Poland Nationalizing Private Pension Fund Assets

The Polish government just announced that they are going to confiscate all bonds in privately owned pension plans.  The bonds will be transferred to the public pension plan in order to reduce Poland's national debt.  Nationalization of these assets must conflict with private property laws.  But, the Polish government does not seem concerned with technicalities.  Desperate people do desperate things.  Public debt was 52.7% of GDP at the end of last year.  If the Zloty were just the world's reserve currency 50% of GDP would be nothing!  US public is 75% of GDP.  http://www.reuters.com/article/2013/09/04/poland-pensions-idUSL6N0H02UV20130904?feedType=RSS&
http://en.wikipedia.org/wiki/US_budget_deficit

Poland provides a preview of what is in store for savers in many other indebted countries.  Many pundits most notably Jim Sinclair predict that the US Government will nationalize assets from tax advantaged plans such as 401k plans.  It seems extreme, but then so is the US financial situation.  

Although extreme, it is possible that the US government resorts to nationalizing private savings plans because, as the bank robber Willy Sutton said "that is where the money is!"  401k plans hold about $3.5 Trillion of assets  http://www.ici.org/policy/retirement/plan/401k/faqs_401k   Nationalization would hit Mitt Romney hard.  His infamous 401k plan has over $20M in assets.  http://www.reuters.com/article/2012/01/24/us-usa-campaign-romney-ira-idUSTRE80N04E20120124  
On the other side of the spectrum, 27.6% of 401k owners have borrowed against their plans.  http://abcnews.go.com/Business/401k-loan-defaults-skyrocket/story?id=16957307  Presumably they would be in default as soon as the government confiscated this collateral.  

$3.5 Trillion is not what is used to be!  Recent years' deficits have been over $1T, so all the 401k assets wouldn't even cover a presidential terms worth of deficit spending.
http://en.wikipedia.org/wiki/File:U.S._Total_Deficits_vs._National_Debt_Increases_2001-2010.png

There is much more to know before we can really understand the situation in Poland, for example:
- Are withdraws from the private plans currently blocked?  Otherwise, the owners would take their money and run.
- Will friends-of-the-president be able to withdraw their savings before the transfers are implemented?  Refer to the Cyprus bank bail-in for a best practice.  
- Why only bonds and not equity?  And, is it just polish government bonds that will be confiscated?  What about other governments' bonds and corporate bonds?
- How do the private funds work?  The article states that "private funds within the state guaranteed system would have their bond holdings transferred . . ."  What exactly is the state guarantee for a private fund?  If the state happens to be guaranteeing returns or benefits then the plans are not so private after all.  

Other governments must be watching this situation in Poland very closely.  Savers need to watch out as well.  

Here's a link to an overview by the IRS of what expense may be paid from 401k and IRA assets without incurring the 10% early withdraw penalty.  http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---Tax-on-Early-Distributions  Of course, income tax would still be due on withdraws.  

Rik Green's Investors Forum Growth Portfolio up 1% in August

RG's growth portfolio <Port-faux-lio> gained 1.2% in August while the S&P500 lost 3.1%.  CVX lost 3.7% and GG was up 4.5%.  PHYS and PSLV were up about 6% and 20% respectively, which is slightly more than the market prices for gold and silver.  The trusts appreciation was more than the metals because their premiums to net asset value expanded during August.  SLW was up 15% during August while silver was up only 5%.  

Year to date the port-faux-lio is down 7.5% and the S&P 500 is up 14.5%.  Gold and silver ended August at $1,395 and $23.52, respectively which is down 17% and 23% year to date.

The mid-May trade of CVX for SLW and CDE is working out well.  Since then, CDE is up 15%, SLW is up 20%, and CVX is down 4%.  This trade has netted an unrealized gain of $5,716 in the port-faux-lio.

The trade on August 26th of CVX for AUY, CDE, and PHYS port-faux-lio has an unrealized loss of $1,729.  PHYS is flat and the miners are down.  AUY is down 12% and CDE is down 5% since August 26th.

CVX is now 37% of the port-faux-lio's market value down from 43% at the beginning of the year.  It pays a nice dividend of $1,00 per quarter.  The annualized dividend yield is 3.3%.  

Interest Rates Rising - 10 Year Treasury Hit 2.99%

Interest rates for the 10 year Treasury reached 2.99% yesterday and are now down to about 2.90%.  As I have written about earlier, rising rates crush economic activity.  For example, in housing mortgage rates have increased in parallel with the 10 year Treasury.  Since May national rates for a 30 year mortgage have increased from 3.40% to 4.56%.  http://www.bankrate.com/partners/wsj/#Mortgages

Rate Increase Makes Homes 15% Less Affordable

Annual payments for a $200,000 30 year mortgage at 3.40% are about $10,700.  If the rate is 4.56%, the annual payment increases by 15% to $12,400.  Another way to look at it is that an annual payment of $10,700 pays for a $175,000 mortgage at 4.56% instead of a $200,000 mortgage at 3.40%.  Unless you are paying all cash, home prices just increased about 15%.

And, here is a quick review of how rising rates impact corporate earnings:
http://www.zerohedge.com/news/2013-09-05/10-year-breath-away-300-just-50bps-left-until-disorderly-rotation

Demand for Gold by China and India Continues to Strengthen

China continues to import increasing amounts of gold.  This is gold for consumers and not for the China central bank.  The Chinese people are storing increasing amounts of their wealth in gold.
http://www.bloomberg.com/news/2013-09-05/gold-imports-to-china-from-hong-kong-climb-on-physical-demand.html

So far this year India has been trying to limit gold imports with increased tariffs and import restrictions.  In response there have been many reports of gold confiscated from smugglers at India's airports.  Now gold imports by Pakistan are increasing.  Much of this gold must be headed to India.
http://www.scrapregister.com/news/1589/indias-neighboring-nation-pakistans-gold-imports-raise-1533-yy-in-july-pbs

This reports suggests that the government will allow more gold to enter India soon.  This is very bullish for physical gold.  Although the situation is about as clear as the bureaucracy in a former British colony.
http://www.reuters.com/article/2013/09/04/india-gold-idUSL4N0H025C20130904  
Demand for gold in India remains very strong even though gold prices in Indian Rupees are at an all time high.  Or maybe, just maybe the devaluing Rupee is creating ever more demand for gold as savers flee the fiat.

There seem to be more market commentators lately who don't see the connection between demand for gold and confidence in a currency.  They believe that if price goes up demand declines as prescribed by all intro to economics textbooks.  Gold is a store of wealth not a commodity such as copper.  As confidence in fiat currencies is lost more investors move their wealth to gold and gold prices will increase.  Increasing gold prices may be interpreted as a sign that the fiat currency is devaluing and thereby stimulate more demand for alternative stores of wealth such as gold.  India has been exhibiting this feedback loop.

US Mint Sales of Gold Coins Tanked in August. Sales of Silver Eagles Remained Strong.

Sales of gold Eagle and Buffalo coins by the US Mint were 21,500 ounces in August, compared to 69,000 ounces in July and 48,000 ounces in August 2012.  August gold sales were the lowest month since June 2008.  As of August, year to date gold sales are 881,000 ounces which is 76% more than in 2012 and 1% more than in 2011.  The US Mint reported that in August 10,000 gold Buffalo coins and 11,500 ounces of gold Eagle coins were sold.

Sales of silver Eagles by the US Mint were 3,625,000 in August, compared to 4,406,500 ounces in July.  Silver sales are still strong despite the drop from July's exceptional performance.  August silver Eagle sales were 26% more than in August 2012.  And, sales in August exceeded sales in May and in June.  Year to date silver Eagle sales are a record 33,075,000 ounces which is 47% more than 2012.  Silver sales are well on track for a record year.

http://www.usmint.gov/about_the_mint/index.cfm?action=PreciousMetals&type=bullion

The US Mint increased the retail price for an uncirculated Gold Eagle by $50 to $1,675 during August.  An uncirculated silver Eagle retails for $43.95 which is unchanged from July.

A quick survey of 3 internet coin dealers shows that pricing for gold and silver Eagles is about $65 and $4.00 over spot respectively.  The premium for gold Eagles decreased slightly and for silver has increased over the last month.  These price premiums are based on purchasing one coin.  The dealers all offer volume discounts for larger purchases.  Spot gold and silver market prices are currently $1,392 and $23.40, respectively.

Coin dealers are currently offering to pay about $25 and $1.75 over spot to purchase gold and silver Eagles, respectively.  This seems reasonable because the US Mint charges dealers 3% for gold and $2.00 per coin for silver premiums.  Dealer purchase premiums are not hinting at supply constraints as they were in April and May.

Physical Gold News Headlines

Mine workers in South Africa are striking which will reduce supply and increase cost of gold.
http://beforeitsnews.com/financial-markets/2013/08/all-eyes-on-south-africa-2595944.html

Gold jewelry demand in Indonesia is set to hit 40 metric tons this year a 30% increase from 2012.
http://www.bloomberg.com/news/2013-08-22/gold-s-rout-spurs-surge-in-indonesian-demand-southeast-asia.html

The Shanghai Gold exchange continues to trade a tremendous amount of gold bullion.  Lately, weekly trading volumes have been almost as much as annual global gold production.  Also note that price premiums, the difference between prices paid on the Shanghai exchange and international gold prices are about 1.5%.
http://koosjansen.blogspot.nl/2013/08/week-32-sge-chart.html

A good review of recent restrictions on gold imports to India, as well as some history and speculation on what is to come.
http://www.kitco.com/ind/AuthenticMoney/2013-08-21-Is-India-Preparing-To-Confiscate-Its-Citizens-Gold.html

US Mint sales of gold and silver eagles has fallen dramatically in August after a torid pace through July http://www.maxkeiser.com/2013/08/u-s-mint-american-eagles-sales-fall-in-august-but-robust-for-2013/

My attention has been increasing focused on news about physical gold and silver because manipulation of the precious metals markets will be short term as long as demand for physical is strong.  Understanding the bullion funds GLD and SLV is central to understanding the market.  Many pundits proclaimed that when prices were falling in April and May the funds were forced to sell bullion which perpetuated the price decline.  In reality, the GLD and SLV funds do not work that way.  Bullion may only be sold through Authorized Participants (AP) in the fund in baskets of 100,000 shares.  The APs are the bullion banks, including Goldman Sachs, HSBC, and JP Morgan.

These are two excellent articles about the GLD and SLV funds.  I wish I had discovered them sooner.  
http://victorthecleaner.wordpress.com/2012/06/01/gld-the-central-bank-of-the-bullion-banks/
http://fofoa.blogspot.com/2011/01/who-is-draining-gld.html
The authors show graphs of inventory levels and share prices at GLD.  Inventory and price are correlated, but not perfectly which proves to me that share demand does not directly translate to sales or purchases of physical.  The authors conclude that the bullion banks move gold in and out of GLD with share redemptions as they need the physical.  Thus declining inventory at GLD implies that the bullion banks need physical and is bullish for gold.  

Growth Portfolio Update: Traded More Oil for Precious Metals

This afternoon I made the following trade in the Growth Port-faux-lio:

This trade is similar to the trade that I made on May 14th which has worked out really well as of today. http://rikgreeninvestorforum.blogspot.com/2013/05/growth-portfolio-update-traded-oil-for.html  CDE and SLW are up 15% and 20% since acquired on May 14th.  CVX is down 4% since then.  The total trade gained about $5,600 which is a gain of $4,600 on CDE and SLW plus avoiding a $1,000 loss on CVX.  

Today's trade is jumping on the bandwagon.  I expect gold prices to break through $1,400 and then gap higher over the next month.  I invested in more PHYS because the trust's premium on gold to net asset value is low.  As gold prices accelerate, the premium should increase as in past rallies which will be icing on the cake.  The port-faux-lio added a small investment in gold miner, Yamana Gold (AUY) in order to get more exposure to gold prices while diversifying from GoldCorp (GG).  

Today's trade moved about 8% of the port-faux-lio's assets from CVX to precious metals.  CVX is now 37% of the total market value, down from 46%

Let's hope this bandwagon is off to the races!