Coin demand and asset protection in the gold and silver markets

ASI's Rich Checkan takes a look at some of the trends currently seen in the gold and silver coin market and what we are likely to expect as the year continues

GEOFF CANDY:  Welcome to this week's edition of Mineweb.com's Gold Weekly podcast.  Joining me on the line today is Richard Checkan - he's the senior vice president and COO at precious metal broker and asset protection specialist, Asset Strategies International.  Richard, given the state of the world economy at the moment, a lot of people are indeed looking for asset protection and ways to protect what assets they still have and hopefully will have for some time to come, and a lot of them are turning to precious metals.  How big an uptick in demand have you seen particularly for precious metal coins, since the crisis first began to emerge?

RICHARD CHECKAN:  Well we've seen a considerable uptick - and you go back to 2007-2008 when the equities market started to unwind as a result of the subprime crisis - that's when we started to see people moving to precious metals in general.  However, of late we've seen people move not just to precious metals in the various forms of ownership such as ETFs or certificates for offshore storage etcetera, but we're seeing a fairly recent trend and a changeover to physical bullion that clients actually take delivery of and that does include, to a large extent, the coins minted by major mints around the world - whether it be the US Mint, the Royal Canadian Mint, Austrian, Australian, South African, etcetera.  People want to take the metal into their own possession and hold it - and that speaks volumes to the events that are governing our news headlines here in the past few months and years.

GEOFF CANDY:  Why is that do you think - or I suppose the better question is - why are people moving more particularly into physical bullion now as opposed to the likes of ETFs?

RICHARD CHECKAN:  It talks to a lack of confidence, a lack of trust in traditional investments, paper assets and the things that they represent.  You know you hear these terms "too big to fail" and then you realise that anybody can fail and no matter how long someone has been in business or how many assets are at their disposal, how many clients we have working with them, it's obvious that nobody is safe from market forces if something is done the wrong way.  So people are losing trust, losing confidence in paper and they're moving to something that they can touch, feel, hold themselves and know to be true, and that's real intrinsically valuable assets.  When they have them in their possession there's no question, its nobody else's - you know liability to deliver or follow through on a promise they have it in their hands already - and the numbers kind of talk to that.  We've seen an increase in the silver prices over the past few years.  In 2009 the average price was $14.67/oz, in 2010 it was $20.19/oz and thus far this year we're looking at an average price about $31.86/oz and we saw about a 40% increase in coin or metal consumption at the investor level for silver.  For gold, we're seeing demand for physical bars and coins up 52% - thus far year-on-year for first quarter, this year versus last.  So that trend is becoming well defined, that people want to hold it in their hands.

GEOFF CANDY:  Now is this the retail investor as well as the institutional investor - is there any way to gather that sort of trend?

RICHARD CHECKAN:  Yes, in both cases they're moving to precious metals although the economy volume dictates for the institutional investors that they use a different mechanism.  I know here of late there is been a lot of press about endowments and so forth, buying huge stakes in physical precious metals and taking delivery, but I've got to tell you that when institutions move they tend to choose the vehicle that's a little bit more easy for them to access, and that's the ETFs - and we've seen explosive growth in both the gold and silver ETFs or exchange traded funds as well.  That seems to be the weapon of choice for the institutional investors, whereas the individual investors want to take delivery and hold the finished product.

GEOFF CANDY:  For the retail investor, what are the pros and cons of coins over ETFs?

RICHARD CHECKAN:  It's a good question - if you're buying it for insurance, and that's typically what our firm has been built on for the past 30 years, is really selling metals for wealth insurance as opposed to profit motive as the first reason for gold.  You look at what gives you the most value or the best store of value in the most liquid form for a potential financial emergency that you hope you never have - that's basically our definition of core holdings or wealth insurance - it's one of the ways we deal with asset protection at Asset Strategies - is through holding physically intrinsically valuable assets.  When you buy coins, its fairly small mark-ups considering the fact that the refiner or the mint has to physically fabricate it with intolerances and then deliver it through distribution network to you.  That all being said, the premiums are still fairly low.  You have a very liquid market - you're probably going to be better off when it comes time to sell, to sell it to a precious metals dealer, but you do have the option if you had to, at least here in the States to go to a jeweller, a pawn shop, etcetera to liquidate.  You'll probably not get as much value but you get the better part of what it's worth.  So there are no impediments really to selling off the metal if you have a short term crisis.  That's really the advantage of the physical precious metals, and worldwide recognition.  With the ETFs - a great vehicle - we don't sell it because we're not a securities broker, but they're readily accessible through any broker that's out there.  We do like the product very much for shorter term purchases because the idea of pointing and clicking and buying your gold, silver or platinum, appeals to a lot of people - folks that would never go through the hassle of taking delivery of metals, but they see the merit in owning precious metals.  So they'll point and click their way and a lot of times you'll find that these people are short term traders as well, so that gives them a bit more of a responsive mechanism to move in and out on moves in the price of the metal .  The other thing we like ETFs for is the accumulation programme - some of the methods of accumulating metals physically or through certificate programmes carry minimums that are kind of dictated by what's cost effective for a small purchase to get it delivered to you.  With the ETFs you can buy a tenth ounce of gold at a time or 10 ounces of silver at a time, so you can work in bite-sized chucks and allocate $100 or $200 a paycheque to the purchase of precious metals and set that up on an ongoing basis, so they're great for accumulation programmes.  The drawback with an ETF - there are a lot of people out there that will question whether the metals are really there - if there's a crisis and the management of the ETFs that they're going to be able to access their metals - I don't have such considerations or concerns.  The biggest issue is that you can't take delivery of - typically - if you're going to leave an ETF you're selling out via currency and in this environment, that's what people are trying to escape.

GEOFF CANDY:  Looking geographically now, there's been a strong bout of buying in Greece over the last few weeks and understandably so - have you noticed any trends in terms of the geographic pattern of buying for gold and silver coins?

RICHARD CHECKAN:  You know, visiting some of the sites where we get a lot of information from, things like the World Gold Council site, www.gold.org or the silver institute site www.silverinstitute.org - if you look at some of the demand trends you'll find that all across the globe people are moving across to precious metals.  Now don't take what I just said as just an overwhelming mania - we're far from a mania in precious metals.  The last analysis I saw - if not less than barely north of 1% of assets under management hold precious metals, worldwide - so this is not the new craze that's sweeping the global economy, but more and more people are making the move to precious metals and it's just a commentary worldwide with all the sovereign debt issues, that people have lost faith in their governments' abilities to manage their currencies.  With currencies its very much a confidence game.  If I believe that the US dollar is managed in a fiscally responsible means so that the dollar I have in my wallet today will purchase the same amount of goods and services a month, a year, 10 years from now - then I have no reason to flee the dollar - I'll just hold on to that because I'm comfortable with it.  If I start to doubt the ability of the government to maintain the dollar's purchasing power and you can change that argument to the euro - the drachma or whatever the case may be - of course the drachma no longer exists - it's part of the euro.

GEOFF CANDY:  At the moment then anyway.

RICHARD CHECKAN:  Yes, so people then look toward something that they have more confidence in and invariably you'll see a flight to precious metals in these types of times.  Global crisis, global unrest, fiscal irresponsibility - all are reasons for people to move to something that they trust just a bit more.  At some point, confidence will be restored in paper assets and paper currencies and I see that pendulum shifting back - everything moves in cycles, as you know.

GEOFF CANDY:  Talking about that, what is your view over the next 12 - 18 months for coin demand?

RICHARD CHECKAN:  In the very short term and mind you I have no crystal ball and my opinion is about as good as the cab driver you took to the studio today.  The bottom line is we think in the short term because we're in the summer months and traditionally these are slower times for the precious metals industry - peoples' attention is diverted away from financial tasks at hand - they're looking more to surf, sand and vacation time with their families.  We tend to see a bit of a lull during this period - we may see some sideways trading, maybe a little bit more volatility over the summer as some of these world issues unfold.  But come the fall, we expect to see renewed demand - I don't think any of the problems that are dictating a flight to metals will be resolved in the next three months, so I fully expect September through February timeframe, as has been the norm, to see a surge in metals prices across the board.  Two things really dictate whether the metals prices are going to go up or down.  The first one I group together and its supply and demand fundamentals - and they remain strong for both gold and silver and beyond is platinum and palladium as well - so from how much are they're pulling out of the ground to how much we're demanding above it point of view, I see increased prices going forward - maybe not at a breakneck pace, but certainly enough to sustain higher prices.  The other thing that affects precious metals prices is getting back to what I just said about that confidence issue in FIAT currencies, if I think holding gold is going to secure my purchasing power better than holding a dollar bill, I'm going to move to gold and I think that's where the real argument comes for higher precious metals prices.  So over the next three months, I kind of expect sideways trading with a bit of volatility.  Going into the fall and into the winter months, I do see an uptick in price appreciation and this trend could continue another three to five years depending how quickly we sort out sovereign debt issues worldwide and make no mistake, they're headlines for a reason.  If people are not paying attention to these issues, they're not going away.

GEOFF CANDY:  Just two questions to close off with - firstly in terms of the difference between gold and silver, clearly silver topped out earlier this year and there was a bit of a parabolic move - that has come back quite strongly - what trends are you seeing between the two?

RICHARD CHECKAN:  It's a good point - gold is first and foremost a monetary metal with a hint of industrial usage.  Silver is just the opposite - it's an industrial metal that's also been a monetary metal about as long as gold has.  But gold is your leader in this complex - nothing moves without gold one direction or the other, and once gold establishes a trend either up or down, silver tends to follow pace and then outpace gold because it's a smaller capped market - less dollars trade hands in the silver market than in the gold market on a daily basis.  So long story short, gold is your leader but silver tends to outpace gold in one direction or the other and it is more volatile because it's a smaller market.  So what we saw really at the beginning of the second quarter, beginning middle of the second quarter, was a run to the previous high of silver back in 1980, of about $50/oz and it was almost like it took on a life of its own that we were going to $50 or bust.  Nobody in this industry that I've talked to thought that was sustainable.  We've doubled in price in a month and a half and the correction that came should be a surprise to no one.  To us that doesn't mean the end of the bull market in silver.  In fact you may see a stronger upside to silver from here in the medium to long term for two reasons.  One, in spite of the mere fundamentals are strong, as people start looking at gold inching up $1,500 to $2,000/oz, they're going to get the impression, right or wrong, that it's too expensive and they're going to look to precious metals in a more affordable form, and that's going to be silver.  So I believe you're going to see a lot of substitution buying for silver.  The other reason I believe you'll see a better performance in silver is because of its volatile nature - it fell further than gold did on this correction, and therefore as it moves back up and we fully expect that it will, you have the potential for greater gain.  How well you do in any sort of investment a lot of times has to do with buying right as opposed to selling right... and silver looks like a good buy.

GEOFF CANDY:  Did you see a lot of selling of the actual silver coins though, as the silver price came down?

RICHARD CHECKAN:  Actually we saw less of that as I understand especially in the first quarter when the ETFs took a pretty good hit and that's when we saw some divesting and on the selling side, what we mainly saw a s a retail broker, is we saw people divesting of paper assets and in most cases, but not all, they were replacing that with physical metal ownership.  Not necessarily getting rid of all their paper assets, but shoring up physical needs that they felt were a bit stronger in this environment than they were say, five years ago.

For more information go to www.assetstrategies.com.

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