Reasons to Buy Gold and Silver in 2015: US Dollar, Currency Wars, Russian Reserves, Central Bank QE

Gold and Silver Market Ripe For Rapid Growth

Though stateside gold prices may appear docile, from a foreigner's perspective precious metal prices are already too high because in much of the rest of the world the key precious metals have become a lot more expensive to purchase thanks to currency wars : the mighty US dollar.

Seventy-five percent of silver production (mine production) happens at gold mines - this means that, when gold production slows down (companies shuttering mines which started happening in the middle of last year) silver output declines.  This keeps the gold silver ratio intact despite the delinking of the two metals at London's commodities bourse.

The core price is set by comex, the commodities exchange in NYC and thus is traded in USD.
The fact that the price of both pcm's has barely increased over the past six months in my opinion makes both ripe for the picking ! 
Elsewhere the strong US dollar is making gold increasingly harder to afford, but that's inflation spurred by changes in local currency rates;  though quantitative easing and changes in interest rates are wreaking havoc on other currencies, the USD already has that factored into its value.. with The Fed at its side nothing aside from a shaking of the Fed's basic policy of money creation can shake its value... or of course a tiring by currency traders of the endless excuses for more QE.

In my opinion however, gold should've gained much more than nothing in US dollar terms.  Demand is still rising especially among those seeking a tangible hedge against inflation, as well as by those transferring money out of equities in response to growing global economic uncertainty, a shrinking middle class. 

The Gold Supply Problem

Now there's also the inevitable gold supply problem : let's face it, prices crashed last year - and the big producers responded by shuttering mines, big mines that weren't producing at reasonable cash costs.  Restarting those mines doesn't happen overnight - it can take years to complete new shaft reconstruction, bring in the necessary capital investment funding, and in some cases may even involve reapplying for licenses and approvals.  The big gold companies are now worth a lot less making it increasingly difficult for them to get banks to lend them the billions of dollars needed to make the mines work.  Then of course there's the shareholders who need to be convinced that the metal prices won't collapse again.

As of 2014 there is an estimated 24 billion ounces of silver existing in the form of jewelry.  Total historic production of silver is about 52 billion ounces, eighty percent of that mined since the dawn of the twentieth century.  However, much of the 52b oz will never be available to the bullion market due to its historical value (in the form of religious items, museum pieces, non-scrap jewelry).

India Imports Record Amount Of Gold From Switzerland

According to data from November 2014 Indian imports of gold from Switzerland totaled CHF2.9 billion up a whopping 600% versus the previous year; it's not just that month either, in October it was up 280%; January through November gold imports amounted to 457 kilos.

Russia Continues To Add To Gold Reserves
Russia purchased 20.73 tonnes of bullion in December - note also that in December gold prices were up for the first time in five months (+1%).  Makes Russian reserves fifth largest at 1210 tonnes.
Also notable - Ukraine held onto its reserves after selling 16 of 40 tonnes in Oct/Nov. 

Then there's the other central banks who cumulatively only became net buyers of gold since 2010 after 20 years of being net sellers.

Russia is key here - July through September 2014 it accounted for 59% of the 92.8t of net gold purchases by central banks.  Gold comprises just under 11% of Russian reserves up from 8% in 2013.  Those purchases allowed it to leapfrog China (1150 vs 1054).
Gold imports from HK by China were down last year but it was still the second highest on record at 813 tonnes.  Demand for gold should continue to increase into February as a result of Chinese new year festivities.

Don't Bet Against The Canadian Dollar !

I don't consider the current CDN/USD fxrate to be sustainable -  Beginning in 2016 oil prices are forecast to go up possibly by as much as 50% ($45->$65 per barrel).  Also note that Canada's federal government is starting to run a balanced budget while the USA has a severe, structural deficit which ultimately will lead the United States into a situation where it will be forced to run up high payments to foreign bondholders further weakening its long term outlook.

Don't Let Yesterday's Gold Selloff Turn You Off

- gold responds positively to durable goods numbers
- most global currencies are either under pressure (canada, australia, euro) or being deflated (asia) - this strengthens the US dollar in the near term but makes it increasingly vulnerable over the long term
- when the dollar shows any sign of weakness expect a big jump in precious metal prices
- Greek debt bailout 80 out of 240 billion is owed to Germany - If Greece doesn't pay up Germany will undoubtedly rethink its financial obligations to the Eurozone and that weakens Europe, its central bank and its structure.

Germany Rebuffs American Companies NSA, US Fed, Russia Gold Reserves At Record High

It's not just soccer that is pitting these two superpowers against one another;
German government cancels contract with America's number two wireless services provider Verizan (nyse:VZ) over allegations the NSA has unrestricted access to all information going through Verizon, regardless of how sensitive that information is.  Germany is deeply concerned about "the ties revealed between foreign intelligence agencies and firms".

Germany versus USA: Who Wins ? Federal Gold Reserves Stay In NY

Also this month, the German government cancelled a previous request to repatriate Fed-held gold reserves, on account of the slow pace / doubts about their whereabouts still prevalent.  The cancellation comes just 1.5 years into a 7 year plan that had called for the return of 87 tonnes per year (374 tonnes from Paris, 300 tonnes from New York), though Germany was getting it back at the rate of only 25 tonnes per year.  What's more, The US Fed returned only five tonnes representing only 8% of what should have been returned.

Russia Replaces US Security Bond Reserves With Physical Gold

Over the last three years Russia has dumped $50 billion in US securities, replacing dollars mainly with gold bars.  In the month of May 2014 alone, Russia purchased 900 thousand ounces of gold ($1.17 billion) bringing its total gold holdings up to 35.5 million ounces (valued at $44.3 billion).  The previous month of April was also a big month for purchases, had been the biggest month for gold purchases by the Russian central bank since 2010.

USA to export first shipment of oil in August 

On June 25, 2014 the Obama administration signs bill lifting previous oil export ban; the ban had been in place to protect US oil supplies.
Over the last few years American oil output increased from 5.5 million to 8.0 million barrels per day, while at the same time US oil consumption fell from 20 million to 18.5 mbpd.  Initially, exports will be limited to condensate from shale produced at Eagle Ford.  Exports could reach 700,000 barrels per day by early next year.  note: shale oil is light oil, making it easier to use in industry; for instance it can be used as aerospace fuel whereas heavy oil cannot.

China Buying Up London

Just this week China Construction Bank paid £110 million for a 123 thousand ft2 seven story building at 111 Old Broad Street.  The building will presumably be its headquarters in Europe and base for yuan clearing bank operations.  This comes one week after China Life paid £795 million for 70% stake in a London office tower.

China Construction Bank is the second biggest bank in China after ICBC.  It has an aggressive overseas expansion plan (in 2013 overseas assets up 40% to $120 billion).

20 Largest Banks & Financial Institutions in the World Globally as of September 3, 2012 (revenue, assets, deposits, hsbc, icbc, fiscal, capitalization)

Banks are ranked by most recent financial data, revenue, assets, earnings, market value.  TD Bank data is from the February to July 2012 period. % change in market value over the last year represents the change in total market value.  When USA, NYSE, or ADR is shown it means the stock value was already in USD. Just missed the list: Unicredito Italiano (Unicredit Group), Assicurazioni Generali (Generali Group), Royal Bank of Canada.
           
                        A lot has happened since my last report on the banks exactly one year ago.  In May 2012 JP Morgan's CEO announced that faulty derivatives trading caused the bank to lose more than $2 billion. The news sent the stock reeling, in after hours trading that day the company lost more than 11% of its market value. The loss is significant because that's about the same amount of market cap that separated it from the other top valued financial institutions.

Canadian banks are aggressively pursuing acquisitions ! Between 2008 and May 2012 Canadian banks spent $37.8 billion on ~100 acquisitions which is impressive considering big banks like Citibank and BNP Paribas were trying hard to sell off assets.  To put things into perspective, between 2001 and 2008 Canada's six big banks spent $38.0 billion on acquisitions meaning that today they are spending at roughly twice the rate they used to. One thing to consider though is the fact that a lot of their recent acquisitions bolster their position in Canada rather than overseas;  95% of the purchases they made between 2001 and 2008 were abroad.  So far in 2012 some of the biggest Canadian deals were made by TD Canada (acquisition of MBNA Canada) and more recently the Bank of Nova Scotia (August 31, 2012 closes deal with ING Groep for ING Canada, paying only $1.9 billion net in cash for 3% of the Canadian market for retail banking).  ING used the money to help pay off a government bailout it received a few years ago. That's pretty much it for ING in Canada, if you remember, back on May 13, 2009 ING sold all of its share in ING Insurance to institutional investors for $2.2 billion. Today, that 70% share is worth about $5.5 billion. Why is ING so eager to get out of Canada ?

In the summer of 2012, the Agricultural Bank of China lauched its Canadian operations in Vancouver.  Chinese institutions clearly want a piece of the Canadian market but is it too little too late ?  Canada's retail banking market is already highly congested meaning that Chinese banks will probably have to attempt a takeover or two if they really want to be a player.  Afterall, the first takeover of of a US bank by a Chinese one (ICBC) happened only four months ago on May 9, 2012.  ICBC paid $140 million for 80% of the Bank of East Asia (13 American branches).  ICBC (Industrial and Commercial Bank of China) reported in its 2Q2012 report a rise of 36.6% in the value of its overseas assets in only six months !  ICBC assets abroad are now worth US$ 166.6 billion.  Since the US Fed approved the deal, three Chinese banks are now permitted to operate in the United States.

In China, payment delays are becoming more problematic especially in the mining sector (debt owed to machinery companies up significantly). That's causing headaches for the big four banks there which have seen their market capitalization drop off quite a bit from last year's highs.  More of the loans on their books are becoming risker and investors are taking notice.

Royal Bank of Scotland: I excluded it from my list last year and again this year.  This year the bank's problems go beyond just the unending quarterly losses.  The company's market value remains pennies on the dollar at just over US$20 billion which is lower than it was at this time last year. The bank remains mired in problems which include conflicts of interest, rigging of inter-bank borrowing, IT malfunctions, problems in Ireland. The bank's market cap has been erratic as of late.  It's also 83% owned by the British government.

World's 21 leading financial institutions with data from last six months as quoted in company reports (using domestic currency):  click on link for company interim 2012 report (in the case of TD Bank it's the 2nd + 3rd qtr ending July 31, 2012)

Bank	Assets			Revenue			Net Income
	June 2012	June 2011	% chg	1H12	1H11	% chg	1H12	1H11	% chg
ICBC	16,431,196 (mar'12)	14,896,048	+10.3%	258,900	231,160	+12.0%	123,200	109,600	+12.4%
HSBC	2,652,334	2,690,987	-1.4%	43,672	42,311	+3.2%	9108	9762	-6.7%
ConstrBank	13,505,745	11,754,766	+14.9%	227,812	197,246	+15.5%	106,494	92,953	+14.6%
JP Morgan	2,290,146	2,246,764	+1.9%	48,232	52,000	-7.2%	9884	10,986	-10.0%
AgriBank	12,112,888	10,725,141	+12.9%	210,780	184,633	+14.2%	80,522	66,679	+20.8%
BO China	12,825,590	11,483,498	+11.7%	179,665	165,974	+8.2%	75,002	70.234	+6.8%
Citigroup	1,916,500	1,956,600	-2.0%	38,048	40,348	-5.7%	5877	6340	-7.3%
BO America	2,190,868	2,338,826	-6.3%	44,246	40,113	+10.3%	3116	-6777	up
TD Bank	806,283	713,642	+13.0%	11,591	10,540	+10.0%	3396	2894	+17.3%
Itau Unibanco	888,809	793,679	+12.0%	40,183	35,821	+12.2%	6729.8	7132.5	-5.6%
Santander	1,292,677	1,231,908	+4.9%	22,544	21,403	+5.3%	1704	3501	-51.3%
AIG	555,383	610,427	-9.0%	35,566	34,119	+4.2%	5788	3554	+62.9%
BNP	1,970,041	1,983,154	-0.7%	19,984	22,666	-11.8%	5082	5246	-3.1%
Goldman Sachs	948,638	936,910	+1.3%	16,575	19,175	-13.6%	3071	3822	-19.6%
UBS	1,412,043	1,419,162	-0.5%	12,934	15,515	-16.6%	1252	2822	-55.6%
Lloyds	961,371	978,951	-1.8%	8,965	10,868	-17.5%	-641	2278	up
Barclays	1,631,265	1,492,922	+9.3%	15,475	15,299	+1.2%	480	1983	-75.8%
Deutsche	2,241,174	2,164,103	+3.6%	17,214	19,014	-9.5%	2063	3363	-38.7%
ING Groep	1,237,248	1,240,731	-0.3%	7,759	7,137	+8.7%	1851	2888	-35.9%
IntesaSan	666,417	644,673	+3.2%	8944	8720	+2.6%	1274	1402	-9.1%
SocGen	1,246,666	1,158,008	+7.7%	12,583	13,122	-4.1%	1405	1897	-25.9%

Highlights and Some Key Data To Keep In Mind:

Industrial and Commercial Bank of China
Revenue growth outpaced growth in operating expenses (13.7% vs 12.6% for the half) and that pushed the cost to income ratio down to 25.57% which is a first half record low.  EPS 0.35 RMB up from 0.31 RMB qoq.
On July 6, 2012 ICBC announced the closing of the acquision of 80% of the Bank of East Asia, a deal that gave it a foodhold in the US market.
By June 30, 2012 ICBC middle east operations already surpassed their 2011 full year earnings.
S&P has a slightly higher rating of the bank vs Moody's (outlook positive vs stable). 
June 2012:  ICBC is present in 34 countries, overseas asset value at US$ 166.6 billion +33.6% since December 2011.

Banco Santander
Profit from continuing operations was €3472m down only 11.9% from (€3940m).  The real profit decline of 51.3% --> €1704m is due to the setting aside of €1,304 million in the 2Q12 in provisions for property (real estate exposure in Spain);  That reduced 2Q12 net income from €1,404 million --> €100 million.

American International Group Inc. AIG
Insurance premiums contributed 53.6% of revenue ($19,080m / $35,566m) which is down from 56.8% in 1H2011 ($19,380m / $34,119m)

Deutsche Bank
In euros, assets (+3.56%) and deposits (+0.61%) went up in value but because the euro lost -8.19% of its value relative to the USD when denomited in dollars both experienced a decrease in value.

Societe Generale
Asset value actually went up +7.66% however the euro lost -8.19% of its value relative to the USD and that caused SocGen asset value to fall slightly when denominated in dollars.

Agricultural Bank of China Breakdown of Customer Deposits 
June 30, 2012:  53.4% are demand deposits (28.3% individuals / 25.1% corporate), 41.4% time deposits (39.8% individuals / 11.6% corporate), rest are other.
June 30, 2011:  57.4% demand deposits (28.6% individuals / 28.8% corporate), 38.9% time deposits (28.7% individuals / 10.2% corporate), the rest are other.
Revenue is quoted as operating income, customer deposits are referred to as Due to Customers.

China Construction Bank
EPS  basic and diluted are the same, 0.43 rmb up from 0.37 rmb
The bank's cost to income ratio down to 32.73 from 36.19 year ending December 31, 2011
Customer deposits breakdown:  June 30, 2012:  51.2% are demand deposits (18.3% personal / 32.9% corporate), 48.8% time deposits (27.9% personal / 20.9% corporate), rest are other.
June 30, 2011:  53.5% demand deposits (18.5 personal / 35.0% corporate), 45.2% time deposits (26.7% personal / 18.5% corporate), the rest are other.

Toronto-Dominion Bank
TD's 3Q2012 was one of the best on record;  EPS (basic) up to $1.92 from $1.84 in 2Q2012, $1.77 in 3Q2011.  Though the company's bottom line was much improved, it didn't result in any dividend hikes (still at 0.72 q2q, but up from 0.66 last year).
For the recent third quarter wealth and insurance net income was +3.15% --> $360 million (21.1% of total group profit).
In just the last 3 months TD's total assets are up +4.28% !
Revenue grew +1.6% between April 2012 (2q) and July 2012 (3q) compared to 5.2% between April 2011, July 2011.
Only 16% of its wealth and insurance net income comes from its ~ 30% stake in TD Ameritrade.
In 2012 TD acquired MBNA Canada.

About the table at the top of the article, currencies used*Average fx rate calculated myself using data at x-rates.com and google finance exchange.
Exchange rates used to convert to USD for the 6-month period (used for customer deposits, revenue, net income/profit)
Chinese RMB 1hfy12 0.158243255555, 1hfy11 0.1529334634 up 3.47%.
Euro 1hfy12 1.29745937777, 1hfy11 1.403703906 down 7.57%.
Swiss Franc 1hfy12 1.07705781666, 1hfy11 1.10659625 down 2.67%
Brazilian Real 1hfy12 1.86424560555, 1h11 1.6312765625 down 14.28%.
British Pound 1hfy12 1.57693847777, 1hfy11 1.61702795275 down 2.48%.
Canadian Dollar 1hfy12 1.00605145856, 1hfy11 0.9704058232 down 3.67%

Currencies used for assets last day of most recent reporting period
Chinese RMB   June 30: 2012  6.3550, 2011 6.46350
                           March 31, 2012 6.29700  (ICBC)
Euro  June 30: 2012   1.266350,  2011   1.451931
Swiss Franc  June 30: 2012  0.947650, 2011   0.84160
Brazilian Real  June 30: 2012   2.00950, 2011  1.560491
British Pound  June 30; 2012   0.636679, 2011   0.62250
Canadian Dollar  July 31: 2012   0.955100, 2011   0.955100