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  1. 1. S E C T I O N N A M E | Story Name 2 | American Hard Assets
  2. 2. American Hard Assets | 3 40 - At the Crossroads 6 World News SpECiAl fEAturES 12 Going for Gold in Alsaka 18 Investing in Film numiSmAtiCS 24 American Coin Designs hArd ASSEtS 30 2014 Silver Preview 34 Bail-Ins 40 At the Crossroads 54 Platinum 58 Market Predictions 64 Bitcoin Controversy lifEStylE And luxury 48 Elegant Fountain Pens 66 Real Estate Star Joe Farrell 68 Art Market in 2014 74 Step up to the Plate 81 Discovering Baseball Gold mininG & minErAlS 84 Mining News rEfErEnCE 90 Preferred Dealers 94 Events 96 Hindsight Adjusting New Reality Having emerged from a decade long stint in the doldrums, gold prices began to gather steam in first years of the new millennia. 58 - market predictions AHA sat down with Michael Haynes, CEO of APMEX, to answer five questions about the upcoming year and to provide some 2014 Predictions for the metals market as well as the economy in the year to come. 30 - Silver preview Silver had a turbulent year in 2013. Will 2014 bring the relief of smoother skies? The Most Elegant weapon 48 - fountain pens 18 - investing in film
  3. 3. 4 | American Hard Assets e D i t O r ’ S N O t e Happy New Year H appy New Year to all of our readers. We here at American Hard Assets hope you and yours had a prosperous holiday season. In this second year of American Hard Assets magazine, we’ve seen our readership increase both in print and online, via our website www.ahametals. com. There you will find the great content you’ve come to expect from AHA along with interesting stuff from our partners, real-time updates, exchange rates, metal prices, and more. To kick off 2014, we’re bringing you a Gold and Silver forecast along with predictions from industry experts. We know you have come to expect great content based from the American markets, but we’ve also included international market content as well and have beefed up our World News. Aside from the core metals markets, we’re continuing our commitment to the most interesting hard assets coverage you’ll find on the newsstand. Find out about what to expect from the art market in the New Year as well as the latest in numismatics. Cinematic investment is always a very interesting topic and we find out this issue about a new reality to investing in that genre. So, we’re all set to put a bow on 2013 and to ring in the New Year with our best issue yet. As always, don’t hesitate to give us feedback on the magazine or online to help us get better. We want to bring you the content you need to see. Thanks so much for making our first year memorable and keep up with American Hard Assets for all your investment news in the future. Good Investing! Bra� Has�ed� American Hard Assets In this second year of American Hard Assets magazine, we’ve seen our readership increase both in print and online, via our website com. content you’ve come to expect from AHA along with interesting stuff from prESEntEd by: AHA Metals, LLC mAnAGinG Editor: Brad Hastedt EditoriAl Support: Kevin Thompson vp SAlES & mArkEtinG: Mike Obert SubSCriptionS: Leigh Chamberlain CirCulAtion mAnAGEr: Jennifer Cunningham GrAphiC dESiGn: Noel ‘Kip’ M. Macasero GEnErAl mAnAGEr: Josh Eells dirECtor of opErAtionS: Mike Boniol CuStomEr SErviCE: Sandi Heuerman fEAturE WritErS: Fred Reed, Nic Forrest, Ed Estlow, Mark O’Byrne, Michael Haynes, Gabriel Benson, Eavan Moore, Jonathan Kosares, Louis Golino, Scott Wayne ContributorS: Grierson, Greg Canavan, The Bullion Baron, Hector Cantu, Alistair Bailey, Mike Woodcock, Daryl Middleton, Michael Moore, Christy Stewart, Jonathan Kosares, Tom Genot diSClAimEr: American Hard Assets is 100% American owned. All contents of American Hard Assets (AHA) are for information purposes only. AHA does not guarantee the accuracy, completeness or timeliness of the contents. None of the information contained herein constitutes a solicitation, offer, opinion, or reccomendation by AHA to buy or sell any security or commodity, nor legal, tax, accounting, or investment advice or services regarding the profitability or suitability of any security, commodity or investment. All commentary and advice in this publication is of a general nature only, and doesn’t consider your individual circumstances or financial objectives. You should always consult a licensed financial advisor for your personal investment advice. Please do your own research. ContACt uS for AdvErtiSinG Publisher Inquiries: Advertising Inquiries: SubSCriptionS 1.877.695.1258 P.O. Box 835433 Richardson, Texas 75083-5433 American Hard Assets is a bi-monthly publication and subscriptions are available for one year at $29.99.
  4. 4. Story Name | S E C T I O N N A M E American Hard Assets | 5
  5. 5. 6 | American Hard Assets H a r D a S S e t S u p Dat e S | World News A rare St. Louis coin collection that sold for more than $23 million at a two-day New York City auction can be traced to when the collection’s 102-year-old owner received an 1859 one-cent piece more than nine decades ago from his grandfather. Retired St. Louis lawyer Eric P. Newman only paid about $7,500 for the 1,800 piece collection of early American coins that sold for much more at the auction. Most of the coins had been off the market for 50 years. Auctioneer Jim Halperin said the items represent just one-third of Newman’s total collection. Another auction of foreign coins is planned for January and is expected to garner at least $10 million, Halperin said. Proceeds from both sales will go toward supporting the nonprofit Eric P. Newman Numismatic Education Society. The society operates the Newman Money Museum, which is part of the Kemper Art Museum at Washington University in St. Louis. Newman is a 1935 law graduate of the school. “His feeling was that it would be a win-win situation of having these wanted items back in the hands of collectors who appreciate them, not just sitting in bank vaults,” said Andy Newman, a trustee of his centenarian father’s charitable foundation. The auctioned items included a 1795 U.S. silver dollar in almost pristine condition that sold for $910,625 and another one from 1799 that sold for $822,500. A rare quarter-dollar from 1796, the first year the denomination was produced by the U.S. Mint, sold for $1,527,500 — compared to the $100 initially paid by Newman. Halperin, co-chairman of Dallas-based Heritage Auctions, called Newman one of the world’s most accomplished numismatists, or professional coin collectors. He’s written at least five well-received books and countless articles on the topic in a journey that began with a present from his grandfather when Newman was just seven. Much of his recently-sold collection was obtained in the 1930s from the estate of a colorful collector, Col. E.H.R. Green, whose wealthy mother, Hetty Green, was known as “The Witch of Wall Street.” “He helped invent it. He saw the future before anybody,” Halperin said of Newman’s early forays into collecting coins. “He really predicted what future tastes would be like.” 1,800 Rare U.S. Coins Valued at $23M (Source: Associated Press) World News Updates
  6. 6. American Hard Assets | 7 World News | H a r D a S S e t S u p Dat e S I t is a business worth $50 billion a year in gems built on mankind’s desire, sometimes a dark passion, for rare stones of brilliance and beauty. As supply from the mines to market fails to match the world’s growing appetite, the market is booming, confidently expecting that next year the trade will become more valuable than ever before. In 1,500 diamond offices, eight thousand people, representing 160 nationalities, handle diamonds worth $139 million every day. Inside their safes are uncut, cut and polished gems worth hundreds of millions more. Indirectly away from the scene, 25,000 insurers, bankers, security guards and drivers take part in a business that is worth five per cent of Belgium’s exports. The hub of diamond prospectors, cutters and polishers can trace its origins back to the 16th century but took global pre-eminence in the 19th century when a combination of low wages and relaxed regulation pulled the trade to Antwerp from Amsterdam. Even when the guest of a well-known diamond trader, security when entering the Antwerpsche Diamantkring, at number 2 Hoveniersstraat, is tighter than at any global summit of world leaders. Visitors must hand over their passport and have the print of their right index finger scanned before receiving a swipe card. The details are then checked on criminal record databases. Terrorists too have struck at the diamond trade’s Jewish community. On October 20, 1981, a car bomb exploded near a synagogue in the Hoveniersstraat. Three people died and the street was devastated. As well as a security born from the threat from armed robbers or terrorists there is an all-permeating culture of secrecy as many traders seek to hide their glittering trade from another predator, Belgium’s tax man. Beyond the security barriers the Diamantkring is like any other office block, with its empty, slightly shabby strip-lighted corridors and nondescript company name plates on the doors. The rooms and desks are stark. Sitting around desk lamps equipped with a special “northern light”, Indians, Jews, Russians and others sit with their eyes glued to a jeweller’s “loop” scrutinizing, and usually rejecting, uncut and polished diamonds. The gems are wrapped in “parcels”, the uncut in folds of the kind of paper you usually see in a cheesemongers, the cut and polished diamonds carefully arranged in padded boxes to avoid scratching. Vashi Dominguez, a Spanish-Indian entrepreneur and founder Antwerp’s Secret Heart of the $50B Global Diamond Trade (Source: Telegraph) World News Updates based in London, granted The Telegraph rare access to the beating heart of the diamond trade. He estimates that for every carat, a fifth of a gram, of rough stone scattered in front of the men grading them, up to 1,750 tons of earth has been mined to get at them. The owner of and Diamond Manufacturers Ltd, Mr Dominguez has built his business on his contacts in Antwerp and the cutters of stones in Mumbai and Surat in India. He explains the rigid concentration of those sorting rough diamonds, for valuation ahead of cutting and polishing, a task that only a skilled human perform. “Diamonds come in over 16,000 different categories and there is no technology where you can just analyse what the criteria are. Technology can tell you the size and the shape but not the color and clarity. That is not an exact science, it is more like an art that will always require human interaction,” he said. “All diamonds are different. Even with those 16,000 categories there are many others. If I’m buying a parcel of diamonds they are all different.” This is the exciting moment, he explains, when, tumbling from a folded piece of paper, an exceptional diamond can cross a trader’s desk. “I find this so exciting because all diamonds are different. They are like fingerprints. So every time you look at a diamond with a loop or a microscope you are looking at something unique. Every single day you see something different,” he said. “There are very few jobs or industries that inspire this passion. If you are not excited about this industry, what are you going to get excited about? The rough diamonds look a bit like broken glass but once they are polished you can see all the lustre, sparkle and brilliance, the life and color. For me, even after 15 years in the business it is sheer excitement.” “Retail demand is outstripping demand. This is a situation that all major producers forecast will continue,” he said. “Demand is getting stronger than ever, supply is shorter, known reserves are declining and with all these factors, prices are going to go up. There has never been a better time to invest.” Amid a financial crisis that wiped trillions off the value of assets and investments, diamonds promise astonishing returns. “When we look at one to five carat diamonds over the last five years they have produced an average compound return of 11.6 per cent. That is across all categories, the best are even higher,” he said.
  7. 7. 8 | American Hard Assets H a r D a S S e t S u p Dat e S | World News World News Updates J ohnson Matthey and Norilsk Nickel all seem to be basing their conviction that the stockpile is finally nearing depletion on the fact that Russia has been releasing lower and lower amounts of palladium for the past few years. For instance, at the beginning of the year, Bloomberg quoted Johnson Matthey as saying that 2012 stockpile sales came in at 250,000 ounces, down from 775,000 in 2011 — that’s a decline of 68 percent. The firm is certain that sales this year will follow a similar downward trend, sinking to around 95,000 troy ounces. “Russian state stockpiles have been dwindling and are now pretty much exhausted,” said Peter Duncan, Johnson Matthey’s general manager of market research. Similarly, Anton Berlin, Norilsk’s market strategist, said at a conference last week, “[i]n the last couple of years, the stream has become really thin. We view this as a very good indication that the stockpile is depleted,” as per International Business Times. Barclays, on the other hand, cites Swiss trade data as indicative that the stockpile is nearing depletion. Most palladium released from the stockpile is thought to move through Switzerland, Kitco News states, and Barclays said during the summer that in July, “Russian shipments into Switzerland were around 6,400 ounces … consistent with last year’s run rate.” Is Russia (Finally) Running Out of Palladium? Dubai’s $7 Billion Expo 2020 Could Become a Glittering White Whale(Source: Resource Investing News) (Source:Gizmodo) Populous The key benefit of the stockpile’s end will be, in the words of Will Rhind, ETF Securities’ managing director, “full transparency in the palladium market for once.” While the stockpile is operated by Russia’s finance ministry, which according to RT, releases material only when the government needs to “soothe any outstanding budget deficits,” such releases have not been without side effects. If past years are any indication, data on the amount of palladium released this year from Russia’s stockpile should be made available in January — though even if the amount comes in at zero, it will be impossible to know whether the country still has more sitting in the wings. At this point, however, Norilsk Nickel believes that is no longer an issue. As Berlin said last week, “we don’t expect that the Russian government sales will have any influence on the market this year or in any following year.” The end is effectively here, he believes, no matter what the Russians say — or don’t say. I n 2020, Dubai will host roughly 70 million tourists to its first World Expo, housed inside a gigantic, brand new, solar-powered city. But exactly how smart of an investment is an Expo, these days? And can economically volatile Dubai handle the $7 billion cost? Dubai beat three other cities to clinch the bid—Ekaterinburg, Izmir, and São Paulo. The projections for how it could help bump up Dubai’s GDP are optimistic: it could add as many as 200,000 jobs, and boost the city’s GDP by one percent every year until 2020. But there are also plenty of troubling projections. Like so many other
  8. 8. American Hard Assets | 9 World News | H a r D a S S e t S u p Dat e S World News Updates (Source: USA Today) cities that have eagerly hosted Expos,Olympics, and World Cups, the ROI is not always what it’s cracked up to be. The forthcoming site of the 2020 Expo will add another 1,000 acres of new buildings to the market—at a cost of between $7 and $9 billion over the next seven years. Keep in mind that roughly $42 billion of the city’s current debts will come due during the same period—shaky ground, indeed. So what are those billions going to? 45,000 new hotel rooms, for one thing, not to mention an extension of the city’s subway system (plus roads, tunnels, and other infrastructural investments). Then there are the 12.9 million square feet of exhibition space, designed by the Dubai office of American architecture firm HOK, which worked alongside a design team from Populous. Under these “souk-like” canopies, exhibitors from more than 150 countries will set up shop during the fair, inside what the architects describe as “innovation pods” and “best practice areas:” One major unanswered question regards who will be building these massive structures—and how they’ll be treated. Dubai, like its neighbor Qatar, has a less than pristine record when it comes to the human rights abuses of migrant construction workers. Another super-expensive, super-fast tracked construction project is not likely to improve that reputation. And then, of course, what will happen to these massive spaces in 2021, when the tourists go home and the city is left with even more housing and commercial stock? According to HOK, the site will become a “Museum of the Future.” T here’s considerable debate about where bitcoin will find its niche in spite of its growing popularity. Those who flush valuable Bitcoins are creating new products designed to simplify the technology and spread Bitcoin mania into the modern American mall. While the number of Bitcoiners has grown, and some have become instant millionaires, the currency has yet to gain traction among American consumers and businesses. “If you want to make it popular, you have to make it easy, consumer friendly,” says Rob Banagale, who designed Gliph, a mobile phone application that allows people to send or receive Bitcoin via text message, bypassing the sometimes cumbersome transactions through Bitcoin exchanges. “Technology always starts off a little rough. We’re trying to sand off the edges.” Even as more people acquire the Bitcoins, one of the greatest challenges is finding a place to spend them. About $7 billion worth of Bitcoin is now in circulation. Bitcoin: Super Currency or Super Fad?
  9. 9. 10 | American Hard Assets H a r D a S S e t S u p Dat e S | World News World News Updates Some initial Bitcoin users traded their dollars, euros and yen for Bitcoin to do business on black market Internet exchanges, such as Silk Road and Black Market Reloaded, where vendors who dealt in illegal drugs and services demanded Bitcoin. As the number of Bitcoin users has grown, so has the need for legitimate markets in which to spend them. Colleagues Michal Handerhan, a social media and website manager, and Tim Sidie, a computer programmer then working at NASA’s Goddard Space Center mused at lunch one day in March about where they could spend their Bitcoin. They created, a website that lists goods for sale on Amazon, eBay and other retailers, available for purchase by Bitcoin. To work around Bitcoin’s volatility, they had to design a computer program that recalculates prices on the site every 15 minutes. They charge a 10% transaction fee. The site filled its first order in September and has logged more than 600 transactions worth $120,000 for goods in every category since then. Transactions are large and small. A non- profit organization spent $16,000 on computers, tablets and office furniture. They have sold snow blowers, an industrial sewing machine, a 3-D printer, condoms, an acoustic guitar, pearl earrings and toys, including My Little Pony and Star Wars Lego. On Thursday, a customer bought pumpkin spice coffee with Bitcoin. Expansion plans include expanding shipping from the U.S. to Canada and Australia and carrying merchandise from Macy’s and QVC, Handerhan said. Sidie calls Bitcoin “a huge evolution” in the history of money that he expects to thrive. “The rate of people who accept Bitcoin as payment is skyrocketing,” Sidie said. Part of the effort to move Bitcoin into the marketplace also means persuading people the cyber currency is legitimate, safe and has a value. Dave Smith, 32, of Lansing, Mich., created to encourage Bitcoin users to recruit others into the fold. “I’m a free market guy. I never liked the idea of the Federal Reserve,” he said. “I was excited about the idea of Bitcoin.” T he gold refinery of Ohio Precious Metals, LLC (OPM Metals) of the United States of America has been added to the LBMA’s Good Delivery List for gold with effect from 19th December, 2013. OPM Metals has satisfied the LBMA as to its ownership, history, production capability and financial standing. It has also passed the LBMA’s exhaustive testing procedures, under which its gold bars were examined and assayed by independent referees, and its own assaying capabilities were tested. OPM Metals is located in Jackson, Ohio. Its primary sources of feedstock include dore, scrap from the jewellery sector and dishoarded bars. OPM Metals’ refined gold output is in the form of investment bars, grain, coins and medallions. Background The London Good Delivery List of Acceptable Refiners of gold and silver is maintained by the LBMA, by whom it is copyrighted. It lists those refineries whose gold and silver bars have been found, when originally tested, to meet the required standard for acceptability in the London bullion market. The List now includes 67 gold and 77 silver refiners. About the London Bullion Market Association The LBMA is the international trade association that represents the wholesale over-the-counter market for gold and silver bullion. The LBMA undertakes many activities on behalf of its members, including the setting of good delivery and refining standards, the organisation of conferences and other events, and serving as a point of contact for the regulatory authorities. Ohio Precious Metals added to the LBMA’s Good Delivery Gold List (Source: Stewart Murray, Chief Executive) The site, which launched in November, allows Bitcoin users to give Bitcoins as gifts, even to those who don’t have the electronic wallets and have never used Bitcoin before. He has had two sales so far: one to a relative and another to an audience member at a talk he gave. He said he’s not discouraged by the slow start. “It’s like being on the ground floor of the Internet 20 years ago,” Smith said. “Bitcoin is going to be transformative.”
  10. 10. Story Name | S E C T I O N N A M E American Hard Assets | 11
  11. 11. 12 | American Hard Assets S p e c i a l F e at u r e | Alaskan Gold F ighting reckless battles against ice, excavators, and their own crew members, the gold miners on Alaska-focused reality television shows paint a dramatic picture of life in the resource business. Recent high gold prices drew dreamers to Alaska, and shows like Gold Rush Alaska and Bering Sea Gold have helped fuel a surge of interest among would-be placer miners. But industry veterans say the shows fail to capture the truth of placer mining. Success, to them, means earning enough to live off during the winter season – and the chief threat to their existence isn’t snow or equipment catastrophes, but paperwork. The real gold fortunes come from major metal deposits owned by explorers patient enough to spend years on workable mine plans and secure investors as committed to the region as they are. Placer Miners “It seems like everybody wants some Alaska-based TV show or something or other right now,” remarks Steve Herschbach, a prospector and writer whose previous business, Alaska Mining and Diving Supply, saw an uptick in mining equipment sales after the shows started airing several years ago. “But also, of course, mining has certainly been undergoing quite the boom due to the gold prices for the last few years….What really drives the sales is more the price of gold than anything, and the TV shows are just capitalizing on that.” What they also have to capitalize on is one of the few remaining placer mining industries in the world. Placer miners are different from prospectors, explorers or industrial miners; they obtain free gold in creek bottoms without trying to trace it back to a large- scale deposit. Their methods are simple: strip the upper layer of earth to get to the bedrock, collect gravel, wash it, and settle out the heavier gold particles, all without resorting to the more intensive crushing and leaching used by big operations. Placer miners don’t earn much in a year; most live off the proceeds of a short season that begins when the ice thaws in April or May and ends by October when waterways freeze again. Going for Gold in AlaskaBy Eavan Moore
  12. 12. Story Name | S E C T I O N N A M E American Hard Assets | 13 It’s a tough life, but satisfying for people like Sheldon Maier, a placer miner in the Fortymile district, and the 450 other permitted miners scattered throughout Alaska. Unfortunately, Maier says, the industry is threatened by regulatory requirements too onerous for these small-scale miners – and the TV shows aren’t helping. “My dad watches the show,” says Maier. “He says it’s entertaining, but they dramatize everything a bunch. It has brought the regulatory branches down on us harder because what they’re showing is that these guys aren’t always operating safely, and they don’t always care so much about the environment. They’re just trying to extract as much gold as they can.”
  13. 13. S E C T I O N N A M E | Story Name 14 | American Hard Assets Tom Irwin, current vice-president of International Tower Hill Mines (ITH), spent six years as a commissioner at Alaska’s Department of Natural Resources. He watched one episode of Gold Rush Alaska. “Their kind of gold mining isn’t what people do up here,” he says, explaining that miners go in with formal, permitted plans. “It’s not helter-skelter, it’s not at risk of losing a pump or a hoe in the water, or catastrophic failure. They care about personal safety and environmental safety and wouldn’t make a very good TV show.” That said, not all the requirements for regulatory compliance are realistic for small-timers. To maintain their Mine Safety and Health Administration (MSHA) certification, miners regularly go through training classes. Funding cuts for education have made it more difficult for miners to afford compliance, says Maier. “They cut the funding for the classes and redirected it to enforcement,” he says. “So they’re hiring more enforcement people to enforce the regulations rather than help us to comply with them.” Maier says a number of people have quit rather than fill out the required paperwork. “Oh my gosh, the paperwork is just getting ridiculous,” agrees Herschbach. “I toyed around with the idea of being more serious, but it’s amazing when you start looking at what happens these days if you start trying to get into running just a little bit of equipment. The various governmental agencies that are starting to get involved, in particular MSHA, have got so many rules that are designed for huge mines, great big multibillion-dollar mining operations.” Herschbach thinks the time will come when there are no small miners and prospectors. “It’s all going to be just big operations,” he says. “The ability for the individual to get out there and do it is dwindling fast because of the permitting.” In practice, many Alaskan miners continue to operate while out of compliance – with the blessing of regulatory agencies that recognize many changes have happened in short order, says Leslie Tose, project manager at the U.S. Army Corps of Engineers. For example, rule changes in 2006 and 2008 added new requirements for streams and wetlands preservation that miners are still struggling to fulfill. Her office has been holding off on making certain demands while working on a simplified permit application for the small-scale miner that will cut down on stacks of paperwork. “It’ll be like a cellphone,” she says. “He can stick it in his pocket.” Maier nonetheless feels that enforcement has been more vigorous since the TV shows’ advent and since President Barack Obama took office in 2009. “Right now, we’re dealing with the Interior Department, the Corps of Engineers, and the Environmental Protection Agency,” he says. “They’re telling us
  14. 14. American Hard Assets | 15 Alaskan Gold | S p e c i a l f e at u r e that these regulations have already been there but now they just have a directive from the White House to enforce them. [MSHA is also] cracking down harder and coming down on us small miners here because they see these things going on the TV and they think that all of us are being really unsafe and they’re trying to protect us.” Disregard for the environment is not an accusation Maier would accept. “Those of us that have been doing this for a long time, we care deeply for the land,” he says. “Myself, I’m 30 miles off the highway. I live in the mountains for months at a time. And we do that because we love to and we choose that. We subsist off the land; we hunt, we fish. We drink the water.” The fact that miners work directly in streams means that numerous laws bear down on them: questions of water withdrawal, water quality, fish habitat, and so on are managed by different people and offices with different requirements. Tose says she’s excited about an initiative to allow small miners to do their own wetlands mitigation rather than paying into a mitigation bank as more well-heeled companies do. But Tose, who has been working in Alaska since 1995, has another comment. “What I think is that small miners really like to complain a lot,” she says. High Cost of Doing Business Even in Alaska, placer miners represent a small fraction of gold production, contributing only 85,000 ounces in 2012. The rest originates from a few major mines: Fort Knox, Kensington, Pogo, and Greens Creek. The state’s suspected mineral resources could support more mines, but getting new projects to production is a tough proposition in Alaska. For one, the days of surface prospecting are probably gone: the world is running out of shallow deposits, and Alaska is no exception. Herschbach sees his own prospecting work as a fun sideline. “In the mining industry we use geophysical surveys geared towards looking for metallic minerals,” explains Steve Todoruk, investment executive at Sprott Global Resource Investments. “Those are expensive surveys. A prospector doesn’t have that kind of money.”
  15. 15. 16 | American Hard Assets S p e c i a l F e at u r e | Alaskan Gold That leaves discovery to the companies that are able to raise funds in what is currently a very difficult financing climate. Todoruk suggests that explorers fortunate enough to raise money are more likely to look in less expensive jurisdictions: fuel and supplies add up to a 30-40% tax just for the privilege of operating in the remote north. But Alaska’s mineral potential, stable permitting environment, and supportive state government do have their attractions, and several companies continue to do advanced exploration work. From them, investors like Sprott are asking for very strong deposits. “If it’s open-pit, I’d say in Alaska you want it five million ounces over two grams per ton gold at least,” he says. “If it’s going to be an underground mine, ideally you want five million ounces at better than ten grams per ton.” It’s not impossible to get a lower-grade project built, but someone might have to pay a price for it. Todoruk says that Kinross’s low- grade Fort Knox property near Fairbanks was acquired for pennies on the dollar from a company in financial difficulties. “That’s the only reason it worked,” he says. “If Kinross went out and found that deposit today, they couldn’t justify building it.” Irwin has a different viewpoint on grade, having worked on the Fort Knox project during his earlier career at Kinross. “When we came to do Fort Knox, there were a lot of questions - can you do a low-grade mine in Alaska? Can you get the supplies in? Can you operate in these cold temperatures? Do you have a quality workforce? Yes, you can. …Fifteen years later it’s still doing exceptionally well, and they’ve made it better.” He finds Fort Knox a useful example in discussing ITH’s Livengood project, 45 air miles away. A July 2013 feasibility study put Livengood’s proven and probable reserves at 9 million ounces averaging .69 grams per ton. Irwin says that using the mine plan in the current study, the company would need gold to sit at $1700 an ounce, a far cry from 2013’s lows under $1300. But ITH has been discussing – with entities under confidentiality agreements – ways to optimize the mine plan and bring up the grade while conserving cash, which Irwin expects to last into the third quarter of 2015. Like most hopeful miners, ITH will need a larger company to partner with, and that can take time. Garfield MacVeigh, president and CEO of Constantine Resources, says finding the right partner was critical to his Palmer copper-zinc project. Dowa Metals and Mining Co. of Japan plans to spend $22 million over four years in return for a 49 percent interest in the project and guaranteed concentrates for its Japanese smelters. “We spent probably $10 million of our own money to make the initial discovery and advance the project, which allowed us to finally make a very attractive deal with a partner,” he says. “For us to try and raise the money that we would have needed to move the project ahead 100% -- I mean, maybe we could have found the money to do it, or maybe the company would have been diluted too much to make any sense to our shareholders.” The Pebble Effect “The most significant new discovery in Alaska in recent history is the Pebble copper-gold deposit,” says Todoruk. Vociferously opposed by those who rely on nearby salmon fisheries, the Pebble project has polarized Alaskans, made global headlines,
  16. 16. Story Name | S e c t i O N N a M e American Hard Assets | 17 and worried miners who see it as a bad press or bad precedent for their jurisdiction. After spending six years and $541 million on the project, joint venture partner Anglo American walked away in September, leaving junior explorer Northern Dynasty to find a new partner or buyer. Todoruk suggests a junior who is fortunate enough to raise money in a difficult market will be warned off by the Pebble saga. “The message is if we find something, there’s going to be huge opposition to it. Why do we want to go there?” But what Pebble’s reception – and its still-to-be-released EPA report – means for other companies is still unclear. Environmental groups hailed Anglo American’s departure with cautious optimism, while the industry watched with discomfort. “EPA has been conducting an assessment of the area over the past few years and has said that they will use this assessment to decide if they’re going to veto their permits,” says Deantha Crockett, Executive Director of the Alaska Miners Association. Knowing that an already permitted project can be vetoed, she says, is “a gigantic red flag for people that are considering investing in Alaska. It’s a very scary thing for me as an Alaskan.” Although the economic and environmental impact of Pebble is worlds away from placer mining, even Maier fears the outcome. “I would say I’m not personally a supporter of multinational corporations,” he says. “And let’s face it, a lot of these large mining outfits have had a bad history in the past of leaving environmental catastrophes behind. But if these environmental groups are able to shut it down without seeing a permit and having it processed, our industry will just be a bug on the wall, because it’ll be easier for them to shut us down.” “A lot of the time, our industry gets lumped in with those large mines,” Maier adds. “We’re just small business owners trying to carve out a living and live off the land and be good stewards and take care of it.” Irwin believes that it’s possible to mine responsibly on a large scale. And he, too, emphasizes the quality of life that draws him to work up north despite the challenges. “Alaska’s a great place for raising a family,” he says. “In this kind of [winter] weather, if you’re out on the highway and have a car problem – I say this as a compliment – sometimes the biggest problem you have is the number of cars stopping to see if they can help you. The outdoor activities allow family to appreciate and enjoy what God has created. We love this place.”
  17. 17. S E C T I O N N A M E | Story Name 18 | American Hard Assets I once asked an investor I knew, who in my mind had invested in plenty of things that I thought were borderline crazy, if he wanted to invest in an independent film that I was looking to finance. The investor did everything but laugh in my face. Was this investor right that investing in film is the same as just throwing your money away? A quick search online of investor websites seems to share this opinion. “As the economy struggled, it became difficult to get investors to put their hard-earned capital into a project that lacked a clear path to success,” says Steve Hummell, Managing Partner Of Capital First Investment Group. “But as the economy has improved and discretionary cash is loosed up from stock profits, it is possible to think about investing in film again. But I would need to show my clients a solid game plan.” INVESTING IN FILM Adjusting New Reality By Gabe Benson
  18. 18. American Hard Assets | 19 Investing in Film | S p e c i a l F e at u r e As the world of independent film financing has changed so dramatically over the past several years with newer distribution outlets such as Netlfix, Hulu and ITunes all hungry for material, why hasn’t investing in film become a bull market for investing? The answer is, as always, in the business plan. THE TEMPTATION Just a few short years ago, a director name Oren Pei directed a found footage horror film for around $15,000. The film got into a few festivals, got great word-of-mouth reviews and was eventually purchased by a major studio for $350,000. The studio put some work into the picture, and eventually the movie was released and went on to gross over $200 million. The film was called Paranormal Activity and the fourth film in the franchise will be released in early 2014. To date the Paranormal franchise has grossed over a $500 million world wide. I would imagine if you had put up that initial $15,000, you would feel pretty good about your ability to pick a winner. And there are plenty of other success stories. According to Box Office Mojo, some other independent success stories are My Big Fat Greek Wedding (over $368 million), Saw (7 films and over $415 million), and The Blair Witch Project ($248 million). Each of these pictures struck a nerve in the public consciousness and raked in some serious cash. So with the potential for gigantic returns, on top of the advent of new distribution outlets needing to fill slots for hungry viewers, the question remains why aren’t more people investing in film. On top of the advent of new distribution outlets needing to fill slots for hungry viewers, the question remains why aren’t more people investing in film.
  19. 19. S p e c i a l F e at u r e | Investing in Film THE RISK The problem is the business plan. Too many times, the film’s producers either don’t have a business plan or are not realistic about their chances of success. “For both the investor and the group looking for financing, it is important to treat your film as a business. Too many groups approach me looking for financing for an entertainment project without having solid fundamentals,” says Steve Hummell, Managing Partner of Capital First Investment Group. “Who are the principles involved? What is their experience? What is the marketing plan? How are they bringing the film to the market? Put your film plan together just like you would if you are trying to start any business, because that is exactly what you are trying to do. You aren’t making a movie, you are starting a business.” And after you do that, you have to look at your business plan objectively. And from a producer’s point of view-you have to take the creative side of it out of the equation. If you can’t get your film in front of the right amount of eyeballs, your movie won’t make any money. You can’t just assume that because you think it is the greatest story ever, it will be found and loved by millions. If your budget is too small, are you doing a disservice to the picture? Are you cutting so many corners that the film just doesn’t work? Is your budget too high for the type of picture you are making? Historical models show what types of movies gross what in certain environments. You certainly don’t want to tell a small personal story on a blockbuster budget. Sometimes the numbers just don’t make sense. Sometimes movies, like products, just don’t make 20 | American Hard Assets
  20. 20. American Hard Assets | 21 Investing in Film | S p e c i a l F e at u r e sense financially. The world’s greatest lightbulb won’t sell for $1,000 a piece, and sometimes movies just can’t find the right budget. And then you have to look at what to do with your movie once it is completed. Do you have the money to get it seen? “Sometimes the problem is the marketing dollars aren’t allocated in the initial budget. And I’m talking about more than money to advertise to the public, I’m talking about the money needed to market your finished film to distributors,” film and television producer Shaun McLaughlin says. “It takes money to set up screenings, submit and show at festivals, even to send out DVDs of your film. I’ve worked on too many projects where at the end of the day the film just languishes because all the focus went on getting the film made and not enough on getting it seen.” And if you can’t get your film in front of the right amount of eyeballs, your movie won’t make any money. Sometimes movies, like products, just don’t make sense financially. The world’s greatest lightbulb won’t sell for $1,000 a piece, and sometimes movies just can’t find the right budget.
  21. 21. 22 | American Hard Assets S p e c i a l F e at u r e | Investing in Film THE REWARD? But it would seem that with the new onslaught of new distribution sources-both digital and traditional-that your movie would have a better chance of being seen. “With the new distribution outlets available, there seems to be more ways to see a return on your investment assuming the production costs can be kept relative to the return that these new distribution sources can bring,” says Hummell. “The good news is that there is less of a chance for the investment to sit on the shelf for years without distribution, but the returns are also potentially lower as these new media sources (Netflix, iTunes, and VOD) don’t bring in as high a purchase price.” And this is where your business plan needs to be scrutinized and every cost must be attributed in your analysis. Remember the $248 million that The Blair Witch Project made at the box office? Well, first you have to subtract 50% for the cut for the theater owners. So, then from your $124 million you have to subtract fees for your distribution company, sales agent, back end talent deals and marketing costs. Then with whatever is left over, you have to reimburse your investors and share On a small production budget you still end up on the plus side, but if your movie only grosses a smaller portion of that, the numbers can get pretty tight.
  22. 22. Investing in Film | S p e c i a l F e at u r e profits. On a small production budget you still end up on the plus side, but if your movie only grosses a smaller portion of that, the numbers can get pretty tight. If your picture can’t secure a feature release slot, there is still life for your investors in VOD or Netflix, but the guarantees are lower and it will take your film that much longer to reach profitability if it ever does. The bottom line is that making money in independent film financing isn’t impossible. There are individuals who have mastered the market and found the sweet spot in their budget that allows for them to make the movie necessary to reach profitability. But it is difficult. You know what else The Blair Witch Project, My Big Fat Greek Wedding have in common? They all prove that there isn’t a winning formula. Each of the creator’s next projects cost more and grossed significantly less. There are individuals who have mastered the market and found the sweet spot in their budget that allows for them to make the movie necessary to reach profitability. But it is difficult. American Hard Assets | 23
  23. 23. S e c t i O N N a M e | Story Name 24 | American Hard Assets A ccording to a report published on October 28 in Coin World that was based on an October 18 meeting held by the Citizens Coinage Advisory Commission, the CCAC has rejected a proposal by the U.S. Mint to reissue various classic U.S. coins in platinum. The CCAC advises the Secretary of the Treasury on the designs and themes of U.S. coins and medals. The Mint’s proposed addressing lagging sales of precious metal numismatic coins in recent years by issuing a new multi-year platinum American eagle series that would reuse classic coin designs like the Morgan dollar, Draped Bust dollar, and Standing Liberty quarter. The Mint also proposed issuing a platinum proof coin in 2017 for the 20th anniversary of the platinum eagle program that reissues the design of the Augustus St. Gaudens $20 gold coin, whose obverse design currently graces gold eagles. It would be the only coin in the platinum program not to use the modernized Lady Liberty obverse. The CCAC countered that such a series would be a move in the wrong direction, moving away from its preference for the issuance of more contemporary coin designs. The CCAC’s members believe on the whole that the reissuance of classic coin designs has been overdone, but most coin collectors disagree and are eager to see more classic designs. The issue will be revisited in future meetings of the CCAC, but the tension between the preference of collectors for more classic coins and that of the CCAC for more modern ones is likely to continue, and it could pose ongoing challenges for the process of coin issuance going forward. Classic coin designs are extremely popular with collectors of modern U.S. coins (and modern world coins too, as seen in the numerous classic world coins reissued in the last couple years). There are several reasons for this such as the fact that the old designs are in so many cases very powerful artistically and are inspiring representations of perennial American themes, especially the allegorical Lady Liberty. There is also the fact that many people cannot afford to collect many of the original classics such as Gobrecht collars, which is another design the Mint proposed reissuing in platinum, or would enjoy seeing such designs in a larger format and made to modern quality standards. American Coin Designs Classic and Modern Have Their Place By Louis Golino
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  25. 25. 26 | American Hard Assets N u M i S M at i c S | American Coin Design But the appeal of the classics also has a lot to do with the fact that modern designs on circulating, numismatic, and commemorative U.S. coins have for the past couple decades not been terribly impressive, and in some cases are not very good at all, in the view of a wide number of collectors. A good example of such mediocre art work is the 2012 Infantry Soldier silver dollar. If recent modern designs were on the whole of higher artistic quality, were not so one dimensional like many of the state quarters, and were produced with higher standards of engraving and with finer detail like many modern world coins are, people might feel differently. We can do better, and if we are going to issue lots of collector coins with modern designs, they had better be good ones, or they will continue to sell poorly like many recent commemorative issues. And it is also true that a number of classic coin designs have already been reissued to great success in recent years. The most significant cases are of course the obverses of the American silver and gold eagles and the Buffalo gold coins issued since 2006, as well as the 2009 Ultra High Relief Double Eagle gold coin and the four Liberty-themed First Spouse gold coins. There are a couple others like the San Francisco Mint silver dollar commemorative that reuses the Morgan dollar reverse. It is important to note that all of these coins are very popular precisely because they reissue the old designs. One wonders, for example, if the silver and gold eagle bullion and numismatic programs would have been so successful if they did not depict popular designs from the past, particularly the two used on these coins that are so widely acknowledged as excellent. And I hear on a regular basis comments from collectors that they would like to see more classics reissued, so there is clearly demand for such coins beyond the coins that have already been issued. It is therefore easy to understand why the Mint would want to satisfy collectors’ demand for classic coin designs by making more of them, especially since turning a profit is a major part of the Mint’s mandate, and the Mint strives to address the interests of collectors. But in the view of Scott Barman, who writes the Coin Collector’s Blog, and who ran for ANA governor earlier this year: “This sounds like a case of the marketing trying to dictate the artistic integrity of the U.S. Mint. The CCAC is right to tell them to come up with something better. I think if the marketing folks let the artists be creative they will come up with something far more interesting.” Mr. Barman also said: “While a lot of people love the classic designs, myself included, there comes a time to move forward and come up with something different and fresh. Although I have not agreed with some of the CCAC’s decisions, I agree that CCAC Chairman Gary Marks is right when he said, “Let’s If recent modern designs were on the whole of higher artistic quality. . . were produced with higher standards of engraving and with finer detail like many modern world coins are, people might feel differently. . . . commemorative U.S. coins have for the past couple decades not been terribly impressive, and in some cases are not very good at all, in the view of a wide number of collectors.
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  27. 27. N u M i S M at i c S | American Coin Design do something modern, something new. The problem with the U.S. Mint chasing classic designs is that it is already being done on the First Spouse gold coins when the corresponding president was single or widowed while in the White House, with the exception of Alice Paul whose effigy opposite of Chester A. Arthur was mandated by law.” But so far the number of classic designs used on U.S. coins remains relatively small. For example only four of the First Spouse coins out of more than 50 designs that will be issued in the series use classic obverse designs. In addition, silver and gold eagles exist in many versions and have been minted for almost three decades, but that is only two classic designs that appear on one side (the obverse) of both coins. So since just about everyone agrees the classics are great at least in moderation, a few questions present themselves: How much is too much? Is the Mint already making sufficient use of the classic designs, or should it do more in this regard? In my view the answer is to do both: issue some more coins with classic designs, and I think the upcoming hundredth anniversaries of the release of the Standing Liberty quarter in 2017, and of the Peace Dollar in 2021 could be honored by issuing coins that use those beloved designs. Collectors are the end user, so to speak, so why not issue what the majority of collectors want? And at the same time, also issue coins with solid modern designs that make better use of the talented artists and sculptors at the Mint and in the Mint’s Artistic Infusion program. Few people would disagree that our modern coin designs have tended to lag behind what most of the rest of the world is doing, but I know we have both the artistic talent and the technology to do better. Just compare our recent modern design coins with the designs that appear on modern world coins, which regularly receive the lion’s share of awards for best designs. Finally, there is another aspect to this issue, which is the idea of modern depictions of Liberty and related Americana themes, and that is precisely what the CCAC suggested with its proposal for a series of circulating Liberty-themed coins that is now a bill pending in Congress. Ed Reiter, editor of Coinage magazine, wrote an editorial in his magazine’s October issue that criticizes the proposal and argues it is unlikely to generate the kind of revenue the commission and “While a lot of people love the classic designs there comes a time to move forward and come up with something different and fresh.” 28 | American Hard Assets
  28. 28. Story Name | S e c t i O N N a M eLunar Horse Coins | N u M i S M at i c S its congressional supporters believe it is. He is also concerned that it would result in too many coins being issued, and in the creation of yet another product (the Liberty half dollars for collectors) that separates a collector from the money in his or her wallet. He may turn out to be right about the revenue issue, if the bill becomes law, although I believe the program would be more popular than he does. And the legislation calling for this program specifies only one new circulating coin a year, a dime or a quarter in alternating years, not both as Mr. Reiter wrote, and with a rebounding economy there is greater need for more circulating coinage. In addition, no one would force anyone to buy collectible half dollars they do not want, and I am sure many people would enjoy collecting Liberty half dollars. The key point for this discussion is that there is scope for all kinds of designs, provided they are compelling in the view of most collectors. There should not and cannot be a choice between either classic or modern. To argue only one kind of design should appear on our coinage, which spans circulating, bullion, numismatic, and commemorative coins, would be folly. Both kinds of designs should be used as well as designs that straddle the two, such as the 2012 Star-Spangled Banner silver dollar, a collector favorite because it evokes the classic coins of the past yet does so in a modern way. “. . . there is scope for all kinds of designs, provided they are compelling in the view of most collectors. There should not and cannot be a choice between either classic or modern. “ American Hard Assets | 29
  29. 29. S E C T I O N N A M E | Story Name 30 | American Hard Assets S ilver had a turbulent year in 2013. Will 2014 bring the relief of smoother skies, or will the bulls end up reaching for the airsick bag? About this time every year, metals traders pause to reflect on the year that’s been and ponder what may lie ahead. Of particular interest is what may lie ahead for the price of silver. While the myriad of factors that affect the price of metal makes it nearly impossible to forecast the price of silver, it is worth examining the underlying macro-trends that largely steer the precious metals markets in one direction or another. January of 2013 began with the 10-year treasury yield at less than 2%, silver trading a little above $30/ounce, and the S&P 500 hovering around 1400. Over the course of the last twelve months, we have seen yields jump to near 3% and equities rise as much as 30%, all on the back of slowly-improving macro-data and a declining unemployment rate. Silver, for its part, has been dragged all the way down to $20/ounce, and even traded in the mid-18s for a time. With the likelihood of another cataclysmic economic crisis dwindling, market participants have started looking ahead to the withdrawal of the monetary stimulus that has supported so much of the financial market these last five years. The third iteration of quantitative easing alone will end up being between $1.5-$2 trillion. That’s just part of a $4 trillion overall balance sheet. To illustrate the magnitude of this number, one trillion is equivalent to one million millions (or one thousand billions). We have spent roughly four of those buying financial assets on government balance sheets. 2014 Silver PreviewBy Brad Yates, Elemetal Capital
  30. 30. American Hard Assets | 31 2014 Silver Preview | H AR D A S S ET S While this money is not printed like traditional, circulated currency, the yield-reducing effect of these purchases cannot be understated. As global yields contracted, investors seeking returns on assets were forced into less stable sectors that otherwise may have been avoided as too risky. In August of this year, outgoing Federal Reserve Chairman Ben Bernanke hinted that the Fed’s monthly asset purchases could contract from $85 billion to $65 billion. As expected, the market took the news badly--so badly in fact that the Federal Open Market Committee (FOMC) opted to delay the dreaded tapering. In light of this, the same question is on everyone’s mind: when can we expect tapering to kick in, and how much? The general (and certainly fallible) consensus is that the Federal Reserve will reduce their monthly purchases to between $65- $80 billion per month from the current $85 billion; the formal announcement is expected in mid-December or late January. In the long term, this reduction in monthly purchasing is minimal. However, in the short term, purchases are going to decrease and the market’s already-feeble recovery is going to get less support from the monetary crutches it has depended on for several years. The next question is will the market be able to stand on its own two legs? To give the market any hope of continued recovery, there are only two options: either the Fed adopts a policy of reducing its accommodation only as continuing economic data dictates (at what may be an imperceptibly slow pace), or it adopts a slightly more hawkish rate of tapering, leading initially to a lessening of global growth rates. Sensational or outlying scenarios of rampant inflation or deflation can be safely ignored. If the Fed has indicated anything to the investing public, it is that the Fed will take the conservative route whenever possible. And with Janet Yellen assuming the lead in January 2014, this tendency is unlikely to change. With that in mind, the more likely option for market recovery seems to be the first: a gradual reduction in monetary stimulus resulting in a steady (though marginally lower) growth rate. The recovery process may not be painless, but this unconventional tactic may, in the long run, prove to actually work. Considering all this, what should our outlook be on silver in the coming year? Industrial demand may see a slight rebound, but technological advances in solar cells, mobile devices, and electronics on the whole is likely to lead to a lower aggregate demand curve, though an improving global growth rate will prevent any drops from being too significant. Any major drop in growth, out of China in particular, may create demand-side risk to the down side. Silver is likely to experience a significant drag from the close association with gold and the seemingly inherent reduction in accommodative monetary policy.
  31. 31. 32 | American Hard Assets H a r D a S S e t S | 2014 Silver Preview From a fundamental supply-and-demand perspective, if silver is likely to remain in surplus, then any excess supply will need to be absorbed by the investment sector. Coin and bar demand typically accounts for only 10-15% of the aggregate demand, so the rest will have to come from the ETF segment. Despite the negative price action in silver this year, investors have increasingly made electronic exposure a part of their portfolios. Net total holdings in silver ETFs are roughly equal to one year’s mining production, so a swing to net selling (as gold ETFs saw this year) could mean a large difference on the margin. Another important reality of the global silver supply is that a large portion of the supply has effectively no marginal production cost; it is estimated that up to 50% of new global mining supply every year comes as a byproduct of another primary metal such as copper or gold. For this reason, silver can actually trade below its net cash cost of $15-$18/ounce on a long-term basis. Even with no active demand, new silver supply could continue to be created every year. This is not likely to have a major effect in the context of a single year, but it is a key factor in differentiating it from other commodities like energy or agriculture that tend to revert to their net production costs. When it comes down to it, silver is likely to experience a significant drag in 2014 from its close association with gold and the seemingly imminent reduction in accommodative monetary policy. Rising real interest rates will cut investor demand for non-yielding assets and the industrial supply-demand fundamentals are not as bullish as in years past. The real potential for any upside in silver will come from any misstep from the path of steady economic growth over the next year, or a major turn in interest rates or equities. Investors will continue to see silver as a safe haven investment; therefore silver, like gold, should continue to play a part in any well-diversified financial portfolio. Its correlation benefits are well established and the potential for substantial gains in the event of financial crisis are significant. If 2014 goes as smoothly for the broad economy as the Federal Reserve hopes, metals on the whole will face some headwinds, but any stumbles along the path of economic growth will ensure that silver shines brightly. If silver from a fundamental supply and demand perspective, then, is likely to remain in surplus, then any excess supply will need to be sopped up by the investment sector. Even if no new silver were actually needed, it could continue to have new supply come online every year.
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  33. 33. 34 | American Hard Assets H a r D a S S e t S | Bail-ins and Deposit Confiscation O ne of the most important risks facing investors, savers, corporate depositors and indeed all depositors today is bank and financial institution bail-ins. This is why we have completed a research document on this not fully understood or appreciated risk entitle ‘From Bail-Outs to Bail- Ins: Risks and Ramifications’. Preparations have been or are being put in place by the US Federal Deposit Insurance Corporation (FDIC), international monetary and financial authorities, including the FDIC, for bail-ins of both banks but also other financial institutions. The majority of the public are unaware of these developments, the risks and the ramifications. In December 2012 the Bank of England and the FDIC produced a joint paper on “Resolving Globally Active, Systemically Important, Financial Institutions”. This important and little reported upon document explained the need for a single national resolution authority and claimed that the bail-in regime is a reaction to the financial crisis that began in 2007 and the lessons learned from bail-outs. The US resolution strategy is based on powers stemming from the Dodd-Frank Wall Street Reform Act of 2010 which would “assign losses to shareholders and unsecured creditors”, while the UK approach draws its powers from the UK Banking Act of 2009 and would involve what is “a bail-in (write-down or conversion) of creditors”. Bail-Ins and Deposit Confiscation Makes International Gold Ownership Essential By Mark O”’’’Byrne
  34. 34. American Hard Assets | 35 Bail-ins and Deposit Confiscation | H AR D A S S ET S In March 2013, the EU and IMF spearheaded the restructuring of the troubled Cypriot banking sector. Although the terminology of bank ‘bail-ins’ first entered public consciousness during the Cypriot financial crisis of March 2013, the idea of bail-ins as a central bank rescue mechanism has been openly discussed for a number of years amongst international central bank policymakers. Cyprus became the defining event since it revealed the preparations and planning of international banking regulators and governments at the highest levels for the coming ‘Bail-In Regime’. The market’s expectation was that Cyprus would be similar to previous Eurozone rescue packages applied to economies such as Greece, Ireland and Spain, where banks had their losses ‘bailed-out’ by governments, with the bail-out cost and risk transferred to the sovereign nation and funded by the taxpayer. However, the backlash from taxpayers and certain political parties and a vicious circle of sovereign bank-induced debt was leading to recessions and the possibility of an economic depression. This may have contributed to the international monetary authorities, central banks and governments altering the approach to burden sharing, pushing the losses onto bank depositors. The important shift from bail-out to bail-in had not been signalled in a very public way. The market’s expectation was therefore confounded when Eurozone finance ministers imposed bail-ins on Cyprus. This forced bondholders to convert into shareholders, and critically, imposed an element of bank deposit confiscation and the forced conversion of these deposits into bank equity. Never before in the public’s perception had bank deposits been countenanced as potential financing sources for the rescue of insolvent banks. The public was shocked by the freezing and confiscation of deposits and the use of them in a desperate attempt to prevent banks from failing. While bail-in generally refers to a bank restructuring where shareholders and various unsecured creditors such as bondholders are forced to share the rescue costs, after Cyprus, the term ‘bail- in’ became synonymous with possible deposit confiscation, where uninsured depositors were seen as unsecured creditors of the bank and liable to share bank restructuring costs. The coming bail-ins regimes will pose real challenges and risks to investors and of course depositors - both household and corporate. Return of capital, rather than return on capital will assume far greater importance. Evaluating counterparty risk and only using the safest banks, investment providers and financial institutions will become essential in order to protect and grow capital and wealth. It is important that one owns physical gold and not paper or electronic gold which could be subject to bail-ins. Owning a form of paper gold and derivative gold such as an exchange traded fund (ETF) in which one is an unsecured creditor of a large number of custodians, who are banks which potentially could be bailed in, defeats the purpose of owning gold. Physical gold, held in secure storage conferring outright legal ownership through bailment remains the safest way to own gold. Many gold investment vehicles result in the buyers having very significant, unappreciated exposure and very high counterparty risk. Retail investors, retail savers, high net worth individuals, family offices, pension funds, charities, companies, corporations, corporate treasurers, financial advisors, accountants and anyone who manages money on behalf of clients need to consider the risks and ramifications of bail-ins. Many in the financial services sector have paid lip service to diversification in recent years. This has led to many investors experiencing sub par returns and returns below the market rate of return. Those who have achieved real diversification involving owning international equities, high credit bonds, property, cash and gold have been protected from the recent volatility. If there is a failure to observe the fundamental tenet of investing in the coming years – real diversification – we may be subject to further financial pain. Conservative wealth management, asset diversification and wealth preservation are of paramount importance today.
  35. 35. 36 | American Hard Assets H a r D a S S e t S | Bail-ins and Deposit Confiscation Gold will again have a fundamentally important role to play in order to protect, preserve and grow wealth in the coming bail-in era. Leading economists and financial commentators in Ireland give their perspective regarding the risks of bail-ins. If you manage money in any way, your own or others, it will be prudent to heed their warnings. Dr. Constantin Gurdgiev, Chairman of Ireland Russia Business Association “The recent abatement of the euro area crisis and the reduction in overall global financial uncertainty have led to a decline in the demand for gold as a safe haven instrument and speculative asset. Contrary to the short-term signals in the spot markets, gold and other precious metals role in delivering long-term risk management opportunities and tail risks hedging is becoming more important as the immediate volatility and short-term risks recede.” Cormac Lucey, Chartered accountant, Financial Analyst & Lecturer at the Irish Management Institute (IMI) Depositors should seriously consider two questions when putting money into a bank: (i) is there is a serious possibility of the bank failing? (ii) if the bank fails, is there then a serious possibility that the government would be unable to honour deposit guarantees in full? If there is a significant possibility, even small, of capital loss, depositors should ask themselves the same question that corporate treasurers regularly ask themselves: am I being adequately compensated by the deposit rate for the risk I am now exposing my money to?” Jim Power, Chief Economist at Friends First Group Any individual or any corporate treasurer would be taking an unacceptable risk in making a decision to leave deposits in excess of €100,000 in any single bank, unless one is convinced that the institution is 100% sound. The events of the past 5 years should have taught us that such a conviction would be dangerous. For investors, bank diversification is essential, but more broadly, asset diversification has to be the priority for anybody with any wealth. We still live in very dangerous and uncertain times and investors should do whatever it takes to manage risk and ensure that all of their eggs are not in a single basket that may be badly holed.” What Are Bail-Ins? A bail-in is when regulators or governments have statutory powers to restructure the liabilities of a distressed financial institution and impose losses on both bondholders & depositors. Simply stated, a bank bail-in is an attempt to resolve and restructure a bank as a going concern, by creating additional bank capital (recapitalisation) via forced conversion of the bank’s creditors’ claims (potentially bonds and deposits) into newly created share capital (common shares of the bank). To understand what the bail-in concept of a troubled bank is, it is important to understand what a bank balance sheet is, and what the balance sheet consists of. Simply put, a bank’s balance sheet consists of sources of financing and uses of this financing. At a high level, the sources are shareholders’ equity (shares) and the bank’s liabilities, which consist of lending to the bank by bondholders (bonds) and lending to the bank by depositors (deposits). For large institutions, there are two main approaches to a bail-in, the first being ‘single point of entry resolution’ where the bail-in occurs in the holding company at the top of the group, and the second being ‘multiple point of entry resolution’ where, given that a banking group may be operating across lots of regions. Who Is Driving The Bail-In Regime? It is revealing to examine the genesis and evolution of the centrally planned bail-in regime as discussed by central banks and international policymakers, since it highlights that the planning and preparation for a global bank “Bail-In Regime” has been on-going internationally at a high level for a number of years now, primarily under the auspices of the Financial Stability Board (FSB). The Financial Stability Board emerged from the Financial Stability Forum (FSF), which was a group of finance ministries, central
  36. 36. American Hard Assets | 37 Bail-ins and Deposit Confiscation | H a r D a S S e t S bankers and international financial bodies, founded in 1999 after discussions among Finance Ministers and Central Bank Governors of the G7 countries. The FSF facilitated discussion and co-operation on supervision and surveillance of financial institutions, transactions and events. The FSF was managed by a small secretariat housed at the Bank for International Settlements in Basel, Switzerland. The Key Attributes Of A Bail-In Regime The Key Attributes include a number of noteworthy pronouncements on an effective resolution regime such as: • Allocating losses to fi rm owners (shareholders) and unsecured and uninsured creditors in a manner that respects the hierarchy of claims. • Not relying on public solvency support and not creating an expectation that such support will be available. • Where covered by schemes and arrangements, protecting depositors that are covered by such schemes and arrangements, and ensuring the rapid return of segregated client assets. The inclusion of Financial Market Infrastructures means that large parts of the global financial system is susceptible to bail-in and could potentially be bailed-in. The scope of this planned bail-in regime for participating countries is not just limited to large domestic banks. In addition to these “systemically significant or critical” financial institutions, the scope also applies to two further categories of institutions, a) Global SIFIs, in other words, cross-border banks which happen to be incorporated domestically in a country that is implementing the bail-in regime, and b) ”Financial Market Infrastructures (FMIs)”, such as clearing houses. The inclusion of Financial Market Infrastructures in potential bail-ins is in itself a major departure. Where Are Bail-Ins Likely To Take Place Bail-ins are likely to happen at banks that are close to failure in countries that have adopted the FSB bail- in conventions and or do not have financial resources to bail-out their banks. Thus, deposits in failing banks in G20 nations may be subject to bail- ins. The total debt to GDP ratios, household, corporate, financial and sovereign debt, in Japan, the UK and the U.S. are all at very high levels. All three countries have banks whose outlook is far from positive. Many analysts warn that many Wall Street and City of London banks are bigger now than they were prior to the collapse of Lehman. The Eurozone debt crisis has abated in recent months but many analysts and economists are concerned that it is only a matter of time before the debt crisis returns with Greece, Spain, Portugal, Italy and Ireland all remaining vulnerable. European banks have been recapitalised but should the sovereign debt crisis return or a new global systemic crisis happen, à la Lehman Brothers, individual banks may again face capital shortages. Greece, Cyprus, Spain, Italy, Portugal and Ireland all remain vulnerable. However, other countries in the EU also have risks, including the UK, the Netherlands, Switzerland, Denmark & France. A recent paper by Eric Dor of the IESEG School of Management in France, warned how most European governments remain very exposed to their banks, especially France. The paper computes the total recapitalisation needs of the banking sector of each European country in case of a new systemic financial crisis. It looks at ratios that would represent the increase of public debt, in percentage of GDP, that would result from a recapitalisation of the big national banks by each country. France which would incur the highest cost in percentage of GDP, if the big banks in France had to be recapitalised with public monies. After France, Cyprus, the Netherlands Greece, the United Kingdom and Switzerland are the most vulnerable. When Could Bail-Ins Take Place? The readiness for the bailin regime depends on how quickly each participating jurisdiction implements supporting legislation. Given the recent updates (see below) from a number of regulators and
  37. 37. S e c t i O N N a M e | Story Name 38 | American Hard Assets central banks, it appears that they are well positioned to have the necessary legal framework in place to support resolution authorities by about 2015, if not before. EU leaders plan to agree on the ‘Single Resolution Mechanism’ by the end of 2013, for adoption by the European Parliament in 2014, and implementation in January 2015. The UK and U.S. appear to already have the supporting powers and legislation in place for bail-ins, based on powers granted in the UK Banking Act of 2009 and the Dodd Frank Act of 2010, respectively. The exact timing of any bank rescue involving a bail-in obviously would then depend on the need for the bank to be rescued. Emergency resolutions and legislation would be likely in many countries in the event of another Lehman Brothers collapse and another global credit and financial crisis. How Likely Are Bail-Ins? There are differing opinions as to the severity of the on-going financial crisis, and whether it has turned a corner. There are two very broad ‘schools of thought’. The first school believes that the U.S. Federal Reserve, along with partner central banks internationally, has successfully stabilised the global financial system through low interest rates and quantitative easing, while the EU has managed to help recapitalise banks and avoid bank insolvencies in the European Union and and the breakup of the European Monetary Union (EMU). The second school is more skeptical of this view and believes that many banks globally remain vulnerable to insolvency because they are being kept on life-support due to extremely accommodating central bank measures including near zero percent interest rates and quantitative easing. Banks are also being supported through the use of almost fictional, though internationally endorsed, accounting treatment for their asset books, such as mark-to-model valuations for their over-the-counter (OTC) derivatives exposures and by failing to have realistic valuations on problematic property loan portfolios. Many sovereigns nations remain vulnerable to sovereign debt crises. The Eurozone debt crisis and other sovereign debt crises have been solved for the moment through various forms of ultra loose monetary policies, quantitative easing or debt monetisation. GoldCore Secure Storage service brings unrivalled transparency and security in a cost effective solution. Precious metal investments need to be held securely. Many clients are unable to safely arrange for storage in a location convenient to their residence or place of business. GoldCore is a partner with Viamat International (, the world leader in precious and valuable storage solutions. We operate our storage accounts in many locations including Switzerland, United Kingdom, Hong Kong, Singapore and the United States. Your investments are fully insured by Lloyds of London under Viamat’s Insurance policy. As an extra safeguard GoldCore tops up this level of insurance with an additional policy that will cover any eventuality which is not covered by Viamat’s insurance. If you have a holding of precious metals and you would like to discuss storing it with GoldCore contact them today or visit their website at
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  39. 39. 40 | American Hard Assets Up, Down, or Sideways? T he last twelve years have been a fascinating time for the gold market. Having emerged from a decade long stint in the doldrums, gold prices began to gather steam in first years of the new millennia. The run which really began to take off in 2004 was like nothing we’ve seen in the past. Even the inflationary spike in gold prices back in the early 80s was comparatively short-lived. As the bull market continually posted double-digit gains year after year, precious metals began to find their way back into the mainstream and the forefront of investors’ minds. Whereas in the 1990s, gold was somewhat relegated to the doom-and-gloom survivalist minority, the 2000s saw it blossom into a cornerstone of many Main Street portfolios. The story on Wall Street was not much different. As the precious metals market knocked down previous highs like bowling pins, new Exchange-Traded Products (ETPs) emerged to meet the growing interest from both private and professional investors. Investments into these ETPs were massive and sucked enormous quantities of precious metal inventory off the market quicker than mining operations could pull more metal out of the ground. Occurring simultaneously were significant changes to the central banking investment strategy in which these massive institutions also became eager buyers of the yellow metal, an investment appetite they had not held in a long time. The effect of these changes was the price-positive environment which gold enjoyed in the early 2000s and was later amplified by the financial crisis of the latter part of the decade. As American stock investors scrambled to stop the bleeding, governments around the world began to employ “extreme measures” to divert a repeat of the Great Depression. AT THE CROSSROADS Gold in 2014 H AR D A S S ET S | Gold in 2014 By Mike Getlin
  40. 40. American Hard Assets | 41 The new U.S. fiscal and monetary policies which emerged from the crisis created a perfect storm for gold. Like pouring gasoline on a raging fire, quantitative easing drove massive speculative demand into the gold market from 2009 through 2011. The solid multi-year uptrend turned into a bull market on steroids. Like a modern-day Icarus flying too close to the sun, the price of gold attained in 2011 was too high to sustain and have since come falling back down to earth. Prices sputtered in 2012, fumbling between about $1550 and $1800. However, 2013 brought the real shift as concerns of an end to the Fed’s stimulus programs prompted massive selling across the entire commodities sector in anticipation of a stronger dollar post-QE. To date however, the tapering has not come. For all the talk about tightening, the Federal government has done nothing to reign in its monetary policy. We all know investors buy the rumor, not the news. They abandoned gold in 2013 on the rumor that QE would be stopped. The news however, never came about. By many accounts, gold may have shed as much as $400 per ounce of “QE premium” on the assumption that the Fed’s dangerous game might soon come to an end. So what does this mean for gold prices moving forward? Can we draw any conclusions about this market which has been utterly directionless for months? Though 2014 may be the hardest year in recent history for gold forecasting, there are some significant points on which we can achieve some clarity. Seeing enough small factors clearly might help us piece together the big picture in a meaningful way. Gold now finds itself at a crossroads. Which way will it go? Will it continue its legendary bull run and finally achieve the coveted $2000 per ounce mark or will it slip back down into its pre-2001 slumber. Neither is likely to happen in 2014. What will likely emerge is some more clarity as to the role gold will play over the coming years. Gold in 2014 | H AR D A S S ET S
  41. 41. 42 | American Hard Assets H AR D A S S ET S | Gold in 2014 Supply As with any commodity, gold’s long-term price trends are determined by supply and demand fundamentals. Though frenzied investment demand may push the market around in the short term, those changes usually succumb to the supply and demand fundamentals when the time table is stretched. Gold supply is really quite easy to understand, especially compared to that of many other commodities. Nowadays, gold supply really only comes from two places: mining and recycling. If we rewind to 2000, it’s a very different story. Back then, approximately 14% of the gold supply came from recycled scrap, 47% came from mine supply, and the remaining 39% came from central bank sales. Over the last decade, central bank sales essentially have stopped. At the same time, recycling has increased drastically as rising prices made the prospect of selling scrap gold that much more attractive. Mine supply did increase, but not significantly. Most analysts believe total mine supply to be less than 10% higher now than it was in 2000. Since then, the price is up more than fourfold. As we sit today, global mine supply makes up about 65% of the gold that comes to market, while the balance of about 35% comes from recycling. Looking forward to 2014, we can make some logical assumptions about each of these supply factors. Rising gold prices have been the driving force behind the increases we’ve seen in recycled supply. The time, effort, and expense of recycling gold does not change with the gold price. However, the reward for doing so does. As the price has risen over the last decade, returns on recycling operations have skyrocketed. Want proof? Go back and watch Superbowl XLIII from 2009. You’ll see a Cash4Gold commercial that was rumored to cost the scrap recycling company a cool $3 million. Like many other recyclers, their business reaped massive benefits as folks were eager to cash in on rising gold prices. In 2012, Cash4Gold filed for bankruptcy. Its assets were purchased for $440,000—just a fraction of what it had paid for just one thirty-second TV commercial. Needless to say, the winds have shifted significantly in the scrap-recycling world. As 2013 saw gold prices fall significantly, it’s fair to assume that the recycling supply in 2014 will remain subdued as compared to previous years. That said, recycling supply can ramp up quickly if prices turn higher again. So far as the role it will play in 2014, all we can conclude is that the scrap supply will be price-dependent. Mine supply on the other hand, will not. Whereas it takes weeks or even days to establish a retail scrap company, it takes years or even decades to bring new mines online. The process of gold exploration is cumbersome, slow, and massively expensive. As such, the falling price of gold in 2013 has ravaged global exploration projects. To expound fully on the mining industry woes of late would make for a book of comparable size to War and Peace.
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  43. 43. 44 | American Hard Assets H AR D A S S ET S | Gold in 2014 Suffice it to say that after years of pouring money into new operations and exploratory projects, the mining industry has been hammered by the decline of the price of gold. These investments were made in anticipation of the price of gold holding at $1600/ ounce or higher. But with prices at $1200 - $1400/ounce in 2014, the return on those investments will be catastrophic. The net effect has been a rush to cut costs, cancel projects, close mines, and abandon exploration. Even if gold prices recover quickly in 2014, it will take years for the mining operations to recover and begin bringing significant increased supply to the market once again. One more concern for miners is the cost of financing. Like all businesses, mining operations are heavily dependent on financing costs, and at the moment, they can borrow quite cheaply. However, as interest rates begin to rise, the cost involved in production may overtake the value of the recovered metal, leaving the mining sector in a precarious position. All in all, it is unlikely that there will be any significant increases in global gold supply in 2014. With a subdued recycling climate and blood in the streets for miners, there is only one place significant supply increases may originate: central banks. That said, those institutions don’t exactly turn their investment strategies on a dime. It’s hard to imagine the same people who are sacrificing the value of their own currencies deciding to sell the best asset they have when it comes to hedging currency declines. There’s not a lot of noise about a potential shift to net selling from central banks. Our bet is that gold supply in 2014 will remain relatively constant, with a trend to the downside over the coming years. Demand Gold’s price in 2014 will be decided primarily by demand. Currently, the demand picture is made up of four general sources: industrial, official sector, jewelry and investment. As of 2011, demand from industrial applications accounted for about 10%, official sector (central banks primarily) accounted for another 10%, jewelry accounted for about 35%, and the remaining 45% came from investors. Central bank and industrial demand remains constant and makes up the smallest piece of the pie. It’s the jewelry and investment sectors that will drive prices in 2014. Gold in 2013 was plagued by a collapse in both. India is the world’s largest gold importer and makes up the most crucial portion of global jewelry demand. As rising account deficits were pressuring the rupee and putting India at risk of a credit downgrade, the Indian government began aggressive attempts to curb gold imports in mid- 2013. Through new tariffs and restrictions, Indian gold imports plummeted as much as 70%. Though it enraged the public (and initiated a healthy black market), the strategy was somewhat successful. Though demand from China has risen to fill some of the gap, the lack of Indian exports has been a major blow to the gold price. On the other hand, one thing has become very clear: the Indian public’s lust for gold cannot be suppressed forever. The cultural significance of gold in India dates back thousands of years and will continue for thousands more. Also, there is not much to indicate that their gold imports will fall further. From the bottom, there’s really nowhere to go but up. Whether or not those imports increase in 2014 stands to be seen. That said, the Indian demand factor has the potential to be very positive for gold in 2014 and poses little downside risk. Investment demand is where the rubber really meets the road. It’s fickle, it’s unpredictable, it’s wound up in an infinitely complex web of outside markets, and it’s the key to gold’s direction in 2014. Between 2007 and 2011, jewelry demand fell by about 18%. Yet, overall gold demand skyrocketed as prices surged to above $1900 per ounce. That is what investment
  44. 44. American Hard Assets | 45 Gold in 2014 | H AR D A S S ET S demand can do. However, in 2013, gold dropped like a rock. That also is what investment demand can do. Before the financial collapse, investment demand was driven by two main concerns: crisis and inflation. Since then, it’s been driven by one: monetary policy. When it comes to gold these days, the Fed giveth and the Fed taketh away. Gold was at about $1000 per ounce in early 2008, before the first round of quantitative easing. Shortly after QE2 stopped, gold topped $1800 per ounce. With falling jewelry demand over this time period, investment buying (due primarily to currency debasement fears in the brave new world of quantitative easing) drove gold up more than $800 per ounce. That “QE premium” began to come out of the market by early 2012, and has now been all but erased. This is clearly evidenced by massive outflows from ETPs. For professional investors, gold has fallen about as far out of favor as imaginable. Even the dependable players like Soros and Paulson have cut their holdings significantly. The other (and perhaps most important) factor affecting gold demand as of late is the stock market. I have always said, the only real enemy of gold is other options. Gold is really the “default” store of value. When you realize that gold is just about the only asset that has never been worthless, it reasons that one would want to use it as the main storage place for wealth. This is not necessarily the case, however, when better options arise. Gold does not pay dividends, it does not enjoy stock buybacks or IPOs, and it is an effective (though often crude) hedge against inflation. When you look at periods in which gold prices have been subdued, they all have one thing in common: strong investment performance in other sectors. As of late, the stock market has been running like mad. Due mostly to the Fed’s intervention which has destroyed the market’s ability to accurately assess risk (which incidentally is exactly what the Fed hoped to accomplish), the stock market has posted outstanding gains as of late. I will venture that those gains are not only outstanding, but unsupportable and probably short- lived. Stock prices have more than doubled since 2008. During the same time period, economic growth has been essentially non- existent. Consumer demand has putted along, innovation and product development has been tepid at best, and the only real explanation for an 8000 point run in the DOW is the effect of quantitative easing. Unlike gold however, stocks have not yet shed any of their QE premium. This poses a significant risk to the value of stocks going forward. As gold does not exist in a vacuum, we have to examine it in terms of its relative appeal when compared to other asset classes. At the moment, gold has probably suffered most if not all of the losses it will sustain if QE does end. Stocks have not. If the Fed continues to move the goal posts back with justifications to keep the stimulus flowing, it reasons that gold will recover some of the QE premium it has lost and will move higher. Stocks may not. There is one more concern that must be noted. A lot has been said as of late about a potential bubble in the securities market. It’s not a stretch when you consider that bubbles are by definition found in markets that have lost the ability to accurately compare risk and reward. Quantitative easing has artificially removed risk from stock markets as near zero interest rates have made stocks the only game in town. It’s quite similar to the pre-2005 housing market. Remember when home prices were just going to go up forever? Do you think stocks now are going to keep going forever? If the stock bubble argument proves true, we could see securities prices continue to rise with reckless abandon for some time. In this environment, it’s hard to imagine a significant move back into gold on the part of investors. Of course the other shoe must eventually drop. When the bubble pops, investors will panic and begin searching for firm
  45. 45. 46 | American Hard Assets H a r D a S S e t S | Gold in 2014 footing—the kind of stability that gold has provided since the end of the Stone Age. So What’s Next? Looking forward in the new year we can make some general assumptions about gold. It’s likely that supply will not be a significant factor for prices in that it will probably remain relatively constant. As prices have come down significantly, it reasons that interest in jewelry will probably increase moving forward. Whether or not Indian import restrictions are lifted may determine whether much of that interest turns into real demand. The jewelry factor has the potential to be a significant positive for gold, especially if pent-up demand from a lack of Indian imports is somehow released through a relaxation in tariffs and restrictions. Whether that will materialize stands to be seen. All in all however, this consideration is neutral to positive for prices. So far as investment demand is concerned, we must again weigh downside risk against upside potential. Gold showed a desire to stay above $1225 for much of 2013 even under significant sell pressure and without clear direction or strong investment demand. People kept buying it off the lows for most of the year simply because they thought it was too cheap to pass up. This speaks volumes to the downside risk. If the $1200 bargain buying trend holds through the opening months of 2014, we can assume that downside risk is quite limited. This is not to say that frenzied short selling couldn’t drive prices lower, but rather that the long-term value floor is somewhere in that $1200 range. Concerning the upside potential, there are many factors to consider. If the outside market environment remains the same as it was in the latter part of 2013, we will likely see a similar trading range for gold. If on the other hand, any number of occurrences disrupts the high stock, strong dollar, no-inflation environment, we could see gold make very meaningful gains. Despite the fact that many analysts won’t agree on this point, an end to quantitative easing will prove to be very price positive for gold in the long term. Tapering may hurt gold a bit, but it will hurt everything else much more. As capital is moved out of stocks and other bubbly assets, some of it will make its way back into gold. All in all, we never really addressed the imbalances that created the financial crisis of 2008. We just papered over its effects. The Fed’s “emergency measures” have become the new norm. That’s because we treated the symptoms of the crisis, but have done nothing to address the underlying illness. That illness will surface over time and in increasingly unpredictable ways. Right now, it’s mostly subdued. Gold’s struggles as of late reflect that reality. However, the same logic holds that when these massive systemic imbalances resurface, gold could quickly rebuild its wings and soar once again toward the sun. In my mind, it’s not a matter of if this will happen but when. The real question is not if gold prices will rise in 2014. It’s whether gold is more likely than other asset classes to provide low downside risk and high upside potential. Looking at all these factors together, I believe the answer is a resounding “YES!”
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