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Author, Andrew Sheldon

Global Mining Investing is a reference eBook to teach investors how to think and act as investors with a underlying theme of managing risk. The book touches on a huge amount of content which heavily relies on knowledge that can only be obtained through experience...The text was engaging, as I knew the valuable outcome was to be a better thinker and investor.

While some books (such as Coulson’s An Insider’s Guide to the Mining Sector) focus on one particular commodity this book (Global Mining Investing) attempts (and does well) to cover all types of mining and commodities.

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Tuesday, November 05, 2013

Bitcoins - inflation proofing or scamming?

There is growing support for Bitcoin and other crypto-currencies. Stefan Molyneux offers a good explanation of these crypto-currencies. I however am a little more critical of them....in fact a lot more. Whilst one can acknowledge that:
1. There is scarcity in terms of value of Bitcoin - the problem is that the scarcity is only in terms of its 'limited' volume. Even then, I would argue that there is the discretion of the operators to 'break that monetary discipline', however with competition, that prospect becomes less likely as competition becomes more pressing. Having said that, there is the prospect of competition giving greater 'marginal utility' for an 'near-anonymous' collection of holders from selling their 'intangible' currency.
2. There is vulnerability in terms of the lack of objective value in the coins
3. There is value in the prospect of competitors offering an alternative currency.

Frankly, I think the authorities would love it if these 'crypto-currencies' failed because they are destined to discredit the entire industry. The reality is that it is good that a monetary system has discipline. The problem is that Bitcoin discipline is backed by 'the arbitrary' whim of its managers. That is a 'threat'. The greater threat however is posed by its lack of tangible value. A value has value in use or exchange. The value in exchange however is a derivation of its 'utility'. Now, this becomes a circular argument, where its utility is trading, unless you can actually get some exogenous benefit from these units. This is the problem. Unlike gold, people don't wear 'bitcoins'. It won't even be an antique item in future. I therefore suggest that unless you are daytrading them to convert currency, then you are taking a risk. Such platforms, which are unable to offer a tangible store of value, like gold, are destined to turn simply into money exchanges where you trade foreign currency. I expect them to become 'insured guarantors' of currency conversion, since they can perform that service at a much lower cost than the banks. It actually makes for a nice 'regulatory' loophole if the value you offer is 'money insurance' rather than 'money transfer'. i.e. That arguably occurs if you charge for 'insuring' protection of your monetary value rather than the conversion. The question is how that might happen?

Now, at this point there might be a 'fixed' number of bitcoins - I believe 21 quadrillion possible units, which have been 54% mined. This obfuscates the problem of:
1. People can set up exchanges to sub-trade them; though that is a moot point
2. People can set up exchanges in competition
3. The demand for bitcoins can decline - since they are not entirely anonymous
4. They don't deal with the risk of being mugged trying to buy bitcoins
5. They ignore the risk of a better money system coming along offering better product & services. Remember, there is no tangible value in electronic money. The government's money might lack tangibility, but it has some tangibility. i.e. They are able to force people to pay tax at the point of a gun. Of course they undermine that value, which compels people to buy bitcoins in the first place. But you need to think about what you are buying. The reality is that its 'not a ponzi scheme', but its like one. Whilst you are impressed because the price is rising, the reality is that there will come a day when people will be abandoning it.

If you want a better store of value, might I suggest a diversity of emerging gold miners. Here is why.
1. Emerging gold companies with millions of ounces in the ground are worth $5-25/oz, when the cost of production is around $800-900/oz and the gold price is $1400/oz.
2. Gold has been valued and loved for 4500+ years
3. You can't steal gold until it is mined; and it won't be mined until it can be done so safely.

There is a risk of having gold in the wrong country with sovereign risk issues; so you need to spread your investments. The other nice aspect is that you can trade those positions in the interim. You are obliged under 'economic slavery' to pay capital gains tax. The nice point being that you only pay it on passive profits.

Now, there is essentially no 'fixed' unit of gold, but as I have shown, there is no fixed number of bitcoins either, if you can arbitrarily create new exchanges, and in that context, new exchanges are actually a source of diversification. The problem is that diversification diminishes the value of the exchanges. They need to find tangible value. Now, the infinite volume of gold is an issue, but consider:
1. You don't actually need to physically hold the gold; you just need a claim to it. It is kind of nice if its stuck in war-torn countries which can't attract technical operators or investors prepared to risk their capital.
2. The incremental addition of gold to the supply needs to be recovered at the marginal cost of supply, so that's an average of $800-900/oz, but some mine costs are $1300/oz. There is however the prospect of costs falling with new technology; however those are the types of gains upon which real wealth and the value of your money rises, i.e. the purchasing power of your gold increases against.

For this reason, I stay with gold; but you don't need to hold physical gold; you want to hold the 'intangible' claim to a potential source of gold, which offers you multiple bets on multiple currencies. For this reason, I like the idea of owning gold, but it can be demand-based commodities as well, like zinc, etc.

For these reasons, I believe bitcoins are a product that people poorly understand; and when people don't understand things, prices become volatile, or their price profile 'bubble like'. This does not preclude making a lot of money. The problem is that its simply a risk. You are playing with dangerous money. Its the type of speculation that governments don't create; its the type of speculation that only private sector spruikers create. Its not reason for regulation; its reason for education. i.e. Learn from the Dotcom bubble and the Tulip Bubble, because these were similar private sector bubbles.

The final point being that bitcoin does offer inflation proof. That is not however the point at issue. I can't even say you are buying a 'lemon' since lemons are worth $2.50/kilo. You are really buying a poorly conceived idea, and liking it because:
1. It seems to solve a problem - government fiat currencies
2. It seems to have credibility - because everyone else is buying

Don't be a sucker. If you use it, do so in small amounts for currency conversion to avoid the high fees of the banks. This is the proper use of such instruments. They are a risky/vulnerable source of medium-long term source of savings.

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Investment Strategy

If you are investing for the long term, you still need an investment strategy. Dont be fooled by the rhetoric of fund managers. The reason they advise you to 'buy & hold' is because they dont want to compete with you in sell-offs. Markets and industrial sectors are cyclical, so they demand trading to get the best returns. Fund managers actually cant hope to match the performance of small investors (if you are half good) because they have to manage huge amounts of funds and charge you a fee besides.
MY ADVICE is (i) look at a range of market indices and decide upon what level of correction would give you the justification you need to get in & out of the market. It might be a 5-10% retracement or a break of trend. (ii) Diversify if you dont have an intimate knowledge of the company or management. More than 30% in one company is aggressive.

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