Bankers getting a larger piece of the pie

This article shows data about banker compensation increases over the last 25 years.  Interesting that the article is in Bloomberg whose largest customer segment must be bankers.  No doubt in my mind that capital-reallocators have secured a larger piece of the pie.  The author shows the trend and despite the title does not delve in to why it has happened.  So I will.

Bloomberg: the-reason-wall-street-got-so-rich-in-two-charts

Bankers have been able to extract increasing compensation by:
- combining commercial and investment banking activities which was enabled by the repeal of Glass-Steagall in 1999.
- putting less of their own and getting more of investors money to put at risk.  The decline of the partnership ownership structure being replaced by shareholders
- changes to political campaign finance rules that have allowed individuals and corporations to give more and more to specific candidates
- more bankers entering government and more government officials leaving for banking positions
- more and more friends of the CEO on the board of directors 

Greg Smith who famously publicly resigned from Goldman Sachs last year because he was discouraged by how the firm kept misleading its clients gave an interesting talk at Stanford recently.  The video is here:
Greg Smith former Goldman Sachs Director presentation at Stanford

He did a nice job summarizing how an effective system cannot be regulated with fines, taxes, and the threat of jail time.  The system must be structured so that unfair practices are not possible.  Commercial banking should be separated from investment banking and not just by a 'Chinese' wall.  Traders should have more of their own capital at risk.  High frequency trading should be stopped with a procedural change such as a 30 second rule.  

Mexico's Federal Auditor Recommends physical audit of gold holdings

Now Mexico is proceeding to join the 'gold rush'.  That is the rush to audit their physical gold holdings and move it back to sovereign soil.  Over the last several months many countries have officially and publicly stated their intent to audit their gold holdings.   Germany recently decided to move all of their gold located in Paris and some of their gold in London and New York back to Germany.  And, Venezuela recently moved their gold from London back to sovereign ground.  

Mexico currently stores about 95% of its gold abroad and 99% of that in London.  Why does Mexico keep over 120 tons of gold in London?  London is the home of the London Bullion Exchange where precious metals are traded.  I doubt that Mexico is considering selling.  So, the only reason I see is that Mexico is so corrupt that they do not trust each other to safe guard their own gold!  But, if they are really that corrupt  storing it abroad does not really help.  The gold can always be transferred to other accounts while abroad.  Maybe that is what has already happened.  Mexicans get your gold, if it has not already suffered the same fate as that land north of the Rio Grands!  Germany is already in line ahead of you!  

Mexico wants to audit its gold holdings abroad

Can you imagine how the average US citizen would react if their country's gold was stored abroad?  And, even if Mexico keeps their gold abroad would it not be prudent to conduct regular physical audits?  Why are the central banks so reluctant to insist on physically auditing their gold?  

If London or any other bullion vault does not have all the physical gold that its depositors own they will be forced to cash settle for any shortfall if there is a run on their vaults.  And, you can bet that the cash settlement will be based on the market price ($/ounce) from before the run.  So the bank nor the depositor will not be able to buy all the missing physical metal on the market because prices for physical will jump as soon as the run starts.

There is precedent in the US, even: cash settling for an amount set before a run is very similar to what US President Roosevelt did in the 1930's when the US dollar was removed from a gold standard.  Also, central bank stone-walling physical audit efforts is not just a foreign affair.  Representative Ron Paul has been trying unsuccessfully for many years to audit US holdings at Fort Knox and the US Fed Reserve.

Miners estimate 2.3% gold production growth in 2013

A survey of 7 top gold mining companies shows expectations of 2.3% growth in gold production for 2013.  The mining companies recently reported 2012 actual results and presented estimates for 2013.  

The gold mining industry appears to be able to grow production by only 2.3%.  And, the cost of producing all ounces of gold is trending up by over 20%.  

As a gold bull it is reassuring to see gold supply so limited.  235,000 ounces of the estimated growth is due to strikes at AngloGold mines in South Africa during 2012.

Calculating gold production for each company on comparable basis is difficult.  Some publish estimates for gold sales and some for production.  Some report sales and production of gold equivalent ounces (GEO) which includes silver production converted to GEO at a price ratio.  The ratio is typically about 50:1.  In addition the production data may be attributed or managed production.  Attributed includes only ounces that are owned by the company.  For example, if Mine Co is responsible for managing a mine of which they own 60%, the attributed production would be 60% of the mines total or manged production.  In this way the table above could be double counting the production of a specific mine that is jointly owned.  These differences do not have a material impact to the trend because they affect 2012 and 2013 similarly.

Reporting of production costs is even more diverse than production.  Each miner has their own definition of production cost, cash cost, sustaining cash cost, etc.  Estimated total production cost as defined by each company weighted for their respective production increases 20% in 2013.

They are not making it any more!

According to the World Gold Council the supply of gold in 2012 was 4,453.3 tonnes which was 1.4% less than in 2011.  The decline is attributed to lower recycling.  It seems that the we-buy-gold stores on every other corner are seeing less business.  
World Gold Council - demand and supply in 2012

The declining gold supply also shows that mining companies have not been increasing output.  As gold and silver prices have increased over the last 5-10 years, mining companies increased investment and more of their reserves became profitable.  One would expect these investments and newly profitable reserves to create growth in supply.  Mining is a long investment cycle business.  Are the investments going to pay off with higher production in the coming years?  Are old reserves being depleted as quickly as new reserves are being added?

The old adage about land being a good investment because "they ain't making it any more" may be more apropos for gold and silver.  I recently drove across much of Texas and New Mexico and saw a lot of land available.

More from the Kinross Corporation's 2012 MD&A

Gold Supply and Demand Fundamentals
Source: GFMS Gold Survey 2012
Total gold supply decreased a modest 0.7% in 2012 relative to 2011, with global gold mine production increasing 0.2% and recycled gold decreasing 1.6%. Mine production and recycled gold have been the dominant sources of gold supply, and in 2012 they represented approximately 63% and 37% of total supply, respectively. 

http://www.kinross.com/media/243788/2012%20mda.pdf

Gold prices down another 2% make for buying opportunity

Spot gold closed last Friday at $1,581 down another $30 or about 2% from February 15th.  Month to date gold is down about 6%.  As you can see in the chart of historical spot gold prices below, each time that gold prices dipped below $1,600/ounce was a buying opportunity.  I am going to invest more in gold and silver.  "You call this a storm!  It's time for a showdown!" Lieutenant Dan from the movie Forest Gump.

Gold and Silver prices are being manipulated down

Why do I believe that gold and silver prices are being manipulated down?  Because there are large sell orders placed in the market all at once and at inopportune times.  No seller trying to maximize their proceeds would place such large orders all at once because it drives down the price they realize.  So why are and who is placing large sell orders?  I can think of only one reason: to suppress the price.  

Some links to discussion about large sell orders of precious metals:
http://news.sharpspixley.com/article/ross-norman-flash-crash-in-gold-whodunnit-/145195/
http://www.resourceinvestor.com/2013/02/15/the-untold-reality-of-gold-and-silver-price-contro?ref=hp
http://harveyorgan.blogspot.com/



Interestingly gold lease rates recently turned from negative to positive for 3 month leases.  If lease rates are negative the lessor will pay you to lease.  You could lease gold, sell it, earn interest on the proceeds until the end of the lease term, then buy back the gold from the market, return it to the lessor, and collect the lease payment.  In the process you earn the interest and the lease payment.  Of course this would only be profitable if you can buy the gold back at a price near where you sold it.

http://www.kitco.com/lease.chart.html


The quoted and publicized prices are for 'paper' gold.  Paper refers to a price for a gold contract and not physical gold.  The contract can be an option or a forward, for example.  In general the contract specifies that the owner can receive the value of gold and not necessarily physical gold bullion.  Markets trade contracts instead of the physical commodity for convenience.  Traders could not move metal in an out of their vaults as quickly as the amount they buy and sell in a day.  

Senator Elizabeth Warren attended her fist banking committee hearing a couple days ago and took the SEC to task for not being tough enough with Wall Street.  Good for her!  Someone is finally doing something to clean up the financial system.  I am not even going to mention her political party affiliation for fear of distracting from the main issue: reforming the financial system. 

Senator Elizabeth Warren's first banking committee hearing.  "Too big to fail has become too big for trial"

You may remember that after the financial crisis and bank bailout in 2007/2008, Warren set up and was Obama's nominee to head the Consumer Financial Protection Bureau.  Her nomination was not confirmed after intense lobbying efforts by the big banks.  In November she successfully ran for United States Senator for Massachusetts.  

The number one, first priority for my great country is to reform the financial system and break the big banks and corporations hold on the government.  Senator Warren is the only senator or congressperson who at least appears to be stepping up as a reformer.  We need to show her and other politicians that they can stand up to the big money interests, that voters will not be diluted by divisive social and hot-button issues.  Financial reformers will be re-elected until, as Jesse writes "the banks have been restrained, and the financial system reformed, with balance restored to the economy."  

You can contact Senator Warren with word of encouragement here:
http://www.warren.senate.gov/about.cfm