All quiet at the Gold ETF sand castle this summer holiday?

There may be some calm in the gold markets before a (positive) storm according to people quoted in the Telegraph but summer holidays can be pretty dangerous.  

Gold on Sunday night 11 March 2012

BullionVault's market report from Friday is the only outline I've read of what went on at the end of last week.

Gold gains more than 1% but will it continue?

The gold price gained more than 1% this morning. It's a bit unnerving for someone waiting on the sidelines hoping the gold price will fall far enough to justify selling in December.

But here's what seems to be happening today: the euro rose against the dollar but commentators tell Reuters it's not a longterm trend and Indians started buying gold again (Reuters again).  I try to get my head around both of these issues below  - the Indian buying story may not be a longterm one yet either.

But it seems no one really expects much real movement on Europe until the results of Spanish and Italian bond auctions on Thursday and Friday. Is there any reason to buy gold before then?

Well the gold price shot up today:

The gold ETFs I do not own gained too -

As the falling dollar played a big part in the gain any changes in the pound sterling denominated PHGP looks a bit less impressive/painful and these are the changes you'd get if you owned PHAU, the dollar version anyway - which is what I'd buy. The Bloomberg dollar index chart shows the dollar moving lower. (Reuters said this was due to short covering on the euro:"Traders said there was no fundamental reasons for the short squeeze in the euro with news out of Europe continuing to paint a dreary picture.")

The pound moving in the same direction as the euro - up today (the green figures above the chart) but moving downwards over the last month (the chart). It's opposite relationship to the dollar is likely to get stronger? (Reuters story: )




Adding to a list of gold watchers who think the price of gold is more likely to fall than rise in the short term appears to be Perth Mint's Bron Suchecki (also Gold Chat) whose negative views included the effect of MF Global: "This is not necessarily negative in the long run, as these investors may instead opt for direct physical investment, but in the meantime any contraction in leveraged paper positions puts pressure on the gold price."

The other key factor he cites is Indian gold demand: "Physical Indian ounce demand will return eventually but in the short run the situation  continues to be negative, with Reuters reporting Prithviraj Kothari as saying "Still prices  are high. Interest rates are high. Liquidity is tight. I think imports in the first quarter of  2012 will be 50 percent lower than last year."

Although he adds that there is some pick-up of bar demand and that a change, when it comes, will be very fast.

Just this morning Reuters said dealers in Mumbai said a drop in local prices to a one-week low was used to stock up ahead of wedding season beginning later this month. Harshad Ajmera, proprietor of JJ Gold House in Kolkata said: "Buying will continue until March."

It also said India's central bank has allowed four more banks to import precious metals which would boost competition and help reduce premiums.

In the same report Reuters quotes Macquarie analyst Hayden Atkins who said "A big part of the weakness into the end of the year was people taking profits and liquidity being a bit lower."

He said that the end of this process might explain why an inverse correlation between the dollar and the euro/gold.

"I would expect that to unwind, and maybe that's why we're seeing stronger gold even when the euro is tending to weaken. You don't have that length there any more." He told Reuters he expected gold's inverse link to the dollar to drive prices in this year.

Violent gold thefts hit UK's Asian community says BBC

According to a BBC investigation the rising price of gold has sparked a number of violent robberies in Yorkshire's Asian community targeting wedding gold.

The written introduction for the half-hour-long radio show (broadcast last week) said: "As a result of the fear of this crime there is now a long waiting list for safety deposit boxes - as an alternative those with extended families try and ensure their homes are never left empty, whilst others are buying CCTV systems or working out what to hide where. According to the police it isn't just burglaries - the gold is also being snatched in streets robberies where Asians are being targeted and in a recent cases a newly married bride was robbed whilst at the wedding celebration itself."

A number of wedding gold robbery victims are interviewed and the ease with which stolen gold can be sold via online gold buyers is also discussed.

As a gold ETF investor I don't really care about the gold itself, I'm never likely to see anything I own via exchange traded funds. My focus is on its financial value. 

In fact I sold  all 28 of my gold shares a couple of days ago out of fear that the price of gold might fall as low as  $1,200 per oz. I aim to buy them back but that's not the same for people who own gold for other reasons.

I do own a gold signet ring which a number of local pawn shops valued at around £40 and I think I'd be quite upset if I had to sell it or it was stolen.
   

Gold ETF Investor market report: 2 November 2011

This isn't really a market report. Here's what some other people are saying. You could spend a lot of time reading it - but would it help?

A general goldy newsy piece from Reuters: Gold rises on deepening eurozone crisis which included this on ETFs:

"In ETF flows on Wednesday, gold holdings were up by just over 11,000 ounces after an inflow into the COMEX Gold Trust.

"Last month, global holdings of gold in ETFs rose by 852,000 ounces to 67.907 million ounces, more than offsetting the 444,000 ounces outflow in September and the 297,000 ounces outflow in August."

MarketWatch: Gold could go up but platinum will go up more

OilnGold: Dont bet on it, gold could go down a bit more

Gold investing news: Lots more people could invest in gold soon - China makes gold owning easy for its citizens (opposite of what happens here).

Harvey Organ: Says that gold and silver prices were pushed down by the big short sellers - but suspects it'll have backfired (I still don't understand how the bear raid stuff works.)

There's loads of stuff in the Harvey Organ post including this from

ZeroHedge: How US banks are lying about their European exposure, an article saying that if anything else goes wrong it will test whether interconnecting deals between banks adds up to a safety net (hedge) or a bad bet (melt down).

ZeroHedge points to "MF Global for example, which filed bankruptcy precisely due to its hedged (?) European exposure - luckily MF was not in the business of writing CDS on European banks or else all hell would be breaking loose right now."

He applauds this Bloomberg piece which said U.S. lenders exposure to Greek debt via CDS (insurance against default) rose by $80.7 billion to $518 billion in the first half of 2011.

Too much too soon

But this is all too much for me. I'm still wondering how, why or when to buy more of a physical gold ETF (PHAU).

Yesterday I nearly bought some more. I didn't do it and tried to blame my broker.

But it was me - and the situation bought up very basic issues that I need to address.

Like how long can I go on deluding myself that I have a strategy?And why have I bought gold when I can't honestly answer these simple questions:

a) Is my aim to build up a stake in gold because I think the world is about to collapse?

b) If so, why don't I just put cash in it now?

c) How much of my cash am I actually talking about?

d) Once I've put it in, do I have any idea why or when I should take it out again?

But then the panic wanes a bit. I remember that I started off knowing that I know nothing and I shouldn't be terrified by other people knowing lots more than me.

I also need to remember that I've bought gold because otherwise I wouldn't bother looking at it.

But what did I learn from yesterday?

1. It's never going to be obvious when to buy and when I have bought it will feel like I made a mistake until its obvious that wasn't a mistake which could be never.

2. I've got to make up my mind if I'm pound cost averaging or not... if I am I should have bought PHAU at around 11am on October 22, a weekend but I would still have got a better price than now whether I'd bought before or after.

However, I don't really want to buy automatically because the reason I'm doing this is to force myself to pay attention.

3. So, if I'm not pound cost averaging, what am I doing? Should I be buying on dips (investing - catching falling knives?) or following trends up (trading - chasing bubbles)? I don't know. I need to do some reading!

4. Volatility - do I really need to think, every time I miss what looks like a low, that it was my last chance ever?

5. I need to stop looking for information to justify what I've done. I need to find out if I am doing the right thing, not prove that I am doing the right thing.

This all sounds like something out of a self help book! Find yourself - buy gold! Or am I already turning into Gollum?

So, how much was that gold ETF again?

I still don't really know why I own gold or whether I trust it. But that hasn't stopped me thinking about buying more ETF Securities Physical Gold (PHAU).

After the Greek prime minister surprised everyone by calling for a referendum everything fell, including gold. The price of PHAU dropped by more than 2% during the day but ended the day down less than 1%.

As PHAU is a dollar denominated share I needed to find out how much of it I could buy with the pounds sterling that I own. When I looked at the exchange rate between the pound and the dollar I saw that the pound had dropped 1.3% against the dollar - this meant my pounds wouldn't go so far as they had done 24 hours earlier. But at the same time it meant my existing investment in gold hadn't lost as much of its value in terms of pounds sterling as it had in dollars.

Even so, I was still thinking about buying more shares in my gold ETF because the last time I bought I paid $172.7 per share. On that day - September 22 - the pound fell dramatically against the dollar and was only worth around $1.53 at end of the day. I got a slightly better rate and the combined moving parts - the gold price and the exchange rate - meant that I paid £111.97 for each of my PHAU shares.

Today the same shares were trading around $165.7 each and, because the purchasing power of my pounds had increased since my last adventure - (they now buy $1.59 each: Google Chart ) - I could have bought them for around £104.21 per share.

That's a fall of nearly 7% since my last buying point.

Information gap

Unfortunately I only worked out a general view - that I wanted to buy - and I had done it using Google Finance data before opening up my Hargreaves Lansdown (HL) account. When I started the process to buy the first HL page showed me everything in dollars:

(The prices shown, if you can read them, are from later in the day.)

I placed a deal via the "place deal" tab where I said I wanted to spend £1100 including costs. The last stage of the buying process was a 15 second window in which I had to decide whether I wanted to accept a specific deal. But this page only gave me a total cost in pounds which meant I didn't know how much I was paying per unit.

Luckily I was offered 10 units so I could work that out easily enough - but was it a good deal? Was it even what I expected it to be?

At 13.48 I pondered over this screen for 15 seconds:
It took a moment but I realised that I didn't have enough information here to know what the exchange rate was or how much I was actually paying for the gold in dollars. If I had a dollar price and a pound price I could have worked out the exchange rate if I wanted to.

At 14.01 I saw this screen:
At 14.13 I saw this screen for 15 seconds:

At 14.42 I saw this screen for 15 seconds:

So what's the problem? I can't tell if I'm making an unnecessary fuss about this. It could be argued that if I'm buying in pounds sterling so why do I need to know anything more than the price I'm paying in sterling?

To me the problem is clear. Only having a sterling value obscures the two important factors at work in the investment: the dollar value of gold and the value of my pounds against the dollar.

When I buy I want to know if the price is attractive because of a change in the currency relationship or because the thing that I wanted to invest in - gold - has performed well. The situation in one of these moving parts may be dominant and it may be changing for better or worse.

I don't think it's unreasonable for me to know these simple facts when making the investment.

What happened to the sterling price of PHAU today is a case in point. The price of gold fell but my existing investment didn't suffer too much because the dollar strengthened against the pound.

However, looking at the exchange rate I could see that, despite the pound falling more than 1% against the dollar, my pound was still a lot stronger than it had been the last time I bought Google Chart .

For now though, I have to accept that this information isn't available at the moment I buy.

What's more, as I discovered the first time I bought PHAU, it's not easy to get hold of that data even after the event.

This means that an investor needs to know beforehand what sterling price they will accept. They also have to accept that they will not know why a price may be better or worse than they expected. And if they want to find out they will have to go back to data that is 15 minutes out of date. This knowledge gap makes it difficult to decide whether they should wait or go ahead and buy at that moment.

Even if I decide to delay my buying decision for a few minutes and the price changes I won't know if it's because the currency has strengthened or if the gold price has changed.

These factors can change in seconds, particularly in times of market stress like today.

There is also a disconnect between the presentation of the data that alerted me to a potential good deal and the presentation of the price I was then offered by HL.

In my case I was attracted by a dollar price of individual PHAU shares on Google Finance (with a 15 minute delay) - this was roughly confirmed by Hargreaves Lansdown with another delayed dollar price per share. Then, at the final stage, in the 15 second window I had to make up my mind, I was confronted by a sterling price that gave me a total for all the units I was buying - not a figure per share.

Not only was this switch a little bit disorientating, it took me moment to realise that it was impossible for me to connect the pound sterling price I was being offered to a dollar price that had looked attractive.

PS. Interesting observations about the world of credit default swaps (CDS: insurance policy against goverments defaulting on bonds) from Jim Sinclair. He points out that a referendum in Greece could change the status of Greek debt to "default" and trigger those insurance policies.

If that happened attention could swing away from european banks to US banks who are the main sellers of CDS.

Also an interesting article from Galmarley.com: "The market doesn't wait conveniently showing the point at which we should get out. It hangs between greed and fear. When it falls it tempts us to hold on with the prospect of recoveries which don't happen, yet it punishes us repeatedly if we start selling, with bounces which would have saved us from our loss. Bit by bit it turns the shrewdest market operator into a rabbit."

Cashing in on gold loans to muslims in East London?

Jewellery shops on Whitechapel Road, Tower Hamlets, East London.

The quest to connect with my gold ETF investment led south from Hackney into Tower Hamlets. Why? Because on Wednesday I heard a report on the BBC about gold in India in which the reporter said gold was in the DNA of indians.

I noticed the journalist had also reported on people panning for gold in the sewers of Dhaka, the capital of Bangladesh.

I wondered if gold was in the DNA of Bangladeshis too and London's highest concentration of Bangladeshis is just a short cycle ride south of Hackney. May be they had a more interesting gold market there.

Inside UKAY Jewellers on Whitechapel Road I was offered £38 for my signet ring (Hackney Jewellers offered between £30 and £40 so nothing special there).

A visit to Bombay Jewellers proved fruitless as they didn't deal in anything less than 22 carat gold.

I asked both if there were any Bangladeshi pawnshops - in Hackney they tended to offer better deals. Both said no adding that Muslims don't pay interest and so they don't run pawnshops or offer loans. I'd forgotten that Muslims don't do interest! It's not halal.

But somebody in Whitechapel must be using pawnshops - a new one was being built two shops up from UKAY (It was Fish Brothers, picture below, which has a branch in Hackney.)

Had I known there was a Money Shop on Whitechapel High Street I'd have asked them. It's right opposite the East London Mosque (For the latest on East End politics you could start here: Trial by Jeory)

Instead I dropped in on the Bethnal Green Road branch where they offered me £45 for the ring (much better than the jewellers). The woman behind the counter was happy to chat and said that she had served a number of Bangladeshi women, usually pawning their wedding jewellery.

I asked if they had been able to reclaim it, she said generally yes, they had. She also said that an interest rate on a loan backed by my signet ring would have cost me just under 8% a month.

The moral of the story?

Hopefully families that are put in a position where they need to pawn jewellery aren't doubly stigmatised by Islamic law. They probably are but I don't imagine it would take much imagination to neutralise the unacceptable interest rate and may be charge a storage cost instead.

It seems that there all sorts of options allowed under islamic law that could easily be applied to pawnshops and give Muslims access without breaking their religious code.

Hopefully a loophole will be found in this lot before the financial crisis drags poorer gold owning muslims into a gold loan dilemma.

That's not to say that taking gold to a pawn shop is good idea. It's not a cheap way to borrow money and that's what I'll look at next.

Anything to do with a gold ETF?

May be not yet.

My local gold market: Hackney

I bought a small amount of gold a month ago and it has already lost about 10% of its value. The gold I bought wasn't the sort I could hold in my hand, it was shares in something called an exchange traded fund (ETF).

I bought the stuff because gold is meant to be a safe bet in times of financial trouble - like now - but recently it hasn't behaved as expected.

The losses add some urgency to the task of understanding my gold investment. Unfortunately the factors at play are so grand or so technical (eurozone debt crisis, Chinese growth, futures markets, currencies) that it's hard for a normal human being to get a real feeling for it.

So I turned to a gold market closer to home where I live, Hackney in East London, hoping this might help me 'connect' with my small lump of metal.

Narroway is the main street in Hackney Central, the focal point of the recent riots (video below) and it has five pawnbrokers/jewellers who buy and sell gold (one of them, Fish Brothers, was shut).

I didn't think this market would have much to do with gold ETFs so I took a gold signet ring I was given by a relative.

The first place I went to was called Cashier where staff served customers from behind perspex screens embedded in battered-looking booths. When I arrived there was one guy in shop and he was getting strict instructions not to be late with a loan payment - he had until Saturday.

When he left the woman who served him dealt with me. Yes, she said, I could get cash for the ring but only after a couple of on-the-spot tests. She said she would weigh it first, give me a rough price, and if I wanted to take it further she would do a chemical test.

I've had this ring for decade or so. It had belonged to my great uncle and while I had no real idea what it was worth I was kind of hoping for a nice surprise. My expectations were tempered a little when she pointed to the '.375' hallmark which meant the ring was 9 carat gold (not very pure). But I was still shocked when she offered me £46 - a sum which would have replaced just one of my shoes.

I started asking her questions like where her gold price came from, how often it was updated and (it seemed like a normal question at the time) whether she'd had any customers coming in with gold teeth. At this point she got a little suspicious and I decided to tell her what I was doing.

We had brief chat and, among other things, she said the store was pretty busy and that she'd had a customer in the day before selling gold teeth.

As it turned out Cashier offered me the best price out of four shops I tried. The next best came from a newly opened branch of Albermarle Bond (pictured above) where I was offered £43 for the ring. The girl behind the counter also said the store was busy but no one had been in with gold teeth.

She, and all the other gold buyers, said that most customers generally over estimated the value of their gold trinkets. I confessed that I was one of them.

In retrospect it seems likely that the two shops which offered the best prices for gold (Albermarle and Cashier) really made their money out of payday loans (according to the Wall Street Journal the only booming part of the financials sector in the US).

I suspect that people who hoped to plug a hole in their finances by selling their gold jewellery would be tempted into one of their high interest short term loans.

Hackney Discount Jewellers, which has been on Narroway for 30 years, offered me £40 for the ring. The guy running the shop had a different theory about the higher price being offered for scrap gold at Albermarle Bond and Cashier. He said it was more likely due to the other shops having retail outlets - and so having some control over how much they could make when they sold the gold again.

He said times were hard and that a handful of his customers had been selling gold teeth. He added that thieves had been targeting ostentatious gold wearers.

Next was Erbiller which felt more like a traditional highstreet jewellers - it felt more like a shop that catered for female customers and there were two women looking at rings. The young man behind the counter said that business was slow with fewer people buying jewellery. He only offered me £30 for the ring.

So, the news from the Hackney gold market is that most of the people who are active are selling their gold to make ends meet. My guess is that they are selling their gold because they have to.

Unfortunately, when they walk into a gold shop, like me they'll probably be disappointed by the amount they are offered for their gold. My guess is that this experience will make the high interest loans offered by these places look like a good idea.

But over all, the trend on the Narroway is no buyers, mainly sellers. But these shops are pawn brokers or jewellers, they don't sell the coins and small bars favoured by investors.

Investors are more likely to buy from the likes of ATS Bullion and Baird & Co for physical gold. Or, if they don't want to stash it at home, to ETF Securities or BullionVault.

Hackney has some history on this front and one high profile example was highlighted this year by one of the UK's most successful fund managers, Sebastian Lyon, who runs the £1.4 billion Trojan fund and the £370 million Personal Assets Trust.

Lyon likes gold and has about 13% of these funds' assets in gold - mostly using the same vehicle that I do: exchange traded funds.

In a report to his investors in June he said he said he wasn't worried that the gold price was in bubble: "With only 0.6% of global financial assets invested in gold compared to 3% in 1980 and with the supply of paper money increasing at an exponential rate we are way off bubble territory."

But for a human angle he turned to a recent piece of Hackney history: "Martin Sulzbacher, a German Jewish banker, who hid a hoard of gold coins in a garden in Hackney before being interned in 1940".

Sulzbacher never reclaimed the coins and they were rediscovered 70 years later and returned to his son. Over this period their value increased from $1,640 to £100,000. Lyon pointed out that "paper money would scarcely have preserved wealth at all."

It's the story of one long-dead Hackney gold investor who certainly hadn't meant to lose his gold. I can't say I identify with it, but it does highlight the liklihood that the buying and selling on Narroway doesn't represent all of Hackney's gold reserves.

Gold ETF bestseller for retail investors?

The three most heavily bought shares (by value) were the same as the three most heavily sold shares by investors using Hargreaves Lansdown on Friday. These were Barclays, Lloyds and the iShares FTSE 100 exchange traded fund.

The ETFS Physical Gold ETF (PHAU) was one of the few shares on the top twenty list that didn't also make a showing on the list of shares being dumped at high speed by investors.

On Thursday Hargreaves Lansdown published an interim management statement which said that the number of clients opening accounts had increased but added that it wasn't expecting much action from them: "Whilst uncertainty remains about sovereign debt and default and a possible second recession, it is increasingly likely the retail investor will feel they need more pounds in their pocket and may continue to defer new investment decisions."

It's hard to tell if their buying and selling lists illustrate this prediction, or whether retail investors see gold as a kind of cash.

Also on Thursday the Sterling denominated PHGP was the gold ETF of choice (At close on Friday the spreads for PHGP were bid 10,382 offer 10,385 or 0.028% which were narrower than the spreads for the dollar denominated PHAG $164.09 and $162.3 or 0.12% - I was under the impression it was usually the other way around.)