2/4/2012: Q1 2012 US Mint Gold coins sales

Time to update the data for Q1 2012 US Mint gold coins sales - something I have been doing as a sort of an ongoing project.

As before, there is much volatility sloshing around, and as before, there is less drama when one takes a closer look at the data.

Q1 2012 volume of sales (oz) of US Mint coins fell 29.7% year on year, and 22.3% on 2010. The demand is also down 38.5% on 2009. Total volume of sales stood at 210,500 oz in Q1 2012, 17% below the average demand for Q1 over 2008-2011 period, but much stronger (+89%) on pre-crisis average for 2000-2007.

Much of the downside to the demand was driven by February sales, which run 21,000 oz against March sales of 62,500 oz.

Chart below illustrates:

Note that stabilization of the price trend along the flat line above US$1,660/oz since H2 2011 is not associated with establishment of a similarly flat trend for volume of US Mint sales. More on this below, but in basic terms this confirms that the demand for gold coins has little to do with the price in general. In other words, no hysteria and no bubble here. Something other than price movements drives demand for coins. 

It is worth noting, that, as consistent with the above observations 6mo MA for volume demand is now at 95,083 oz which is below the March demand of 99,500. Again, no drama - rather mean reversion in the short run.

On the side of coinage sold, demand for coins fell 20.6% in Q1 2012 compared to Q1 2011, but it up 41.3% on Q1 2010 and 12.0% on Q1 2009. Total demand was 383,000 coins in Q1 2012 of which 256,500 came in January. Compared to this, 2000-2007 Q1 average is 216,929 and 2008-present Q1 average is 313,000. So current first quarter is well ahead of the historical averages, but on a moderate side compared to 2011.

 Looking at the two charts above, it is clear that while volume demand is following a pronounced down-sloping trend, coinage demand is relatively flat. Which is consistent with a decrease in average gold content per coin sold. In Q1 2012, average oz/coin sold fell to 0.63 from 0.82 average for Q1 2008-2011. Average weight per coin is down 0.1% in Q1 2012 year on year, and down 37% on Q1 2010 and Q1 2009 (in both of these years, average oz/coin content of US Mint coins sold was 1.0). However, this decline has itself been mean-reverting as the chart below clearly shows.

One point to be made in addition to the above is the increased volatility in the series since the mid-2007 through 2010 that is now abating since the beginning of 2011. This reinforces the general historical trend established since 1987.

As mentioned above, correlations between price and volume of gold demanded (via US Mint coinage sales) are now running consistently below the historical trend for some time - primarily since H2 2010. This continues today. The 12mo rolling correlation is negative on-average since July 2010 and this remains the case for Q1 2012. However, Q1 2012 negative correlation is moderate - averaging just -0.05, which is statistically indistinguishable from the Q1 2011 (+0.1) and more moderate than -0.4 correlation for Q1 2010. The average for 12mo rolling correlations for Q1 period over 2000-2007 was +0.18 and during the crisis period it fell to +0.03. With standard deviation of 0.36 none of these correlations suggest any dramatic departures in price-demand relationship from a stable long-term zero correlation trend. Chart below illustrates:

The point that the above adata suggests is best glimpsed by directly relating the levels and the rates of change in gold price and the overall demand for gold via US Mint coins. Both exercises are illustrated below:

And guess what: historically - that is since 1987 - gold price has virtually nothing to do with demand for US Mint coins (in terms of volume of gold sold via coins) neither in terms of levels of price effect on levels of demand for gold, nor in terms of rate of change in price effect on rates of change in demand.

Which means that at least in the case of the US Mint sales, there is no hype, and no madness. What there is instead, is a rather volatile demand with gentle upward slope imposed against a robustly positive exponential relationship in gold price:

The fact that in recent months demand for gold has been oscillating around the historic trend (as opposed to resting above that trend in August 2008-August 2011 period) is the good news - the current levels of demand are historically sustainable, trend reversion-consistent and show neither hype, nor panic buying.

As I have noted in January post (here): "Welcome back to ‘normalcy’ in US Mint sales." Yep, still holds.




Disclaimer:

1) I am a non-executive member of the GoldCore Investment Committee
2) I am a Director and Head of Research with St.Columbanus AG, where we do not invest in any specific individual commodity
3) I am long gold in fixed amount over at least the last 5 years with my allocation being extremely moderate. I hold no assets linked to gold mining or processing companies.
4) I have done and am continuing doing academic work on gold as an asset class, but also on other asset classes. You can see my research on my ssrn page the link to which is provided on this blog front page.

5) Yes, you can find points (1)-(3) disclosed properly and permanently on my public profiles. 

6) I receive no compensation for anything that appears on this blog. Never did and not planning to start now either. Everything your read here is my own personal opinion and not the opinion of any of my employers, current, past or future.

2/4/2012: Impact of the middle class on economic, social and political institutions

A fascinatingly interesting study of the effects the middle class has on economic, social and political institutions.

The World Bank Policy Research Working Paper 6015: "Do Middle Classes Bring Institutional Reforms?" by Norman Loayza Jamele Rigolini Gonzalo Llorente (link here - emphasis mine) "examines the link between poverty, the middle class and institutional outcomes using a new cross-country panel dataset on the distribution of income and expenditure." The data "spans 672 yearly observations across 128 countries" allowing the authors "...to gauge whether a larger middle class has a causal effect on policy and institutional outcomes in three areas:

• social policy in health and education 
• market- oriented economic structure and 
• quality of governance." 

The study finds that "when the middle class becomes larger (measured as the proportion of people earning more than US$10 a day),

• social policy on health and education becomes more progressive [expansion of share of these expenditures to GDP], and 
• the quality of governance (democratic participation and official corruption) also improves. 
• This trend does not occur at the expense of economic freedom, as a larger middle class also leads to more market-oriented economic policy on trade and finance." 

From data (econometrics) perspective: "These beneficial effects of a larger middle class appear to be more robust than the impact of lower poverty, lower inequality or higher gross domestic product per capita."

The causality of the latter effect is itself an interesting point: "That may be linked to the evolution of the middle class: they are more enlightened, more likely to take political actions and have a stronger voice. They also share preferences and values for policy and institutional reforms, as well as higher stakes in property rights and wealth accumulation."

The authors note that their results show that "the indicators of poverty and inequality are also relevant determinants for social policies, economic structure, and governance quality, but not always in the expected way or with the consistency shown by the middle class measure. For instance, a decrease in income inequality seems to produce a decline in official corruption (as possibly expected) but also a reduction in democratic participation (which may be harder to explain). Similarly, a decrease in the poverty headcount appears to induce a liberalization of international trade but also, surprisingly, a constriction of credit markets."

Fascinating stuff, in my view.

2/4/2012: Two studies on Global Financial Crisis

An interesting analysis of the International Financial Crisis of 2007-2009 from Gary Gorton and Andrew Metrick, both Yale and NBER just out - see link here. Worth a read and contrasting with Taleb's excellent paper on same (earlier work than that of Gordon and Metrick) here.

2/4/2012: Banks bailouts and bonds eligibility

Two important documents relating to banks bonds, Sovereign Guarantees and the bondholders' haircuts.

First, the ECB decision of March 21 that was rumored to have been implemented by the Bundesbank last week - allowing the NCBs not to accept as collateral Government-guaranteed bank bonds from the countries currently in the EU-IMF financial assistance programmes (aka Greece, Ireland and Portugal). Here's the link. Key quote (emphasis mine):
"Acceptance of certain government-guaranteed bank bonds: On 21 March 2012 the Governing Council adopted Decision ECB/2012/4 amending Decision ECB/2011/25 on additional temporary measures relating to Eurosystem refinancing operations and eligibility of collateral. According to that Decision, National Central Banks (NCBs) are not obliged to accept as collateral for Eurosystem credit operations eligible bank bonds guaranteed by a Member State under an EU-IMF financial assistance programme, or by a Member State whose credit assessment does not comply with the Eurosystem’s benchmark for establishing its minimum requirement for high credit standards. The Decision is available on the ECB’s website."

Hat tip for the link to @OwenCallan of Danske Markets.

However, the latest information is that Bundesbank clarified that it will continue accepting all EA17 Government bonds. See link here. Confusion continues as to what Bundesbank will and will not accept.

Second, today's release by the EU Commission of the consultation paper on dealing with future banks crises and bailouts. Titled "Discussion paper on the debt write-down tool – bail-in". The paper clearly states (emphasis is mine, again):

"Rather than relying on taxpayers, a mechanism is needed to stop the contagion to other banks

and cut the possible domino effect. It should allow public authorities to spread unmanageable

losses on banks' shareholders and creditors."

The proposals advanced by the EU are not new: "In most countries, bank and non-bank companies

in financial difficulties are subject to "insolvency" proceedings. These proceedings allow either

for the reorganization of the company (which implies a reduction, agreed with the creditors, of its

debt burden) or its liquidation and allocation of the losses to the creditors, or both. In all the

cases creditors and shareholders do not get paid in full."

Per EU: "An effective resolution regime should:

• Achieve, for banks, similar results to those of normal insolvency proceedings, in terms of allocation of losses to shareholders and creditors
• Shield as much as possible any negative effect on financial stability and limit the recourse to taxpayers' money
• Ensure legal certainty, transparency and predictability as to the treatment that shareholders and creditors will receive, so as to provide clarity to investors to enable them to assess the risk associated with their investments and make informed investment decisions prior to insolvency."

There is no point at this stage to explain that in Ireland's case, NONE of the above points were delivered in the crisis resolution measures supported by the EU and actively imposed onto Ireland by the ECB.

It is, however, worth noting that the Option 1 advanced by the EU includes imposing losses on senior bondholders and that the tool kit for doing this includes debt-equity swaps. Readers of this blog would be well familiar with the fact that I supported exactly these measures.

2/4/2012: Improved Manufacturing PMI - March 2012

Manufacturing PMI for March is out and there are some nicely positive surprises.

First off - we bucked the trend on euro area manufacturing PMIs which signal contraction. Second headline - we bucked the trend within recent months for our own PMI. Third, PMIs are volatile, manufacturing PMI is even more volatile and we have to be careful reading the 'trend'.

Details, then:

• March PMI headline reading is 51.5 - in an expansion territory, but statistically within 1/2 Standard Deviation of 50.0. This marks the first increase above 50.0 reading since October 2011 and the highest reading in headline PMI since May 2011. Per NCB/Markit statement: "Although only slight, the improvement in operating conditions was the first in five months".
• 12mo MA of headline PMI is now at 50.0 - meaning that on average, manufacturing activity stood still over 12 months. 3mo MA is very close to that at 49.8, which is an improvement of sorts of previous 3mo MA of 49.1. 2011 3mo to March average is 56.1 - that was reflective of robust growth reading back then. In 2010, 3mo average to March was 49.9.
• Volatility of the series remains above pre-crisis levels - standard deviation for the series rose from 4.54 for full sample (1998-present) and 4.46 for pre-2008 period to 5.60 since 2008.

More details on the data:

• Output sub0index posted stronger reading than core PMI index, rising to 52.8 in March from 50.4 in February and marking second month of above-50 readings. March level was statistically significant relative to 50.0. 12mo MA is now at 51.1 and 3mo MA at 50.2 against previous 3mo MA of 49.9. These series generally run above the core PMI index, with 3mo through March averages in 2010 of 51.2 and in 2011 at 59.2. The sub-index also has higher volatility than core PMIs with crisis-period stdev at 6.35.
• New orders sub-index also hit statistically significant expansion reading at 52.7 in March up on 50.1 in February. 12mo MA is now at 49.8 and 3mo average at 49.9 against previous 3mo average of 49.0. 
• New Export orders sub-index rose robustly to 55.1 in march from a weak contraction level of 49.7. This is a massive gain, although the sub-index is volatile. NCB analysis suggests that the reason for the rise is due to Irish economy exposure to stronger US economy, offsetting the negative forces from the euro area recession. 12mo MA is now at solid 52.5, 3mo average through March at 51.9 a small rise on 50.2 for 3mo period average through December 2011. These readings, however, are still far behind the reading of 60.4 in 3mo through March 2011 and 57.4 for 3mo through March 2010. Volatility of new exports orders sub-index is one of the highest amongst core sub-indices at 6.97 for crisis period, up on 4.99 in pre-crisis period.

Some other sub-indices:

On the net, majority of other subcomponents continue to show weakness, but all are improving in rates of signalled contraction. Backlogs of work are down again, but at a slower rate. Post-production inventories of finished goods continue to fall, but the rate of fall is moderating. Inputs purchases expanded robustly from 48.7 in February to 53.8 in March in line with growth in orders and exports.

On tow core points of employment and profitability (both will be covered in individual posts once we have Services PMI data as well):

• Profit margins continued to shrink in Manufacturing - compounding months of deterioration, which is bad news for the sector
• Employment sub-index reached back into growth territory at 51.2, for the first time since December 2011. 12mo MA is now at 49.6 and 3mo average is 50.0. Both are an improvement, but overall employment sub-index is not exactly a great predictor of actual jobs creation. In particular, in 2011 3mo average through March stood at 53.2 and there was no jobs creation of any appreciable quantity.

So core conclusion: cautiously, this is good news. But I must stress the point that it is only 'cautiously' so because:

• Core index and sub-indices are volatile, and
• The oerall trend since around June 2011 remains relatively flat and close to statistically identical to flat-line economy at 50.0

1/4/2012: Flightless dodo - the Hunt of Chief Noonan

I am not usually prone on updating my past posts, but the Promissory Notes 'deal' announced last week by Minister Noonan just keeps on giving more and more backlash and analysis. So:

• My original post here.
• Note the updates in the above
• FT Alphaville view here which is broadly in agreement with my view and with links I posted in the original post updates.
• Interesting information coming out of ECB on Minister Noonan's claims that the 'deal' is a part of some 'broader plan' - via the Irish Times, here.

Reiterating my view:

• Promo Notes have been paid, not deferred
• Payment of Promo Notes was originally to be based on Government borrowing cash from the Troika. Under the 'deal' it has been replaced by the Government borrowing cash from BofI
• Payment of Notes under the 'deal' cost us more in new debt and increased deficit in 2012, but will decrease interest payment in 2013 compared to original arrangement. Net effect on interest cost - nearly a wash.
• The 'deal' is NOT (see ECB official statement) a part of any 'broader deal'.
• The ECB are now clearly on a defensive - which means they will be unlikely to support any further 'deals'.

Having gone out with a brave claim to spot a bald eagle soaring in the sky and get a feather for his war bonnet, Chief Noonan came back with a smudgy mud-print of a dodo, a bill for €400mln+, and a promise to go hunting again. Next stop, trading gold for glass beads... oh, they sparkle so nice.

(Obviously - an allegorical analogy. For those rare readers lacking in humor department.)

On a serious note - I find it discomforting and sad that an excellent seasoned politician and a very promising Minister for Finance has been forced into this position of defending the failure. Let's hope his luck (and progress) change in the nearest future.