Is the mint ratio relevant?

on Jun 27, 2013 in Commodity, Home, Precious metals | 2,726 comments

The mint ratio simply defined as the gold/silver ratio, is an indication of how many ounces of silver are equal in price value to one ounce of gold. In other words, how many ounces of silver would it take to buy one ounce of gold. Throughout history, governments have artificially set the gold/silver ratio for purposes of stabilizing the value of their gold and silver currency. In essence the mint ratio has been a government-established rate of exchange between gold and silver. Only when a nation establishes an official exchange rate, the market ratio is normally very close to the mint ratio in that nation because of the potential for arbitrage. For example, if Switzerland uses a 17:1 mint ratio and the UK has a 14:1 mint ratio, an investor can trade her gold for silver coins in the UK and trade her silver for gold coins in Switzerland, although he has to take the risk of transporting the precious metals safely. This bimetallist monetary system has been for instance practiced by the US government roughly from 1790 to 1870, which set by law the value of a unit of currency at a specific weight of a specific purity of metal. Of course, in doing so government is interfering with the workings of the free market and I do not expect that governments will revert to this outdated system anytime soon. I personally wouldn’t use the relationship between silver and gold prices to determine whether the price for one of these metals is likely to increase or not. But knowing its definition could be useful for your financial...

What does the growing spread between WTI Crude and Brent Crude reflect?

on Nov 19, 2012 in Commodity, Home | 2,509 comments

  A price widening has been observed between West Texas Intermediate (WTI), and its global counterpart, Brent Crude, which has gradually become the international marker. Approximately two thirds of traded oils are currently priced relative to it. Historically the price differential between the two was generally around USD 1 or USD 2 a barrel in favor of WTI. However, sometime in 2007, the premium shifted gradually in favor of Brent over WTI and in early 2009, WTI traded at USD 10 a barrel discount to Brent and Saudi Arabia shifted to Brent in pricing its crude to the US. The differential between WTI and Brent worsened since then and reached almost USD 28 a barrel. Moreover, much of the crude oil produced in the US eventually finds its way to Cushing, Oklahoma storage facility. Cushing is the delivery location, and the NYMEX pricing point, for West Texas Intermediate (WTI) crude oil. Over the last year, increasing supplies from Canada and the Bakken have continued to find their way through Cushing and due to limited capacity to get oil out of its storage complex, WTI prices have remained under pressure. Thirdly, WTI typically reflects supply and demand conditions in the US and Canadian oil markets. Brent crude oil, on the other hand, tends to reflect global supply and demand dynamics. Whereas developed-world oil demand declined from 2000 to 2010, oil consumption in countries outside the Organization for Economic Cooperation and Development (OECD) has soared by 12.5 million barrels per day. Chinese oil demand has roughly doubled in 10 years. Today, China consumes more than 10% of global oil demand. Meanwhile, India uses more oil each day than Germany and the Netherlands combined. Within the next 7 to 10 years, India will overtake Japan to become the world’s third-largest oil consumer. These demand trends are reflected in the widening gap between WTI and Brent crude oil. Since key emerging economies also show no signs of slowing or temporarily soft landing, I believe the gap between Brent crude, traded on the ICE Futures Europe exchange in London, and WTI crude, traded in New York Mercantile Exchange reached will remain elevated for a while and not contract as Goldman Sachs analyst...

Allocate commodities in your portfolio

on Nov 1, 2012 in Commodity, Home | 1,896 comments

The traditional mainstays of any portfolio are equity and fixed income investments. While finding the appropriate balance between the two can have a paramount impact on your portfolio, there is one asset class that investors overlook: commodities. Now, with the rapidly expanding ETF industry, investors can establish a long term exposure to commodities without having to participate in futures markets by trading on margin and the roll process which takes place on a regular basis to maintain constant futures exposure. While commodities are a cornerstone of investment portfolios, they do not deserve a major allocation. Even though commodities provide inflation hedge, they are subject to high volatility and price correction. Instead, they should be used as satellite investment and account of no more than 5% of your portfolio depending on your investment strategy. When you pick asset classes, you intend to bring the correlation down. Generally speaking, bonds are only minimally correlated with equities which are one of the reasons investors like holding them in their portfolio. But commodities have actually been negatively correlated to both equities and bonds historically. Commodities are the only asset class negatively correlated to bonds, making them a powerful diversification tool. The returns should do well over a holding period of a couple decades if you buy a broad index of commodities. Investing in a commodity ETF is one of the easiest ways to participate in the commodity markets and also diversify your investment portfolio. For decades, commodities remained for good reason the exclusive domain of professional traders, financial institutions and hedge funds. Futures trading require an in-depth understanding of economic trends and the ability to anticipate the impact those trends will have on the cost of goods, as well as the willingness to monitor trading activity on a daily...

Closing the gap between gold price and gold mining companies prices

on Oct 25, 2012 in Equity, Home, Precious metals | 2,422 comments

In an environment of ballooning sovereign debts and major central banks expanding their balance sheets aggressively, real assets, such as gold, should increase in value. Over the last few years, the physical price of gold has risen steadily, outperforming the S&P Metals & Mining Select Industry Index which tracks the world’s leading gold companies. The divergence of gold price and gold mining share prices is an example of a market dislocation. Historically, the two move tightly together. The logic is simple: When gold price rises, the mining companies sell their gold for higher prices, and increase therefore there bottom line. The two main reasons for this performance bridge are the following: Through the invention of Exchange Traded Funds, investments have been drawing away from gold equities. These funds, allow investors to own gold without having to worry about storage, insurance, transportation, purity, reselling…Gold ETF’s have grown significantly in size and are now a big player in commodity investing. The mining shares have additional risks related to production costs, geopolitical risks, fraud and corruption, resource nationalism, infrastructure access…A decade ago the average cost of extracting an ounce of gold from the ground stood at USD 200. Nowadays replacing depleted reserves is becoming harder. For instance, Barrick Gold’s extraction cost went up from USD 440/oz to 505 USD/oz in 2011 and this trend is likely to continue. However, as more investors move towards gold as an investment, people will look for new ways to be long gold without actually holding gold bullion or buying an ETF like SPDR Gold Shares. One way to bridge this performance gap is throughout dividends. Due to higher cash flows that these miners are generating, they have greatly increased their dividend payouts. Some miners have become even more creative and linked their dividends to the gold price itself, and I believe that these attractive dividend schemes could help persuade some investors into the miners instead of into gold. Such changes to dividend policy could mark a paradigm shift in the industry! To conclude, mining companies have had to be more creative to differentiate themselves from other investment vehicles. But would that be...

Should you add gold as part of your portfolio?

on May 2, 2012 in Home, Precious metals | 5,709 comments

In an attempt to avoid a recession, governments have been forced to inflate their economies with an easy monetary policy and increased spending. Gold can offer inflation protection, as evidenced by the skyrocketing precious metal price in the late 1970s when inflation reached double-digit rates. Simultaneously, inflationary fires are being fanned globally by the twin threats of rising oil prices and competitive de facto currency devaluations which only throw fuel on that fire. These fundamental developments will add more potential to the precious metal owners. Gold is indeed uncorrelated with most other assets and moves independent of key economic indicators. This makes it a good diversification opportunity in portfolios. Studies show portfolios containing gold are more robust and better able to deal with market uncertainties and even outperformance during periods of systemic risk. Gold acts as a cost-effective form of protection that does not negatively affect and sometimes benefits long-term expected returns, while reducing risk in times of economic turmoil. The yellow metal has offered investors a solid, long-term and tangible way to hold and protect wealth with relative safety. Unlike paper investments, like equities, bonds and currencies that can and have become worthless overnight, precious metals have true intrinsic value…and, hence, will always be...