Is the mint ratio relevant?

on Jun 27, 2013 in Commodity, Home, Precious metals | 2,070 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government is interfering with the workings of the free market and I do not expect that governments will revert to this outdated system anytime soon.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...

Closing the gap between gold price and gold mining companies prices

on Oct 25, 2012 in Equity, Home, Precious metals | 1,778 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 | 4,784 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...