Category Archives: Commodities

Investment of a different kind – Buy Collectible Coins when you want to invest in Bullion

Every other day you would hear about investment advisors recommending to take an exposure in Gold or Silver using an ETF or buying phisycal metal. A lot of investors prefer buying gold or silver bars instead of putting money in an ETF as the ETF’s have management fee and usually trail the bullion price on any given day.

For those who prefer holding phisycal gold or silver buying the Collectible Bullion coins would be a good idea. Most leading mints issue .999 purity silver coins every year and varying variety of Gold coins from 22kt purity Krugerrands to 24Kt Chinese pandas.

These bullion coins are minted in limited quantities each year and cater to both the collectors and investors market. The coins are usually at a premium to the silver price for the minting charges, transportation and insurance costs.

One would ask that why should they pay a premium for a coin and not buy simple bullion bars?

Yes one could buy the bars but even the bars come at a premium to the spot silver price i.e. include the cost of mintage (shaping silver to a bar), the process of making a bar is simpler which results in a smaller charge.

The differential between the price of a Bar and a coin of similar weight is around 5% but coins come with a potential of collection value as they are minted in limited quantities for each year, with the year mark and are usually sold out even before the year ends – The 1 oz. Australian Lunar coins bearing the dragon for 2012 have already been sold out!!

Additionally the coins are equivalent to a piece of art and carry aesthetic value.

The mintage of the popular Silver bullion coins is listed below

Silver Kiwi Fern – avg 10,000 each year – 1oz. Fine Silver




Chinese Panda – 600,000




Australian Kookaburra – 300,000 2011, maximum 500,000




Mexican Libertad – 1,650,000




Canadian Maple – 3,526,052 in 2009





American Eagle – 34,662,500 in 2010




So think about buying these coins as investments in silver or gold – a bar minted in say year 2000 would have a small premium over silver price of the day but a coin that was minted in 2000 would always command a bigger premium than the bar.

Relative Value arbitrage – Gold, Silver and Platinum

Bullion space has been really volatile in the past few days. Gold has given better returns than silver and Platinum in the upmove during the past 5 years.
Gold lost around 10% from the highs of last year but silver and Platinum have both come down 30% and 50% approximately from their highs of 2008.

Historically Gold, Silver and Platinum have maintained a value ration amongst them and this seems to be out of sync at the moment.

Doing some number crunching on the historical data here is a trade strategy that exploits the relative mispricing and is geared to give near positive returns when tracing the past data.

The bullion trio is priced at:
Gold – US$ 948/oz,

Silver – US$13.45/oz and

Platinum – US$1182/oz at the time of writting.

I am recommending creating a strategy where one is 60% short on Gold and 20% long on both silver and platinum by value.

The strategy should yield an absolute return of around 25% when the bullion trio traces back to the historical ratio’s and the mispricing in relative value is resolved. Gold: Silver – 60 and Platinum: Gold – 1.75

We shall trace the strategies pay out on a weekly basis. So as of date we start with
Short Gold – worth 600US$
Long Silver and Platinum – worth 200US$ each

The ratio now as we create the trade is 70.48 for Gold Silver and 1.24 for Platinum Gold

Watch out in a week to see how the strategy is doing.


Week 1 – 29th July 2009:

Gold – US$931: Silver – US$13.51: Platinum – US$1166

Gain – 10.75$ on Gold, Loss of 2.7$ on Platinum and 0.44$ on Silver

percentage gain – 0.76%


Week 2 – 5th August 2009

 Gold – US$965: Silver – US$14.64: Platinum – US$ 1267

Gain – $16.25 on Silver and $14.38 on Platinum; Loss – 10.75 on Gold

Percentage gain – 1.98%


Week 3 – 13th August 2009

Gold – $949.50; Silver – $14.56; Platinum – $1254

Gain – $15.06 on Silver; $12.18 on Platinum; Loss – 0.94 on Gold

Percentage Gain – 2.63%


Week 5 – 25th Aug 2009

Gold : 944.50; Silver: 14.10; Platinum: 1237

Gain on Gold – $2.215; gain on Silver $8.27; gain on Platinum – $9.30

Percentage Gain – 1.98%

Changing strategy to 50% short gold and 25% long each Silver and Platinum. Both strategies will be tracked.


Week 6 – 3rd September 2009

Gold – 977; Silver – 15.37; Platinum – 1229

Gain on Silver – 27.03; platinum – 7.65; Loss on Gold – 15.18

Gain on Strategy – 1.98%

(With ratio’s of Short Gold 50% and Long Silver and Platinum 25% each the strategy would yield 3.11%)


Week 7 – 8th September 2009

Gold – 1000.70; Silver 16.54 and Platinum – 1285

Loss on Gold – 33.35; gain on Silver – 44.31 and Platinum – 17.42

Gain on strategy – 2.83%

(With ratio’s of Short Gold 50% and Long Silver and Platinum 25% each the strategy would yield 4.94%)


Week 8 – 15th Sep 2009

Gold – $1007.40; Silver – $17.04; Platinum – $1328

Loss on Gold – $31.33; Gain on Silver – $64.62; Platinum – $30.87

gain on Strategy – 6.42%

(strategy of 60% short gold and 20% each long silver and platinum would yield 3.88%)


After 9 months – 23 April 2010

Gold – $1140; Silver – $17.96; Platinum – $1731

Loss on Gold – $101.26; Gain on Silver – $81.61; Platinum – $116.11

gain on Strategy – 9.65%

Gold – Next bubble in making or Next Bubble to Burst?

Practically every day we hear one or the other analyst doling out advice to invest in gold and how at least 10% (though this recommendation can be as high 20%) of your portfolio should comprise of gold or gold stocks.

The Gold price has fluctuated wildly in the past year. After hitting a high of US$1032/oz in March 2008, it fell to US$690 in November 2008 and is back up again at around US$900/oz.


The US Dollar co-relation

First the rally was attributed to weakness in US dollar. The Gold prices moved in inverse tandem with the weakening dollar beginning 2003. US Dollar Index fell from 101.91 in Jan 2003 to 71.34 in Apr 2008 – appx. a 30% weakness. The USD Index measures the performance of the US Dollar against a basket of currencies: EUR, Japanese Yen (JPY), Pound Sterling (GBP), Canadian Dollar (CAD), Swiss Frank (CHF) and Swedish Krona (SEK). The most noted move was the weakening of USD from 1.25 to 1.63 against the Euro during the same time frame – a 30% appreciation of Euro against the USD.


Gold in the mean time marched from US$450/oz to US$1030/oz translating in gains of around 130%


Oil Co-relation

Some traders price Gold between 7.5 to 15 ratio to the Crude Oil. So when Oil touched its peak of US$147 a barrel the gold prices were being predicted to touch $2200 (147×15 = 2205) on an optimistic scale, and the price of US$1100 (147x 7.5 = 1102) looked reasonable. The gold prices did follow the falling crude for some time but the pair seems to have lost co-relation now. With current crude oil prices around US$45/bbl, using the Crude oil to Gold ratio the optimistic Gold price comes at US$675/Oz and pessimistic price comes to US$338/Oz.


The Inflation hedge

Gold has been, more often than not, regarded as a good hedge against inflation. With the skyrocketing prices of commodities during first half of 2008 the inflation across the world had started to move toward the double digit territory. Countries like India and China had inflation of upwards of 12%. With the rising inflation the investment in gold as a hedge was a prime theme then. The inflation has now fallen back to single digit levels in most of the economies and there seems to be real threat of deflation with falling consumption.


Risk Aversion for uncertain times

After having exhausted all the above theories the latest story is that of safe investment in uncertain times. With falling stock prices, lowering treasury yields and the sovereign default risk inching upwards investing in gold seems to be the buzz word again. The reason this time is that Gold is a real tangible asset that has been considered valuable for centuries. The supply of gold is limited thus it makes a perfect investment.


The Contrarian View

Having considered all the reasons of why to invest in gold let us now look at the other side of the coin.


Applying the Dollar co-relation theory the gold price should be headed downwards. The USD index is up at 87 as on date of writing. Using linear equation we can arrive at a fair value of gold in relation to the USD index which is appx. US$775.


Using the Oil co-relation the gold should be trading anywhere between US$338 to US$675 an ounce and with inflation falling sharply people should be selling gold.


Now coming to the risk aversion theory let us answer a simple question – is gold not really a commodity? It has a derived value. Unless the world moves back to the days when people would use gold as currency to buy and sell goods, investing in gold is as good as exposing your money towards the price fluctuations in gold price (unless someone can guarantee that gold will never fall down).


On the demand supply front – the demand has shown elasticity to price. India one of the biggest consumers of Gold reported 90% decline in Gold imports year on year for the month of January 09, when the prices touched all time highs due to increased global price and weakened domestic currency. Since then the currency has weakened further and there are reports of households selling old gold and avoiding new purchases.


Some other interesting facts about gold

1. Except for the last five years, gold has been in a bear market after a peak in 1980.

2. Central banks have tons of bullion which they occasionally threaten to sell. Will they not realize this threat if national debt needs to be repaid? Central Banks have pledged gold in the past to obtain foreign debt.

3. If you don’t count the last five years, gold stocks have not done well.

4. The Gold stock in the world is lesser than silver and more than platinum.



As with any investment it’s easy to get carried away during a bull market is prevailing. When oil was at US$147 the prediction of US$200 a barrel looked true, but then fundamentals kicked in and the demand dropped drastically as consumption slowed.

Same can be the case with gold, with prices around US$900/oz the targets of US$1200 or even 1500/oz look within striking distance. To support the technical analysts who are recommending gold would point out that gold has created a strong foundation around US$900/oz and is ready for the next big move, but looking from the other side you can see that Gold has made multiple attempts to breach US$1000/oz mark but has been unsuccessful thereby creating a resistance.


Also why is gold the only metal being recommended for investment? Silver and Platinum are equally precious and have a wider industrial use. Both the metals have corrected by around 40% from there all time peaks which is definitely more than the correction that gold has underwent (10%).

Lastly do answer these questions before considering to “invest” in gold, you might realize that Gold could be the next bubble to burst.


1. Does Gold grow with time, or generate income or pay interest.

2. Is owning Gold not associated with storage costs, Insurance etc?

3. If you lost your job and had Gold and House as an Investment – which would you sell first?

4. Can gold be eaten?

5. What would happen if the gold funds faced redemption pressure?


Published in Business Times as well –,4574,327931-1239479940,00.html?