Tag Archives: capitalism

Is This the Gold Buying Opportunity of a Lifetime?

22 Wednesday Oct 2008

Posted by in deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, precious metals, silver

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From: SeekingAlpha.com

Is The the Gold Buying Opportunity of a Lifetime?…

By: Robert Perrego  StockTradingCards.com

Everyone has been saying how gold is going through the roof, right? All those predictions of massive inflation and that gold was the only safe place to hide. What happened you might ask? Why is it not working? Well, here is one answer and should it be right, this is the last best chance to catch the gold bus!

I am one of those that bet on gold and gold miners. How is it working out so far? Well, not so well. What am I doing? Buying more and this is why.

I saw the problem with the mortgages coming and the economy going south while inflation was being jacked higher by the retarded green-movement inspired ethanol subsidies and regulations that inflated the cost of food, the worldwide oil and commodity demand explosion caused by expanding populations and the entrance of the Chinese and Indian masses into the fast early economic growth stage while the worldwide printing presses were churning out more and more paper money. Does this make me a genius? No. Did this foresight even make me rich on this trade? No. What happens next and the important question is, ‘What are you going to do now?’ This is always the most important question a trader faces.

The mortgage mess did implode the financial system and the market crashed. The funny thing is that the dollar rallied, the market crashed and gold still did not break out as the inverse relationship to the dollar held it down like holding a beachball under water.

Lets start with the dollar. Gold and the dollar trade with a strong inverse relationship. This is because gold is a real asset in short supply that was the worlds first currency (and unfortunately I think someday it might be its last) and money. All currencies used to be backed by gold as a fiat currency for gold. That linkage was broken decades ago with the Bretton-Woods Agreement. Basically the more paper currency that you have in relation to something that people hold dear and real and difficult to get, the more paper money you have to trade to get it. Now lets say this ‘it’ is shiny, does not corrode or oxidize and is buried deep in the ground, and then throw on top of all this the fact that you can make things out of it that are pretty and helps a guy get the girl and people will start to value this ‘it’ a whole lot. Let’s call this ‘it’ gold.

The dollar is the world’s dominant currency. This is a result of the Marshall Plan that was launched after World War II when the United States provided Europe with a lot of dollars to rebuild. Europe’s economic infrastructure was destroyed, as was Russia’s and Japan’s. The U.K. and France were a little less blown up but I think you get the idea. The only country with factories and productive assets that were not destroyed by the bombing and warring was the United States and thus the only unit of currency that had productive assets and value behind it was the dollar. With the Bretton-Woods Agreement the dollar became a fiat currency not tied to gold but tied to the economic productivity of that country. So enter stage right Mr. King Dollar.

The world has quite a few currencies from the pound to the yen to the euro to the Dollar. If you noticed I did not capiltalize all but the Dollar as the Dollar is still King. Oil and gold are traded in dollars and for good reason – the United States still has the most productive assets and the largest economy in the world and on top of that, for a long time we have been selling debt to all the other countries that print the other currencies.

Now this selling of debt gets people all very nervous, but in reality it was and is a sneak attack. Ask yourself how much the yen would be worth if all those Dollars the Japanese are holding were worth less? Ha ha – you got it. They hold all our debt and in a perverse manner their currency is reliant on our currency staying strong or the dollar assets they hold are worth less and they are not as rich and their currency is worth less. Also, should they start selling the dollar and it goes down, the dollars they still have are worth less. We have successfully co-opted the world into our own good fortune. Now use this same logic with the Chinese yuan, the euro and the Middle Eastern petrodollars. This is not even to mention all the lovely factories Toyota (TM) built in the United States but that is a whole different subject. We go broke – you go broke. Period! Have a nice day.

But I digress…

The tech/internet bubble and resulting market crash was solved by making credit and money easy. Interest rates were slashed and every clown in the country was given access to easy money through dubious mortgage lending and government policies. The natural human desire to keep up with the Joneses and the feeling that ‘Hey, I was rich and now I am poor as that internet company I invested in that shipped fifty pound bags of dog food turned out to be a dud’ turned the populace into greedy pigs wanting more. So what did all these newly awakened traders start doing? They started trading real estate saying ‘They are not making any more land are they?’ and ‘Real estate never goes down.’ Newsflash – sand found on beach – what goes up too fast must come down too fast.

This positivity and group-think that real estate could not go down had the people dealing in it lose all trace of caution and voila! Another bubble!

How did we get out from under the rubble of the tech bubble crash? We made credit more available and printed money. How do you think we are going to get from under this one?

The United States Government just passed a $700 billion bailout plan. In actuality it was bigger, but what’s another $150 billion? The European governments have done the same. Russia even pumped its petro-rubles into its fledgling stock market as it crashed day after day. All this means is there is a whole lot more fiat currency floating around representing a not as fast growing worldwide economy and still pretty much the same amount of gold.

The dollar has rallied as the market crashed as foreign investors took the Concorde flight to safety – the safest asset on the planet – United States Treasury Bonds. In order to do this first a foreign investor has to swap out of the currency they are holding into the dollars to buy the Treasuries. This drives up the demand for dollars and the dollar goes up relative to the currencies they are selling. You ask ‘Why don’t they just use the dollars they already have?’ Well this is because these dollars are already invested in Treasuries and they want to buy more.

So the market has crashed and the dollar has run up. Now what?

That huge bailout bill money has not been pumped into the economy yet. From what I hear this will start happening this week. You getting wise yet? All that paper money the United States Government has been printing will start hitting the mainstream this week. The whole $700 billion won’t be spent on Tuesday or Wednesday but it is starting. A huge amount of the credit default swaps on Lehman Brothers came due yesterday. Events like these, a lot of times, mark reversals in various markets. I believe this to be the beginning of the bottoming process in gold.

Over the past weeks we have seen every asset class drop but Treasuries and the dollar. Stocks plunged, commodities got taken apart and corporate bonds got smoked. What has been happening is a massive deleveraging (not a real word but it is now) across the financial markets. I just read that over 350 hedge funds have gone out of business recently. When the guys are at the door to repossess the office furniture (and in the markets this is called a ‘margin call’) you sell everything – your winners, your losers – everything. This deleveraging is what has caused what was supposed to be a big winner, gold, to decline.

So what we are looking for is when will all this deleveraging end. First of all, the government pumping those $700 billions in is a good start. The Lehman settlement event will also give the market a better grip on the size of that calamity and that means less uncertainity and the market hates uncertainity. Will this be enough to slow or stop the deleveraging? Also, if the stock markets start to look better around the world, the money that ran to the safety of Treasuries will reverse flow and start back into equities. If this selling of Treasuries also causes foreign investors to decrease their exposure to the dollar that means selling in the dollar and the dollar goes down and gold goes up.

What makes me right or wrong in this matter is whether or not the world experiences deflation or inflation now. I pick inflation. The financial price deflation has done damage across most all asset classes. For a decade now every country on the planet has been running its printing presses and the world’s most voracious consumers (U.S.) have been taking on debt to buy things. The amount of paper/fiat currency has been growing at dangerous levels and I have faith that all the worldwide governments can do to get out from under this mess is to keep printing and spending.

No government wants a depression. During depressions citizens get pissed off and start thinking that whomever is running the goverment should not be. That reaction can be as extreme as a revolution or a voting revolution. Politicians certainly don’t want that – they like to keep their jobs so they can take money from lobbyists. They will run the printing presses overtime and let the inflation genie out of the bag.

Throw on top of all this the possiblity of a socialist hitting the White House with an agenda of ‘spreading the wealth around’ and that means more inflation. ‘Spreading the wealth around’ has been an economic disaster throughout the annals of history as it diverts money from productive assets to non-productive assets. One has only to look at the productivity decline of the Venezeulan and Mexican oil industries to see the latest prime examples of this ill-guided policy.

I think gold is cheap here. I think the politicians are going to inflate the economy to get out from under this mess. I think inflation is going to ramp up from here and gold is going to be the next bubble.

Want to get in early on this ride or would you like to buy the top again?

We all love bubbles until they pop in our faces.

Gold Vs Miners

21 Tuesday Oct 2008

Posted by in commodities, Finance, gold, hard assets, Investing, investments, Latest News, Markets, precious metals, silver

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Gold Vs. Miners
Written by Julian Murdoch   
Tuesday, 21 October 2008 11:20
Page 1 of 3

 

In times of economic crisis – such as the plummeting stock market of fall 2008 – the idea of holding gold is attractive. But the status of the market also opens up opportunities for investment in the pick-and-shovel enterprises that bring us that gold.

If you haven’t yet read our piece, Spot, Stock Or Future, you may want to check it out before reading further. In that article, we outline the basic differences between physical ownership (or more realistically, owning physical gold through an ETF gold trust, like GLD), futures and equities. The purpose of this article is to get beneath the surface of the mining sector – pardon the pun.

 

Indexing Gold

The easiest way to make the miner bet is to just buy them all. But just like every other sector, you have a choice of ETFs and underlying indexes to choose from, and they’re not all identical. Amex currently sponsors two: the Amex Gold Miners Index (GDM) and the Amex Gold BUGS Index (HUI). The Philadelphia exchange has long sponsored their own version, the Gold & Silver Sector Index (XAU). While there is a lot of overlap, there are some differences.

First up, the Amex Gold Miners Index comprises public companies primarily mining gold and silver. It is a modified market-cap-weighted index that can be invested in via Market Vectors Gold Miners ETF (GDX). As of October 15, the index contained 33 companies from all over the world. A current list of constituents and their weightings can be found on Van Eck’s Index overview site. (Note: Van Eck is a sponsor of HardAssetsInvestor.com.)

Amex’s second option is their Gold BUGS Index (HUI). There are two rather enormous philosophical differences between the two. The first difference is that BUGS is a “modified equal” weight index. The quote marks are there because while the equal-weighting sounds good, Newmont, Goldcorp and Barrick are still all above 10%, with the other dozen companies each making up between 4 and 5 percent at the time of this writing. The more important difference is that HUI is made up of companies which explicitly do not use long-term hedging (defined as hedging gold prices for a period of greater than one and a half years.)

Some of the companies included do no hedging of their gold production at all, instead selling everything on the open market, or theoretically warehousing excess. Thus, they’re completely exposed to any gains or losses in the price of gold. One of the biggest examples of a nonhedger example is Newmont Mining Corp. (NYSE: NEM), which in 2007 closed its hedging book, taking a pretax loss of $531 million to get out of its futures contracts. CEO Richard O’Brien released the following statement in the press release about the strategy change:

 

“With the elimination of our gold hedge book, we have renewed our commitment to maximizing gold price leverage for our shareholders.”

 

The advantage of this type of no-hedge philosophy is the ability to take advantage of high and rising market prices. And if you believe that gold has nowhere to go but up, this strategy makes sense – after all, futures aren’t free. The other advantage of this type of strategy means that when you invest in a nonhedger, you’re investing directly in how well that company runs its primary business – getting gold out of the ground – and not its ability to hedge correctly. However, a no-hedging philosophy also leaves a company like Newmont completely exposed to downturns in gold price. And gold’s price is influenced by far more than day-to-day supply and demand. As a monetary proxy, how much gold really costs, in terms of Newmont’s bottom line, is based on the strength of the dollar, the strength of the global economy and the breeding patterns of European ferrets. It seems like pretty much anything can swing the price of gold.

There’s no quick and dirty ETF on HUI.

The Philadelphia Gold & Silver Sector Index (XAU) is another miners index, and one that often gets the quotes in mainstream newspapers. It is a capitalization-weighted collection of currently 16 companies involved in mining precious metals, hugely concentrated. At the time of this writing, over 20% of the index was in Barrick Gold, with Freeport McMoRan, Goldcorp and Newmont making up another 45%.

No quick and dirty ETF on XAU either.

One of the newest kids on the block is the NASDAQ OMX Global Gold & Precious Metals Index (QGLD), a modified market-cap-weighted index that began in just August of 2008. At the time of this writing, this index has only been in existence for two months, too short a time to see how it stacks up against the indices currently in play.

 

 

Gold Miner Indices vs. Gold

 

Despite these differences, the reality is that they’re all fishing from the same pond. Consequently they move almost in lockstep with each other. Even XAU, though showing lower returns, still moves in tandem with the other indices. Only gold goes on its own way. The interesting thing to note is that even though the Amex Gold BUGS Index (HUI) is made up of companies that are primarily unhedged, the index doesn’t do much better capturing gold’s return in the long term.

It doesn’t look all that different when you zoom in either:

 

Miner Indices vs. Gold

 

 

This chart illustrates that while gold and the companies which pull it out of the ground are tied together, gold has clearly been the winner – and in fact, a safe haven when the stock market has gone south.

 

The Miner Conundrum

Of course, investing in mining companies brings with it some questions. Like most companies, a miner’s profits are derived from the price of goods sold minus cost to produce those goods. Companies with high profits are the ones that are able control those costs, while getting the highest price they can. There are many areas in which mining companies need to exercise cost controls, but some things can’t be skimped on: keeping the lights on, keeping your workers alive and finding new gold.

 

Energy

Crude Oil vs. Gold Miners Index

 

Mining is energy-intensive, using diesel fuel and electricity for most operations. It’s just a cost of doing business, subjecting mining companies, like the rest of the world, to rising costs. How directly do rising energy costs impact mining companies? In one example, Barrick Gold estimates in its 2007 MD&A report that 35% of its total energy costs can be attributed to electricity. Some they produce themselves, and some they purchase from local power companies. When they looked ahead to 2008, they estimated that a 10% increase in the cost of electricity would translate into an increase of production costs of $4 per ounce, or $28 million. That’s just electricity. With 3.5 million barrels of diesel oil used by the company, it’s no wonder that while they gave up hedging gold, they’re in energy hedging in a big way. If you look at the chart, perhaps it’s not so coincidental that miners traded down just as oil went on a tear this spring.

Safety

Safety at mining companies is a big deal for practical, if not humane reason. If mines are unsafe, gold doesn’t come out. Industry safety has vastly improved over the years, but it’s still a dangerous endeavor. For example, while the number of deaths in South African mines has been coming down, there are over 200 deaths per year. Back in July, Gold Fields (NYSE: GFI) was cited as having the worst safety record in South Africa, responsible for around 50% of the 85 deaths that had occurred by that point in the year. The company has embarked on a companywide safety education program and is performing much-needed maintenance and equipment modernization. In fact, it made the topic of June’s earnings report, with this kickoff from Gold Fields CEO, Nick Holland:

 

“After a particularly difficult start to the quarter, with the accident at the South Deep Gold Mine in which nine of our colleagues tragically lost their lives, the people of Gold Fields rallied together to show their mettle. Galvanized by my statement that “we will not mine if we cannot mine safely,” they took control of the safety situation on all of our mines, where a new safety culture is rapidly taking root.”

 

Despite this summer’s rallying cry, during the week of October 13, Gold Fields had to close two of its largest mines in South Africa after two accidents that resulted in fatalities. The company had been expecting lower production, and lower earnings during its first quarter of FY’09, which began July 1, due to scheduled mine improvement projects. Analysts had expected Q2 to see production increase, but with the latest mine closures, that may not be the case. In a Reuters article, it was reported that CEO Nick Holland said past Gold Fields’ production was down about 700 kg a quarter because of safety stoppages.

 

Keeping The Gold Flowing

Exploration is a hot topic for miners, just as it is in the oil industry. Gold is a finite resource that is getting harder to locate and reach. And sometimes, even if you find a deposit, environmental issues and public sentiment can keep a company from accessing the ore. Junior mining companies are the most vulnerable to this issue, having fewer resources to exploit and less money to spend. One such case is that of Atna (TSE: ATN) and the property delightfully known as “Seven Up Pete.” Pete’s a gold venture in Montana that has been the topic of much media coverage, lawsuits and even a documentary movie. After 17 years of trying to get the rights to mine the property, or at least compensation for not mining, Atna finally had to throw in the towel after the Supreme Court refused to hear the case in early October 2008.

And if you can’t find new gold, managing waning resources can lead to some seemingly counterintuitive mining practices. For example, it is common practice in the industry to stop mining the easy-to-get gold when gold prices are high. Instead of increasing profit per ounce, companies will focus their energies on mining gold that is more costly to produce, preferring to “get it while they can” and switch back to the easier gold when gold price dips. Practices such as these are designed to extend the functional life of gold mines at the expense of short-term profits. After all, no company wants to mine itself out of existence. Though because gold is finite, prices are bound to go up eventually, as “peak gold” is reached and production begins to decline.

 

Stock Or Gold?

There’s little question that gold miners – like oil companies – are only loosely tied to the price of their underlying commodity. It’s axiomatic that over any meaningful time horizon, what’s good for gold will be good for miners. But just as with any pool of companies, there are winners and losers. We cover the horse race regularly around here, and ultimately, it always comes down to the same thing – which companies get the business part right, and which companies can’t seem to get out of their own way.

A bet into the miners instead of into the metal is fundamentally (and obviously) a bet that the miners are undervalued relative to their metal. As such, the most interesting trade might actually be the long/short pair.

 

 

Gold Price/GDM

 

Because the implication of this little chart – the ratio of the price of gold to the value of the Amex Gold Miners Index (GDM), the gold miners are cheaper than they’ve been in years.

 

P.S. The Other Option: Physical Gold

Beyond buying a Krugerrand and sticking it under your mattress, or buying through an online broker and having them store it for you, recent years have seen new options for investing in gold – ETFs and ETNs. There’s not a tremendous amount to say about these products – they provide reasonably accurate pure gold exposure-with the caveat that they all charge something, and that just because a gold ETF sounds easy to run, there’s no guarantee your particular investment is going to peg the LME PM fix every day.

 

 

 

 

Return
 

Ticker

Exp. Ratio

1 Mo

3 Mo

YTD
SPDR Gold Trust

GLD

0.40

6.14

-5.02

5.41
PowerShares DB Gold Fund

DGL

0.50

5.49

-5.66

3.00
iShares COMEX Gold Trust

IAU

0.40

2.38

-5.70

4.40
ELEMENTS MLCX Gold Mtl ETN

GOE

0.38

5.55

-5.83

N/A
E-TRACS UBS CMCI Gold

UBG

0.30

5.56

-5.87

N/A
DB Gold Short ETN

DGZ

0.75

-5.41

5.37

N/A

Gold – Spot, Stock or Future

21 Tuesday Oct 2008

Posted by in deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, precious metals

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Spot, Stock Or Future
Written by HardAssetsInvestor.com   
Tuesday, 09 October 2007 17:21
Commodities aren’t like stocks or bonds; there are many different ways to approach the commodities markets, and each has its pros and cons.

This article will examine the three main “buckets” of exposure — spot exposure, equity exposure and futures-based exposure. Later, we’ll explore different kinds of financial products — ETFs, ETNs, mutual funds, etc. — and figure out which is best for different situations.

So You Want To Buy…

Let’s say that you’ve decided you want exposure to gold. We could just as easily choose crude oil, or corn, or even a diversified commodity index, but we’ll use gold to make it simple.

You think gold is going up. Great … I hope you’re right. But how do you cash in on that idea?

Well, here are your options…

 

“The simplest way to buy gold is to walk down to your local bank and pay them for a 1 ounce American Buffalo coin.”

 

Buy The Physical Commodity:

The easiest way to gain exposure to gold? Just go buy it.

Buying gold bullion gives you, by definition, 100 percent correlation with that magical gold price you hear about on the evening news. The only risks you face are physical theft (if you hold the gold) or financial shenanigans (if you store it with a custodian).

The simplest way to buy gold is to walk down to your local bank and pay them for a 1 ounce American Buffalo coin. That gets you a nice walk, and a chance to say hi to your banker … but that’s pretty much it.

The disadvantages pile up. On any given day, expect to pay 5 to 10 percent more than the spot price for your shiny coin. And if you misplace that coin, or mistake it for a Sacagawea dollar and use it to buy a cup of coffee … well, that’s a $700 cup of coffee, my friend.

Fortunately, there are smarter ways to own the hard stuff. Online metals dealers like Kitco will sell you coins and bars at thin markups. And gold pools — there are thousands of them — will let you buy a stake in a pile of gold for about 1 percent more than the spot price.

But now, thanks to exchange-traded funds (ETFs), we can do better than that. ETFs are mutual funds that trade like stocks, and increasingly, they are moving into the commodities space.

There are currently two U.S. ETFs that hold gold bullion as their sole asset: the streetTRACKS Gold Fund (AMEX: GLD) and the iShares COMEX Gold fund (NYSE: IAU). These funds store gold in a vault — that’s all they do — and when you buy a share of the ETF, you’re buying a share of that gold. You can even see pictures of the gold bars on line. The cost? Just 40 basis points (0.40%) per year in expenses, plus your brokerage fee.

The downside is that there are only bullion ETFs for gold and silver; for other commodities, you’re out of luck. And that raises an important point: While holding physical gold or silver may make sense, holding oil or corn doesn’t. What are you going to do with a barrel of oil, anyway?

Taxes

One big disadvantage of physical bullion is that the Internal Revenue Service (IRS) doesn’t consider it an investment. It calls gold and silver “collectibles” and slaps a 28 percent tax on any profits. That compares to a 15 percent long-term capital gains tax rate on equity investments. And yes, that tax rate applies to the ETF as well as physical bullion. One way around this is (theoretically) to buy exchange traded notes such as the Deutsche Bank series, which come in leveraged and short flavors. For the moment, it looks like these will be taxed as capital gains when sold.  But pay attention, because that’s an issue still open for debate.

Buy The Equities

 

“You may know a little bit about gold, but the guy running a gold mining company knows a lot about gold.”

 

Alternative #2? Buy the shares of gold mining companies.

The thinking goes like this: You may know a little bit about gold, but the guy getting paid millions of dollars to run a gold mining company knows a lot about gold. So why not cast your lot with him?

In some cases, it can make sense. But it’s important to know that equity investments and spot commodity investments aren’t the same thing. While the two returns are correlated much of the time, there are important differences.

For one, when you buy a stock, you’re buying a company. And like any company, there are lots of things that can go wrong with a gold mining firm (or other commodity producer). The company can be mismanaged; the managers can be crooks; there can be environmental disasters, labor strikes or lawsuits.

Complicating things further is the fact that many companies hedge their exposure to commodity price swings. After all, it’s hard to plan a business when you’re not in control of pricing. So gold miners and other commodity producers use futures contracts to lock in price for their product. That means that, even if commodity prices rise, your company may not benefit.

Of course, equity investments have their advantages, too. For one, companies can make smart decisions, discover new mines or cut costs and boost profits.

Also, companies often take out loans to pursue big projects. That effectively leverages your investment, giving you more bang for your investment buck. In fact, that’s often how commodity equities perform: They act like leveraged exposure to the underlying commodities, with their prices swinging 2-3 times as much as the underlying commodity.

As with any equity market, there are mutual funds and ETFs that provide exposure to commodity-focused companies, including gold-focused shares.

Taxes

Equity investors get all the breaks: Long-term capital gains are set at just 15 percent.

Buy The Futures

 

“What is a future? It is a promise between two investors.”

 

Options #3? Invest in futures.

Futures are where many serious commodity investors find a home.

What is a future? It is a promise between two investors. If you buy a gold futures contract, for instance, you promise to buy gold from someone at a certain price at a certain time in the future; they, in turn agree to sell it to you at that price. When the time comes, if the price of gold has gone up, you’ll feel like the smartest guy in the room.

Here’s how it works. The most popular gold contract in the world is the COMEX Gold Contract. Let’s say spot gold is trading for $725/ounce today, and the COMEX Gold contract for June 2008 is priced at $750/ounce. Each contract covers 100 ounces, so the June contract costs $75,000. By buying the contract, you promise to pay someone $750/ounce for 100 ounces of gold on the third Friday in June. If gold goes up above $750 by June, you’ll make out handsomely. If not, watch out…

The real beauty of the futures market is leverage. These are big contracts: $750/ounce X 100 ounces = $75,000. Fortunately, no one expects you to put up all that cash. In fact, for each contract, there’s a set amount of money you have to set aside as collateral. For the COMEX Gold contract, that amount is just $2,500 (although your broker may demand more).

Leverage is a double-edged sword, of course. If you put down $2,500 and the price goes up $100/ounce, you’ve made $10,000 on a $2,500 investment. But if the price falls $100/ounce, you’re in trouble. (And you can expect a call from your broker, asking you to post more cash to your account.)

Like any leveraged investment, this makes directly owning futures both exciting and terrifying. But remember: You don’t have to actually do all this buying and selling of futures; there are mutual funds and ETFs that will do the heavy lifting for you.

Taxes

Futures contracts get unusual tax treatment by the IRS. Sixty percent of any gains are taxed as long-term capital gains (with a 15 percent maximum tax rate), while 40 percent are taxed as short-term gains (with tax rates topping out at 35%). That creates a maximum blended tax rate of 23 percent (less if you’re not in the top income bracket).

The kicker with futures is that you have to pay each year: holdings are “marked-to-market at year-end.” That means that any gains you accumulate during the year are taxed, and cannot be deferred.

Next Up? More About Futures

If you think a futures investment will track the price you hear about on the evening news, think again.

Diamonds Are Forever and Now Can Be Traded Online Too!

21 Tuesday Oct 2008

Posted by in commodities, deflation, diamonds, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets

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Diamonds Are Forever, And Can Now Be Traded Online Too
16 Comments
by Robin Wauters on October 21, 2008

Who knew you could auction real diamonds much like you could sell your stamp collection on eBay?

Well, not really, but pretty close. DODAQ has launched a demo version of what appears to be the first ever online diamond exchange, enabling professional traders to buy, sell and hold certified polished diamonds like stocks. The company offers a two-way auction for traders and facilitates electronic transactions with real-time tradable pricing.

Now, it’s been a while since I’ve traded any diamonds, but according to company management the mechanism is bound to make waves in the industry. The way it works now, is that there’s no real fixed price for polished diamonds. The few inventory lists that give an idea of which stones are out there, are often inaccurate or incomplete. Buyers and sellers pretty much agree on pricing based on a scheme that’s distributed on a weekly basis, but without any real, dynamic transaction data that can be used for benchmarking.

DODAQ aims to provide a centralized, global meeting place that enables basically anyone to trade or invest in diamonds, with transparency on rates. The platform also allows outsiders to start investing in diamonds and set up a virtual holding. Obviously, the biggest challenge for the company is building a market place so secure that it’s able to convince industry professionals diamonds can effectively be traded online ‘like any other commodity nowadays’ (not my words). In order to brush off skepticism, the authenticity and actual existence of every stone is graded and guaranteed (including insurance), and the polished diamonds are locked in a vault facility together with their certification documents.

DODAQ acts as a custodian, so it charges a fee for the vault service and takes a commission of maximum 1,5% on any transaction. You can sign up for a demo account and play around with $500,000 on a dummy balance. I embedded a video below that outlines what DODAQ does in a nutshell.

 

Comments

Envy – October 21st, 2008 at 3:07 am PDT

this is interesting… really cool idea, but in order to work the power houses have to buy in….

reply

mahalo bruddah – October 21st, 2008 at 7:56 am PDT

I wonder if I can by a CDO on this badboy — collateralized deadpool obligation

jk, actually right now diamonds are priced per the rappaport report or some bs like that.

the only problem is that a lot of jewelers base the pricing that they can acquire a diamond for a customer off that report and the cost is known when the customer is there. If there is an auction, the price is up in the air for two days.

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Amit Bhawani – October 21st, 2008 at 3:25 am PDT

Can they be easily traded like stocks? Also who would verify the quality?

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Robin Wauters – October 21st, 2008 at 5:18 am PDT

Yup, traded just like stocks, or more like gold actually (try the demo).

“All diamonds published on the DODAQ platform have first been graded by a recognised gemological grading laboratory and are received with their original certificates into the DODAQ vault.”

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gresh – October 21st, 2008 at 7:32 am PDT

Riiiight.

Either the people behind this idea don’t really understand how diamonds are graded and traded in the real world, or they are hoping you don’t really understand how diamonds are graded and traded in the real world.

I’m betting the latter.

 
 
 

LeoDiCaprio – October 21st, 2008 at 3:39 am PDT

Haven’t you seen the blood diamonds movie dude? …diamonds suck

en.wikipedia.org/wiki/Blood_diamonds

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mickey – October 21st, 2008 at 4:05 am PDT

its unlikely anyone’s going to overthrow debeers, but they can try
rankmaniac

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yann – October 21st, 2008 at 4:09 am PDT

What a nice video )

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Fat Man – October 21st, 2008 at 4:10 am PDT

As developers of the promo, I can tell you this is an incredible application. I’ve seen it in clear cut action, so to speak and it’s going to cut a swathe through the diamond trade.

Congrats to Simon & team at Dodaq.

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Colnector – October 21st, 2008 at 4:36 am PDT

Next: put/call options on diamonds )

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Aaron Cohen – October 21st, 2008 at 5:20 am PDT

I hope the guys at DODAQ have bullet-proof cars and 24/7 secuirty escorts for their families. The cartel does not like upstarts like this.

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John Stephens – October 21st, 2008 at 6:31 am PDT

At first I was apprehensive that such a thing could even be done but on closer inspection, having used the site, this looks like it could really change things – ultimately for the better. Fascinating stuff. I look forward to reading more.

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Jonathan Mervis – October 21st, 2008 at 7:31 am PDT

This will certainly be interesting. The diamond world isn’t used to startups of any kind. Not in the least, something like this.

As a financial instrument, why not trade diamonds like any other commodity? But, if you are choosing just ONE diamond for your fiancee, I highly recommend seeing a stone in person. Any gemologist will tell you that no two stones are ever the same, and that each has its own “fingerprint” and will handle light refraction differently. There are 57 angles to a diamond, and each stone is cut slightly differently, according to the natural growth of its crystals.

Two stones of the same 4 C’s can produce very different effects of light and sparkle. This is a subtlety that is often times lost when people compare diamonds, site unseen, and assume the 4 C’s tell the whole story. But when you put the two stones next to each other, you might be surprised at how obvious of a difference there could be.

It’s very helpful to categorize diamonds with the 4 C’s, but as you can imagine, a 10 minute crash course in the 4 C’s can’t replace a lifetime of experience in diamonds. It’s the same in any industry, where reading a wikipedia article on something doesn’t make you a real expert. You’ll have solid footing, though, and that’s a good start.