That Glittery Stuff...

Yep, gold is in the news again with record prices.

What isn't so apparent is the changes that affect gold in production. Back about 1950, ore generally produced about 12 grams of gold per ton. That number has dropped to about 3 grams per ton in most mining areas, and even the quality of the ore quality had declined.

The picture above shows the most sought after gold bar for investment, the 100-gram bar. It will just about fit in the palm of your hand, and costs a cool $3,500.

Foreign governments continue to buy gold over US Dollars for safe investments. The Reserve Bank of India just bought 220 tons of gold from the IMF (International Monetaru Fund) for $6.7 billion. Sri Lanka recently disclosed it too is buying gold, and of course we know the Chinese are investing heavily in gold.

Gold has been around as a stable investment for over 6,000 years, while other monetary forms have come and gone as governments rise and topple. Despite the increased value of gold, if we adjust the price for inflation it will have to top $1885 to set an all-time record high.

Meanwhile, be very cautious if you choose to sell your scrap gold. Many folks are getting a mere fraction of the real value as fast-talking salesmen make their pitch.

The Seduction of Gold on Two Fronts

I've written a few things lately about this precious metal we call gold, mostly from a financial value viewpoint.

Lately I've been thinking about this lovely malleable metal in terms of adornment. I lived in Miami during and after the first influx of Cuban Refugees in the early 1960's. It wasn't until they had been amongst us a year or two that I frequented some common areas. One thing I remember is all the heavy gold chains and ID bracelets the men wore and it wasn't 14KT either.

The only jewelry I could afford as a young adult was silver, and I soon learned I couldn't wear it without my body reacting to it. I began to wish I had some gold jewelry, other than small gold studs in my ears. When I divorced my first husband, I immediately bought myself a heavy gold nugget ring which I wear to this day, and a Museum Movado watch with an 18KT gold case. Eventually I bought a few more select pieces that I wore with my corporate drag.

Now I dress comfortably in jeans and hiking boots, and seldom wear any of the jewelry except my nugget ring, and a couple of small gold chains. I've given some of it to nieces, but even they dress down these days. However, the allure of gold still remains deep within me.

As to the value of gold jewelry... would I trade what few pieces I have left for food in a real crisis? I really don't know since I have never been in that kind of situation. I do regret some pieces I hocked, or sold, to pay rent. I was friends in the 1960's with a Hungarian man who came to the US as a refugee in WWII. He would buy any kind of gold jewelry at yard sales, auctions, etc. I remember him describing people in the war-torn areas of Europe who wore coats with gold jewelry sewn inside. They were always able to trade for food with it. I guess once you have seen it happen, you know it can happen again.

On the financial/market value side of gold... if you have been watching the market, gold is up further in value, well over $1,000 now. The IMF has announced they want to sell 403 tonnes of gold, which is about 1/8 of their gold holdings. 403 tonnes has a market value of close to $13 Billion.

Unconfirmed via Reuters reports say China is interested in buying it, if the price is right. They said $13 billion is small beans to the Chinese, who have more than $2 trillion in foreign exchange reserves. The Chinese report having 1,045 tonnes of gold already, accumulated slowly over the last 10 or so years. I wonder how much the US still has?

Last year in a moment of panic about the banks, a neighbor withdrew $25,000 from her savings and installed a home safe. I suggested she buy gold with it; gold was $928 then. That would have bought around 27 ounces of gold, worth about $2500 more today. Her savings were paying a pittance, even the CD's. After about 60 days, she put it back in the bank.

Spitting Contest

Have y'all been noticing the spitting contest that's going on? It goes like this...

The Chinese haven't been too happy with how the US government has been handling the mess on banking and investment firms going belly-up... and since the Chinese have a substantial stake in US dollars, they are worried about more losses.

They say they were deliberately encouraged (and mal-informed) by some firms to invest in derivatives. So, the Chinese recently announced they would allow some Chinese government-owned firms to default on derivatives. Spit one.

Then the US government issued a 35% tariff on Chinese tires, effective with a 2 weeks notice. Spit two.

Now the Chinese have spit back, threatening to cut off imports of American chicken.

I wonder how we will spit back? I did notice gold shot up dramatically on Wednesday.

The Gold Coin with Charisma and Lawsuits

When President Roosevelt seized all the US gold coins in the 1933, the US mints had just produced about half a million 1933 $20 gold pieces, called a ‘double eagle’. They were never released by the government but melted down instead, although a few did make it outside the federal vaults.

Two of the coins were given to the Smithsonian, and one went into King Farouk of Egypt’s coin collection. That coin eventually came to the hands of a British dealer and the US government seized it. Finally an agreement with the government was reached and in 2002 it was sold at auction for $7.6 million.

In 2004, 10 more of them were found in an old forgotten family safe deposit box by the family of a Mr. Switt. When the family took them to the US Mint for authentication, the government seized them, claiming they were stolen goods. Mr. Switt had been a gold dealer and the family insists he would have acquired the coins legitimately before the ban, most likely through a gold-for-gold exchange process used by the Mint in those days.

The Secret Service, which polices currency crimes, has argued that all of the double eagles that escaped government control passed through the hands of Mr. Switt (grandfather of the current owner) working with a corrupt cashier at the Mint. A Mint spokesman declined to comment on the case because of the litigation.

The family has sued the government for their return, and a District Court judge recently ruled that the government must prove they were stolen.

With the right timing and a good market, Mr. Fenton (the dealer who sold the Farouk coin) said, they could bring $4 million to $6 million each, because there are many people who would want to own one.

“This coin,” Mr. Fenton said, “has got so much charisma.”

Silver and Gold

Photo: Creative Commons License by Muffet

Continuing with my thoughts on money, currency, and gold… I thought I’d write about silver a bit. In my earlier post on Gold Value, Investing and Risks, I mentioned USD ‘silver certficates’ which preceded the USD federal reserve notes.

There are still a few of those silver certificates around, in the hands of collectors. They were withdrawn from general circulation in the mid-1960’s as I recall. That was about the time the price of silver went up and the value of the silver in our coins became more than the face value of the coins, so the US Mints stopped making silver coins. I read somewhere that when silver was $16/ounce, the silver value of our then-silver dime was over $1 in value by weight of the silver.

People began saving their silver coins as the newer alloyed coins were minted. When many folks were preparing for Y2K, it was advised to look for silver coins in case our economy collapsed. Those old silver coins usually have no value to a coin collector except for the silver value. Those coins are called ‘junk silver’, and even today an occasional silver coin will show up in circulating change. (I once found an old US half-dime in some change; they were minted from 1792-1873. I had it in my jewelry box with some buffalo nickels and my baby sister bought ice-cream from the ice-cream truck with them.)

My grandfather always carried 2 silver dollars in his pocket. One was minted the year he was born, and the other was minted the year my grandmother was born. I got them when he died, but when all my jewelry was stolen a few years later, the coins were in the box. I bought one replacement, his birth year (1882) several years ago, in just ordinary circulating condition, and I paid something like $20 for it. Probably cost about that to replace it today as that year Morgan Silver dollars were plentiful except the ones with the "CC" mint mark.

Silver has fluctuated a lot in USD value over my adult years, from around $2 to almost $23 a troy ounce. Today as I write this, it is $16.62.

The US Mint issued Kennedy half-dollars in the mid-1960’s that had an inner core of 79% copper and 21% silver, and clad with an outer layer of 80% silver/20% copper. They were the last US Mint coins containing any silver; their total silver content was 40%. Our current half dollar coin has a metal value of about 8¢.

Pennies from 1909-1982 were 95% copper (except for the 1943 steel WWII penny), and worth almost 2¢ in copper today. Pennies since 1982 are 97.5% zinc and worth about half a cent in metal value. The few folks who do small metal castings (like sand castings) can melt pennies along with some aluminum cans and some copper wire for a very inexpensive homemade alloy that has a low melt point for casting small parts.

If you want to see the historical (and current) price of silver, check here.

One thing does concern me a bit… should a catastrophic event occur, would our government confiscate our silver and gold coins they way the Patriot Act says they can (including confiscation of food stores and other items) in much the same way Roosevelt confiscated gold in 1933?

Of course, you could invest in gold foil-covered chocolate 'coins' like the photo above... you can always eat them!

It was a sneaky Monday...

On Labor Day, Reuters ran the story that China's Ministry of Finance is planning to issue (sell) bonds in their sovereign yuan currency, to raise as much as $100 billion yuan, the equivalent of $14.64 billion.

The move comes as China presses ahead with internationalizing it's yuan. China has already allowed some foreign banks to sell yuan-denominated bonds, and launched a pilot program to allow companies to settle imports and exports in yuan.

In a separate report by another English paper, China is reported to be alarmed by the US printing money to buy US Treasury debt, which could cause inflation and a decline in the value of the USD. A top member of the Chinese hierarchy, Mr. Cheng, said if there is a serious devaluation of the USD, it could compel China to redesign its foreign reserve policy.

He said most of the Chinese Reserves are in US bonds, over $2 trillion, and China would need to diversify into euros, yen, and other currencies. "Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added.

Gold Value, Investing, and Risks

I mentioned investing money in gold as being 'safe'... but JUST REMEMBER, I am not a financial advisor. I am not completely sure gold is a truly safe investment in this country, either, based on our history.

In April 1933, President Franklin D. Roosevely issued Presidential Executive Order 6102, which confiscated all gold coin, gold bullion, and gold certificates within the continental United States. The stated reason was based on "An Act to provide relief in the existing national emergency in banking, and for other purposes~"

An individual was allowed to keep up to $100 in gold. Failure to comply with the Presidential Executive Order could result in fines of $10,000 and 10 years in prison.

Having said that, let's look at the value of gold. The price of gold on the market today is very close to $1,000 USD per troy ounce of gold. But what does that really mean? Well, what you can buy with an ounce of gold today isn't really very much more that what an ounce of gold could buy 50 years ago, although the purchasing power of gold has increased, while the purchasing power of the USD had decreased. In other words, it takes more dollars to buy milk, or a car, today than 50 years ago.

When gold coins were "withdrawn" from circulation in 1933, the gold "standard" to back the US dollar was reduced from 23.22 grains to 13.71 grains. There are 480 grains of gold in one Troy ounce of gold. (Troy is the measurement standard for metals; 12 Troy ounces = 1 pound, whereas 16 Avoirdupois ounces = 1 pound.)

So, the USD changed overnight in value; it had been just over 20 dollars for an ounce of gold, and overnight it went to 35 dollars for an ounce, becoming generally called "the gold standard" which remained in effect for many years. Richard Nixon finally took the US completely off the gold standard in 1971.

When I was a youngster, our US paper dollars were marked "silver certificate" which meant they could be exchanged for silver. Now they say "Federal Reserve Note" but they can no longer be redeemed for silver, only for more notes. Government currency backed only by the power of the government is called a "fiat" currency, and is only as good as the government.

If you watch much television, especially late at night, you will see many commercials by companies buying scrap gold jewelry. (In fact, some of that business has been in the news lately due to lawsuits and press about the pitiful amounts they pay for gold.)

Those are companies are trading dollars of varying value for gold of known value.

Do These Dots Connect?

I've spent several days reading and trying to understand the Derivatives Market, and I still barely have a clue. I do not begin to qualify as any kind of financial analyst, but I do read. And, some things stand out in recent news making me wonder if there is any connection between them?

First, we all know China holds a huge stake in the USA. I don't know how much of a stake, and I'm not sure I want to know.

Then last week China made this blip on the Financial Market radar: “BEIJING, Aug 29 (Reuters) - Chinese state-owned enterprises (SOEs) may unilaterally terminate derivative contracts with six foreign banks that provide over-the-counter commodity hedging services, a leading financial magazine said.

China's SOE regulator, the State-owned Assets Supervision and Administration Commission (SASAC), had told the financial institutions that SOEs reserved the right to default on contracts, Caijing magazine quoted an unnamed industry source as saying, "On September 1, 2009 Reuters said that the Banks, not the commodities would be at risk if China followed through."

Then, in several other unrelated reports:

1. Sep 3 HONG KONG (MarketWatch) -- Hong Kong is pulling ALL its physical gold holdings from depositories in London, transferring them to a high-security depository newly built at Hong Kong's airport, in a move that won praise from local (Chinese) traders Thursday.

2. China pushes silver and gold investment to the masses.

3. The IMF (International Monetary Fund) said last Wednesday China has agreed to purchase approximately $50 billion worth of bonds denominated in Special Drawing Rights (SDR's, the IMF's own currency), a fundraising effort that is part of a broader push to bolster the IMF's resources.

Many analysts had expected China would sell some of its more than US$2 trillion in foreign-exchange reserves to buy the IMF bonds, in order to reduce its exposure to the U.S. dollar. But according to the agreement posted on the IMF Web site, China will use its own currency, the RMB, called the renminbi.

"The addition of the SDR-denominated bonds to China's assets should help the nation painlessly diversify its foreign-exchange reserves, the world's largest. U.S. dollar assets now account for a good portion of their reserves, but because China's positions are so large it would be difficult for it to switch out of the dollar and into something else without causing market turmoil."

In a research note, Barclays Capital economist Wensheng Peng said the currency used for China's payment will eventually come back into China, as the funds are lent out to member nations who then convert them to major currencies such as the dollar.

4. ChinaDaily ran this story: The national flag of the People's Republic of China (PRC) will be hoisted at the South Lawn of the White House in Washington on September 20, 2009.

Chinese associations in the United States had applied to hold a ceremony in front of the US President’s residence to celebrate the 60th anniversary of the founding of PRC.

Chen Ronghua, chairman of Fujian Association of the United States, told reporters that their application was approved not only because of the sound Sino-US relations but also because China is a responsible country.
"Many Americans admire China due to the success of last year’s Beijing Olympics," said Chen.

More than 1,000 people will attend the ceremony and the performances held after it, according to Zhao Luqun, who will direct the performances. Zhao said the performances will demonstrate the friendship, magnanimous spirit and kindness of modern Chinese people.

5. That brings me to the IMF itself, the World Bank, and other IFI (International Financial Institutions). These groups control the world's finances. All the loans are made with strings attached, and usually as political as monetary. They controlled all the world's money, until recently... and now, still "mostly" although there are other movements rising on the wind that may affect each of us.

Understanding the history and global reaches of monetary policies a bit better just might help each of us individually, and I will cover some of it in another post.

But for now, I would buy gold (if I had any money!). Not investments in gold funds, but real gold (coins, mini-bars) to have in your own possession. It is a valid, world-wide medium of exchange. The Wall Street Journal reports gold just increased another 2.3% as the USD continues to drop.