Silver Stock Report
Thursday, October 29, 2009
With "free market" advocates like these, we'll never return to honest money!
Sometimes well meaning "experts" do more harm than good.
Antal Fekete explains "free coinage of gold" -- to New Zealanders
Antal Fekete wants government to open their mints to the people, for free coinage of precious metals, to allow people to turn scrap gold, or newly mined gold, into gold coins for free.
Thus, he wants government to provide free (subsidized) services of four different businesses: assaying, refining, minting, and retail coin shops.
As he says, "the proper role of government is to provide coins for the realm".
He also wants no seigniorage nor any tax nor cost associated with such conversions. Seigniorage is the extra value of precious metal in "official" coin form.
Antal is living in a fantasy land.
Government "help" can never be free. Subsidies and bail outs always come at a cost, it's only a matter of who pays.
What's especially troubling about Antal's advocacy is that government subsidies are inconsistent with free market theory!
Since we handle three of those four services ourselves (all but refining) I think I'm qualified to speak on this topic.
Government bail outs are uneconomic, don't work, and always come at a much higher cost than when provided by businesses in a competitive free market.
Government minted Silver Eagles already cost more than privately minted 1 oz. rounds, showing that government is not providing the service better or cheaper than private industry already does.
Furthermore, the US government's current minting program sells retail "collectible" silver and gold to the public at the mint's web site, but only at extremely high prices. The mint sells cheaper bullion to about 15 major wholesalers, who then re-sell to other dealers, like ourselves, who then sell to the public. This private-industry re-sale market is more efficient, and less costly, than direct purchases from the US Mint.
Assaying gold, refining, minting, and selling retail gold coins are all businesses that involve advertising a place of business, hiring skilled employees, paying for equipment, installing security systems, and training skilled people. Also, such businesses need to know how to offset the risks of price movements in the metal such as avoiding taking a short position in a bull market, and providing these services more efficiently than the competition.
Assaying requires a skilled and trained assayer making a quick and accurate estimated value of the underlying bullion. That estimate must also include all such costs of the business, such as advertising, rent, salaries, time taken away from other customers, etc.
One time, I needed to cover a silver order, and I was talking to some customers. Due to my 10 minute delay, I lost $150, because the silver price went up.
It is simply impossible for any government or any entity to sustainably pay everyone 100% of the bullion value for their bullion. Doing so would only create another government program that is open to being scammed and defrauded, at the ultimate cost to the taxpayers.
There are simply not enough real world resources, such as fire crucibles, to give every customer an individual 100% accurate fire assay, and it would be completely uneconomic to melt a single $25 pair of earrings in a special melting pot, which could cost well over $25 in energy just to melt, if melted individually, to obtain 100% accuracy. 100% accuracy would come at a loss of efficiency, and only businesses are able to understand this, and allocate resources to most appropriately meet these real world trade offs in the most efficient way. In some cases, it might cost 100% or more to give a 100% accurate assessment, which could result in offering nothing to the customer, or costing the government everything.
We pay from between 60% to 85% of our estimated bullion value when we buy scrap gold, which is higher than all other locations that we have heard of in the Sacramento Area. The difference is explained by the amount of time it may take to do an assay, and also by the accuracy of our assays, and also by the amount brought in by the customer. If a customer can bring in over 5 ounces of gold, we are simply able to pay more. If the quality of the gold is difficult to determine such as is the case with placer nuggets, or smaller 10k-18k jewelry items, we must offer less. Scrap gold comes in many forms, with many contaminants, and refining is a real, added cost.
Refining is a separate business which must aggregate, or pool together, enough scrap or placer gold to melt them economically. Our current refiner only works with established businesses like our coin shops, who will bring in repeat business of about 30-50 oz. of scrap gold per month. Refiners operate on the slimmest of margins. A man called us this week to sell us a new $1 million dollar machine to refine gold, so we could do our own refining, instead of using our current refiner. I said, "Great, we can pay for that machine, given our current refiner's costs, in about 100 years!" At $1 million in start up, compared to our current great prices from our refiner, it's just not economic for us to try to do it ourselves!
Minting coins is a business that today requires a minimum of 10 different machines and processes. We have a pre-melt bucket, a continuous caster, a rolling mill, a slitter mill, a punching machine, a rimming machine, an annealing oven, a burnishing vat, die making machines, and stamping mills. We are looking to buy a wrapping/tubing machine. All of those machines cost money, the installation costs money, the rent costs money, employees cost money. And we are still not yet set up to mint a single thing! How can it be provided for free?
Bottom line is this: Antal's position assumes that these services should be provided by government for free, or essentially, at prices substantially less than the prices charged by existing, sustainable, competitive businesses in the free market today. Antal is thus claiming that the prices charged by businesses today are too high for his theoretically optimum scenario. It he accusing these businesses today of price gouging?
If current assaying, refining, minting, and retailing prices are really too high, then Antal should go into the market, and provide those services cheaper than industry is already providing. Go ahead Antal, start up your own scrap gold buying business if you think prices charged are too high. Nobody is stopping you. There is little government regulation, thank God, so the market is already free, and highly competitive in this area.
Many investors who could provide these services instead choose to buy mining stocks, as real business involves real work!
But Antal should not claim to be a free market advocate, while asking for government intervention and subsidy. That kind of rank hypocrisy can win no support from the public, who is sick of seeing government handouts, and can easily see they hypocrisy of a "free market" gold advocate who seeks government handouts.
The gold market does not need government welfare. We need government to get out of the gold business, and stay out.
What's especially ironic about Antal's position is that the government is already providing gold at "below market" costs, as they are dumping gold onto the market through the leasing of government central bank gold to bullion banks, who dump it into the market at opportune times, which is helping to manipulate prices lower than they should be.
In essence, Antal is already getting what he wants, that is to say, cheap gold provided on an uneconomic basis, but those of us who can see this correctly, are correctly identifying this as market manipulation, and we recognize that it is unsustainable, and is ending, which is leading to the higher gold prices we are seeing.
Another advocate of using precious metals as honest money is billionaire Hugo Salinas Price, in Mexico. Here's some of his work:
A BRIEF EXPLANATION OF THE PROJECT TO MONETIZE THE ONE OUNCE SILVER "LIBERTAD" COIN
Hugo wants the Mexican Central bank to provide a price quote that would be a virtual nominal currency value for a 1 ounce silver round, a value that will never go down, just as nominal values on notes and engraved values on coins never go down. It sounds elegant at first glance. Hugo maintains that this "price floor" for a silver coin is essential for helping it circulate as currency, since money holders should not be taking on the role of speculators.
But expecting to be able to ask the Mexican central bank for a favor that works against its own interests is self-defeating. Would I ask any of my customers to shoot themselves in the foot? Of course not!
Nobody expects the dollar, or any other currency, to "never move down" compared to other currencies of the world! There might be an exception. True, China is trying to let the value of their currency "only move up" against the dollar, but this is after they already devalued their own currency by 40% against the dollar a few years ago. Such attempts are normally and appropriately called price fixing, and are widely recognized as totally contrary to free market principles.
Nobody should expect society to return to free market money by violating free market principles!
Why should silver investors, or silver holders, get a government guarantee that the nominal value of the silver coins they hold will never go down? No other investor gets such a guarantee. No other currency holder gets such a guarantee. Why should silver investors be so special?
Hugo is just another billionaire looking for a government hand out or bail out.
When silver is already the lowest valued thing on earth you can buy, value for value, why would a "price support" system even be necessary?
The problem here is that asking for government intervention hinders what Hugo could already be doing if he simply decided to do it himself.
Hugo could already mint his own 1 oz. rounds privately. He could reduce the spread if he wants, all on his own. He owns a chain of Mexican electronics stores, and he could sell 1 oz. privately minted rounds emblazoned with his own store's logo, and he could sell the coins at 10% over spot, and even accept them at up to 10% over spot, or 9% over spot, or whatever he may choose, in return for his store merchandise.
But he will never even think to develop his own plan, as long as he wastes his time and money on seeking a handout from the Mexican government. Or, as he said to me a few years ago in his own words, "It's too late in the game now to try and change tactics. I've already gotten so many on board with the current plan, I don't want to confuse anyone."
And so, his refusal to change, and his insistence on seeking government handouts, prevents the actual implementation of real world silver as money that could be issued by his own stores directly, within a few weeks!
No government is preventing Hugo Salinas Price from issuing silver as money.
No government is preventing Antal Fekete from buying scrap gold as from the public.
Both of these men are hindered only by their own hypocritical cries for government intervention.
The firearms manufacturing industry, after WWII, fearing the dumping of surplus military weapons onto the market, pushed for gun restrictions, or "government protection" for their businesses, as if they didn't make enough money during the war years! Today, those gun restrictions have mutated into nearly destroying the firearms industry who has been beset with lawsuits for selling "assault" weapons.
Another story: Over 100 years ago, silver advocates pushed for a government handout. They wanted the silver price to be guaranteed to be set at a 15 to one ratio with gold. Western states wanted to be able to pay their debts with silver. This would be price fixing, completely contrary to free market theory, and would have cost the government their entire gold hoard. The compromise? Silver advocates (Democrats) lost to Republicans, who demonetized silver, and made the paying of all debts greater than $5 due in gold only. The 'gold standard' advocates ended up being the champions of the banking industry, who eventually demonetized gold as well.
Moral? Government subsidies backfire! They always do.
Yes, I advocate silver and gold to be used as money, as Hugo and Antal do. But I'm not asking for the government to do anything.
I'm doing it.
I'm using silver and gold on a daily basis. We buy scrap and sell to a refiner. We have coins minted. We sell bullion to the public.
I'm helping people to use gold and silver as a form of savings, since I sell it to them. I'm helping others liquidate it, both of which help to monetize it.
Nearly every day I explain to people why we can pay 99% of the spot price for a gold Eagle, but only 60% to 85% of the spot price for jewelry. One is fungible, the other is not. One is money, the other is not. One is similar enough to be like any other similar piece of gold as to be easily exchangeable and interchangeable. The scrap stuff is not. Scrap must be assayed, then refined, then minted, and then it can be sold in a coin shop (yes, at one more small mark up), as a stable form of money.
Warning, numismatic silver and gold items are not fungible, despite the claims of many numismatic dealers who attempt to make them fungible with quote books, and grading slabs, etc. It can cost up to $60 just to grade a silver Eagle. What a rip-off market! if you spend $300,000 on numismatic investments you "ARE" the numismatic market! It's a horrible trap.
Those who ignore the danger of non-fungible gold have to pay the price.
Asking government to pay, really just gives the government a license to steal from others to be able to pay for it. Gold and silver stand in the way of such government theft, if properly used and understood.
Besides, when silver was money in the USA, the markup on silver coinage was up to 400%. The government bought silver for 29 cents per oz., and turned it into $1.40 of coinage! ($1 of 90% silver coinage contains .72 of an oz. of silver. $1.40 x .72/oz. = 1 oz.).
So if the government gets into this game of "FREE" coinage, you will likely trade 1 oz. of scrap silver to the government, and get maybe a 1/5th of an oz. of silver back in an "official" silver piece! That's not free at all!
Jason Hommel is the publisher of Silver Stock Report and he lives in Grass Valley, CA in the heart of gold country.For further reading:
"Forgotten Anniversary: One Hundred Years of Legal Tender", Antal Fekete, October 28, 2009
"Opening the Mint to Gold and Silver - Then and Now", Hugo Salinas Price, September 7, 2009