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Tuesday, August 6, 2013

What Are Precious Metals?

What Are Precious Metals?

Precious metals are elemental metals that have high economic value.  Metals are classified as precious because of their use in currency, investment, jewelry, industry and rarity.

Historically, precious metals were important as currency but are now regarded as investment and industrial commodities.  However, the most widely known precious metals have ISO 4217 currency codes:

Gold: XAU
Silver: XAG
Platinum: XPT
Palladium: XPD.

Precious metals are chemically less reactive than most elements, usually ductile, have a high lustre, and high electrical conductivity.  For example, Silver is the most electrically conductive and the most thermally conductive metal.

Rarity is a chief characteristic of precious metals. Rarity relates to the relative abundance of the element in the Earth’s crust and the relative difficulty of extracting it from ores.  Aluminium was considered a precious metal until modern mining techniques made it easy to obtain.

The fifteen precious metals listed in descending order by atomic number are: Beryllium (4), Gallium (31), Germanium (32), Ruthenium (44), Rhodium (45), Palladium (46), Silver (47), Tellurium (53), Rhenium (75), Osmium (76), Iridium (77), Platinum (78), Gold (79), Mercury (80), and Bismuth (81).  The Platinum Group includes Ruthenium, Rhodium, Palladium, Osmium, Iridium, and Platinum.  The precious metals are shown outlined in red in the Periodic Table.  

This table shows the relative abundance of the precious metals in Earth’s crust in Parts per Billion:


Wednesday, July 31, 2013

Is Gold Money?

Is Gold Money?

The question "Is gold money?" seems a topic of debate.   In a U.S. House Financial Services Committee Meeting on July 13, 2011, Congressman Ron Paul asked Federal Reserve Chairman Ben Bernanke – "Is gold money?" Chairman Bernanke answered, "No.  It's a precious metal."  Obviously, Congressman Paul thinks the answer is yes.  James Turk, founder and chairman of GoldMoney, claims "Gold is money!"

Who is correct?

James Turk says, "Gold is just a sterile asset.  It has no cash flow. It doesn't generate wealth.  It protects wealth. That's why it's money."  At an investment conferment in Munich in 2011, Mr Turk said, "Rather, gold’s usefulness arises from its reliability in economic calculation to determine the price of goods and services.  In other words, gold is money, and therefore is no less useful than other so-called non-productive assets like the paper banknotes and bank ledger entries that we call dollars, euros, yen and pounds."

Chairman Bernanke when on to say in answer to Congressman Paul, "I pay attention to the gold price.  But I think it reflects a lot of things.  It reflects global uncertainties.  I think the reason people hold gold is as protection against of what we call tail risks, really, really bad outcomes.   And to the extent that the last few years have made people more worried about the potential of a major crisis then they have gold as a protection."   Bernanke also said, "Well, you know, it's an asset. Would you say treasury bills are money?  I don't think they're money either, but they're a financial asset."

To answer the question "Is gold money?" we have to agree on a definition of money:  "Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socioeconomic context or country.  The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment. Any kind of object or secure verifiable record that fulfills these functions can serve as money." - Wikipedia.

Again from Wikipedia, "A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system."

Gold is not currently used as a medium of exchange in any country.  Therefore, based on the definition of money above, gold is not now money.  Gold has been money in the past and could be in the future; but, strictly speaking, gold is not money.

Paul, Bernanke and Turk do agree on one thing: gold is a store of value and protection against risk.

Gold is Insurance.

Friday, February 18, 2011

Gold and Silver Backwardation

In normal futures markets the spot or cash price is less than the price for delivery of the goods at some distant time. This normal condition is called “contango” in futures terminology. In contango the price of further out futures contracts is higher than nearby or closer in time contracts. For example, the price of a contract for delivery of goods in April is more than a contract for delivery in March and so on. This condition reflects the carrying costs of warehousing and maintaining the goods until delivery in the future.

The opposite condition, where the spot price is higher than the price of future delivery contracts is called “backwardation.” Backwardation occurs when buyers are willing to pay a higher price to have the goods now. Backwardation is a sign that buyers anticipate shortages of the goods in the future due to immediate demand.

Backwardation in gold and silver is very rare. Silver is now in complete backwardation or “zero contango.” This condition exists out till 2015. That is, the silver price of every contract month is lower than the next further out month. Backwardation is bullish for silver price and indicates demand by retail investors and industrial users is strong. The Silver price leads the gold price in a bull market. Will gold also go into backwardation? If so, that would be extremely bullish for the gold price.

Sunday, February 13, 2011

Gold and Silver Options Expiry

The gold price and the silver price movements near options expiry dates have attracted attention from some analysis. These analysts noticed a pattern where gold price and especially silver price regularly declines before options expiry. Such a price move causes many call options to expire worthless. They claim these moves are orchestrated to benefit the sellers of call the options.

Gold and silver options are options on gold and silver futures contracts. Gold and silver futures and options are traded on the New York Mercantile Exchange (NYMEX) and the Tokyo Commodity Exchange (TOCOM). NYMEX gold futures contracts (symbol GS) are for 100 troy ounces of 9995 gold. NYMEX silver contracts (symbol SI) are for 5,000 troy ounces of 999 silver.

NYMEX gold and silver options expire on the fourth business day prior to the future contract’s delivery month. The settlement type of the option is the physical metal underlying the futures contract. Delivery may take place on any business day beginning on the first business day of the delivery month or any subsequent business day of the delivery month, but not later than the last business day of the current delivery month.

2011 gold and silver options expiration calendar:

Contract MonthExpiry Date
January12 December 2010
February26 January 2011
March23 February 2011
April28 March 2011
May26 April 2011
June25 May 2011
July27 June 2011
August26 July 2011
September25 August 2011
October27 September 2011
November26 October 2011
Decemeber22 November 2011

Wednesday, September 29, 2010

Gold Silver Ratio

The Gold Silver Ratio is given by dividing the Gold Price by the Silver Price. The ratio is the amount of silver a given amount of gold will buy. For example, today the Gold-Silver Ratio is about sixty – 1:60. One ounce of gold will buy sixty ounces of silver.

From ancient times until around 1840 the Gold-Silver Ratio varied between 1:10 to 1:15. Silver was used as currency for 2500 years and as a store of value in the form of jewellery and works of art. The Industrial Revolution of the last 200 years found many thousands of uses for silver as governments have removed silver from circulation as a currency. Now silver is referred to as an Industrial Metal.

However, silver is still considered by many to be a store of value. A declining Gold-Silver Ratio may indicate that silver is becoming more desirable as a store of value over its value as an industrial metal. The silver price can be very volatile as it is subject to both industrial supply and demand as well as demand as a store of value.

Many study Gold-Silver Ratio charts. The charts below show the Gold-Silver Ratio is currently declining. The ratio is declining as both the gold price and the silver price are increasing. Some would say the declining ratio indicates that silver is being viewed more as a store of value – like gold – than an industrial metal.

Friday, April 30, 2010

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Saturday, November 28, 2009

Peak Gold

Most have heard about Peak Oil – the proposition that world oil production has peaked and is in terminal decline. Now, Peak Gold is being proclaimed by industry experts. Vincent Borg, spokesman for the world’s biggest gold producer Barrick Gold, says gold production has been in decline since 2001. Total gold production peaked at 2,600 tonnes per year around 2000. The reason gold production has peaked is that existing mines are being depleted and new discoveries are few and small. Also, it takes many years to bring a resource discovery into production.

Demand, on the other hand, has increased to 3,800 tonnes in 2009 according to the World Gold Council. Over the decade from 1999 to 2009 central banks have sold 3,867 tonnes of their gold under various Central Bank Gold Agreements. These agreements have now ended and no more central bank selling is planned. Even with central bank selling the gold price has increased well over 200% since 1999. During the last several years a number of Gold Exchange Traded Funds have appeared. These are funds that sell shares to investors that track the price of gold. These funds must purchase and hold physical gold to back the shares. Currently these funds hold 2,000 tonnes of gold and represent a major new source of demand. The financial crisis that began in 2007 adds other demands as large institutional investors that have never owned gold before move into the market. New small investors are attracted to buy into the funds, coins and jewellery.

It appears that Peak Gold is real. Given the current climate – the gold price has only one way to go.

An interesting fact: The total amount of gold ever produced will fill a little more than 3 Olympic-size swimming pools. Here is the calculation. The World Gold Council estimates 163,000 tonnes of gold exists above ground today. That is 163,000,000 kg. The density of gold is 19,300 kg per cubic meter. Dividing 163,000,000 kg by 19,300 kg per cubic meter gives 8456 cubic meters as the volume of all the gold in existence. The volume of an Olympic-size swimming pool is 2,500 cubic meters (50 m by 25 m by 2 m). Dividing 8456 cubic meters by 2,500 cubic meters give 3.34 Olympic-size swimming pools as the volume of the gold in the world.