can expect to see the outcomes from the long awaited Senate inquiry into affordable housing. After comments from Nick Xenophon last year in an open letter to Prime Minister Tony Abott, that we should consider tweaking negative gearing to encourage affordable new housing (which I read to suggest quarantining negative gearing to newly constructed homes, a reasonable alternative to dumping it altogether) I was hopeful this inquiry might result in some changes. Recent comments from Abbott suggest that he will not consider such changes.

Despite housing affordability being a hot topic at the last federal election, neither of the major parties had any policy specifically directed at tackling it. Though quarantining negative gearing to new builds or removing it completely would only be one part of a solution to tackle the problem, Abbott has made it quite clear that he's not interested in a sensible debate on the matter. Last month Labor released a discussion paper aimed at informing Labor’s Housing Affordability Strategy (to be taken to the next election). I'd expect that with the right mix of policies directed to tackling housing affordability and the right attitude (knocking back ideas before the results of the Senate inquiry into affordable housing as Abbott has done is one way to show you are not taking the national discussion seriously), Labor might just have an edge that could help them secure a win at the next federal election.

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I'm sharing links and opinions daily on Twitter (@BullionBaron).

Australian Property Market: Secular & Cyclical Trends

2015-04-12T17:34:00.000+09:30

Barry Ritholtz recently framed secular markets this way, “The simplest way to think of secular markets is as longer eras driven by overriding dynamics that define the period either positively or negatively”. Wikipedia says a a secular market is a long term trending lasting up to 25 years which consists of a series of primary trends, "A secular bear market consists of smaller bull markets and larger bear markets; a secular bull market consists of larger bull markets and smaller bear markets."

However you want to define it, property in Australia over the last 20-30 years has been in a secular bull trend, not only in nominal prices, but also measured by real increases. Consider the rise in land values compared with GDP (via Prosper, Soos):

A measure of real house prices (via Prosper, Soos):

Or perhaps the most commonly observed, dwelling price to income ratio (via Christopher Joye / UBS):

Some argue that price to income ratios at current levels are not sustainable, but as the chart above shows (at least on a nation-wide basis), the current price to income ratio has levitated within a relatively tight range (4.5-5.5) for well over a decade now.

Price enablers and drivers have included an increase in dual income households, low interest rates, easier lending practices (high LVR loans), tax policies (including the restoration of negative gearing after a brief hiatus, introduction of GST and the Capital Gains Tax discount), strong income growth stemming from a resources boom and mining investment, government incentives (such as the First Home Owners Grant & Boost), supply constraints, strong population growth and more recently investment in residential property by foreign buyers. There is no one cause, but rather the overriding dynamics have resulted in prices in Australia becoming some of the least affordable in the world.

While some of these factors may change (housing affordability is becoming more politicised, especially in Sydney where prices are being driven excessively higher by an influx of investors), some of the changes that have occurred over the decades are unlikely to reverse course and I think those holding out for a significant crash in prices Australia wide (e.g. where we see price to income ratios return to the level seen in the early 1990s) will be disappointed.

It's likely we are nearing the top of the latest growth spurt (at least on a national measure), see this chart from RP Data which visualises the cyclical trend.

But the national rolling annual change doesn't give us a full picture of the performance of all capitals which makeup the series.

I expect that Sydney and Melbourne may be nearing major cyclical peaks (i.e. within the next 12 months). Sydney is showing many signs of rampant speculation that were similarly observable at the 2003 peak (e.g. investor loans reaching record nominal levels and as a % of all lending). Sydney's cyclical peak in 2003 saw prices decline and ultimately 5 years of lower/stagnant prices.

Perth has seen the cyclical climb higher that I predicted from mid 2012 ('Perth Property on Cusp of Price Growth?'), however a sharp drop off in mining investment (the 'capex cliff') and falling commodity prices are likely to take the wind out of the sails going forward (as I speculated might happen).

Adelaide is still playing out as expected with muted price growth given the underwhelming economic conditions ('What's next for Adelaide property prices?'). Despite the recent growth prices in Adelaide (at a capital city level) are only around the same as the last cyclical peak in 2010 and in some suburbs I am watching are similar to those seen in 2008/2009.

I expect growth to rollover to the downside (lower level or negative growth) as reality bites with the closure of the Holden factory, some major infrastructure projects come to an end (such as the new Royal Adelaide Hospital) and with a lack of good economic news in the pipeline. However, I think the next couple of years may provide a buying opportunity in Adelaide, the ability to lock in lower interest rates, with yields at a more reasonable level than the eastern states and prices which will potentially be little higher than they were 6-7 years prior, it's likely to be enough to coax me back into the property market (for the first time since the peak in 2010 when I sold).

That said I will be approaching the market cautiously and looking for opportunities where downside risk is limited if Australia faces recession or continued weak economic conditions.

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I'm sharing links and opinions daily on Twitter (@BullionBaron).

BB.

Cash Is A Store of Value If Interest Rates Are Negative

2015-03-28T11:28:00.001+10:30

Here is what happens when you take a quote out of context... Rick Santelli (CNBC), Zero Hedge and no doubt many others by now have honed in a line from Federal Reserve Chairwoman Janet Yellen. Zero Hedge has shortened the quote for their headline which reads: Santelli Stunned As Janet Yellen Admits "Cash Is Not A Store Of Value", this would suggest Yellen had been critical of holding cash for that purpose (as a store of value), however watching the clip reveals a very different message.

Yellen does say "cash is not a very convenient store of value", but she says so immediately following a comment that she's surprised there hasn't been a larger pickup in demand for cash (in the Eurozone areas where interest rates are negative).

What Yellen is actually implying in her response is that holding (physical) cash IS a good store of value when interest rates are negative, the reference to it being an inconvenience is presumably about having to deal with it physically. Like precious metals, holding assets physically comes with a different set of risks to owning them digitally in an account.

In fact I recently commented on the blog of JP Koning about holding cash as a store of value, pointing out there may be an opportunity for new services in the secure storage of cash (not unlike an allocated bullion account):

Physical cash acts as a store of value (or potentially even rises in value if the area is experiencing deflation) when interest rates are negative because the nominal amount you own doesn't change, where as if you hold a deposit in a bank account you may be charged a negative rate.

Of course over the long term, assuming a successful return to inflation and positive rates, cash is not a good store of value, but there are periods such as now, in countries where interest rates are negative, that holding cash as a store of value makes sense.

The deceptive way in which Zero Hedge and others have framed this quote by Yellen is why you need to be careful about the narrative and agendas that others drive as I have pointed out several times in the past.

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I'm sharing links and opinions daily on Twitter (@BullionBaron).

BB.