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GROW TRUE WEALTH
PRECIOUS METALS IRA
WITH A
www.ProvidentMetals.com | 800-313-3315
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Diamond Records
6 World News
2013 Was truly the Year of the Diamond.
SPECIAL FEATURES
12 Record Breaking Diamonds
12
18 Winning and Breeding 24 Drugs and Money 30 Under The Radar
Breed To Win
76 How To Break Into Fort Knox
The world of equine investment is explored and you’ll be amazed at the dollars involved.
NUMISMATICS
18
68 Cash In Your Coins HARD ASSETS
40 Black Swan, Yellow Gold
Under The Radar
72 Treasure Assets
It’s Tax Season so let’s take a look at the relationship between bullion and the government.
LIFESTYLE AND LUXURY
48 Watches of the Skies 54 Floating Seastead City
30
56 $628k Rare Lalique Decanter 57 First Curved-Coin by U.S. Mint 58 An Outdoor Sports Lover’s Dream
Sky Watches Go up in the clouds (and space!) with Ed Estlow and these elegant timepieces.
MINING & MINERALS
34 A Different Kind of Search for Treasure
48
84 Mining News CURRENT INFORMATION
90 Preferred Dealers
Bust Into Fort Knox
94 Events
Jason Vaile takes us on a tour (or a heist!) of America’s fortress.
96 Hindsight
76
www.ahametals.com American Hard Assets | 3
EDITOR’S NOTE
Spring Time is Here Spring is here again and I’m sure that is welcome news to many of our readers from different parts of the country this year. That was a difficult
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winter, wasn’t it? To say the least! Thank goodness that is behind us and
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on to warmer temps!
EDITORIAL SUPPORT: Kevin Thompson VP SALES & MARKETING: Mike Obert
Now that we’re in the middle of our second year of American Hard Assets Magazine, we continue to see our readership increase both online and in print. Along those lines, this is a good time to ask you to please visit our website at www.ahametals.com. There you will continue to find the interesting precious metals content you’ve come to expect from AHA along
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with relevant pieces covering the spectrum of the hard assets business.
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The arts, coins, wine, horses, travel and more await you there as well as
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inside the magazine. We’ll also continue to bring you the latest in content
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from our partners, real-time market updates, exchange rates and prices, and links to important stories of the day.
FEATURE WRITERS: Ed Estlow, Gabriel Benson, Eavan Moore, Jonathan Kosares, Jason Vaile, Judith Rosby, Amber Ness
This issue, we’re bringing you a variety of content with a slight nod to
CONTRIBUTORS: Hector Cantu, Beth Deisher, Christy Stewart, Jonathan
tax season since yes, it is that time of year as well. The relationship be-
Kosares, John W. Garibald, Jeff Patton
tween bullion and this time of year will be explored, as well as our usual
DISCLAIMER: American Hard Assets is 100% American owned. All contents
great stuff about other assets you may not always think about, like horse
of American Hard Assets (AHA) are for information purposes only. AHA does
investing, the booming diamond market, and a different twist on mining
not guarantee the accuracy, completeness or timeliness of the contents. None
-- underwater.
of the information contained herein constitutes a solicitation, offer, opinion, or reccomendation by AHA to buy or sell any security or commodity, nor legal, tax, accounting, or investment advice or services regarding the profitability or suitability
So, we’re all set to kick off the warmer springtime weather and are ex-
of any security, commodity or investment.
cited to bring you the second issue of the year. As always, don’t hesitate to give us feedback on the magazine or online to help us get better. We are committed to bringing you the news and stories you want and need to see. Thank you so much for continuing your commitment to this publication and keep up with American Hard Assets for all your metals news in the future. Good Investing!
All commentary and advice in this publication is of a general nature only, and doesn’t consider your individual circumstances or financial objectives. You should always consult a licensed financial advisor for your personal investment advice. Please do your own research.
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HARD ASSETS UPDATES | World News
WORLD NEWS UPDATES
China passes India as world’s leading gold consumer
Source: RT.com
China has outpaced India in terms of gold consumption in 2013, with people there increasingly investing in the precious metal, according to the Thomson Reuters GFMS Gold Survey.
“Greater wealth and disposable incomes created pent-up demand when prices were high, so when they dropped there was this phenomenal surge in buying.”
The influential report says Chinese demand increased by 32 percent within a year, reaching 1,189.8 tons in 2013, which marks a fivefold increase since 2003, says the Financial Times.
However, the gold price is still vulnerable and faces a risk of further falls. Few analysts predict prices will recover this year, while the investors’ appetite for the precious metal remains weak.
The increase was mainly driven by purchases of Panda coins, gold bars and jewellery.
Thomson Reuters GFMS forecasts an average price of $1,225 for a troy ounce for 2014, which is nearly $20 below the current level. Physical demand remains sustainable, “but without a repeat of the bargain hunting surge”.
The lion’s share of sales came from high purity 24 carat gold products bought mostly for investment reasons rather than as jewelry. The same reason led the ‘kilobars’ and smaller weight investments, setting a new record of 366 tones, which was 47 percent more than in 2012. As for gold coins, only Turkey minted more than Beijing last year. “Gold has always been popular culturally in China, and now it’s increasingly seen as an asset class for individuals,” Andrew Leyland, the manager of precious metals demand at GFMS said.
6 | American Hard Assets www.ahametals.com
Besides becoming the biggest gold consumer, China has also become its world’s major gold producer with total estimated output at 437.3 tons, which is more than 9 percent of the global supply last year.
World News | HARD ASSETS UPDATES
WORLD NEWS UPDATES
Sierra Leone sells 125 Carats Octahedral Diamond
Source: Economictimes.com
FREETOWN: Sierra Leone said on Friday it had exported the largest diamond discovered in the west African nation last year -- a 125-carat stone worth around $800,000.
The agency said the miner, whom it did not identify, had visited his mining plot one morning “hoping to find his usual odd pieces of stones but was shocked to discover what changed his life for good”.
The “high quality” diamond was dug up by a miner in the eastern district of Kono in November, according to a statement issued by the state-run National Minerals Agency.
It was not revealed whether he had received the full market value for the piece.
The agency did not say where the stone had gone but confirmed it was “the largest single diamond found in Sierra Leone in 2013”, adding that it was “one of the finest and most valuable reported in the country in recent times”. “What makes the diamond exceptional is the fact that it is very rare for a diamond above 100 carats to maintain its original shape and to be without any crack or... impurities as was the case of this rare gem,” the statement said.
Sierra Leone remains one of the world’s poorest countries after a brutal 11-year civil war which ended in 2002, but its mineral riches -- which include diamond, gold, bauxite, titanium ore and magnetite iron-ore -- have attracted massive investments. Small-scale artisanal mining has sustained the country’s eastern region since diamonds were discovered in 1930, and it was here that the 968.9-carat Star of Sierra Leone -- the largest alluvial diamond ever found -- was mined in 1972.
www.ahametals.com American Hard Assets | 7
HARD ASSETS UPDATES | World News
WORLD NEWS UPDATES
The 2012 Australian Kangaroo One Tonne Gold Coin is displayed in Hang Seng Bank’s Headquarter in Central until Saturday. Photo: K. Y. Cheng
World’s Largest Gold Coin goes on display in Hong Kong
Source: www.SCMP.com
The largest gold coin in the world, on its first visit outside Australia, was unveiled at Hang Seng Bank headquarters in Central as part of a showcase tour for the historic Perth Mint.
“We distribute Perth Mint’s gold coins, and is very popular in Hong Kong and with Chinese everywhere…it demonstrates Chinese as a whole like to accumulate gold and gold bars.”
The 2012 Australian Kangaroo One Tonne Gold Coin is worth HK$305 million, far more than the AU$1 million (HK$6.9 million) legal tender. The gigantic coin that’s made from 99.99 per cent pure gold, weighs 1,012 kilograms. It is 31 inches wide, more than 4.7 inches thick, and took some 18 months to manufacture.
Despite the China’s huge gold demand, the largest gold coin will not be put on public display. Only ‘selected’ retail and commercial customers at Hang Seng Bank will be invited to view the coin at the bank’s headquarters. It will be on show there until January 11 before it heads to Berlin, Germany, for a world exhibition.
One one side, the coin carries the image of Queen Elizabeth II, the head of the state, and a leaping kangaroo on the other.
On its release two years ago, Perth Mint chief executive Ed Harbuz said it was “the pinnacle of ingenuity and innovation”.
Since the coin was released, its worth has falled to HK$305 million from HK$431.66 million, as the value of gold has dropped.
“To cast and handcraft a coin of this size and weight was an incredible challenge – one which few other mints would even consider,” said Harbuz, at the time.
Unveiling the golden disc, Andrew Fung Hau-chung, head of global banking and markets at Hang Seng Bank, said it was with luck that Perth Mint, a long-term customer of the bank, chose Hong Kong as a “strategically important” first visit.
8 | American Hard Assets www.ahametals.com
Fung said a number of considerations, from a lack of space to host an exhibition to a range of security and safety concerns, ultimately prevented a full public display.
World News | HARD ASSETS UPDATES
JP Morgan Holds Highest Amount Of Physical Silver In History
Source: GoldSilverWorks.com
Ted Butler, precious metals analyst specialized in COT analysis, reveals a remarkable insight in the physical silver market. Butler’s calculations show that JP Morgan (JPM) has accumulated the largest holding of physical silver in modern world. Since May 2011 when Silver peaked, the bank has acquired between 100 and 200 million ounces of physical silver (if not more). The equivalent in metric tonnes is between 3,110 and 6,220 tonnes.
the silver price with their HFT tricks in order to reverse the trend. By doing so, JPM could regain control over the silver market. Meantime, JPM has established the longest position in physical silver in recorded history. It holds its grip on the silver price through its short corner in COMEX silver.
To put that number in perspective, it exceeds the amounts held by the Hunt Brothers or Warren Buffett (in his investment company Berkshire Hathaway). On an annual basis, some 100 million ounces of silver reach the investment market, which translates into 250 million ounces between May 2011 and December 2013. That has a value of approximately $5 billion. Given the size of the too-big-to-fail bank, that amount of silver, how large it may seem, is easily affordable: • • •
JP Morgan’s quarterly profit is $5 billion (approximately 200 million ounces of silver). In 2013, the closing of the gold short position, as well as the 20,000 contract reduction in the silver short position, netted JPM more than $3 billion. In COMEX silver, JPM was the largest buyer in 2013.
Butler explains that JPM was able to pile up so much silver without being noticed through the big silver ETF, SLV. In his weekly commentaries to his premium subscribers, he has explained on several occasions that the physical silver holdings in SLV have been largely intact on a net basis, but there was a large “churn” in the holdings, which allows for a large buyer to go unnoticed. For instance, 60 million oz were liquidated in the two months after the price smash in May 2011; they were right away absorbed by a big buyer. The conclusion that JPM has been the big buyer in physical silver is confirmed by the following data: • •
In the JPM COMEX silver warehouse, the growth of silver over the past three years was 45 million oz. he recent delivery halted by the bank in December/January COMEX deliveries was 15 million oz.
The inherent motive for JPM to accumulate such a large amount of silver is most likely related to the fact that the bank was on the wrong side of the market when the silver price exploded. When silver went through its historic rally in March and April 2011, the weekly COT data indicated that speculators did not rush into COMEX futures, which means that the peak in the silver price was not driven by speculation in silver futures. On the other hand, there was buying in the big silver ETFs, including record short selling in SLV. The explanation that makes most sense is that JPM realized that it was on the wrong side of the trade, after having discovered how tight the physical silver market was. Consequently, the bank had to crush
Fr. 379b $1000 1890 Treasury Note PCGS Extremely Fine 40.
1890 Grand Watermelon note brings world record $3.29 million at Heritage Auctions
Source: Artdaily.com The legendary 1890 $1,000 Treasury Note, the rarest and most famous of all U.S. Currency notes, popularly referred to as the “Grand Watermelon note” — due to the design of the large zeroes on the reversed side of the bill, resembling watermelons — became the single most valuable piece of currency in existence when it sold for $3,290,000 on Jan. 10, far exceeding its pre-auction estimate of $2 million. Heritage Auctions that’s based in Dallas sold the note as part of the company’s Florida United Numismatics (FUN) Convention Rare Currency Auction in Orlando, FL, part of a series of auctions the firm conducted last week that have grossed more than $105 million total, the largest numismatic auction in history. It was in 1970 that this note was offered at auction where it fetched $11,000. “This note is an icon of American financial history — and is the only known example in private hands — we knew something extraordinary was possible,” said Dustin Johnston, Director of Rare Currency at Heritage Auctions. “Collectors knew this was not a chance that was going to come around again anytime soon, and they bid accordingly. The result being that this beautiful little piece of paper is now the most valuable of its kind in the world and has a new chapter to add to its legend.” The note sold to a private collector that wished to remain anonymous. www.ahametals.com American Hard Assets | 9
HARD ASSETS UPDATES | World News
Bitcoin’s Legality Around The World US Senator Carper’s committee tasked the Law Library of Congress with surveying over 40 countries for their official stance on Bitcoin and whether Bitcoin is actually in use. “Of those countries surveyed, only a very few, notably China and Brazil, have specific regulations applicable to bitcoin use,” according to the report. “There is widespread concern about the Bitcoin system’s possible impact on national currencies, its potential for criminal misuse, and the implications of its use for taxation. Overall, the findings of this report reveal that the debate over how to deal with this new virtual currency is still in its infancy.” The currency is only toddler-aged (5) so that’s no surprise. “This report has some good news – namely that the United States may not be as far behind the curve on virtual currencies as some have argued,” says Sen. Carper. “In fact, the United States might be leading the way for a number of nations when it comes to addressing this growing technology. While there is no consistent or clear definition or treatment of digital currencies throughout the world, this report underscores that Bitcoin and other virtual currencies are present and growing in major economies, supporting the call for increased global cooperation.”
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• According to the report, Germany, Finland, Singapore, and Canada are among the countries that have issued tax guidance on Bitcoin, while Ireland, Israel, and Slovenia have made gestures that they plan to. Carper says he urges the IRS to read the report to help determine its own treatment of virtual currencies. “At the end of the day, I think this report is an important reminder to those of us in Congress as well as federal agencies that this technology continues to play an increasing role in our economy here in the United States as well as around the world, and we need to ensure that our policy making in this area is thoughtful, effective and timely,” he says. So here’s the rundown: • Argentina: Bitcoin “may be considered money but not legal currency… Although bitcoins are not specifically regulated, they are increasingly being used in Argentina.” • Australia: The Ossies are keeping their eye on Bitcoin, and plan to tax it, so those dealing in it down under should be keeping good records. And they’ve seen Bitcoin’s dark side: “In October 2013, an Australian Bitcoin bank was hacked, resulting in the theft of over US$1 million of the currency.” • Belgium: They are waffling when it comes to creating regulation. “The Minister of Finance indicated that government intervention with regard to the Bitcoin system does not appear necessary at the present time.” • Brazil: It may not be ready for the World Cup, but it is ready for Bitcoin. It passed a law in October 2013 specifically for electronic currencies. • Canada: The Great White North famously welcomed the first Bitcoin ATM last year, in part because those who own it don’t have to worry about complicated laws around Bitcoin. Canada doesn’t consider Bitcoin to be legal tender, and is as interested in regulating it as it is Monopoly money… at least for now. People
10 | American Hard Assets www.ahametals.com
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Source: Forbes.com
using it for transactions need to pay tax as they would for bartering or speculative purchases. Unlike in the U.S., Canada’s financial regulator doesn’t regard Bitcoin exchanges as money services businesses, meaning they don’t need to register with it or flag suspicious transactions. • Chile: There’s no frenzy here yet, though Ayn Rand expats have invaded. “Interest in acquiring bitcoins is slowly growing. However, because there is no regulation on the use of bitcoins, transactions are informal in nature and mainly conducted among friends. In 2013, a group of American Libertarians founded a self-sustaining organic farming community called Galt’s Gulch Chile in central Chile with an economy based on bitcoins.” China: It quelched the bidding fury around Bitcoin in December 2013 declaring that “bitcoin is not a currency and should not be circulated and used in the market as a currency.” While people there are free to buy and sell it, financial institutions have been warned away. Croatia: “Bitcoin is not legal tender in Croatia but can be legally used.” Regulation could be coming in the future. Cyprus: The country’s financial policies early last year sent scared investors into digital currency, making many take notice of Bitcoin for the first time. Its bank issued a statement on bitcoins in December, stating that “it considers the use of any kind of virtual money as particularly dangerous, given that it is not under any regulatory system and its operation is unchecked.” Cypriots can use it safely by getting a university education with it. Denmark: No love for bitcoin. “Denmark’s Finanstilsynet (Financial Supervisory Authority) has issued a statement rejecting the bitcoin as a currency and stating that it will not regulate bitcoin use.” Estonia: No official stance, but “because of its growing popularity and increasing use by the country’s population, the Bank of Estonia (the nation’s central bank) monitors financial arrangements that use Bitcoin. According to Google’s search statistics, Estonia is the country with the second largest number of Internet searches for the term “Bitcoin”; Russia has the most such searches.” Its central bank recently warned that Bitcoin might be a Ponzi scheme. European Union: Issued a warning about virtual currencies in December. The European Banking Authority “pointed out that since the bitcoin is not regulated, consumers are not protected and are at risk of losing their money and that consumers may still be liable for taxes when using virtual currencies.” Finland: The Finnish Tax Authority is on it. Capital gains tax applies when bitcoin is converted to another currency. Using it to buy things should be treated as a trade, while any increase in its value over the price at which it was obtained should be taxed. However, bitcoin losses cannot be deducted. France: No love for bitcoin. “There are no specific laws or regulations regarding the Bitcoin system in France,” but the central
World News | HARD ASSETS UPDATES
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bank has criticized it as speculative and warned about its use for nefarious dealings. Germany: Of course it has rules for Bitcoin, treating it like a foreign currency. Greece: There are a few businesses there taking bitcoin, but the government is ignoring it for now. Hong Kong: Nothing official, though the treasury secretary there said existing laws forbid its use for fraud or money laundering. Iceland: Icy toward Bitcoin. “The Central Bank of Iceland reportedly stated that engaging in foreign exchange trading with bitcoins is prohibited, based on the country’s Foreign Exchange Act.” India: Nothing explicit in the law yet, though its banks have warned the public about the “risks of cybersecurity attacks and money laundering” related to Bitcoin, and cautioned investors in December. “India’s largest Bitcoin trading platform BuySellBitCo. in, suspended its operations, citing the RBI’s notice. Also, two days after the advisory, India’s Enforcement Directorate raided the premises of the person in Ahmedabad who had hosted the Bitcoin trading platform, BuySellBitCo.in. According to news reports, the raid occurred because of alleged violations of India’s Foreign Exchange Management Act rules. Recent news reports cite the resumption of operations of some Bitcoin operators and the emergence of new players in the market.” Indonesia: Sounds ambivalent. A spokesman for Bank Indonesia reportedly issued a statement on Bitcoin in December 2013, saying that “[b]itcoin is a potential payment method, but it’s different than ordinary currency. . . . It is not regulated by the central bank so there are risks. . . . At the moment, we’re studying bitcoin and we have no plan to issue a regulation on it.” Ireland: No official statement, though they’re reportedly thinking about how to tax it. Israel: Same as Ireland. They are starting to see cybercrime around Bitcoin though: “An incident of an alleged attempted extortion involving a request for payment in bitcoins was reported on December 19, 2013. At least three Israeli banks have received emails from an unknown individual threatening to release the personal details of millions of their customers unless the payment was made.” Italy: Looks to the EU for guidance. “The use of electronic currency is restricted to banks and electronic money institutions— that is, private legal entities duly authorized and registered by the Central Bank of Italy. Aside from these developments, Italy does not regulate bitcoin use by private individuals.” Japan: Despite being the home for years to the long-time monster exchange of Bitcoin, Mt. Gox, Japan is silent on the issue. Malaysia: Nada. Malta: Nothing official, even as businesses develop there. “In October 2012, a Maltese company launched the first bitcoin hedge fund.” Netherlands: Doesn’t see virtual currency as being an electronic money, so Bitcoin isn’t covered by existing regulation, but it does recognize something from its past in Bitcoin’s rise. “The Dutch Central Bank (De Nederlandsche Bank, DNB) recently called attention to the risks posed by the purchase of virtual currencies, including bitcoins and litecoins, and warned consumers
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to be wary…. The former President of the DNB, Nout Wellink, has called dealings in bitcoins a bubble that is “pure speculation” and “hype” and “worse than the tulip mania” of the seventeenth century because “at least then you got a tulip [at the end], now you get nothing.” New Zealand: Kiwis are all good with Bitcoin as long as it is not turned into a physical note or coin. Nicaragua: The government is not doing anything about Bitcoin but it is in use there. “The Nicaraguan daily El Nuevo Diario reported on January 13, 2014, that an American banker, Greg Simon, recently bought a 1,200-square-meter plot of land in San Juán del Sur, one of the most important tourist areas in Nicaragua, for 80 bitcoins, currently the equivalent of about US$72,000.” Poland: Is looking to the EU, with the Polish minister of finance warning that the country needs to figure out how to tax it. Portugal: Doesn’t think it’s a “safe currency” but says “users can both buy and sell virtual currency with legal tender and can purchase goods and services in both the real and virtual worlds.” It looks like trading and use is low there. Russia: Don’t plan to buy your Olympics swag with Bitcoin. “There are at present no legal acts that specifically regulate the use of bitcoins in the Russian Federation,” but a Russian law firm thinks that using it to buy things there could be illegal given that the Russian ruble is the exclusive means of payment in the Russian Federation per the law. Singapore: Has warned investors against Bitcoin, but has not forbidden people from using it not businesses from taking it. The country’s tax authority says whether it should be taxed depends on how it’s being used. Slovenia: It’s not sure what to do about Bitcoin yet, but is sure it should be taxed. Spain: Nothing official, but people using it should be paying taxes per bartering rules. Notably, the U.S. is not the only government with a Bitcoin wallet. “Spain was the second country in the world to seize bitcoins during an investigation of fraudulent transactions conducted with bitcoins, according to a November 2013 report by El Mundo.” South Korea: Nothing yet. Taiwan: Has cautioned investors and businesses away from Bitcoin. Thailand: Bitcoin is in a grey zone as existing laws do not apply. Turkey: Its banking regulator says existing law does not apply and warned people against using it. Turkish financial experts compare Bitcoin to “to Tulip mania in Holland, the Mississippi balloon in France, or the Enron or mortgage balloons in the United States, because the bitcoin ‘has no use value, but only exchange value.’” (Kudos to the Turkish commentators for digging further into history than tulip beds.) Turkish people evidently don’t care about the warnings. “Nevertheless, bitcoin use is apparently flourishing in Turkey. There is a Turkish Lira-Bitcoin exchange, called BTCTurk, and leftover foreign currency can be exchanged at the Istanbul Ataturk Airport for bitcoins through a Traveler’s BOX, a machine like an ATM.” United Kingdom: It’s snubbing Bitcoin. “In the latest quarterly reports from the Bank, Bitcoin is expressly excluded.”
www.ahametals.com American Hard Assets | 11
S P E C I A L F E A T U R E S | Record Breaking Diamonds
Diamonds Record-Breaking
2013 SAW MANY RECORDS FALL
O
ne of the most fascinating trends to have developed over the latter half of the twentieth century is the sale of significant and momentous diamonds and gemstones at auction. Since the seventeenth century and possibly even earlier, the trade and sale of fine works of art at auction has been a prevalent and accepted practice, and the introduction of fine jewels was a logical expansion of such. While previously throughout history the world’s most glorious gems were restricted to the world’s royal families and most elite financiers, the advent of sales of noteworthy precious gems through public auction over the latter half of the twentieth century has significantly broadened the scope of availability of these jewels to a broader and more diverse audience of buyers.
By Judith Rosby
Through their ability to generate publicity, Sotheby’s, Christie’s and other major auction houses are viewed among the highest-profile sellers of important diamonds, including both colorless and fancy color. Other high-profile diamond sellers include private diamond companies such as Graff Diamonds and Leibish & Co. The year 2013 saw an incredible realization of this trend as the year that broke the record of the most new diamond auction records set! This can only mean for diamond investors and collectors the world over that the value and popularity of investing in diamonds is dramatically on the rise, with no indications of dissipating in the foreseeable future.
The Twelve Record Breakers of 2013 34.65 carat Fancy Intense Pink cushion cut ‘Princie’ diamond On April 16, the 34.65 carat ‘Princie’ pink diamond that was sold at Christie’s in New York broke records for the highest price ever paid for a diamond in the United States. It also broke the record for the highest price ever paid for a diamond from the Golconda mine of South Central India. Expected to achieve between $20 million to $30 million, the 34.65 ct Type IIA Fancy Intense Pink cushion cut ‘Princie’ diamond sold for $39.3 million, or $1.135 million per carat.
Records Broken: The most valuable Golconda diamond ever sold at auction, the most valuable diamond ever sold in the US, and the most valuable diamond sold at Christie’s (previous house record of $24.3 Million set in December 2008 for the sale of the Wittelsbach Diamond).
12 | American Hard Assets www.ahametals.com
Record Breaking Diamonds | S P E C I A L F E A T U R E S
The Bvlgari 5.3 carat Deep Blue cushion shaped diamond ‘Trombino’ ring The following week in April, Bonham’s of London sold the a Bvlgari 5.3 carat Deep Blue cushion shaped diamond ring at the record breaking price per carat for a blue diamond. It sold to Laurence Graff for $9.3 Million, or $1.8 Million per carat. Estimated to fetch up to $2.4 Million, the Bvlgari “Trombino” ring realized more than four times its estimate.
Record Broken: The highest price paid per carat for a blue diamond (previous top price was $1.68 Million per carat)
101.73 carat D Color Flawless Pear shaped ‘Winston Legacy’ diamond On May 15 at Christie’s Geneva, a 101.73 carat pear-shaped diamond broke records for the largest D Color Flawless Type IIA ever to be offered at auction. It was bought by Harry Winston for $26.37 Million, or $254,400 per carat. This gesture was partially to act as a statement of the financial power of the Swatch Group, the new owners of Harry Winston and a newcomer to the world of important diamonds, and they renamed the diamond the ‘Winston Legacy’.
Record Broken: The largest flawless Type IIA diamond ever to come to auction.
1.92 carat Fancy Red VS2 rectangular diamond ring
At the same auction, a 1.92 carat Fancy Red VS2 rectangular diamond, set in a ring with half-moon diamond shoulders and a pave-set platinum diamond band, was auctioned off to a member of the U.S. trade. The ring sold for $3.25 Million, or $1.63 Million per carat, setting a world auction price for a red diamond, and achieving a price well above its $1.9 million to $3 million estimate.
Record Broken: The highest price paid for a red diamond.
www.ahametals.com American Hard Assets | 13
S P E C I A L F E A T U R E S | Record Breaking Diamonds
75.36 carat D Color Type IIA briolette cut ‘Star of China’ diamond In June, a 75.36 carat D Color Type IIA briolette cut diamond was auctioned at Christie’s Hong Kong, and was touted as the world’s largest and most perfect briolette. It sold for $11.15 Million or $148,000 per carat, the highest price ever paid for a briolette shaped diamond. It was renamed the ‘Star of China’ by new owner Ms. Tiffany Chen in honor of her company China Star Entertainment Ltd.
Record Broken: Highest price paid for a briolette diamond, and the world’s largest and most perfect Briolette
118.28 carat Oval Flawless diamond
D
Color
On October 7, two phone bidders at Sotheby’s Hong Kong heatedly competed for a 118.28 carat D Color Flawless oval shaped Type IIA diamond from Africa in six tense minutes. The total price came to $30.6 million, or $259,322 per carat, paid by a buyer who was identified as ‘Asian Private’. The October sale broke the record for the highest price ever paid for a colorless diamond at auction that was set in May 2013 with Harry Winston’s recordbreaking purchase. It also earned the tribute of being the largest diamond ever to be auctioned. There are very few stones of this size, color and purity, and extremely rare gems like this appeal to the hearts and wallets of diamond lovers and investors alike.
Record Broken: The largest diamond ever sold at auction, and the largest flawless Type IIa diamond to be sold at auction (formerly the ‘Winston Legacy’ at 101.73 carats)
7.59 carat Flawless Round Vivid Blue ‘The Premier Blue’ diamond The same auction at Sotheby’s Hong Kong did not share a similar fate for the Premier Blue. The 7.59 carat Fancy Vivid Blue round diamond failed to meet its reserve price, so it was not sold. Sotheby’s had expected it to fetch $19 million, but the highest bid was a mere $16.12 million. If it had it sold at the highest bid of $16.12 million, it would have anyway broken the previous per carat record of October 2011 by 25% for a Fancy Vivid Blue diamond. It also would have also broken the per carat record set by the Bvlgari ‘Trombino’ ring, the current highest price per carat paid for a fancy vivid blue diamond. The brilliant cut, internally flawless ‘Premier Blue’ is the largest round Fancy Vivid Blue diamond ever graded by the GIA.
Records Broken: The largest round Fancy Vivid Blue diamond ever graded by the GIA, and would have broken the per carat record set for a blue diamond (by the Bvlgari “Trombino” ring) if it had been sold at its lowest offer. 14 | American Hard Assets www.ahametals.com
Record Breaking Diamonds | S P E C I A L F E A T U R E S
1.56 carat Fancy Red Cushion shaped ‘Argyle Phoenix’ diamond In October’s famed Argyle Tender, a record price was achieved for an Argyle sourced diamond. The Argyle Phoenix, a 1.56 carat Fancy Red cushion shaped diamond, achieved the highest per carat price for a diamond ever produced from the Argyle mine, acheiving a price of over $2 Million from buyer John Glajz who expects to resell it at between $4 Million to $5 Million.
Record Broken: The highest price ever paid for an Argyle diamond.
2.51 carat fancy deep pink radiant cut ‘Argyle Dauphine’ diamond The Argyle Dauphin was the second record breaking diamond of the tender. A 2.51-carat fancy deep pink radiant cut diamond, it broke the record for the highest price paid for an Argyle diamond in overall value terms, and achieved the world record price for a Fancy Deep Pink diamond. Its exact price is undisclosed.
Record Broken: The largest flawless Type IIA diamond ever to come to auction.
14.82 carat Fancy Vivid Orange ‘The Orange’ Pear shaped diamond
First, November 12 saw the auction of ‘The Orange’, a 14.82 carat Fancy Vivid Orange pear shaped diamond that sold for $35.54 Million, or $2.398 Million per carat. That evening, it earned the titles of the largest and the most valuable Fancy Vivid orange diamond ever sold at auction, and the honor of the highest price paid per carat for a colored diamond. The GIA even claims that they have never before graded such a large, pure, vivid orange stone. Estimations for the stone’s value varied between $17.4 Million to $20.7 Million before the hammer came down at $35.54 Million at auction.
Records Broken: The highest price per carat paid for a colored diamond, the largest Fancy Vivid Orange ever sold at auction (previously was the 5.54 carat Known as “The Pumpkin Diamond”), and the most valuable Fancy Vivid Orange ever sold at auction.
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S P E C I A L F E A T U R E S | Record Breaking Diamonds
59.60 carat Type IIa Internally Flawless Fancy Vivid Pink oval shaped ‘Pink Dream’ diamond Second, November 13 hosted the Sotheby’s auction of the ‘Pink Star’, which was renamed the ‘Pink Dream’ by its buyer. The ‘Pink Dream’ is a 59.60-carat Internally Flawless Fancy Vivid Pink Type IIa oval shaped diamond, set as a platinum ring. It went down in history when it achieved the world record for the highest price paid for a diamond or jewel at auction at $83.187 Million, or $1.4 Million per carat. It was estimated before the auction to sell for $60 million dollars. Bought by the diamond-cutter Isaac Wolf of New York, it beat the previous worldrecord holder, the Graff Pink diamond, by more than $20 million. It was expected to be the highlight of the auction, since it is the largest internally flawless Fancy Vivid Pink diamond that the GIA has ever graded. The landmark price eclipsed the previous record at $46.2 million established three years ago by Sotheby’s Geneva for the magnificent 24.78 carat Fancy Intense Pink ‘Graff Pink’.
Record Broken: Highest price ever paid for a diamond, gemstone, or jewel (previously the Graff Pink, which sold for $46.2 Million in 2010), the largest internally flawless Fancy Vivid Pink diamond that the GIA has ever graded, and the largest fancy color diamond ever to be up for auction. 12.85 carat Orangy Pink Type Ia Diamond Ring At the same auction, a new, interesting record was squeezed in at the last minute when a beautiful 12.85 carat Orangy Pink Type Ia Diamond was sold for $4.95 Million, the highest amount ever paid for the gorgeous orangy pink color combination.
Record Broken: Highest price ever paid for an Orangy Pink diamond.
A Final Swing Sotheby’s and Christie’s, the two largest auction houses in the world, began to sell noteworthy diamond and gemstones in the 1970s, although other famous auction houses such as Bonham’s have since begun to do so as well. They have become a significant force in the establishment of price and demand throughout the world of art trade, while also generating interest in fancy color diamonds, former ownership (such as Collections like Elizabeth Taylor’s and the former Duchess of Windsor), and the geographic origin of notable gemstones (such as India, Africa, and Australia). An important innovation of the twenty first century has been the introduction of the option to bid for these world famous diamonds online! Of course, this is years behind leading color diamond companies such as Leibish & Co., who already offered the option to purchase the highest quality fancy color diamonds online over a decade ago! While annual auction sales have grown from less than $50 million to nearly $1 billion in the latter half of the twentieth century, the auction market has become an influential force in the jewelry world today and will remain a formidable influence in the value of diamond sales and diamond investment for centuries to come.
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Record Breaking Diamonds | S P E C I A L F E A T U R E S
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S P E C I A L F E A T U R E | Winning And Breeding
Winning And Breeding Investing In Horses BY Gabe Benson
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Winning And Breeding | S P E C I A L F E A T U R E
In a landslide victory, a gelding named Wise Dan won horse of the year sweeping all categories for the second year in a row. Wise Dan ran in seven total races and going 6-1-0 to win a grand total of $2,751,972 in 2013. To date Wise Dan has won $6,293,610 and has a career record on 19-2-0 from twenty-seven starts. Not bad for a horse that came from a modest pedigree. And as this article progresses you will see that pedigree is everything. It is that dream of finding a diamond in the rough, and almost literally riding that horse to riches, that has made investing in horses an interesting if risky proposition.
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S P E C I A L F E A T U R E | Winning And Breeding
While it is borderline impossible that you will ever own a major sports franchise, it is possible that you could own at least a piece of a Triple Crown Winner. And there is money to be made and lost on all levels of horse racing, from major stakes races to smaller local races.
But the costs of owning a horse can be astronomical and must be worked into any investment.
Perhaps the best way to look at horse racing is to look at your horse as technology start-up. They look good on paper, have a good pedigree, and should turn out to be a winner. But getting from concept to market is the tricky part, and turning a horse into a winner is just as tricky. And unlike your tech start-up, your horse has the potential for injury or sickness that can pretty much sink your investment.
Stabling: Costs can run up to and beyond $100 a day Shoes: Those metal shoes on the horses feet cost several hundred dollars a month. Vet Bills: And you think your children go to the doctor a lot. Vet bills often run several hundred dollars a month. Jockey and Trainers: Unless you know what you are doing, you need a team to get your horse ready to race. And of course, the quality of your staff will only increast the cost.
There are four basic ways to make money on a horse. These are breeding, flipping the horse for a higher price than you bought it, and of course prize money from racing.
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Costs that can be expected are:
And the of course there is food, insurance and a myriad of other fees involved in keeping your horse. The average yearly upkeep cost of a champion level horse is easily $60,000 a year.
Winning And Breeding | S P E C I A L F E A T U R E
Perhaps the best way to look at horse racing is to look at your horse as technology startup. They look good on paper, have a good pedigree, and should turn out to be a winner. But while these costs can be backbreaking, the average investor doesn’t cover them alone. Most of the general public who invest in horses do so through a syndicate. And there are dozens of them. These syndicates basically sell stock in a horse, most of the time the average investor takes a stake between 2% and 10%. But unlike a stock, you have to pay a monthly fee in addition to your upfront investment. The fee goes to feeding, training, stables, and of course any fees associated with getting your horse into a race.
Most syndicates allow you to purchase a share in a small block of horses in order to spread your risk. These syndicates generally have multiple horses at multiple stages of their careers, and price ranges. Like most things, the blue chip investment, in this case an investment in a horse with a winning bloodline, is going to cost greater upfront dollars but carry less risk. The trick is always to balance your return, your investment and your expectations. But syndicates are a great way for someone with limited investment dollars to get into the game. Of course the other option is to purchase a horse outright. The upside of course is that you don’t have to share the winnings, but all the expenses are on you. Horses can be purchased at auctions, but another popular way to buy a horse is through a claiming race.
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S P E C I A L F E A T U R E | Winning And Breeding
Claiming races are bit of gamble. Basically any horse entered in the claiming race has the potential to be purchased at the end of the race. The competition in these races are often less than most other races, so crafty racing veterans sometimes try to sneak better horses into these races in order to win a big prize. Of course, the risk is that someone will see your horses potential and buy her out from under you. Breeding The idea behind breeding your horse for money can be traced back to the 1700s, when three stallions were brought to England from the Middle East. These stallions, known for their speed, were mated with English horses that were known for their stamina. The result was a thoroughbred. These horses ideally were smaller and lighter than other breads, though built with powerful legs. Years later, as thoroughbreds made their way to the Americas, there developed a genealogical line that to this day has value to horse breeders. All racehorses can find their ancestors on this line and the closer to a clean bloodline your horse possesses, the higher the price to purchase and to use as a breeding stud. And now it is often breeding your horse that actually leads to your investment paying off. Stud fees can range from a few thousand to hundreds of thousands of dollars, with males being the most desirable as they can have multiple offspring per year. If the stud horse’s offspring become successful, his stud fee can skyrocket.
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Stud fees can range from a few thousand to hundreds of thousands of dollars, with males being the most desirable as they can have multiple offspring per year. The historical example is that of legendary horse owner Samuel Doyle Riddle. Riddle paid about $5,000 for a horse named Man o’ War. The horse had a short but successful racing career, but that wasn’t what made owner Samuel Doyle Riddle a legend. It was the 61 stakes winners that came from Man o’ War. Riddle’s $5,000 investment was estimated to bring Doyle over $1,000,000 dollars over the course of the horse’s life. Today, the philosophy remains the same though the numbers have gotten astronomical. In 2000, a syndicate purchased retiring 2000 Kentucky Derby winner Fusaichi Pegasus for an unbelievable $60 million dollars. The horse, a very young three years old when purchased, and estimated to live to approximately 25 years of age is expected to sire hundreds of offspring - an estimated $200,000 a piece in stud fees. However, while estimates are hard to prove it is widely believed that the investment has not paid off as hoped. So the question in investing in horses can come down to – can you put a price on winning? Because winning a race is what separates horse racing from, say, investing in underwater mining. Both offer the potential for big rewards. Both offer equally high risks. But only horses can win the race and get you invited into the winner’s circle.
There is No Substitute
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for Being the Best at What You Do Focused Philosophy
Runners win races because they condition themselves to do their absolute best all the time without substituting shortcuts for the right way to win. Our philosophy at MCM is much the same - we center our focus on being the best at everything we do, from providing the most comprehensive selection of Modern Coins and precious metals bullion to our stellar customer service and lightning fast order fulfillment.
Standing Apart from Others You’re an active or retired successful professional. You didn’t get there by following the crowd - you got there by thinking for yourself and knowing what you want. Our sales team is aware and respectful of the fact that our loyal customer base either knows exactly what they want or will ask us for assistance only when they need it. We don’t assign account managers and we don’t make cold sales calls.
Experience Matters Just getting involved? Who can you trust? Experience matters, and at MCM we have over two centuries of combined relevant experience. Our professional team consists of former graders, numismatists, expert metals traders, and research authors that represent an unparalleled standard in the industry.
The MCM Difference If you’ve never ordered from us - or never even thought about buying precious metals or coins - you owe it to yourself to experience the MCM difference. Our business philosophy, wide range of quality products, stellar customer support, and expertise in the field sets us apart from the crowd. Discover why MCM is trusted by more, with clients in over 50 countries around the world.
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S P E C I A L F E A T U R E | Drugs and Money
Drugs MONEY AND
It’s what makes the world go round.
By Jeff Patton
S
carface. Contraband. Blow. Breaking Bad. Film and television are obsessed with the drug trafficking trade. Why? Because audiences eat it up. Although they usually end with the drug trafficker dying or learning a moral lesson, the audience is mesmerized by fast cars, piles of cash, and scantily clad women. Even the Oscar nominated The Wolf of Wall Street contained multiple scenes of drug deals and money laundering. The dark underworld of trafficking is exposed for the audience to peer into from the safety of a movie theater seat or their own comfy couch. The real world of drug trafficking and money laundering aren’t quite as glamorous as the movies depict. Child prostitution, human trafficking, and even terrorist groups are intertwined with the trafficking of narcotics
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Drugs and Money | S P E C I A L F E A T U R E
Trafficking Drug trafficking exists in the global black market that is dedicated to the cultivation, manufacturing and distribution of drugs that are subject to the drug prohibition laws. The illegal drug trade generated about $321.6 billion in 2003, according to the UN. Because of the prohibition of alcohol in the 20’s and 30’s , organized crime grew with the American desire for alcohol. Where there’s a want, there’s a way. The same thing happened with modern day drug cartels. If people want illegal drugs (and they do), someone is going to find a way to profit off of it. Methamphetamine is gaining popularity with drug traffickers, due to its easy fabrication and high profit margin. Surprisingly, most meth labs are now located outside of the United States border and only the finished product is shipped in. The ingredients that are difficult to get your hands on in the United States, ephedrine and pseudoephedrine, are easily accessible in Southeast Asia. Anyone who has tried to purchase decongestants recently know how difficult it is these days. Your driver’s license and signature is required and you are put on a watch list. Try to purchase more than they deem necessary, you are flagged and not allowed to purchase more until a certain date. The “Golden Triangle” of Southeast Asia that once provided the world’s supply of opium, has now started exporting the raw materials for meth production instead. These materials are shipped to Mexico, where 80 percent of the meth consumed in the US is produced. On a positive note, Mexican cartels are actually responsible for shutting down about half of the meth production labs in the United States. Unfortunately, that has not reduced the tons of meth that is being shipped into the US. The money from the US sales is usually laundered through China, where cartels purchase more raw materials, appliances, and other household goods that are shipped to Mexico and sold legally. “El Chapo,” the largest Mexican cartel kingpin was named “Public Enemy Number One” for his meth import business. It’s estimated that “El Chapo” generated about $3 billion of personal income from his trafficking of marijuana, cocaine and meth. Even with his drug ties and illegal connections, “El Chapo” has made the Forbes list of world billionaires four years in a row.
Getting the drug in...
Smuggling drugs into the United States post 9/11 has become increasingly more difficult. With tighter border and greater surveillance, drug smugglers have resorted to more “unique” methods. Utilizing truck beds, cannons have been rigged to launch drugs hundreds of yards across the border. Functioning like a mobile, giant t-shirt launcher, the drugs are shot to a designated location. Later, someone inside the United States can retrieve the bundles. On July 12, 2012, a 220 yard tunnel was discovered crossing the border. The lit and ventilated tunnel created a direct route into the United States from Tijuana, Mexico. Drugs are being sent by air, under land and of course by sea too. Speed boats are often used to outrun Coast Guard ships. These nitro-powered boats are fast and maneuverable, but also loud and can be picked up by radar. Innovative traffickers have taken to travelling below the water’s surface now. Narcosubs are small, powered vessels that travel just below the ocean surface. These submersibles are capable of carrying hundreds of pounds of drugs while being invisible to both radar and the naked eye.
Terrorist Connections... Few people connect drug trafficking with terrorist organizations but all terrorists must finance their violent activities somehow. Drug trafficking is at the top of their list. The UN recognized the link between illicit drug traffic and other organized criminal activities which “undermines the stability, security and legitimacy of sovereign states.” Drug cartels concentrate their activities in socially and economically troubled regions of the world. It’s no coincidence that terrorist organizations thrive in the very same regions. Narcoterrorism is a term increasingly being used for known terrorist groups that engage in drug trafficking. Any terrorist group requires men, munitions, and money for its operations. The requirement for men and munitions is self-evident, but money can help with the first two, plus it has many more uses. Money can provide a whole infrastructure of support. Illegal drug trafficking is so profitable that even religious based terrorist organizations that do not approve morally cannot ignore the benefits.
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S P E C I A L F E A T U R E | Drugs and Money The terrorist group FARC in Columbia is the best example. FARC is almost entirely dependent on money gained from the production and export of cocaine. They often trade cocaine for arms. The Taliban and extreme Shi’ite groups have long maintained that although the consumption of opium and similar drugs is forbidden by their religion, the production and trade of drugs is not. Would reducing drug revenue actually reduce terrorist violence? Or would it lead to greater violence as they battle it out for even scarcer resources? James Piazza, a political scientist at Penn State, suggests that “each dollar in drug profit at least marginally increases the ability of cartels and other terrorist organizations to do their nasty violence; soldiers and car bombs don’t pay for themselves.” Even though cartels and the Taliban don’t need marijuana profits to be violent, they’d be somewhat more limited in their ability to conduct business without them. What worries some intelligence circles is terrorist organizations using drug smuggling techniques to get weapons past the border. Could a terrorist cell utilize one of the drug running narcosubs to bring weapons, such as a radiological dispersal device (RDD) or radiation emission device (RED), into the United States? The Department of Homeland Security is utilizing Predator drones to search waterways to ensure this doesn’t happen.
Drugs and money...
Although the US dollar has always been the main form of trade for drugs, times are beginning to change. With the weak US economy and low dollar value, more and more transactions are being done in Euros. Any time you are dealing in currency, weight and size become a major obstacle. Cocaine that’s worth $1 million on the streets weighs about 44 pounds, while a stack of US dollars worth $1 million weighs approximately 256 pounds. That’s a pretty lopsided logistical trade. To avoid having to carry large amounts of heavy currency, drug traffickers are now utilizing bartering systems for drug trade. Unfortunately, human trafficking is becoming one of the most common. It all starts locally. A street gang kidnaps a young girl. They sexually abuse her and then trade her to a larger cartel in Mexico for drugs. Those drug cartels sexually abuse the girl and then trade her to Middle Eastern or European drug traffickers for drugs or raw materials. The girl might be kidnapped off the streets of Southern California and end up in the red light district in Amsterdam. Martin Woods, who worked with DEA agents to uncover Mexico’ s largest trafficking cartels said this, “The drug industry has only two products: money and suffering. Massive profits and enrichment for the lucky few; suffering, misery and death for all others. You cannot separate one from the other.”
Laundering
Now that the drug cartels have made the deals, what do they do with all those piles of cash? Money laundering occurs in every country of the world. Most of the schemes require the funds to be transferred through several countries in the process of “cleaning” the illicit profits. It is usually always necessary to have a government employee handling part of the transaction. A man on the inside. In 2005, US Congressman Tom Delany was indicted on money laundering charges. US prosecutors average around one thousand convictions a year with average sentences of six years for these crimes. 26 | American Hard Assets www.ahametals.com
Money laundering is essentially taking illegally obtained funds and making it look like it is generated from a legal business, or taking dirty money and making it “clean.” The term is said to have come from the mafia, who used Laundromats to filter their illegal funds. Since drug trafficking was once primarily a cash business, they are the ones who perfected the process.
How it’s done... Depositing large amounts of cash is the first step in the money laundering process, and the most dangerous. Usually, this is done in an off shore account in a country that has bank-secrecy laws. The Bahamas, Bahrain, the Cayman Islands, Hong Kong, Antilles, Panama and Singapore are all major players in this first stage. Large amounts of cash deposited can draw a lot of attention in the US and banks are required to report high-value transactions. Once deposited, the money is transferred bank to bank. Wire transfers, between different accounts, in different names, in different countries. Deposits and withdrawals are made with continually varied amounts. Often times currency is changed and high-value items are purchased. Boats. Exotic cars. Luxury homes. These goods allow the form of cash to change. Money laundering comes at a cost. Often times, these goods are sold at a greatly reduced price in order to entice a quick sale and get some “clean cash.” Once the money is laundered, it has to be deposited into a “clean account.” Perhaps the money can be sent to a local business that the launderer is investing in for a cut of the profits. The criminal can also purchase a “golden screwdriver.” They buy a $10 million screwdriver that is only worth $1. Financial experts are often hired by drug lords to make their cash trails impossible to follow. They use a variety of techniques including “smurfing.” Smurfing uses multiple people or “smurfs,” to deposit very small, less suspicious amounts into an account. Any deposit less than $10,000 does not have to be reported by banks. Shell companies are another popular technique. These are completely fabricated companies that produce absolutely no goods or services. Fictional invoices and books are created to mimic transactions that never really occur at all. Often times these are abandoned warehouses that don’t even try to look like legitimate businesses.
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S P E C I A L F E A T U R E | Drugs and Money
Money laundering is a $1 TRILLION dollar a year business. The impact on the economy is staggering. That’s one trillion dollars that is not being taxed or is being taxed inappropriately. When criminals find an easy way to circumvent taxes and make a lot of money illegally, then crime really does pay. In 1996, the International Monetary Fund estimated that two to five percent of the worldwide global economy revolved around money laundering. How is anyone supposed to keep track of over 700,000 global wire transfers occurring every day? In 1970, the Treasury Department enacted the Bank Secrecy Act. This eliminated all anonymous banking in the United States. This is where the $10,000 rule came into effect. Any deposit, or multiple transactions, that total more than $10,000 to or from a single account in one day must be reported. Any bank teller that does not report this could face a prison term of up to ten years. One of the largest money laundering schemes of drug money was masterminded by a Harvard educated economist. Franklin Jurado was hired by a Columbian drug lord to launder his drug money. Jurado would deposit cash from sales of cocaine in the US into Panama banks accounts. He then transferred money, in less than $10,000 increments, into 100 bank accounts in 68 banks in nine European countries. Jurado had these accounts set up in the names of family members, friends and even mistresses. He then formed several shell companies in Europe to document the money as legitimate income. They would then transfer the money into legitimate Columbian businesses that the drug lord owned. A Monaco bank collapsed and an audit revealed that most of the accounts led back to Franklin Jurado. He was found guilty in Europe, served his time, and then found guilty again in the US and sentenced to 7 1/2 years. The governments win big time in drug trafficking cases. They seize all funds, property, and equipment and sell what they can at auctions. With bank secrecy legislation and the tight scrutiny and regulation in the United States, most would assume that only banks outside the US borders are involved in laundering money. But US banks appear to be just as involved. In 2006, a DC-9 was intercepted near the Gulf of Mexico carrying $100 million in cocaine. More importantly than
that, there was a paper trail that the DEA and IRS tracked back to one of the biggest banks in the United States: Wachovia, now a part of the mammoth Wells Fargo. Criminal proceedings were brought against the bank, but not any individuals. Wachovia settled with federal authorities by $100 million in forfeitures and $50 million in fines for failing to monitor the cash flow. The bank was also sanctioned for not applying the proper antilaundering mandates in money transfers to Mexican exchange houses. The money Wachovia shorted Mexican banks was equivalent to about one-third of Mexico’s gross national product. Even though Wachovia blatantly disregarded banking laws, they were merely slapped on the wrist when the fines equated to less than 2% of the banks $12.3 billion dollar profit. Wells Fargo acquired Wachovia during the 2008 market crash. They were completely cleared of any wrong doing and cooperated fully with the investigation. This was right after Wells Fargo became the beneficiary of $25 billion in tax payer’s money.
How does it end... It doesn’t. There is no easy solution to stopping drug trafficking and money laundering. Both businesses are far too lucrative to keep people from risking getting caught and facing charges. As long as there is a demand, there will always be someone willing to risk it. Tighter borders and banking laws will help, but organized crime always seems to find a way around, or loopholes through, the laws. Robert Mazur, who was a federal agent for 27 years and worked undercover as a money launderer once said, “The only way to stop the flow of this dirty money is to get tough on the bankers who help mask and transfer it around the world.” That’s one place to start. Jeff Patton (pseudonym) has worked for a governmental agency for fifteen years that deals with illegal and illicit transactions.
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F E A T U R E S T O R Y | Staying Under the Radar With Precious Metal Investments
STAYING UNDER THE RADAR WITH
PRECIOUS METAL INVESTMENTS
By Amber Ness
On a sweltering spring day in May of 2003, a team of heavily armed government agents burst through the gates of Robert Kahre’s Las Vegas offices. Kahre and more than 20 stunned employees were brusquely handcuffed and held at gunpoint, charged with several counts of tax fraud. For nearly a decade, Kahre had been paying his employees in United States gold bullion coins and reporting their wages based on the coins’ face value. And he assisted 35 other companies to do the same. Needless to say, the IRS was not impressed. Less than two years later, the Department of Justice released formal indictments, and the trial began in May of 2007. Kahre and his cohorts were formally charged with 109 counts of tax fraud, including willful failure to file, evasion, and conspiracy. The case’s nine defendants were facing 161 charges — and hard time in the state penitentiary. The crux of the case was intent, and it brought several important questions to light. For one, were Kahre’s workers independent contractors, responsible for paying their own taxes? Or were they employees, whose taxes should have been withheld by their employer? The second issue was the United States’ dual monetary system. If the value of one system supersedes the value of the other, how does anyone determine taxable income? No court had ever ruled that the gold coins used by Kahre were required to be reported based on Federal Reserve Note market value. It was a conundrum the jury couldn’t untangle. Four months later on September 17, the case came to a jaw-dropping close. The government had failed to prove intentional violation of tax laws and the jury was hung. In May of 2009 — almost six years to the day since the raid on Kahre’s offices — the businessman found himself standing before a second jury of his peers. Within three months, Kahre and three fellow defendants were found guilty of a laundry list of felony tax violations from conspiracy to evasion and hiding assets.
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Photo of Robert Kahre by Craig L. Moran Kahre was sentenced to 15 years and ordered to pay restitution of $16 million. To the prosecutors, the IRS, the federal government, and many American citizens, justice was served. But was it really? It depends who you ask. A vocal cadre of Kahre supporters believe the business man did not violate tax laws, and what Kahre was actually guilty of was shining a light on the IRS’s massively confusing tax codes and the debasement of the U.S. dollar. In total, Kahre paid his employees $25 million in untaxed wages and roughly $95 million to people who worked for client companies. To some, Kahre was within his rights, elevating him to the status of hero. To others, Kahre is a fraud. Yet this little-known, landmark case poses an interesting question — especially for those who collect or invest in precious metals — about the fine line between willfully breaking tax laws and finding creative, legal means around them. Precious Metals, the IRS and a Nation’s (Convoluted) Reporting Regulations Before we delve into the different ways bullion investors stay under the radar, it’s important to understand current federal reporting regulations. Unfortunately, this can be tricky. Investors, dealers and industry-insiders spend a great deal of time navigating the often vague (and usually perplexing) federal reporting requirements for buying and selling gold, silver, and other precious metals.
Staying Under the Radar With Precious Metal Investments | F E A T U R E S T O R Y Indeed, a great deal of the confusion is rooted in the seven years it took the IRS to officially publish gold reporting regulations, which were mandated under the Tax Equity and Fiscal Responsibility Act.
plans allows you to hold bullion coins and bars in a depository (depending on the custodian), upon selling it is possible to avoid a capital gains tax on your profit.
Despite the confusion, the IRS lists several precious metals as reportable, along with the ounce threshold that requires a Form 1099. These include 1 kilo gold bars, 25 ounces in Gold Maples or Mexican Onzas, 1000 ounces in silver bars, $1000 face value in pre-1965 U.S. 90 percent silver coins, 25 ounces in platinum bars, and 100 ounces in palladium bars.
Only particular coins and bars are eligible for contribution in your selfdirected IRA. For example, most sovereign gold bullion coins of .995 fineness (and silver of .999 fineness) are eligible.
Further, because the US government considers precious metal coins to be collectibles — unlike an investment in stocks — they come with a brutal 28 percent tax on capital gains. That rate applies to other collectibles, like art, antiques, gemstones, and wine. What’s obvious to an insider may be surprising to the layman: for the most part, bullion and numismatic coin purchases are not considered reportable. Yet if you invest using cash, check, or a money order, and your bill is more than $10,000, the dealer has to submit a Report of Cash Payments Over $10,000 Received in a Trade or Business, lovingly dubbed a Form 8300. The problem with all of this — besides a shockingly hefty tax bill — is that we’ve barely scratched the surface of reporting regulations for precious metals. Keep in mind, in no way should the things said in this article be construed or interpreted to be advice for your specific situation. Before making any financial decision, you should consider all factors and consult with a qualified tax professional. Avoid vs. Evade: Staying Under the Radar with Precious Metal Bullion Part of being a successful businessman is knowing how to navigate the system. This often includes finding legal loopholes around paying certain taxes. For the unscrupulous, this sometimes means devising clever tactics that blatantly disregard tax regulations while remaining just below the radar — until they’re caught. So let’s take a closer look at some of the ways the movers and shakers in the gold, silver, platinum, and palladium industry manage to circumvent the man, both legally and illegally. Legally Avoiding Taxes on Precious Metals Self-Directed IRAs One difference between a standard Individual Retirement Account (IRA) and a Self-Directed IRA — both offer certain tax advantages for retirement savings — is that precious metals, stocks, bonds, and mutual funds can be managed in the latter. In a Self-Directed IRA, a trustee or custodian maintains the account holder’s assets, including filing IRS reports, outlining tax regulations, and other administrative tasks. Owning a Self-Directed IRA provides one key tax advantage few bullion investors can ignore: because some of the retirement savings
Examples include American Eagles, Australian Kangaroos and Nuggets, Austrian Philharmonics, U.S. Gold Buffalos, Canadian Maples, and others (so consult a trusted dealer). Gold, silver, platinum and palladium bullion bars and rounds are also eligible, as long as they were produced by a COMEX- or NYMEXapproved refiner and meet certain fineness standards. Avoiding Sales Tax on Precious Metals There are certain states that do not charge sales tax on bullion investments of a particular size. For example, in some states a bullion purchase of $1000 would be exempt from sales tax. This makes buying in bulk attractive to some investors, though the exemption does not apply in the entire country, and for small investors, the bill may not be realistic. Finding an online dealer you trust is another great way to avoid paying sales tax. It’s important to remember that the dealer’s home state dictates whether sales tax is charged, and purchasing across state lines can be a real money-saver. The 24-ounce threshold is another tax loophole private sellers should be aware of. An individual can sell up to 24 ounces of bullion in a year before being required to report with a Form 1099. Consult your tax advisor and trusted bullion dealer to learn which gold and silver coins fall under the 24-ounce threshold. The Precious Metals Tax Paradox The IRS classifies physical metals as collectibles. Thanks to this classification, gold, silver, and other bullion investments held for longer than a year’s time are charged long-term capital gains tax at a significantly higher rate than other investments like stocks and futures: 28 percent. This includes ETFs that own physical metals. Collectibles held in an a self-directed IRA have a capital gains tax rate of zero — a great way to avoid the precious metals tax paradox. Gifts: Avoiding Inheritance and Estate Taxes As we’ve mentioned, taxes on precious metal purchases are higher than on stocks and other investments. Since gifts are not taxable, offering bullion coins and bars to your heirs before you die is one way to avoid inheritance and estate taxes. Such gifts are non-taxable up to $13,000 for each recipient in any given year. Benefactors are legally allowed to bequeath up to $1 million over their lifetime. Another way to avoid the gift tax is through the Uniform Transfers to Minors Act (UTMA). It allows tax-free gifts to minors of up to $14,000 if the gift is transferred to a custodian — who is legally allowed to be the donor — until the minor comes of age. It is important to note that the gift is included in the donor’s estate if he or she passes away while acting as custodian.
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F E A T U R E S T O R Y | Staying Under the Radar With Precious Metal Investments Illegally Evading Taxes Using Precious Metals Transactions in Cash One way some people skirt a paper trail is by purchasing and selling gold and silver coins in cash. In many American cities and towns, gold stores can be found in just about every strip mall on just about every block. The process is simple: A customer visits his local coin dealer with a pocket full of cash. He purchases a coin and sits on it until gold prices rise. Then he sells the coin for cash. No paper trail equals no capital gains tax — a practice the IRS doesn’t take to kindly.
The infamous 1989 La Mina laundering case is another prime example of bullion being used in illicit operations. The Medellin drug cartel fabricated receipts for non-existent jewelry and gold sales to launder millions of dollars for South American drug lords. Eduardo Martinez Romero, who was apprehended in Colombia, used phony jewelers and bullion dealers to hide enormous sums of cash earned by selling cocaine. Martinez and his cohorts managed to stay under the radar because wholesale jewelers and bullion dealers tend to trade in large amounts of cash. Most of the bars Martinez transferred were actually bars of lead that he painted gold to avoid detection.
Cash-Only Businesses While buying and selling goods and paying employees in cash is legal — and relatively common — it is also likely to get the attention of the IRS. Yet small businesses continue to fly under the government’s radar because the IRS tends to focus on larger corporations at tax time.
The Real Wolf of Wall Street
The reason? It’s much more difficult for the government to pin down thousands of employers and their workers who are hiding small amounts of cash than it is to nail a few wealthy business owners hiding multi-millions.
Directed by Martin Scorsese and starring Leonardo DiCaprio, the film recounts the unbelievably debaucherous true story of Jordan Belfort, a New York stockbroker who ran a firm in the 1990s and was later convicted of securities fraud.
Similar to a collector purchasing coins with cash, some coin dealers operate cash-only businesses where they buy and sell coins in cash, avoiding capital gains tax — along with the IRS.
Belfort’s pump-and-dump scheme earned him millions, which he hastily hid in a Swiss bank account. Drug addicted and over-sexed, Belfort was finally indicted on securities fraud and money laundering for which he spent a brief 22 month stint in prison.
Payment in Kind The case of Robert Kahre paying his employees in gold coins — and the consequent 15 years he was sentenced to prison — is perhaps one of the most interesting modern cases of illegally paying-in-kind. Payment-in-kind is a former tax loophole primarily used by wealthy executives who would take payment in the form of valuable goods, which they would turn around and trade or sell for other goods and services. Like with Kahre, payment-in-kind often includes gold and silver bullion coins, offered in payment for labor. As in the Las Vegas case, neither the employer or the employee files income taxes for the goods, effectively avoiding taxes on the entirety of their income. Smuggling and Money Laundering Money laundering is the means of taking “dirty” money that has been obtained criminally and “laundering” it to make it appear that it came from a legal source. Here is a recent example of money laundering by way of precious metals: On February 6 of this year, Natalie and Jed Ladin of Lauderdaleby-the-Sea, Florida were arrested and charged with conspiracy to smuggle gold into the United States from Guatemala, along with conspiracy to commit money laundering.
On Christmas Day of 2013, Paramount Pictures dropped a highlyanticipated black comedy (along with the F-bomb a whopping 506 times) with the release of The Wolf of Wall Street.
Tragically, Belfort was able to swindle away $200 million from unsuspecting investors. He has been ordered to give 50 percent of his income to victims of his scam — and he still owes millions. According to a recent report in the Wall Street Journal, Wolf of Wall Street has earned more than $220 million, and Belfort promises to give 100 percent of the proceeds to his victims. Fat chance, says the U.S. government, since Belfort recently skipped to Australia in an attempt to evade paying taxes. Robert Nardoza, spokesperson from the United States attorney said, “We want to set the record straight. Belfort’s making these claims, and they’re not factual. He’s in Australia and using that loophole to avoid paying.” Moral of the story? Some people spend their entire lives bucking the system as a way to get rich. Since the early days of civilization, there are those who don’t lose a wink of sleep trampling over others — and breaking the law. Yet, at the same time, countless law-abiding citizens work to support their families and make an honest living. For them, finding simple, legal loopholes to save an extra buck can be the difference between making the mortgage this month. And for that, we applaud them.
Allegedly, they reported more than $24 million worth of gold as scrap worth only $6.5 million. They planned to sell the gold at their jewelry business. If convicted, both are facing 20 years behind bars.
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global perspective
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M I N I N G A N D M I N E R A L S | A Different Kind of Search for Treasure Under The Sea
A Different Kind Of Search For Treasure
Under The Sea
By Gabe Benson
A
s we continue to hurtle along at lighting speed through the age of cellphones, flat screen televisions, tablets and a million other gadgets, the manufacturers are finding it harder and harder to find not just gold and silver, but the more specialized metals used in their creation. Many scientists believe that there are vast quantities of these rare materials lying out in the open just ready to be scooped up for processing. So why aren’t they doing that right now? The answer is simple. No one has quite figured out how to pull these riches off the ocean floor one mile below the surface.
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It is believed that it is possible to find vast amounts of nickel, copper, cobalt, manganese, vanadium, molybdenum, platinum, lead, zinc, diamonds, gold and silver. As of this printing, twenty-five companies have been granted licenses to begin mining and that number is expected to grow exponentially over the next couple of years as rising commodity prices, shortages and new technology make what was once impossible at least feasible.
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On the ocean floor, as water is super heated, it’s gasses vent out of the Earth’s crust. They combine over the course of millions of years to create sulfide deposits. These deposits, or nodules, are literally sitting like giant basketballs on the ocean floor. Once a good location is determined a mining company sends down a ROV (Remotely Operated Vehicle) to locate the deposits, cut away a sample and return to the ship above to see if the nodule contains enough material to warrant a full scale mining operation.
the nodules (and other things) through a long hose into the mining ship for processing. The second and more preferred method is known as the Continuous Line Bucket system. This works just like it sounds with giant buckets scooping along the ocean floor bring up buckets full of materials to be sorted through for the desired treasure. Of course, the easiest places to mine have shallow ocean floors. That is why most of the proposed activity to date has been done in the Central and Eastern Manus Basin around Papua New Guinea.
At that point, the extraction process can proceed using two methods. The first is a suction type device that literally sucks
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M I N I N G A N D M I N E R A L S | A Different Kind of Search for Treasure Under The Sea
While there are several companies looking to get into this market there are three that are leading the pack: Nautilus Minerals, Neptune Minerals and UK Seabed Resources (a division of Lockheed Martin). Nautilus Minerals is listed on the Canadian Stock Exchange under NUS and is currently trading at around twenty-five cents a share. In October of 2010, Nautilus believed that they had reached a deal with Papua New Guinea for the explosive rights to mine for high-grade copper and gold. The project code named SOLWARA PROJECT 1 was to be the first full scale deepsea mining project using a brand new state of the art mining ship built by Nautilus. However, to-date, nothing has been brought to the surface . Nautilus and the New Guinea government began a dispute almost immediately regarding the proceeds of any find. In 2013, the two sides went to arbitration and the decision was that the government of New Guinea was to purchase a 30% stake in the Solwara Project. However, in February of 2014, Nautilus terminated its agreement with New Guinea due to lack of payment and the project is dead in the water. At this point, no one seems to know what the future holds for the project. Neptune Minerals is a privately owned company that holds the exclusive licenses on approximately 278,000 square kilometers of ocean floor in the territorial waters of New Zealand, the Federated States of Micronesia, New Guinea and Vanatu. They are currently in the exploratory stage, and hope to have mining operations up and running by 2015. UK Seabed Resources is a division of the United States defense contractor Lockheed Martin. They are currently sitting on licenses for just under 75,000 square miles of ocean and are also hoping to begin operations in the next year or so. While these companies are primed for potentially huge profits, the cautionary tale of Nautilus minerals makes any type of investing potentially fraught with danger and delays.
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Different Kind of Search for Treasure Under The Sea | M I N I N G A N D M I N E R A L S
Recent surveys show that the Cook Islands are in possession of over 2 million square kilometers of sea floor that has potentially ten billion tons of mineral deposits.
But the thought of riches can be very tempting and can cause even countries to dream. Have you ever heard of the Cook Islands? They are a beautiful archipelago of over 15 islands spread out between Australia and Hawaii. And while they are gorgeous to look at, and named after Captain Cook, they are also one of the poorest countries per capita in the world. But they do have one thing that they believe will help them make the jump to the big leagues. Recent surveys show that the Cook Islands are in possession of over 2 million square kilometers of sea floor that has potentially ten billion tons of mineral deposits. While mining isn’t expected to begin until the end of the decade, the Cook Islands are already in discussion with numerous mining companies and other countries to create a partnership to bring these riches to the surface. As the race to be the first to really capitalize on the vast riches on the ocean floor, the only truly profitable underwater mining operation is currently being conducted off the coast of the African country of Namibia. The De Beers Company currently and successfully mines for diamonds in depths of 100 to 200 feet of water off the coast and in the last year, according to De Beers website, pulled more diamonds from the water than from land based mines.
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M I N I N G A N D M I N E R A L S | A Different Kind of Search for Treasure Under The Sea
“We don’t have a good track record of achieving balance anywhere else – think of the buffalo and the rainforest – so the question in, can we get it right.” And as with any mining operation, the battle between the miners and environmentalists takes center stage before any battle can begin. The fear is that as the mining takes place and removes the nodules, the underwater sea life will either be displaced or die. Even those completely on the side of the miners, find that disruption is inevitable and probably not completely solvable. Dr. Jon Copley, a biologist from the University Of Southampton recently told the BBC that “We don’t have a good track record of achieving balance anywhere else – think of the buffalo and the rainforest – so the question is, can we get it right?” Prof. Rachel Mills also of the University Of Southampton responded also to the BBC’s David Shukman by saying “Everything we are surrounded by, the way we live, relies on mineral resources and we don’t often ask where they come from. I actually think it is the same moral questions we ask whether it’s from the Andes or down in the Bismarck Sea.” At this point is hard to argue that the potential for wealth certainly exists. The fact that there are giant deposits of precious metals and minerals are nearly indisputable. And our need for these commodities will certainly go up, not down. So the question is what will happen first? Will the technology allow us to harvest these materials at the right cost? Or will the environmentalists, government agencies and just plain greed get in the way of getting the job done. At this point, despite all hopes to the contrary it appears that we are years away from our first full scale operation and almost anything can happen between now and then.
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H A R D A S S E T S | Black Swan, Yellow Gold
Black Swans, Yellow Gold
“The inability to predict outliers implies the inability to predict the course of history. . .But we act as though we are able to predict historical events, or, even worse, as if we are able to change the course of history. We produce thirty-year projections of social security deficits and oil prices without realizing that we cannot even predict these for next summer — our cumulative prediction errors for political and economic events are so monstrous that every time I look at the empirical record I have to pinch myself to verify that I am not dreaming. What is surprising is not the magnitude of our forecast errors, but our absence of awareness of it.” - Nicholas Taleb, The Black Swan — The Impact of the Highly Improbable, 2010
“Having been mugged too often by reality, forecasters now express less confidence about our abilities to look beyond the immediate horizon. We will forever need to reach beyond our equations to apply economic judgment. Forecasters may never approach the fantasy success of the Oracle of Delphi or Nostradamus, but we can surely improve on the discouraging performance of the past.” - Alan Greenspan, The Map and the Territory, 2013
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Black Swan, Yellow Gold | Hard Assets
Gold as a deflation hedge
By Jonathan Kosares
This short study examines gold’s performance under some of the most commonly predicted worst-case economic scenarios — a 1930s-style deflation, chronic Japanese-style disinflation, a 1970s-style runaway stagflation, and a Weimar-style hyperinflation for the purposes of this article, we will focus on deflation and disinflation. “That men do not learn very much from the lessons of history,” Aldous Huxley once wrote, “is the most important of all the lessons of history.” Though I agree with Huxley’s assessment when applied to contemporary policymakers and central bankers, I do not agree with it when applied to their counterparts in the private sector, i.e., the individual investors. As justification, I offer the soaring statistics of late on private gold ownership both here and abroad, most of which has been accumulated for safe-haven purposes. Individually, we can and do learn the lessons of history even if we do not always do so collectively. This piece is for those who believe, like Nicholas Taleb, that it is just as important to prepare for what we cannot foresee as what we can. Some might put their money on the latest Oracle of Delphi or the contemporary reincarnation of Nostradamus — or even an all-seeing eye plug-in that can be downloaded from the internet — but in the end, such notions are the dreams of government planners and retired central bankers. For the rest of us, a solid hedge in gold coins, as your are about to read, is the more sensible and reliable alternative — a wealth haven for all seasons.
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S E C T I O N N A M E | Story Name
Gold as a deflation hedge (United States, 1929) WEBSTER DEFINES DEFLATION AS A “CONTRACTION IN THE VOLUME of available money and credit that results in a general decline in prices.” Typically deflations occur in gold-standard economies when the state is deprived of its ability to conduct bailouts, run deficits and print money. Characterized by high unemployment, bankruptcies, government austerity measures and bank runs, a deflationary economic environment is usually accompanied by a stock and bond market collapse and general financial panic — an altogether unpleasant set of circumstances. The Great Depression of the 1930s serves as a workable example of the degree to which gold protects its owners under deflationary circumstances. First, because the price of gold was fixed at $20.67 per ounce, it gained purchasing power as the general price level fell. In 1933, when the U.S. government raised the price of gold to $35 per ounce in an effort to reflate the economy through a formal devaluation of the dollar, gold gained even more purchasing power. President Franklin D. Roosevelt also confiscated gold bullion by executive order in concert with the devaluation, but exempted “rare and unusual” gold coins which later were defined by regulation simply as items minted before 1933. As a result, only those citizens who owned gold coins dated before 1933 were able to reap the benefit of the higher fixed prices. The accompanying graph illustrates those gains, as well as the gap between consumer prices and the gold price.
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Echo
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Hard Assets | Black Swan, Yellow Gold
Gold as a deflation hedge
•
Second, since gold acts as a stand-alone asset that is not another’s liability, it functioned as an effective store of value prior to 1933 for those who either converted a portion of their capital to gold bullion or withdrew their savings from the banking system in the form of gold coins before the crisis struck. Those who did not have gold as part of their savings plan found themselves at the mercy of events when the stock market crashed and the banks closed their doors (many of which had already been bankrupted).
If ownership is not restricted, it would turn out to be the best of all possible worlds for gold owners. Its purchasing power would increase as the price level fell, and the price itself could rise as a result of increased demand from investors hedging systemic risks and financial market instability.
•
Note: That, by the way, is the primary reason governments tend to restrict gold ownership when confronted with widespread bank runs and failing financial markets. Governments seize gold not because they need the money; they seize it to cut off the escape route and force capital flows back into banks and financial markets. As an aside, that is precisely the reason why governments have an interest in controlling the price of gold. Former Fed chairman Paul Volcker, it has been copiously reported, once said, “Gold is my enemy. I’m always watching what it is doing.” Though there is no direct evidence I know of that the Fed or Treasury Department intervened directly in the gold market during Mr. Volcker’s tenure, his statement does reflect the acute interest in gold on the part of monetary policy-makers. Alan Greenspan voiced a similar interest in gold throughout his Fed chairmanship and still does today, though unlike Volcker he has always defended gold and expressed an appreciation for its use as a form of money or final payment or reconciliation. Gold, in the end, is not just competition for the dollar; it is competition for bank deposits, stocks and bonds most particularly during times of economic stress — and that is the source of enduring interest among policy-makers.
How gold might react in a deflation under today’s fiat money system is a more complicated scenario. Even deflation under a fiat money system, the general price level would be falling by definition. Economists who make the deflationary argument within the context of a fiat money economy usually use the analogy of the central bank “pushing on a string.” It wants to inflate, but no matter how hard it tries the public refuses to borrow and spend. (If this all sounds familiar, it should. This is precisely the situation in which the Federal Reserve finds itself today.) In the end, so goes the deflationist argument, the central bank fails in its efforts and the economy rolls over from recession to a full-blown deflationary depression. How the government treats gold under a deflationary scenario will play heavily into its performance: •
If gold is subjected to price controls and restricted ownership, as it was in the 1930s deflation, it would likely perform as it did then, i.e., its purchasing power would increase as the price level fell. Under such circumstances, the ownership of “rare and unusual” gold coins might once again come into play.
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The disinflationary period leading up to and following the financial market meltdown of 2008 serves as a good example of how the second scenario might unfold. The disinflationary economy is a close cousin to deflation, and is covered in the next installment in this series. It provides some solid clues as to what we might expect from gold under a full deflationary breakdown.
Black Swan, Yellow Gold | Hard Assets
Gold as a disinflation hedge Gold as a disinflation hedge (United States, 2008) JUST AS THE 1970s REINFORCED GOLD’S EFFICIENCY as a stagflation (combination of economic stagnation and inflation) hedge in the modern era, the 2000s decade solidly established gold’s credentials as a disinflation hedge. Disinflation is defined as a decrease in the inflation rate over time (or a constantly low inflation rate), and should not be confused with deflation, which is an actual drop in the price level. Disinflations, as pointed out above, are close cousins to deflations and can evolve to that if the central bank fails, for whatever reasons, in its stimulus program. Central banks today are activist by design. To think that a modern central bank would sit back during a disinflation and let the chips fall where they may is to misunderstand its role. It will attempt to stimulate the economy by one means or another. The only question is whether or not it will succeed. Up until the “double oughts,” the manual on gold read that it performed well under inflationary and deflationary circumstances, but not much else. However, as the decade of asset bubbles, financial institution failures, and global systemic and sovereign debt risk pro-
gressed, gold marched to higher ground one year after another. As events unfolded, it became increasingly clear that the metal was capable of delivering the goods under disinflationary circumstances as well. The fact of the matter is that, during the 2000s even as the inflation rate hovered in the low single digits, gold managed to rise from just under $300 per ounce in the early 2000s to just over $1900 per ounce by 2011 — a gain of over 600%. Since then, gold has taken a breather. As this essay is written, it is trading in the $1250 per ounce range — still up over 400% in the new century. In the aftermath of the 2008-2009 financial crisis something else happened to the yellow metal: It firmly re-established itself with private investors and nation-states as perhaps the ultimate asset of last resort. As the economy flirted with a tumble into the deflationary abyss in recent years, it encouraged the kind of behavior among investors that one might have expected in the early days of a full deflationary breakdown with all the elements of a financial panic. Stocks tumbled. Banks teetered. Unemployment rose. Mortgages went into foreclosure. Nation-states defaulted on their debts. Disinflation globally became chronic and debilitating.
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Hard Assets | Black Swan, Yellow Gold
As it became evident that the economic and financial malaise could become a permanent fixture (the new normal), gold came under accumulation globally. In 2009, U.S. Gold Eagle sales, a bellwether for public interest in the metal, broke all records by a wide margin, and the pace of accumulation has remained at high levels ever since. The world’s central banks, historically at odds with each other with respect to currency policies, have teamed up to deliver ever larger doses of monetary stimulus that goes far beyond ordinary tinkering with interest rates. Money printing has become a global undertaking — a phenomenon the consequences of which are yet to be determined.
Meanwhile, the disinflationary crisis that began in 2008-2009 is still with us and, through it all, gold demand has gone undeterred. Although many thought the price correction would dampen interest, the opposite has happened: It encouraged a new wave of investment interest particularly in the Far East where low prices were greeted with a wave of public demand. In 2013, China reportedly imported nearly the equivalent of the world’s annual gold mine ouput — almost 2700 tonnes — and other emerging and developed nation-states alike have experienced their own versions of a new gold rush to own. All in all, as the two graphs immediately above amply demonstrate, the 21st century ushered in a new era for gold, one in which it filled a hole in its resume. Now gold has come to be viewed as an effective hedge against one of contemporary economies’ most nettlesome problems — chronic disinflation and the systemic financial risks it periodically imposes.
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L I F E S T Y L E & L U X U R Y | Watches Of The Skies
Watches of the Skies
By Ed Estlow
Whether we’re talking flight instruments, multi-time zone watches, or world timers, these watches are a category unto themselves.
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Watches Of The Skies | LIFESTYLE AND LUXURY
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S E C T I O N N A M E | Story Name
They sound grand, don’t they? “Watches of the skies!” And when you dig into them a bit, you learn that pilot and travel watches have become some of the most iconic watches ever produced. Let’s step back and briefly define both categories. We’ll say pilot watches are those which augment a pilot’s other instruments to aid in flying or navigating the aircraft. Watches like the Breitling Navitimer with its slide rule, “navigational computer” bezel come to mind. On the other hand (no pun intended), we’ll call watches with two or more time zones travel watches. These watches are obviously quite functional when not in the air, but since air travel is a common way to get from one time zone to another, they qualify. Especially when one takes into account the fact that the initial development of perhaps the quintessential dual time zone watch, the Rolex GMT, was a joint venture between Rolex and Pan American World Airways. (Pan Am subsequently issued Rolex GMT watches to all their pilots.) So, by virtue of their heritage, GMT watches are a subset of pilot watches. But in general, what makes a pilot watch? Well, first and foremost, readability. The numerals are typically rendered in a large and easy to read font. Readability also implies a bigger watch and high contrast between dial and hands. The Laco Observation Watch for instance, used in the 1930s and 1940s, was 55mm in diameter – well over 2 inches. These observation watches (Laco was one of five manufacturers contracted to make such watches) featured a black dial with offwhite hands for maximum contrast and a huge crown so they could be operated while wearing gloves. These watches also had a hacking feature. This meant the watch could be stopped by pulling the crown out to the set position. This way, all members of a flight crew could set and synchronize their watches by pushing the crown in at a command from the pilot. We’ve all seen this dramatized in old war movies. 50 | American Hard Assets www.ahametals.com
Watches Of The Skies | LIFESTYLE AND LUXURY
Pilot watches have shrunk since the days of observation watches, but all feature the same excellent legibility and many have that signature large crown. Another feature often found on pilot watches is the chronograph, or stopwatch function. This was useful for measuring the time the aircraft covered a specific ground distance and used to determine ground speed. Similarly, the timing function could be used with an altimeter to calculate rate of ascent or descent. Add a rotating slide rule bezel, such as that found on the Breitling Navitimer (and its forerunner, the 1940s era Chronomat), and the navigator could perform all the calculations necessary to get the aircraft to its destination. These days, such pilot watches have been rendered obsolete by on-board instrumentation and navigation systems. However, they still perform as well as they ever did when used as backup instruments. And some believe they can be a “badge of honor,” or a “club insignia,” signaling that the wearer is indeed an aviator (we’re a bit dubious about this particular use of pilot watches).
These days, such pilot watches have been rendered obsolete by on-board instrumentation and navigation systems.
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L I F E S T Y L E & L U X U R Y | Watches Of The Skies
And certainly, pilot watch-inspired chronographs abound. There’s the IWC Big Pilot series, behemoth watches at 46mm and thickness according to function – there are three-hand watches, chronographs, and even a perpetual calendar watch in the lineup. And Breitling still has several chronographs with a distinct pilot lineage. A more practical and functional watch is the dual, or multi-time zone watch. As we mentioned above, the Rolex GMT was originally developed by Rolex in conjunction with Pan Am. Pilots for the world-traversing airline needed a way to read Greenwich Mean Time (GMT, now replaced by Coordinated Universal Time, or UTC) and still retain the ability to read the time where they were. In fact Rolex’s GMT movement is unique in that its hour hand can be quick-set to the local time zone by the crown while the 24-hour GMT hand remains stationary. In other GMT movements, the opposite usually is true. The GMT hand is quickset while the hour and minute hand need to be advanced in the manner typical of other watches. This gives the Rolex a leg up in operability. An exception to the above is the Sinn 757 UTC. While not technically a UTC (or GMT) watch, it has an additional hour hand which can be set separately via the crown, and which reads a second time zone in the normal 12-hour mode.
Rolex’s GMT movement is unique in that its hour hand can be quick-set to the local time zone by the crown while the 24-hour GMT hand remains stationary.
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Watches Of The Skies | LIFESTYLE AND LUXURY
Rolex’s latest entry in the travel watch category is the Sky-Dweller. The Sky-Dweller has a unique display for the second time zone – a non-concentric 24-hour rotating ring set in the dial. UTC time is read via the red indexing arrowhead at the top of the ring. A nice subtle touch is the 12 month calendar windows incorporated just outside the hour indices. As with the GMT, the main hour hand of the SkyDweller is a quickset hand while the 24-hour ring remains stationary. You’ll also see multi-time zone watches with fully separate displays of the time in different time zones. The Franck Muller Master Banker is one such watch. The main display is one zone, and two sub-dials (at six o’clock and twelve o’clock) each present the time in additional zones, all controlled from the single crown. The Jaeger-LeCoultre Duomètre Unique Travel Time is another timepiece with two time zones displayed on separate sub-dials. The second time zone’s minute hand is independently set, so it can indicate the time in zones a half hour off conventional time (India, for example). The hour is advanced or set back via two pushers on the left side of the case. The really nifty feature though, is a globe display of the northern hemisphere as seen from above the north pole. Here, one can observe the local time around the world in terms of hours added to or subtracted from Greenwich Mean Time. Perhaps the ultimate “watch of the skies” is the Omega Speedmaster Professional, the first watch worn on the moon. To this day, the Speedy, as it’s known to aficionados, is the only watch NASA has ever qualified for Extra Vehicular Activity, or EVA – space walks to you and me. Not only was the Speedmaster Professional the first watch worn on the moon (whether it was the only watch worn there is an ongoing debate), it was the watch used to time the critical rocket burns that got Apollo 13 home. There are those who say any chronograph could have timed those burns. To which we say, the Speedy is the one which qualified for the job in the first place. It’s been on every United States manned space mission since the first manned Gemini flight. Truly, the Speedmaster Professional sits at the pinnacle of the group of timepieces known as Watches of the Skies.
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L I F E S T Y L E & L U X U R Y | Floating Seastead City Offers Alternative Social System
Photos Courtesy of Seasteading Institute
Floating Seastead City Offers Alternative Social System
BY MILA PANTOVICH JustLuxe For those of you who are growing increasingly frustrated with the government, you’ve probably already heard of “seasteading,” — which is to live in a city floating offshore and away from any land-based jurisdiction. The idea essentially allows anyone to avoid politics all together, including taxes, and gives them the opportunity to create their own rule set to live by. Though the idea isn’t entirely new, the Seasteading Institute is getting closer and closer to making it a reality. Partly established by PayPal founder Peter Thiel, the Seasteading Institute’s ambition is for the seasteads to “guarantee political freedom and thus enable experimentation with alternative social systems.” According to the Independent, the development is planning on housing 225 permanent residents and 50 hotel guests. The design will essentially be interlocking boxes that allow for organic growth, allowing one to dismantle or shift them. The platforms mean that if you get in a nasty spat with your neighbor, you can have your home simply towed elsewhere.
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The homes will all have terraces that give sea views, which shouldn’t be that hard to execute considering you’re living in a floating city. Electricity will be attained through solar energy and water for drinking and bathing will be sourced from rainwater. If you get sick (or are just tired of sea life), not to worry, because a helipad will be able to transport you to land. For safety reasons, the initial plans may be to anchor the city inside the territorial limits of a “host” country. The institute is apparently chatting with up to five governments and is hoping to have the choice made in 2014, with residents moving in by the end of the decade.
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L I F E S T Y L E & L U X U R Y | $628k Rare Lalique Decanter of The Macallan Single Malt Whiskey
$628k Rare Lalique Decanter of The Macallan Single Malt is World’s Most Expensive Whisky BY JAMES ROTHAAR JustLuxe
An ultra-rare six-liter “Imperiale” Lalique crystal decanter filled with The Macallan M single malt just set a new record as the world’s most expensive whisky after it was sold by Sotheby’s in Hong Kong for an astounding $628k. One of only four large format custom-made decanters of M anywhere in the world, it holds nearly 1.6 gallons of the world’s most sophisticated single malt whisky and is the largest decanter ever made by Lalique, the famed French crystal artisans. M represents a collaboration between three master craftsmen; design genius Fabien Baron, Lalique President and CEO Silvio Denz, and Bob Dalgarno, Whisky Maker at The Macallan. Each of the four Imperiale decanters required over 50 hours of work by 17 artisans. Each decanter is engraved with the name of a Roman Emperor. Of the four, two will be housed in The Macallan’s own archives, and one was acquired by private collector in Asia. The fourth, engraved with the name of Constantine the Great, was featured in the Sotheby’s sale. Of the four it is the only decanter that also has the signatures of Baron, Denz and Dalgarno engraved on it. Dalgarno selected seven of the most precious Macallan first fill Spanish Sherry Oak casks to create M. Proceeds from the eye-popping auction result of $628k will go to a number of Hong Kong charities.
Photos Courtesy of The Macallan
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First Curved-Coin Minted by U.S. Mint Celebrates National Baseball Hall of Fame | L I F E S T Y L E & L U X U R Y
First Curved-Coin Minted by U.S. Mint Celebrates National Baseball Hall of Fame BY JARED PAUL STERN JustLuxe
For years baseball has been regarded as America’s favorite pastime and has long since attracted die-hard fans. The sport that introduced us to the curve ball will soon have matching curved coins, sure to be an immediate collector’s item. According to the U.S. Mint, a series of curved coins will be available in 2014. Though a curved gold medal was produced in 1973 to honor Roberto Walker Clemente, a member of the Pittsburgh Pirates and the National Baseball Hall of Fame, this will be the first time ever in U.S. history that a coin produced by the mint will have a curvature built into it. The coins will be issued this year to commemorate the 75th anniversary of baseball’s Hall of Fame. The designer of the new-shaped baseball-centric coin, Cassie McFarland, won a nationwide competition that was held to determine the winning design in early September. The common obverse, also know as “heads,” will feature a baseball glove and the common reverse (tails) depicts a baseball reminiscent of a major league ball. The head side is concave and the tails side is convex. There will be a $5 gold coin, a $1 silver coin, and a halfdollar clad coin — which is a mix of 92 percent copper and 8 percent nickel. The half-dollar coin will have the highest mintage limit, producing 750,000 across all options. According to the U.S. Mint, 400,000 of the silver-dollar coin will be minted and only 50,000 of the $5 gold piece will be made. The silver dollar is 90 percent silver and 10 percent copper; while the $5-gold coin is 90 percent gold and 10 percent alloy. The gold coin is the lightest, weighing 8.359 grams, while the silver coin is the heaviest at 26.73 grams and the half-dollar weighs 11.34 grams. Surcharges for each coin sold will be paid to the National Baseball Hall of Fame, an independent not-for-profit educational institution, to help fund its operations. Surcharges per coin are $35 for gold, $10 for silver, and $5 for each half-dollar.
Photos Courtesy of United States Mint
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L I F E S T Y L E & L U X U R Y | An Outdoor Sports Lover’s Dream
An Outdoor Sports Lover’s Dream
By Ed Estlow
Scarp Ridge Lodge in Crested Butte, Colorado is a Rocky Mountain gateway to the outdoors, whether you love skiing, trout fishing, mountain biking, or anything else to do with outdoor sports. Last summer, I spent several days at Scarp Ridge Lodge in Crested Butte, Colorado. Being a trout fisherman, my main reason for being there was the fly fishing week of their Eleven Weeks of Summer program. But, winter or summer, there’s a lot more to do in Crested Butte than just fish. Crested Butte is nestled at 8900’ in the Elk Mountains of central Colorado. CB (as the locals call it) is blessed with an annual snowfall of nearly 200” and average high temperatures in the mid- 70s in summer and high 20s in winter. World renowned for its skiing and mountain biking (the Mountain Bike Hall of Fame is located here), CB offers a host of other outdoor activities to be enjoyed year round as well. Scarp Ridge Lodge can connect you with all of it.
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S E C T I O N N A M E | Story Name
Scarp Ridge Lodge is owned and operated by Eleven Experience, a luxury experiential outdoor adventure company with lodges and resorts all over the world. Besides Scarp Ridge Lodge and the adjacent Sopris House in Crested Butte, there’s Taylor River Lodge just down the road in Almont, Colorado, Chalet Pelerin in Le Miroir, France (in the Tarentaise Region), Bahamas House Inn on Harbour Island, Bahamas, and Deplar Farm on the Troll Peninsula in Northern Iceland. They’ve also got three new lodges coming soon in Amsterdam, Shelter Island, and Patagonia, Chile.
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L I F E S T Y L E & L U X U R Y | An Outdoor Sports Lover’s Dream
Chasing Trout The folks at Scarp Ridge had my four days of trout fishing planned to a T. We spent the first morning with world-renowned fly fisherman and photographer, Brian O’Keefe. Well, we spent the whole four days with Brian, but the first day he spent about three hours instructing us all on the finer points of casting a fly rod. Some of us were experienced fly fishermen. Others had never held a rod. By the end of the morning we were all a lot better at heaving a small feathered hook at the fish of the Gunnison and Taylor Rivers. And while most of us were there to fish, others were there for other experiences. Nate, a video blogger from LA, was there to mountain bike and kayak as well as fish. Ashley, a travel writer from New York City was there to help Nate. Meredith, a business woman from Houston, and Kelly, an outdoor writer from Steamboat Springs, were there to fish, fish, FISH! So after that first morning of instruction, they turned us loose with our guides to test our new-found skills on the Gunnison River just downstream from Gunnison, CO. Over the next four days we fished the Gunnison and the Taylor River near Eleven’s Taylor River Cabins. The fourth day we helicoptered over to Glenwood Springs to float and fish the Roaring Fork and the Colorado. While the Gunnison and the Taylor were no slouches for producing fish, those last two rivers offered an incredible experience. On the Colorado, Lisa lost count of how many she caught. Her guide had her tabbed at between 60 and 80!
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L I F E S T Y L E & L U X U R Y | An Outdoor Sports Lover’s Dream
The Lodge Scarp Ridge Lodge itself is located in the middle of town. Seems odd, but Crested Butte proper is small – with a population of about 1500 and less than a square mile in area. If you’re skiing, the Sno-Cat picks you up at the front door and takes you out of town the back way. You’re quickly on your way up to Scarp Ridge for some of the most amazing back-country skiing available anywhere. Forget your camera? Don’t worry – Eleven will provide a private photographer to document your epic ski runs, fish, and kayaking / mountain biking spills and thrills. If you prefer, Eleven will set you up with dog sledding, ice skating, Nordic skiing, snowshoeing, ice climbing, or snowmobiling in the winter. If summer sports are your thing, you can choose from hiking, rock climbing, white water rafting, paddle boarding, and mountaineering. If you can think it up, and it’s available in or around Crested Butte, the lodge staff will make it happen for you.
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An Outdoor Sports Lover’s Dream | L I F E S T Y L E
& LUXURY
oxygen is available. Controls are located on the light switches. The lodge will sleep 10 to 14 comfortably, and up to 16 depending on the makeup of the group.
The Experience But outdoor activities aren’t all that Scarp Ridge Lodge is known for. Eleven provides a true bespoke luxury experience. If you don’t want to fish (or bike or kayak) and prefer to rest in the steam room or sauna, you can do that. Scarp Ridge Lodge is also all about gourmet dining. Breakfast and lunch – whether they’re served at the lodge or out along the stream or trail – are served up by a gourmet chef, the finest dining you could ask for. You’ll be assigned your own locker in the lobby. Store any – or all your gear there. Around the corner there’s a full kitchen, a wine bar, a great room, and a media room. Down the hall you’ll find the salt water lap pool with adjacent Jacuzzi, a steam room and a sauna. Walk up a short flight of stairs to the gym and access to the outdoor hot tub. The suites are upstairs – five suites of varying sizes, each with a king bed and luxurious bath with heated floors and towel racks. A kids’ bunk suite with 2 queen, 2 full and 3 twin beds and nanny’s quarters are in the midst of the suites. Several suites have soaking tubs and separate walk-in showers. Because of the altitude, supplemental
The heated towel rack in the bath was stocked with thick soft towels. A luxurious bathrobe was hanging on the back of the door, and matching slippers were close by as well. The medicine chest was stocked with a full complement of Jack Black toiletries, plus toothbrushes, razors and (ahem) Band-Aids. I especially appreciated the sunscreen and lip balm in the sunny altitude of Crested Butte. I also appreciated that, if I got hungry in the middle of the night, several refrigerators and pantry/ food stashes were there for the raiding. I could grab a cold bottle of water from the refrigerated drawer, located below a tray of healthy high-energy snacks in the lobby. Or pour a nightcap glass of wine from the well-stocked wine bar. Crested Butte seemed to be a pretty healthy place. I saw no fast food restaurants in town, and everybody seemed to be walking, running, or biking to get where they were going. The lodge has several bikes for guest use.
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L I F E S T Y L E & L U X U R Y | An Outdoor Sports Lover’s Dream
Getting There You can get to Crested Butte several ways. I flew into Denver where Caroline, one of the lodge’s drivers, picked me up. Or get closer by flying into Gunnison, Montrose, Grand Junction, or Aspen. Scarp Ridge Lodge is available to groups of 10 to 16 people. Rates range from $8000 per night in low season to $15,000 per night in prime winter season (rates are based on 10 ppl occupancy). The adjacent Sopris House will handle another six to ten with three King suites and a kids’ bunk room. Rates for Sopris House range from $6600 per night in low season to $9000 per night in prime winter season (rates are based on 6 ppl occupancy).
Recommended Lifestyle If you’re looking for an outdoor adventure, where your every need is considered and taken care of, you could do worse than spending a week at Scarp Ridge. The onsite staff was excellent, spending enough time with us to become partners in the experiences, and yet remaining the consummate professionals at their craft you’d expect them to be. For more information on Scarp Ridge Lodge, visit them online www.ElevenExperience.com
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N U M I S M A T I C S | Cash In Your Coins
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Cash In Your Coins | N U M I S M A T I C S
CASH IN YOUR COINS: Selling the Rare Coins You’ve Inherited
BY BETH DEISHER
Beth Deisher, retired editor of Coin World, has written a new book for anyone who’s inherited or found a collection of coins and is thinking of selling or auctioning them. Cash In Your Coins: Selling the Rare Coins You’ve Inherited is available online (including from Whitman Publishing, at www.Whitman. com) and from bookstores and hobby shops nationwide, for $9.95. It is equally recommended for experienced collectors, who are encouraged to keep a copy of the book with their holdings, to help guide their heirs when the time comes. This article is based on Deisher’s discussion of independent appraisals, in chapter 11 of Cash In Your Coins. After creating an inventory and developing a ballpark understanding of your coins’ value, a number of factors can make it prudent or necessary to have an independent appraisal before you identify a buyer. Among the reasons: • • •
The coins / numismatic items are part of an estate or trust that specifies they must be equitably divided. You plan to donate your numismatic holdings to a museum or other nonprofit entity. You need an independent appraisal for insurance purposes.
• •
You need an independent appraisal so that you can use the coins / numismatic items as collateral for a loan. You want to confirm your work in order to have better bargaining power with potential buyers.
CAPITAL GAINS AND LOSSES Those unacquainted with coins and other numismatic collectibles who learn that a recently departed family member or friend has left them “a coin collection” will find that an independent appraisal might serve their best interest. If the person who formed the accumulation or collection kept a detailed inventory, it may be only a matter of checking current retail-price guides to make sure the values listed are consistent with the current market. For example, the deceased collector maintained a comprehensive inventory, but due to health conditions he or she was not able to keep values updated. Many people are under the impression that it is best to “lowball” values so as to avoid estate or “inheritance” taxes. Exactly the opposite is often true, especially with regard to capital gains. It is important to determine current market value for numismatic items in an estate or trust that will be distributed because the value assigned will become the “basis value” for the person who inherits or receives them. The basis value will have capital gains (or loss) implications when the heir sells the coins(s) or other numismatic items. Probate, the procedure of settling the estate of a deceased person, is conducted in and according to the laws of the state in which the deceased maintained legal residence. Probate retitles a deceased person’s property and puts it into the designated beneficiary’s name.
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N U M I S M A T I C S | Cash In Your Coins
If the deceased person made a will, he or she probably named a person or persons as executor or co-executors. If no one is named executor in the will, the probate court names an administrator (who functions the same as an executor). Federal law requires that an appraisal be performed within nine months of the date of death, with values based upon the date of death, even if no taxes are due. Some states require the executor or administrator, within 90 days of being appointed by the court, to prepare what is referred to as the 90-day inventory. The 90-day inventory lists all property and assets of the deceased and declares a current market value of the items. If there are questions regarding values listed on the 90-day inventory they must be resolved by the time the final inventory is filed with the court. The final inventory is used in distributing assets of the estate to those named in the will. If no will exists, the estate is distributed to heirs according to state statute (such a situation is called intestacy, and the estate is said to be intestate).
date his uncle died in 2013. The heir keeps the coin for more than one year after receiving it and then decides to sell it. (Costs for storage and auction fees could be added to increase the basis value, but to keep the math simple, we are assuming no other value was added to the basis for our three scenarios.)
For tax purposes, collectibles refers to personal property that is easily portable and includes items such as coins, stamps, precious gems, antiques, and fine art. Precious-metal bullion coins produced by government mints are taxed at the same capital-gains rate as collectibles. Collectibles are taxed in two different capital-gains tax brackets:
Scenario A: The value of the gold coin is declared to be $20, its face value. The person who inherited the coin decides to sell the coin more than a year later, learns of its numismatic value, and to his great surprise it auctions for $150,000. He would be subject to capital gains tax on $149,980. Basis value for the coin was $20, thus $150,000 - $20 = $149,980 capital gains × 28%. Capital-gains tax would be $41,994.40.
• •
Short-term collectible capital-gains rate: Collectibles held for less than one year are currently taxed at one’s personal incometax rate. Long-term collectible capital-gains rate: Collectibles held for one year or longer are currently taxed at 28%.
In illustrating the differences and ramifications of basis declaration, we will use as an example a person who inherited a Saint-Gaudens double eagle ($20 gold coin) via his uncle’s estate, created on the
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Value could have been listed on the final inventory as $20, which is the face value. Or, the coin could have been valued as “bullion.” With gold trading at $1,714.40 an ounce, it would have had a current market value of $1,658.68 (because the coin is comprised of 90 percent gold). Through an independent appraisal the coin was identified as a 1920-S Saint-Gaudens double eagle, graded MS-63, with a current retail value in 2013 of $115,000. What are the consequences of these valuations for the person who received this coin from the estate?
Scenario B: The value of the gold coin is declared to be $1,658.68, the value of the gold in the coin on the date of death of the person in whose estate the coin resided. The person who inherited the coin has it auctioned more than a year after inheriting it, and it hammers for $150,000. The basis value for the coin was $1,658.68, thus $150,000 - $1,658.68 = $148,341.32 capital gains × 28%. Capital-gains tax would be $41,535.57.
Cash In Your Coins | N U M I S M A T I C S
Scenario C: The numismatic value of the gold coin is declared to be $115,000 via an independent appraisal for the 90-day inventory. The person who inherited the coin auctions it more than a year after inheriting it and receives $150,000. Basis value for the coin was $115,000, thus $150,000 - $115,000 = $35,000 capital gains × 28%. Capital-gains tax would be $9,800. So how much, after taxes, would the person actually realize under each scenario?
A: $150,000 - $41,994.40 = $108,005.60 B: $150,000 - $41,535.57 = $108,464.43 C: $150,000 - $9,800.00 = $140,200.00
$197 ($1,917 - $1,720 = $197). Any loss up to $3,000 can be subtracted from capital gains or declared as a loss against ordinary income. Under current tax statutes, losses of more than $3,000 can be carried forward to offset future years’ taxable income. No more than $3,000 can be deducted in any tax year against ordinary income. These examples illustrate the importance of independent appraisals. Whether you’ve inherited a coin collection or plan to leave one to your heirs, an understanding of appraisal values is crucial. Note: The information in this article is general in nature and should not be construed to be legal or tax advice. For specific advice regarding your circumstances, it is best to consult your accountant or an attorney specializing in taxes.
Obviously, scenario C is the best. Whether you are the executor of an estate or an heir, the benefits of an independent appraisal are obvious. Generally speaking, assets that tend to increase in value over time (coins and other numismatic collectibles, for example) should be identified as property in the estate because, if administered through an estate, the heir benefits from the step-up in basis. (A coin or other property is valued at the fair market value at the time of inheritance, not at the value at which the deceased purchased it.) Let’s also consider an example of a capital loss. We will use as an example a generic circulation-strike 2012 American Gold Eagle coin containing one ounce of gold. On the date of the uncle’s death in 2013, the coin was valued at $1,917, based on the world market price of gold. A value of $1,917 for the coin was listed in the estate’s final inventory. The person who inherited the coin held it for more than one year and sold it for $1,720, which constituted a capital loss of
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H A R D A S S E T S | Treasure Assets
Treasure Assets COLLECTORS WHO PURCHASE FOR INVESTMENT REASONS ARE ENCOURAGED BY RECENT SALES. BUT POSITIVE NUMBERS ARE NO GUARANTEE OF SUCCESS.
By Elena Mannes
JAMES MARINO TOOK $478,000 and bought a painting. That was about eight years ago. Earlier this year, the California orthopedist decided to sell the piece, expecting to make money on his investment. Marino, of course, loved the painting – Norman Rockwell’s Song of Bernadette, which he bought at Heritage Auctions. As a collector, he would have been happy to own the art only for its aesthetic value. But he also saw an opportunity. “That was a fair amount of money for that painting,” Marino says about the half-million dollars he paid for the work by America’s most famous illustration artist. “My feeling was that Rockwell’s works appreciate and ultimately I’d be able to recoup that investment and maybe more.” Marino had purchased art before, but never anything this valuable. The opportunity he saw was to acquire an alternative asset – one not linked to the rise and fall of stock and bond markets, and one that might even bring a higher return for the family trust. He’s one of many recent fine art buyers with similar motivations. Mark Prendergast, director of Trusts & Estates at Heritage Auctions, confirms that there is definitely more interest in “art as an investment for the common collector.” As art prices rose along with the wider market between 2006 and 2008, Prendergast says “we
James Marino, with wife Louise, purchased Norman Rockwell’s Song of Bernadette eight years ago as an investment. He sold it this fall, hoping for buyers “looking to find an alternative to a conventional asset.” were seeing such an increase that we had to start talking about the reality of investing in art.” Marino decided to sell his Rockwell at Heritage in early 2013. “I thought it was a good time for me,” he says. “Given the upturn in the economy, some people will benefit from that and will be looking to find an alternative to a conventional asset.” Diversification of a portfolio is a prime argument for purchasing fine art as an investment. In fact, treasure assets, such as fine art and antiques, are an important component of total wealth, according to a survey of affluent collectors by the global financial services provider Barclays. On average, wealthy individuals questioned for the Barclays report say their treasure assets comprise 9.6 percent
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of their total net worth. Women tend to own slightly more treasure, accounting for about 11 percent of their net worth, compared with 9 percent for men. Barclays data also show that nine collecting categories, including fine art, outperformed equities over the past decade. Supporting evidence comes from other sources as well. Market research firm Artprice says 2011 was the best year yet for sales of art at auction. And the Mei Moses World All Art Index shows that art sold at auction has outperformed U.S. and international equities for the past 10 to 15 years. Todd Millay of Choate Investment Advisors in Boston says Mei Moses’ data show that “art is a good diversifier
Treasure Assets | H A R D A S S E T S
Propensity to Own Treasures by Profession
Entrepreneurs, senior company managers and professionals in the financial industry are more likely to have their wealth invested in treasures.
14%
Senior Managers of Large Company
11% 11% 11%
Entrepreneurs Professional Financial Workers Senior Managers of Small- to Medium-Sized Enterprises
8% 8%
Professional Non-Financial Workers Other Employees Not Working Retired
in times of trouble. One study they did looked at how art has done in times of war and it’s a very compelling investment.” Such positive numbers, of course, are no guarantee of investment success. The Mei Moses Index is based only on auction sales, and does not include private sales or art that doesn’t sell. Furthermore, people who buy art tend to be entrepreneurs and professional financial workers with large incomes somewhat dependent on the financial markets. Then there’s the emotional factor. Unless one buys shares in an art fund, which decides what to buy and when to sell, personal taste plays a role. Millay likens the purchase of fine art to buying a vacation home. “It’s for enjoyment but it has investment aspects as well.” He cautions that buyers need to be aware that art is not a liquid asset. It takes time to sell a painting. Furthermore, collectors “might not get the full benefits of diversification,” Millay says, if they only buy one artist that they like. A particular artist may fall out of favor. New York art advisor Candace Worth bought a work by English artist Damien Hirst (b.1965) in the high six figures for a client when the British pound was strong. Now the pound has risen relative to the dollar and prices for Hirst have dropped. “So at the moment, the work is worth less than what we paid,” she says. On the other hand, two years ago,
6% 5% 0% 5%
Percentage of wealth
10% 15%
Worth, who specializes in contemporary art, bought another client a major sculpture by Austrian painter Franz West, who died in 2012. The piece is now valued at nearly double what she paid, Worth says.
good value when he purchased it at auction in 2005. The painting is of special interest, he believes, because it was done to publicize the 1943 movie starring Jennifer Jones, for which she won an Academy Award.
MAXIMIZING RESALE VALUE
Once he owned the work, Marino made sure he took other steps to maximize its resale value. He first kept Song of Bernadette in his home, but then loaned the painting to the Norman Rockwell Museum in Massachusetts for about six years to give it public exposure. He also made sure the painting was properly preserved, having it cared for by a highly regarded art conservation institute.
Buyers who purchase art with an eye to investing need to do research – either through an art advisor or on their own, experts advise. Worth tells clients to buy what they love, but to also do their homework. Worth’s client Kristin Fine of Greenwich, Conn., has done just that, amassing a collection of some 100 works over the past 15 years. Fine says she buys more as a patron than as an investor. But she also is prepared to sell if a work appreciates and she could use the proceeds to buy more art. She believes that “one should be an educated consumer.” Worth emphasizes that generalizations about the art market are risky. “The art market is not the art market,” she says. Each artist has his or her own market. And even works by the same artist can behave differently when it comes to value. For buyers who don’t use an art advisor, online databases such as Artnet.com, Askart. com, Artfact.com and Heritage Auctions’ past auction archives make the job of checking values and past sales prices easier. James Marino felt he didn’t need an art advisor to convince him that Song of Bernadette was a
Prendergast believes it’s wise to buy “quality, not quantity.” In other words, if a buyer has $100,000 to spend, it’s better to buy one expensive piece by an artist rather than several of the artist’s less expensive ones. While pieces by established artists can be safer investments, art by lesser known or emerging artists can potentially bring a big return as well. Ten years ago, for instance, original pin-up illustration art by Gil Elvgren (1914-1980) rarely sold for more than $20,000. Today, his paintings routinely top $100,000 at auction. Cappy Price, an alternative investment consultant in Chicago, likens the market of newly discovered, emerging and new artists to micro-cap stocks. They carry greater risk,
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H A R D A S S E T S | Treasure Assets
“If you’re selling at auction,” says Mark Prendergast, director of trusts and estates at Heritage Auctions, “you know you’re getting fair market value and if you buy at auction, you know you’re buying at fair market value.”
but Price points out that a 2013 report by the National Bureau of Economic Research shows lower-priced art outperforms high-priced art by about 5 percent per year.
TAX IMPLICATIONS
An art purchase also involves the question of where to buy. The piece a buyer falls in love with may only be available through a dealer, but there’s far less transparency in dealer/gallery transactions. Prendergast says collectors can always look at auction sales databases. And he notes that “if you’re selling at auction, you know you’re getting fair market value and if you buy at auction, you know you’re buying at fair market value.” “I’ve worked with clients who are more comfortable buying at auction,” Worth adds, “because you know that someone else is willing to pay X. You have more confidence knowing that a secondary market exists.”
Due diligence when buying art – even if investment is only a partial or minor consideration – should include tax implications upon selling.
Motivations for Owning Treasure Assets*
Financial advisor Nick Cosky at the private wealth management firm Balasa Dinverno Foltz LLC in Itasca, Ill., makes sure that clients choosing art as an alternative asset are aware of that aspect. “The long-term federal capital gains rate for stocks and bonds,” Cosky points out, “is 15 percent. For artwork, typically the highest federal tax rate is 28 percent. That’s almost twice as much.” However, if a client leaves artworks to beneficiaries, they will get a “stepped-up basis” and can save the capital gains tax. Imagine that your great aunt purchased a piece of art back in 1950 for $100. Over time, the piece has appreciated in value and is now worth more than $10,000. If your great aunt chose to sell the piece while still alive, she’d realize $9,900 of capital gain. If she died and left the artwork to you, you could simply sell it as soon as you receive it and pay no capital gain. The example assumes the piece is still worth $10,000, and the estate would be paying due taxes. If art is truly an investment, Cosky underlines, then estate planning is essential.
62% 37% 35% 26% 26%
At the end of the day, the final purchase decision often comes down to emotion and subjective judgment. A buyer’s heart plays a role even if investment considerations are in play. In October 2013, Marino’s Song of Bernadette realized $605,000 – $127,000 more than what he paid for it in November 2005. “I liked the piece enough to say that even if I didn’t collect it for investment purposes, I would have been glad to have it for personal pleasure and its aesthetic value.” As financial advisor Cosky reminds us: “You’re not going to hang a stock certificate on your wall. You’re collecting because you have an interest. There’s something more that draws you to it.” ELENA MANNES is an independent television documentary director, writer and producer who has contributed to ABC News, CBS News and PBS.
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Nearly a fifth of the treasures held by affluent collectors are held as pure investments, while 21 percent are believed by their owners to provide financial security if conventional investments fail. I
I enjoy owning them I want to protect them to be enjoyed by my children/grandchildren They are a part of my family/culture I enjoy sharing them with my family/friends I like to show them to people
21%
20%
Their value is because there are so few of them around
18% 12% 10%
They will provide financial security if conventional investments fail
They are purely an investment
I don’t want anyone else to have them Other people respect those who have them
*Percentage of treasure held for each motivation Source: Ledbury Research
ABOUT THE BARCLAYS SURVEY Ledbury Research conducted a survey of more than 2,000 high net worth individuals, all of whom had more than $1.5 million (or equivalent) in investable assets and 200 with more than $15 million. Respondents were drawn from 17 countries around the world, across Europe, North America, South America, the Middle East and Asia-Pacific. Interviews were conducted in January/February 2012.
Un
Story Name | S E C T I O N N A M E
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S P E C I A L F E A T U R E S | How To Break Into Fort Knox
HOW TO
BREAK INTO
FORT KNOX By Jason Vaile
Where do you keep your hard assets? In a bank safety deposit box? Maybe a home safe? How secure is it? Maybe, as some like to say, “Safer than Fort Knox!” Well...maybe not.
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How To Break Into Fort Knox | S P E C I A L F E A T U R E S
History The United States Bullion Depository is often referred to as Fort Knox because of its location in Fort Knox, Kentucky, south of Louisville and north of Elizabethtown. A large Army post, also called Fort Knox, is located adjacent to the depository. Popular film and television paints the depository as an impenetrable fortress, stacked to the rafters with gleaming piles of gold bars. Actually, this visual isn’t too far from the truth. Fort Knox can hold up to 147.3 million ounces of gold. At $1,265, that’s $186 billion dollars worth of gold! That’s about three percent of all the gold ever refined throughout human history. Now that’s a lot of gold, but it isn’t the biggest storage facility for hard assets. The United States Bullion Depository is actually only half the size of the Federal Reserve Bank in New York. In 1933, in an effort to keep citizens from hoarding gold, President Franklin D. Roosevelt and Congress passed legislation to remove gold from circulation. They made it illegal to own gold. Heavy fines and even prison time were enforced on any one not turning in their gold for equivalent value in currency. The trade-in value was about $20.67 per ounce. Once the gold was taken in, Roosevelt and Congress passed more legislation valuing gold at $35 per ounce, thus almost doubling the government’s assets with the stroke of a pen. This “new deal” jump started the troubled economy. Where were all of these hard assets going to be stored now? Thus legislation to build the U.S. Bullion Depository was set in motion. The depository was complete in December of 1936 for a total cost of $560,000. Fort Knox has been used throughout history to store things other than gold. During World War II, it was home to the Declaration of Independence, the Constitution, and the Gettysburg address. Other countries have also used it during times of turmoil. The Magna Carta and the Crown, Shield and Septre have all been housed there.
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S E C T I O N N A M E | Story Name
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How To Break Into Fort Knox | S P E C I A L F E A T U R E S
BREAKING IN But let’s say you think that the world needs a new super villain. You decide that you’re going to break in and steal almost $200 billion dollars in gold. It’s been done before...in the movies. In James Bond’s Goldfinger, Bond faces off against Auric Goldfinger, who didn’t want to steal the gold but merely expose the gold to radiation, making it unusable and driving up the price of his personal gold. Market manipulation at its finest. Instead of the SEC, it ‘s Bond who takes him down. Convinced that your plan is not original and ready to call off the whole heist? No? Okay fine, here is what you’re up against...
Even when they built the depository in 1936, they thought about geographic placement. It was built far inland to avoid any type of sea assault. It is snuggled up at the base of the Appalachian mountains, which provides a natural barrier to its east. This leaves only three ways to approach it. Around the far outskirts of the depository’s forty-two acre property is a very simple wire fence. That’s an easy one to hurdle, just shimmy up the razor wire topped fence and drop right over. Just be careful not to trip the motion sensors lining the fence. After the fence is a 100-yard open field. A walk in the park, right? Wrong. This “outside” perimeter was built in the 1970’s to specifically have an empty area for easier open surveillance. If they didn’t see you scaling the fence, they’re certain to spot you belly crawling across a few acres. Next is a pretty straight forward ten foot tall electrical fence. You made it up one fence, so another one is no big deal. Cut the power supply to the fence, which is constantly monitored. Now comes the tricky part. There are “rumored” security measures which the government has never confirmed or denied, for obvious reason. One of those is the “virtual trip wires” located either between the first and second or second and third barrier. These can supposedly detect movement within 15,000 feet, and are so accurate that they can tell the difference between a passing car and a lingering person that’s thinking about climbing a fence. But for giggles, let’s just say you’ve made it through the electrical fence. Looks like it’s a short sprint to the next fence. You can make it, just look out for the land mines buried all around you. Another “rumored” defense in this area is surface-to-air missiles, in case you decide to approach from above. You’ve tip-toed your way through the field of land mines and made it to barrier three. Just another electric fence to scale. This time, patrolling guards roam the perimeter at random intervals within visible distance of each other. But that’s why you brought your invisibility cloak. You toss that on and hopefully it also masks your scent from the dogs. Finally, the last fence, a black wrought iron fence that was originally built with the depository in 1937. It forms an octagonal perimeter around the main building. This would be the easiest fence to scale so far...no razor wire, not even electrical. You are within sight of the building now. See those four turrets on the ground level on every corner? See the additional two turrets on the second level? Those are vigilant sentinel outposts. They are manned with U.S. Mint Police personnel, armed with Thompson machine guns. The U.S. Mint Police are charged with securing and protecting our nation’s precious metals, monetary and other physical assets, and protecting the employees of the U.S. Mint. If they don’t see you coming, the depository itself is outfitted with multi-focus cameras so that every square inch of the outside of the building is visible. Every. Square. Inch. You still have on your invisibility cloak though, so you should be fine. You slowly approach the front door, trying to get a look in all those
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S E C T I O N N A M E | Story Name
windows. Unfortunately, all of them are completely blacked out so that no one can see in. Completely sealed from the inside and out, these windows are fire and bullet proof. No going through those. You try the front door handle. Nope, it’s locked. Maybe you can just pop it off the hinges? The door is 21” thick and weighs over 22 tons. It’s constructed out of torch, drill and blast proof material. The surrounding door casing is 25” thick, so blowing the door is out of the question. Since no visitors are allowed in, there’s no way to slip off a guided tour into a restricted area. No single employee can enter the vault by themselves. Multiple codes must be entered simultaneously, and these codes are changed daily. Every staff member works random time schedules that are sent with the daily codes. So you never know who you will be working with or what your combination is until the day you work. Once those are entered, a series of biometric IDs are next. Your standard fingerprint or handprint scanners are probably first, and then a system of “stereo cameras.” These cameras scan your face to verify no masks or prosthetics are on (sorry Mission: Impossible) and can detect if features have been altered by plastic surgery. Okay, so there doesn’t seem to be a feasible way to get access through the front door. What other options do you have? Any air assault would be near impossible with the surface to air missile defense system. So you rally your troops of evil henchmen and try a straight up tactical attack on the US Bullion Depository. You still have to penetrate all the exterior barriers, and have the same problem once you get to the depository. The exterior shell is as impenetrable as the front door. The walls consist of 4’ granite slabs, reinforced with
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concrete and 750 tons of steel and fireproof material. It is said that the depository could withstand a direct hit from an atomic bomb. A direct assault would also would be met with the well armed U.S. Mint Police. If they feel the need for a little back up, they just have to call their friends across the street at the Fort Knox Army Post. Rushing to their defense would be Apache helicopters from the 8/229 Aviation division, and the 16th Brigade Combat Team of the 1st Infantry division, totaling over 30,000 soldiers armed with tanks, armored personnel carriers, and artillery canons. Mission failed. A direct assault seems completely out of the question. So you con-
Story Name | S E C T I O N N A M E
tact your friends, the mole people. You convince them to help you burrow a tunnel under the 42 acre compound and penetrate from underneath. If the ultra sensitive microphones between barriers 2 and 3 don’t pick up the digging, the satellite in orbit that focuses on the depository would probably pick up the disturbance. But somehow you make it beneath the building. You look up to find a slight problem with this access, the foundation. Just to support the weight of the front door and walls, the foundation has to be massive. Multiple layers of cement were poured, totaling over 4,200 cubic yards. Top that off with a solid 10’ thick granite slab makes tunneling in from underneath impossible.
personnel into the depository and opened vault number 13, revealing gold bars stacked to the ceiling. Instead of quieting the conspirators it seemed to feed them, questioning the quality of the gold in the images and even the volume of gold it contained. To contain the amount of gold the government said they had, 150 more of these vaults would be necessary. Of course, conspirators also believe that the depository is actually a
But you are an evil genius, so you find the top secret flaw in the system. You crack the code and get access. At the bottom of the elevator, behind the vault door, you would find an impossible maze of individual cells. These smaller vaults were designed by the famous Mosler safe company. Each 10’ by 10’ cell has its own vault door and wax sealed document. If any seal is broken, the contents of each vault must be inventoried. Once you’re inside, the danger’s not over. Each cell is equipped with gas that can fill the cell in seconds. Early articles about the depository suggest that they took a page out of a French bank’s blueprints. Vault areas that can be flooded instantly with water, drowning any would be infiltrators. As the water floods the vault you’re about to plunder, there’s just one nagging question: how did you plan on getting all of that heavy gold out of the building? It took over a year to stock the depository. Train load after train load was brought in, and when complete, the tracks were removed. Hopefully, you developed some sort of molecular transportation device that could simply beam the gold into your new storage facility. What if once you got into the vault you found that it was...empty? Some conspiracy theorists question whether there is any gold in the depository at all. After Nixon was impeached in 1974, distrust of the government was at an all-time high. The outcry to look into the depository grew so loud that on September 23rd, Mary Brooks, the Director of the Mint, led the only public tour in the history of the U.S. Bullion Depository. She led congressman and a group of media
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S P E C I A L F E A T U R E S | How To Break Into Fort Knox government storage facility, housing everything from Jimmy Hoffa, to weapons of mass destruction, to alien life forms. Russian President Vladimir Putin even jumped on the conspiracy theory bus, saying that IMF Director Dominic Strauss Kahn was jailed and charged with sex crimes when he discovered that the gold in the depository had gone missing. More recently, in 2010, Ron Paul asked for an outside audit of the vaults’ contents. This request was promptly denied by the Treasury Department, saying it would be “too expensive.”
Your Own Personal Fort Knox Hopefully, you’ve been talked out of attempting any grand larceny on government property. Since you can’t stash any of your hard assets in the Bullion Depository, what’s the best place to keep your valuables? Obviously, a home safe is the best option, but placement is critical. Master bedroom closets are the first place a burglar will look. An out of the way coat closet or kid’s rooms are the last place ransacked in break-ins. Bolting the safe into concrete is ideal, but many new home safes are designed to be heavy enough that moving them is nearly impossible. This really drives up the shipping costs, or delivery and installation fees from safe companies. Some homes are even being built with custom vaults. Small rooms are constructed out of CMU block. These blocks are filled with concrete and tied together with steel. A concrete pad is poured for a ceiling. Large vault doors that are anchored to the block are available for about the same price as a large safe. Anyone that watched Breaking Bad knows that a wall return air grill is a great place to stash your large stack of meth money. Having things
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“stashed” in multiple areas around your house isn’t a bad idea. Money kept stashed in the freezer is where the term, “cold, hard cash” came from. But valuables wrapped in aluminum foil, tucked behind your box of Eggo’s is a pretty good hiding spot. The “fake book” or “fake aerosol bottles” are reasonably priced options for some small scale valuables, but these are easy to misplace or throw away. An old vacuum cleaner is an interesting idea. Using the storage compartment where the bag used to sit fits a pretty good sized storage bin, and can be kept right in your broom closet. This might be the most “unique” idea. A fake head of lettuce. Just toss it in your vegetable drawer, and your krugerrands will be safe and sound in the fridge. A safe deposit box at your local bank is a more traditional, and perhaps safer, route. They are reasonably priced, $15-60 a year, depending on the size. Keeping assets away from home safeguards them from natural disasters and theft. A bank is far less likely to be damaged by fire or storm, and much less likely to be burglarized. So you may not be able to protect your assets as well as “Fort Knox,” but you also probably aren’t sitting on $200 billion in gold. The amount you spend to protect your assets should be in proportion to the amount it is worth. Having a safe deposit box at your local bank and secure location for your valuables will allow you to sleep a little better at night. Unless, that is, you’re staying awake all night trying to devise a plan to break in to the U.S. Bullion Depository. Jason Walter Vaile is an award winning screenwriter and pen enthusiast. You can follow him on Instagram, Twitter and Tumblr as Mrpenhead or email him at mrpenhead@sbcglobal.net with your ideas on how to break into Fort Knox.
Story Name | S E C T I O N N A M E
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M I N I N G & M I N E R A L S | Mining News
MINING NEWS
By Eavan Moore
Goldcorp Attempts Osisko Acquisition
V
ancouver-based Goldcorp Inc. (TSX: G) departed from the prevailing cost-cutting mood in January with its C$2.6 billion hostile bid for Osisko Mining Corp. (TSE: OSK), which operates the Malartic gold mine in Quebec. Osisko’s board of directors roundly rejected the offer, recommending that shareholders reject it and further seeking to block Goldcorp in court. Analysts had predicted that low metal prices and consequently low project valuations would eventually drive more mining mergers and acquisitions. At C$5.95 in stock and cash per share, Goldcorp offered a 15% premium for Osisko shares as they were trading on January 10, 2014. Osisko called the offer “meager” and “opportunistic,” coming as it did before Malartic’s most productive years. Osisko’s board further pointed out that its shares had risen past Goldcorp’s valuation in the days since the takeover announcement. Among other reasons for rejecting the bid, Osisko’s board wrote: “Shareholders are not being adequately compensated for the risks and uncertainties that are inherent in the Goldcorp shares. Goldcorp shares carry greater geopolitical risk, higher development risk, have significant exposure to base metals and are richly valued. Goldcorp has also disclosed that its primary asset, the Peñasquito mine in Mexico, is subject to significant legal risk.” Landowners disputing the validity of a 600-acre mining lease have threatened to sue Goldcorp in Canada. Chuck Jeannes, CEO of Goldcorp, said that he was “not willing to go up higher” in a January interview with Canada’s Globe & Mail newspaper. Goldcorp intended to fund its acquisition of Osisko with C$6 million in cash on hand and a C$2 billion credit facility. Malartic has been operating since 2011 and has reserves of 10 million gold oz. Its mine plan projects about 500,000 oz of production per year over 16 years. It would be Goldcorp’s first acquisition since 2010 and its second operating gold mine in Quebec, after Éléonore, which is currently in advanced development stage. According to a circular Goldcorp sent to shareholders, it had made 84 | American Hard Assets www.ahametals.com
repeated offers for Osisko since entering a two-year confidentiality agreement in 2008. It owned a 10% stake in Osisko between 2008 and 2011, when the shares were sold for C$350 million. The weeks following the takeover announcement did not see any bidding wars. Newmont Mining Corp. had been considering acquisitions, but had not made any announcements as of January 2013. Goldcorp’s bid was scheduled to expire on February 19. The legal proceeding Osisko commenced in January, alleging misuse of confidential information provided to Goldcorp, was expected to go to trial in early March. Goldcorp would not be able to take control of Osisko shares until March 6 at the earliest. Marigold Sale Meanwhile, Goldcorp shed its two-thirds share in the Marigold mine in Nevada. Goldcorp owns the mine jointly with Barrick Gold (TSE: ABX) and they will be selling the property to Silver Standard Resources (TSX: SSO) for $275 million. “This transaction is consistent with Goldcorp’s ongoing strategy of disciplined portfolio management with an emphasis on creating value for shareholders through the focus on core assets,” said Goldcorp CEO Chuck Jeannes. Marigold is Goldcorp’s only mine in Nevada. Silver Standard CEO John Smith said, “The acquisition of Marigold accomplishes our strategic goal of adding an operating mine in a well-established, low-risk mining jurisdiction.” Marigold is a heap leach operation with several million ounces of gold reserves, annual output of about 100,000, and all-in sustaining cash costs of $1,609/ oz in the first nine months of 2013. Silver Standard said it expected that recent purchases of new mining equipment would lead to better operating efficiency in future. An optimized mine plan “targeting a lower strip ratio and higher grade,” will be incorporated into a new NI 43-101 technical report in the fourth quarter of 2014.
Story Name | S E C T I O N N A M E
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M I N I N G & M I N E R A L S | Mining News
MINING NEWS Amplats Improves Results; Platinum Labor Unrest Continues
T
op platinum producer Anglo American Platinum (Amplats; JSE: AMS) reported an operating profit of 2 billion rand ($180 million) in 2013, turning around its $715 million operating loss in 2012. The South Africa-based company had spent the last year restructuring to cope with overhigh costs, emerging with 2 billion out of the 2.8 billion rand ($249 million) in savings it aims to reach by 2015.
year with plans for mass layoffs that were dialed down after vociferous union opposition. Labor continued to demand higher wages throughout 2013. On January 23, 2014, the Association of Mineworkers and Construction Union went on strike in platinum mines operated by the world’s biggest platinum producers -- Amplats, Lonmin (LSE: LMI), and Impala Platinum (Implats; JSE: IMP) -- with a demand of doubled wages at 12,500 rand ($1,113) per month. As of early February, the three companies were negotiating with the AMCU through the mediation of the Council for Conciliation Mediation and Arbitration.
However, Amplats decided not to give dividends in 2013, citing its debt and future funding requirements. Its debts have risen to 11.5 billion rand ($1.03 billion). Amplats’ restructuring efforts cost 1.5 billion rand, and writedowns of 2.8 billion rand plus a higher effective tax rate resulted in a yearly loss of 1.4 billion rand ($130 million), or about 47 US cents per share. Amplats produced and sold 2.3 million ounces of platinum in 2013. Production rose at the fully-owned Mogalakwena and Unki mines and at joint venture operations Bokoni and Kroondal. Amid a general organizational restructuring, Amplats consolidated its Rustenberg platinum mines, idled or shut down other sites, and dropped 5,000 people from its employment rolls. It had started the
Amplats stated that it was working on reforming the low-tech, low-efficiency operating model is widespread in South Africa and that has served it ill in a time of financial stress. Although the rand/dollar exchange rate, platinum prices, and electricity supply continue to work against the company, it “believes that the long-term supply-depend fundamentals for platinum group metals remain attractive and expects that in the medium term, cumulative deficits will drive price recovery.”
Dominion Diamond Updates Canada Mines
D
ominion Diamond Corporation (TSX: DDC) reported strong results and updated mine plans at its Diavik and Ekati mines in Canada’s Northwest Territories.
The 80% owned Ekati mine produced 0.4 million carats from 0.9 million tons of ore in the fourth quarter of 2013. The Diavik mine, in which Dominion holds a 40% stake and Rio Tinto plc (NYSE: RIO) holds 60%, produced 2.1 million carats from 0.54 million tons of ore processed in the fourth quarter of 2013, compared to 1.9 million carats from 0.47 million tons the year before. Underground work ramped up to full production from all three pipes. In the whole of 2013, the mine produced 7.2 million carats (the same as 2012). Diavik has enjoyed some cost savings from alterations to its underground construction work. No further development capital will be required now that the mine has gone completely underground.
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In future, Diavik’s reserves of about 53 million carats will sustain mining operations through 2023. Reclamation costs of C$188 million will be spent largely between 2022 and 2025, with reclamation continuing until 2030. Ekati will hang on for another six years, based on its 20 million carats in reserves. Dominion is also working on a prefeasibility study for an expansion at the Jay and Cardinal kimberlite pipes.
Mining News | M I N I N G & M I N E R A L S
MINING NEWS EPA: Significant Mining Risk in Bristol Bay
Escobal Reaches Commercial Production
T
he US Environmental Protection Agency (EPA) released in January the final version of its Bristol Bay Watershed Assessment, which studied the potential environmental effects of large-scale mining in Alaska’s Bristol Bay in response to opponents of the proposed Pebble copper-gold mine. “EPA has concluded that large-scale mining in the Bristol Bay watershed poses significant near and long-term risks to salmon, wildlife and native Alaskan cultures,” said EPA Region 10 Administrator Dennis McLerran. That conclusion came as no surprise to the public, which had already seen two drafts of the report.
V
ancouver-based Tahoe Resources Inc. (TSX: THO) brought its high-grade Escobal silver mine in Guatemala into commercial production in January. Mill throughput reached 3,000 tons per day; work is underway to ramp up to the design rate of 3,500 tons per day. Tahoe will begin recognizing net income from production as of January 1, 2014. The expected average silver recovery rate of 86.8% has been met. The operation is also producing small quantities of lead and zinc concentrate. Tahoe expects Escobal to produce an average of 20 million oz silver per year in the first five years. Tahoe based on its production decision on a preliminary economic assessment (PEA) completed by M3 Engineering. It did not conduct a feasibility study and does not have a reserve estimate. According to the PEA, Escobal has an indicated silver resource of 367.5 million oz at 422 g/t, and an inferred silver resource of 36.7 million oz at 254 g/t. The cost of building up to 3,500 tons per day, the base case, is estimated at $326.6 million. A second scenario with an expansion to 4,500 tons per day would add $46.2 million in capital cost. Anti-mining protests put Tahoe behind schedule on Escobal. It faced a court challenge by indigenous groups and a criminal case against its former security manager, who is charged with the assault of protestors.
EPA has not committed to taking any action on the report. It had originally been to restrict development in the area using its authority under the Clean Water Act. The scientists who spent three years conducting the assessment made no policy recommendations. Project proponent Northern Dynasty Minerals Ltd (NYSEMKT: NAK) announced in early February it had hired a new CEO for the Pebble Limited Partnership. Thomas Collier, a lawyer with extensive experience in federal natural resource regulation, replaced John Shively, who will serve as chairperson of Pebble Mines Corp. Collier said in a statement: “I will immediately focus my energies on preparing the strategy and scientific resources necessary to secure federal and state permits for the construction and operation of a modern, long-life mine at Pebble in the years ahead.” In announcing Collier’s appointment, Northern Dynasty CEO Ron Thiessen said, “We look forward with great enthusiasm to the next major milestones for this project – announcing a new major funding partner and initiating project permitting under NEPA [the National Environmental Protection Act].” The project lost its first major partner with the pullout of Anglo American plc (ADR) in September. Its largest investor, Rio Tinto plc (NYSE: RIO), said in December it was considering selling its 19.1% stake in Northern Dynasty.
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M I N I N G & M I N E R A L S | Mining News
MINING NEWS
Quebec Passes New Mining Act
T
he government of Quebec successfully amended its Mining Act in December 2013 after three earlier failed attempts. The resulting legislation, which came fully into force in January, ends several years of uncertainty in the jurisdiction, although a proposed change to the provincial tax regime had yet to be decided as of January 2014. The Parti Quebecois government won support for its legislation from two other parties in a fast-track session to rush the bill through. The new law requires mining companies to have a feasibility study, an approved restoration plan, and a scoping and marketing study with regard to processing their ore in Quebec before receiving a mining lease. Within 30 days of receiving a mining lease, the holder of the lease must put together a committee on community involvement and economic benefit with at least one Native representative. Regional county municipalities have additional powers, including the ability to declare certain areas incompatible with mining. The government can revoke a mining lease for tax offenses, mining law offenses, or failure to abide by economic agreements. Maximum environmental penalities have risen to C$6 million. Although the law has mild provisions to protect aboriginal rights, the Assembly of First Nations for Quebec and Labrador consider it inadequate and their chief threatened court action. Jean-Philippe Buteau, partner at Norton Rose Fulbright, wrote that the “new rules address a number of environmental concerns, foster greater transparency in the mining industry and promote greater so-
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cial acceptability of mining projects. The public will be consulted more and regional land use planning agencies will have more power… as long as they are consistent with government policy directions. Thus although the rules that govern the mining industry have been tightened up, they provide clarity which should facilitate the design and planning of mining projects. It remains to be seen how the various social, economic, environmental and government players who have a stake in the Quebec mining industry will react to this new legislative environment.” The Quebec Mining Association (QMA) called the new law an “acceptable compromise.” Josée Méthot, President and CEO of the QMA, noted that some industry recommendations had been incorporated. “Now that the climate of uncertainty surrounding the legislative amendments is behind us, the way in which the new law is interpreted and applied will give us a better idea of the impact of the new provisions,” she said. “Only time will tell if the legislative amendments will allow the mining industry to continue to ensure prosperity for Québec and maintain jobs, while respecting people and the environment.” Quebec continues to be one of the world’s top destinations for exploration and mining investment, but regulatory turmoil has driven down its appeal in recent years. Mining investment declined almost 10% in 2013, according to Quebec’s provincial statistics agency.
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CALIFORNIA
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190 East Stacy Road The Village at Allen Allen, TX 75002 972-481-3870 13534 Preston Road Dallas, TX 75240
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WEST VIRGINIA Bronze Element
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C U R R E N T I N F O R M A T I O N | Events
Events March 2-5, 2014 PDAC 2014 Toronto, Ontario, Canada www.convention.pdac.ca/pdac/conv/
June 7-10, 2014 IPMI 38th Conference Orlando, Florida www.ipmi.org/seminars/conf_detail.cfm?id=35
March 24-28, 2014 Mines and Money 2014 Hong Kong www.minesandmoney.com/hongkong/
September 14-17, 2014 Denver Gold Forum 2014 Denver, Colorado www.denvergold.org/gold-forums/
March 27-28, 2014 Calgary Investment Conference Calgary, AB, Canada
October 20-23, 2014 LME Week London, England www.lme.com/lmeweek.asp
www.cambridgehouse.com/events/calgary-investment-conference-2014
November 7-9, 2014 Expominer Barcelona, Spain
April 6-7, 2014 Dubai Precious Metals Conference 2014 Dubai, UAE www.dpmc.ae
http://www.biztradeshows.com/trade-events/expominer.html
April 8-11, 2014 Denver Gold European Gold Forum 2014 Zurich, Switzerland www.europeangoldforum.org/egf13
November 11-14, 2014 Metal-Expo 2014 The All-Russia Exhibition Center, Moscow http://metal-expo.ru/en/programm
April 27-30, 2014 Milken Institute Global Conference Los Angeles, California www.globalconference.org
November 20-21, 2014 Minerals Engineering International - Precious Metals 2014 Vineyard Hotel, Cape Town, South Africa http://www.miningnews.net/eventdetail.asp?eventid=2970950
April 29-May 1, 2014 Mongolia Investment Summit 2014 London, England http://mongoliainvestmentsummit.com/london
November 24-25, 2015 Orebody Modelling and Strategic Mine Planning SMP 2014 Perth, Australia http://www.smp2014.ausimm.com.au/
May 12-13, 2014 Metals & Minerals Conference New York, New York www.metalsandminerals.com/ny
December 11-13, 2014 Jakarta International Expo (JIExpo) Jakarta,Indonesia http://www.biztradeshows.com/trade-events/indo-metal-jakarta.html
May 19-23, 2014 LPPM Platinum Week London, England
January 26-29, 2015 Mineral Exploration Roundup 2015 Vancouver Convention Centre - East Facility http://www.amebc.ca/roundup/overview-2014.aspx
May 29-30, 2014 Precious Metals Summit Hong Kong www.precioussummit.com
February 15-18, 2015 International Geophysical Conference and Exhibition ASEG-PESA 2015
Perth, Australia http://www.conference.aseg.org.au/
June 1-2, 2014 World Resource Investment Conference Vancouver, BC, Canada http://cambridgehouse.com/event/world-resource-investment-conference-2014
March 1-2, 2015 PACRIM 2015 Congress Hong Kong, China http://www.pacrim2015.ausimm.com.au/
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HINDSIGHT
Emerging Markets By John W. Garibald Ben Bernanke had his hands full at his last meeting as Fed chairman. With one hand he began to close the spigot of money flowing into the market through the Fed’s Quantitative Easing program and with the other he passed the baton to the newly confirmed Chairwoman, Janet Yellen. The so-called “Sixteen Trillion Dollar Woman” seems unlikely to change course, to the surprise of no one and the chagrin of Fed doves. The ripple effects of the Fed’s asset purchases reach far and wide throughout the macro-economic sphere, and now that the stimulus is being withdrawn we are left to wonder: might those ripples be waves? Fret not American investor, the most obvious consequence right now is not actually in housing, stocks, commodities or even treasuries. All of those markets have had some volatility of late but levels remain largely unchanged since December. My friends, the sector feeling the pain the rest of the world is attempting to ignore is emerging markets. Take a look at Brazil and Indonesia, and of course China and India and you will find a sentiment strongly contrasting that of the US and Europe. When the Fed created the quantitative easing programs to suppress interest rates and encourage investment growth, cheap liquidity flooded any market that showed promise. What could have been more promising than huge populations, seemingly improving fundamentals, and markets starving for capital? Investors were all too willing to look past years of shady oligarchs, poor human rights practices and governments with a penchant for nationalization in search of yield. Infrastructure projects, exchange traded funds, manufacturing developments and even government bonds were all funded using this new found “cheap money.” Was some of this investment productive for long term growth? Absolutely! Much of it, however, was ‘hot money’ and served solely as a rate squeeze. The artificially low interest rates and inflated currencies drove funding for projects that otherwise would not have been considered. Lower rates, while beneficial for developed economies, do not mix well with emerging markets. The image of a train barreling full speed into a turn comes to mind. In recent months, as it has become evident that the Fed was in fact going to reign in QE purchases, emerging market purse strings started their tightening. As expected, investors began to sell EM bonds, quickly withdrawing their capital back to the safety of the US Dollar and her associated treasury bonds. Bond yields in the US dropped, their counterparts in the developing world spiked, and voila! A classic EM currency crisis! How the United States’ weaning off of QE will play out in emerging markets depends largely on the reactions of those in power. Several countries like Argentina have turned to the printing press to continue funding government projects, while others like India are taking the decidedly more dubious approach of ignoring the issue entirely. Argentina, for its part, has blamed economists, chief executives and even American legislators, all while underestimating its rate of inflation by a 96 | American Hard Assets www.ahametals.com
multiple of three. It seems unlikely that the Argentine chapter in this story ends well. What the tea leaves say for global investors is that stormy waters may be ahead. The Fed governors have made it clear that they are unlikely to alter their course, and that unless American job creation takes a non-weather related detour, interest rates may even be on the rise next year. Paired with lackluster EU data, that means little respite for the struggling Emerging Market nations and an increased likelihood of other unforeseen consequences. The Fed’s playbook for the second half of this game is only just now being written, and with the results of the first half being decisively in their favor markets wait for Yellen’s call—ripples or waves.