The most important gold industry interview of 2015

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Recently, my team was able to secure an interview with the head of one of my gold fund’s main refinery partners.

The gentleman we are interviewing  is part of senior management of one of the largest Swiss refineries.  His refinery is one of only 5 global LBMA referees, which takes samples from other refineries around the world and certifies them to produce gold meeting the purity and form factor of the LBMA good delivery standard, which makes it part of the very core of the industry globally.

He has over 30 years experience in the gold markets and has in our view one of the most authoritative perspectives into global physical gold flows in the world. His unique outlook, formed from internal data on gold flows through the refinery, combined with colleagues throughout the industry including the largest bullion banks (versus news outlets)  is an invaluable source of information and paints an important picture for the gold markets moving forward.

Below is the transcript. If you want to hear the original interview, you can do so here:

Jon: Hello. This is Jon Ward with Physical Gold Fund. Recently I was privileged to hold a candid conversation with one of the most connected and influential people in the physical gold market. The gentleman you’re about to hear from holds a senior position in one of the five largest precious metals refineries on the planet. Because of his current position and his decades of prior experience, he has a deep inside knowledge of today’s physical gold markets. His insights and unique perspective on these markets goes way beyond what you will ever find in the mainstream press. Due to the sensitivity of the information he reveals in this interview, his identity and that of the refinery he works for have been withheld. Here is the conversation we recorded.

Head of Refinery: Hello, Jon.

Jon: It’s great to have you with us.

Your refinery is one of the largest refiners of precious metals in the world. The company is notable for being one of only five global referees for the London Bullion Market Association. This means that your company certifies all refineries worldwide for their ability to produce gold that meets the LBMA Good Delivery standard.

To begin, please tell us a little bit about your background in the precious metals industry and the position you hold today.

Head of Refinery: With pleasure, Jon. Thank you very much for giving me the opportunity to talk to our customers directly. I started in 1978 as a telex boy in the precious metals department of Credit Suisse. That’s how I earned my living during university. In 1985, I changed to another large Swiss bank, UBS. I stayed in the banking business until 2001 when I had the feeling and impression that physical business in precious metals was becoming more and important.

I found this importance to be neglected by the banks to some extent. That’s why I then moved into precious metals refining. My refinery, as you said, is one of the largest in the world, and I have built up the precious metals trading, funding, and hedging business for this refinery.

Jon: In your day-to-day work in this industry, what are your primary sources of information about the precious metals market?

Head of Refinery: We have, by nature, a lot of direct information. If you look at the trucks driving in and out, look at the bar lists, and look at the capacity utilization, that gives you some information already. It could be misleading, however, if you try to correlate the physical business with the prices. You have to be very careful there.

Information is also dependant on the network you have. At my age, there are a lot of downsides, especially if you get up in the morning and you feel your bones! But age also has advantages in the network we have here. It is huge. We have been an internationally oriented company since the beginning, so our contacts really are all over the world. We are proud of this network, and therefore, I would say our information is coming less from the newspapers and more from the market.

Jon: Yes, it’s from the people you talk to personally day-by-day across the world. In 2013, I recall you commented on the tightening of physical supply in the gold market and even the difficulties you were having in sourcing material. In fact, as I remember, you remarked that in 30 years, you’d never seen anything like it. Is that situation still true in 2015? How difficult is it to source the metal you need today?

Head of Refinery: The situation has not changed. It is truly difficult. This is also reflected by the price. It is getting more and more expensive to get material out of the market, and also there is less liquidity in the physical precious metals market than there used to be in the past.

Jon: Wouldn’t you say there’s a paradox here because the price of gold on the spot market is seen as low? What’s your understanding of the current price of gold? How well does the price today reflect the realities of physical supply and demand you just described?

Head of Refinery: The price does not reflect the realities at all. Don’t forget, we have a huge amount of artificial gold or paper gold floating around the market. If you look at the numbers of futures exchanges, there is a lot of metal you can’t even detect because it is within some derivative product, which in the end, you have no clue how much it is and on which side it is.

The other point is that nobody is interested in any physical delivery at the end. These products are all cash settled. People are happy just to use the spot market as a benchmark, and the product itself never ends up in the physical market. This looks dangerous to me. If we were to have a situation where everybody said, “Okay, now I have a long position that expires, so I want the physical,” for sure, the physical would not be around.

Jon: That’s a big ‘if,’ of course. Is it your belief that this paper market can be sustained indefinitely with a huge mismatch between the price in the market and the supply and demand in the physical? Can this go on forever, or do you think will it break at some point?

Head of Refinery: It depends very much on the behavior of market participants. Generally, if you look at the situation we have now, nobody understands the price of gold. We have serious geopolitical, not only risks, but already issues. We have a financial world with debt crises we have not seen for decades. We have a relatively low gold price that is in no correlation with the physical market. So there is question mark after question mark.

Will this continue? I think it depends very much on the behavior of the people. As long as market participants are happy for cash settlements, this can go on forever. The spot market price of gold is nothing more than a number, a benchmark. People are happy with cash settlements or they take the currency. If this behavior should change, then it could become dramatically dangerous.

Jon: Going back to the physical market, you’re in an unusual position to observe the flow of precious metals across the world. I’m curious to know what you’re seeing. Where is the gold coming from? Where is it going? Who are the main sellers? Who are the main buyers? Would you summarize the picture for us as it is today?

Head of Refinery: This is very easy, actually. There is nearly just one direction, from West to East. We have seen a small exception within the last year or so with increased demand in the Western world in Germany, but this bears no relation to what we see in general. The flows of metal end up in Asia. It is mainly China, also India, and to some extent the Middle East.

Jon: If you were to roughly estimate the percentage of buyers of precious metals in the East and the percentage of buyers in the West, how would you map it out?

Head of Refinery: For the whole market, figures are published by GFMS or other researchers. They give a more accurate overall picture. In our case, however, it is 90% going to the East and 10% to the Western market.

Jon: That is a pretty dramatic distinction. Obviously, it begs the question. Why is there so much less demand for gold in the West than there is in the East? Physical gold, that is.

Head of Refinery: I think Western financial markets simply offer more possibilities than you have in Eastern markets. People are happy to move out of their gold positions, to sell their gold from an ETF, and jump into some shares or whatever products are available.

The flows are also more driven by demand, but of course, where there is a buyer, there must be a seller. At the moment, it looks very much like people are very confident in general financial markets, and that’s why we have gold prices at these levels.

Jon: Let’s look a little more closely at the East, particularly China, where demand for gold has been high for several years. It seems rather opaque. It’s not very easy to know how much gold China is accumulating, because there are doubts about the official reports. What’s your picture of that? How much variance do you see between the official reported accumulation of gold in China compared to the reality?

Head of Refinery: I absolutely agree with you when you say it’s opaque. I have the same feeling. I don’t know myself how accurate these figures are, but I have my doubts. Not only is China the largest or second largest importer of gold; they’re also the world’s largest producer. Where this gold all ends up, we don’t know.

I must say that I’m always surprised about the retail demand in China. It is really unbelievable how much gold ends up in decorative items, in jewelry, and also in bar vaulting. But the big question mark we have to put there is what are the figures from the People’s Bank of China? We can estimate or possibly believe their figures, but my personal assumption is that the holding is much larger than what’s published.

Jon: Staying with China for a moment, we see that they tend to prefer 1-kilo bars at 999.9 purity over the traditional LBMA Good Delivery Bars, which are 400 ounces at 999.5 purity. Would you say China has effectively imposed a new international standard on the physical market?

Head of Refinery: It has definitely imposed a new standard. It is also interesting to see that 999.5 gold bars were the bars typically for central bank holdings. Then when demand was on the consumer side, these bars were converted to various weights – from 1-gram wafers up to 1-kilo bars. That was always the case. Now, however, given the scale of demand from China, yes, they have established a new standard.

Jon: Over the last couple of years, has this meant that you actually had to melt down and re-refine a whole lot of 400-ounce bars for China? If you have, I’d like to know where the bars come from.

Head of Refinery: The bars are coming from what you could call “the market.” Looking back, there were all these ETF liquidations, and the ETFs were holding bars in the form of 400-ounce bars. At that time a lot of the physical liquidity maintained in the London gold market was actually in 400-ounce large bars. The final customers were not interested in 400-ounce bars, so it was one of our jobs to take these bars, melt them down, refine them up to the 999.9 standard, and cast them into kilo bars.

Jon: Were a whole lot of these bars coming from London?

Head of Refinery: Regarding the ETF liquidations, this gold had to go somewhere, and that was all converted. This is a thing you see every year. You also see some liquidations of physical gold held with COMEX and NYMEX. More or less, these are the sources of gold other than newly mined.

Jon: What about scrap? That traditionally has been at least one source of gold. What’s the status of the scrap market today?

Head of Refinery: We saw a dramatic decrease when the price came down. To put it another way, when we had $1900 an ounce, there was definitely an incentive to look at melting down some of your old jewelry and whatever was around. We now have price levels around $1150, so this incentive is gone. A lot of scrap coming from old jewelry is just not in the market anymore.

We have seen, however, a certain small increase in the scrap business from the jewelry industry’s processing and production. There is always some waste coming back. Then there is price-sensitive scrap – very opportunistic – coming every now and then out of Asian countries; not China or India, but other countries in the area. This may have something to do with the currency, exchange rates, and sometimes with certain tax issues, but this is not a steady flow.

Overall, I can say scrap has decreased remarkably.

Jon: I’m getting the impression scrap is not a very significant source of gold for your business. Is that correct?

Head of Refinery: No, not for the time being.

Jon: Let’s look at the mining sector then. Infrastructure investment in mining has been dramatically reduced since 2011. How do you see that impacting the future supply of gold?

Head of Refinery: I think it is a very important question. Mining companies are not doing well at the moment. Just have a look at their share prices. If one of the results is that they are not exploring anymore but saving costs, that’s a big issue for them. I think it is unavoidable that within a few years, we will see that there was less exploration done in the past, and that means there will be less gold in the market.

Although I must say, if you look back, the mining companies were still able to increase general production at a pace of 1.5% to 2.5% a year. However, with the present cost situation and drop in exploration, I think the only reasonable conclusion is that in a few years’ time, we will have less newly-mined gold.

Jon: Let’s say the price of gold rises at that time. If I understand this right, it takes the mining industry quite some time to catch up and start increasing production again.

Head of Refinery: Yes, absolutely. Setting up a mine is a big investment. Even for a small venture, it could easily cost about a few dozen million US dollars. That said, even if you explore and know how much is in the ground, you still don’t have a mine that is producing. For several million dollars, the investors must feel comfortable with the price of gold and, also, in general, the political environment. Financial stability must be there. You must believe in the safety of your investment.

We see both of these points now, and I would not say they are very positive. On one side, the gold price is under pressure, and on the other side, there is the geopolitical situation in those places where you still have potential for production. These places are not the most attractive places to invest in. I see a double threat there that will have an impact on future production.

Jon: Are we looking at a future where there could be a rise in the price of gold and greater demand for physical gold in the market, but a squeeze on supply to meet that demand?

Head of Refinery: This is certainly possible. Also, since the last move up, a lot of scrap has already come to the market, so if the price moves up again, I don’t know how much scrap will be around in order to compensate for the lower volumes coming from the mining industry.

For physical gold, I’m very much on the bullish side. Let’s put it this way. The danger of less supply is bigger than the comfort of more supply. That should have an impact on the price, yes – and then do it in physical form.

Jon: Maybe that should also be an alert to those interested in purchasing gold to buy while the gold is available, and as you say, do it in physical form. Thanks for that emphasis.

As an introduction to some of our listeners who are not familiar with your company, what can you tell us about your company today?

Head of Refinery: One point for sure is that we are a precious metals refiner. We do only precious metals, and we don’t diversify into any other metal or material – ceramics, or whatever. We are precious metals, and we will always be precious metals.

What is also special about our refinery is that we are a fully-integrated service provider. That means we refine the metal, we provide hedging facilities, and we give our customers the possibility of maintaining a metals account. With this kind of combination, you could say we provide banking services and refining services. However, what we have on the financial service side always must be related to physical metal.

A further point is that we are a Swiss refinery. In Switzerland, we have the only country in the world that has legislation for trading and processing precious metals. Security and safety for our customers is guaranteed in the end by the Swiss government. Then the other issue about Switzerland is that we are a safe place. We have a stable currency, or maybe even a too-stable currency. We have open financial markets. In a nutshell, that is what is different about my company compared to other refineries.

Jon: I believe you’ve been expanding capacity recently. Tell us about any new initiatives at the company that might be of interest to our listeners.

Head of Refinery: There are a few investments. We are investing and very much want to grow in the high-end jewelry and watch industry in Europe. We are expanding there with innovative product designs and alloys, always in very close cooperation with our customers.

Then looking at mining partnerships, we are expanding in Latin America. We have just opened in Santiago, Chile, and are trying to provide even more competitive services for the Latin American mining industry.

We also have several ventures together with the United Nations and some government institutions. We are looking at the artisanal mining industry both in Africa and also Latin America. Although only about 10% of the gold produced is coming from artisanal miners, they account for 90% of the workforce in gold mining. They are often working with very outdated technology, maybe sometimes even dangerous technology — I just want to mention mercury and environmental issues. We have been approached, and also looked ourselves, for contacts at the UN and in certain governments. The response is always extremely positive; therefore, we have considered this one of the areas where we will invest more time and money, and grow.

Jon: That’s most interesting. Do you have any final thoughts to share with us about the current state of the physical gold market?

Head of Refinery: If I am honest, the only thing I could share now with you would be that I’m perplexed about the discrepancy between the prices and the situation of the physical market. This is something I still do not understand and is a riddle for me every day. For all people who are interested in precious metals, the physical side of this business should be given more emphasis.

I believe that in this situation with all the clever plans, the structured products, and whatever is offered, the market should be checked very, very carefully. If you see in one of these products a paragraph that references the possibility of cash settlement, keep your hands off. I may sound old-fashioned, but if you are interested in precious metals, go the old-fashioned way – do it physically. I think the market is going to be quite interesting in the near future.

Jon: Thank you for sharing your unique experience and insights with us today. It’s been a pleasure talking to you.

Head of Refinery: My pleasure, too, Jon, and thank you for giving me the opportunity.

Jon: On behalf of all of us at Physical Gold Fund, thank you to our listeners. We look forward to joining you again soon.


Time for a new project…

Alex Stanczyk appointed Managing Director of Physical Hard Assets Fund SPC and Physical Gold Fund SP

Grand Cayman – (PRNEWSWIRE, September 1, 2015) – Alex Stanczyk has been appointed to serve as Managing Director of Physical Hard Assets Fund SPC and Physical Gold Fund SP.

As one of several principle architects of Physical Gold Fund SP, Mr. Stanczyk has been involved in core aspects of the Fund design and structuring as well as coordinating strategic relationships required to launch the Fund. In 2011, Mr. Stanczyk played a key role as a designer and advisor of the world’s first non-bank private custody, fully SICAV-compliant, precious metals fund – the Luxembourg Precious Metals Fund – LFP Prime SICAV SIF. From 2007 through 2015, Mr. Stanczyk served in a range of capacities for the Anglo Far-East Group of companies where he specialized in physical precious metals logistics consulting for the group’s global operations. He also developed and implemented flagship programs such as Chain of Integrity, Private Allocated Custody, and Institutional Allocated Custody. He has consulted and lectured globally to and for family office, institutional, and government on gold and gold’s role in the international monetary system.

“We are thrilled to have Mr. Stanczyk come on board with us as a Managing Director,” says Nestor Castillero who also manages the Physical Gold Fund SP. “His energy, expertise, and track record in the physical precious metals industry is well known, and his passion for operating in the interest of investors has been instrumental in product development for anything he is involved with.”

“I am excited to build further upon Physical Gold Fund SP’s already world-class platform,” says Alex Stanczyk. “We have taken a hard look at what is available in this space, and I am confident that this Fund is the most robust, secure, and thoughtfully constructed physical gold fund in the world today.”

About Physical Hard Assets Fund SPC

Physical Hard Assets Fund SPC is a Segregated Portfolio Company domiciled in Cayman Islands and regulated by the Cayman Islands Monetary Authority (CIMA).

About Physical Gold Fund SP

Physical Gold Fund SP is a Segregated Portfolio Fund of the Physical Hard Assets Fund SPC. Listed on Pershing platform, the Cayman Islands Stock Exchange, and regulated by CIMA, the Fund is a transparent, open?ended fund that invests in unencumbered, fully-allocated physical gold in the form of “Good Delivery” gold bars meeting accepted global standards. Shares of the Fund are redeemable for gold, and all physical gold is insured to its full market value.

For additional information:

This communication shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall thereby any sale of these securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state or jurisdiction. Nothing in this communication should be construed as investment advice or an investment recommendation. This communication has not been approved by any authority for any purpose.

Source: Physical Hard Assets Fund SPC


Bitcoin’s value is not as much in the currency as it is the technology of instant value transport and public ledger

Back in Feb. I wrote that “Parking Value” may be the near future of Bitcoin.

Bitcoin is many things to many people, and because it is both currency and technology many are unable to separate the two from each other to understand the difference. I still believe that Bitcoin the technology is the most important invention here. The ability to move value from one party to another, instantly with no intermediaries and have it recorded publicly for the world to see, that record then stored on tens of thousands of computers globally and eventually in a network of low earth orbit geo-stationary satellites has the power to change the way the world transfers money, and even how it does business.

Many of my colleagues in the gold industry do not get my fascination with it. I get ribbed all the time, as many allude to bitcoin never holding value the way gold can. While I agree with this point, it illustrates what I said before, that few can separate the technology from the currency and therefore are unable to see how this technology is already impacting our reality.

My view is that the immediate use of the Bitcoin technology will be to temporarily “Park Value” in things like gold, or USD, or Euro, and use the technology of Bitcoin to transfer value between parties before it is then “Parked” again in gold, USD, or Euro (or any other form the customer wishes).

Apparently James Turk, founder of Goldmoney may think along similar lines, as he just sold Goldmoney to Bitgold, which is a company doing exactly as I described:

Update for clarity:

From my understanding (I am a US person so cant be a customer and test this myself, maybe one of you will tell me how it goes) Bitgold has developed a proprietary protocol for international payments among its own customers spending gold. While this may be similar to Bitcoin (The CEO has said in interviews that Bitgold is fully compatible with the blockchain and ripple), if it is developed in house it is clearly not Bitcoin. From reviews I have read you can apparently use Bitcoin to buy gold with them, and redeem the gold into Bitcoin when you sell it – thus parking the bitcoin in gold for a time.



China Gold – the show is just starting

During my last trip to China I spoke to the head of one of China’s most influential government agencies. One of the largest concerns the government has is the real estate market and stock markets being overvalued and having few options for Chinese to invest elsewhere. This is part of the huge push in China for gold by the Chinese government, and why there have been government sponsored advertisements encouraging Chinese to own gold.

With Chinese real estate markets popping and capital flooding into stock markets, I suspect the push for diversification into gold within China will only accelerate over the next few years.

I for one, am looking forward to expanding business operations in China and Asia in general, it is an amazing market.

“Parking” value may be the near future of the cryptocurrency ecosystem, at least for now

The power of the technology, for now at least, is not bitcoin as a store of value. The power of the technology is in the transport mechanism and the decentralized ledger, which is revolutionizing payments.

I predict that the ecosystem is going to continue to move in the direction of using Bitcoin to transfer value, and then “parking” it, until it needs to be moved again. I say continue, because this is already happening.

In my last entry, I wrote that Bitcoin has a huge hurdle to overcome. This hurdle is a general lack of trust. This is true for two primary reasons (not including fear of the unknown, and fear of regulatory response):

  • first is that bitcoin is currently volatile,
  • second is that bitcoin is not yet trusted as a form of money.

This is not to say that someday it will not be trusted, but it is going to require a what I am calling a trust-bridge.

Lets back up a bit so I can explain why.

Some cryptocurrency advocates argue that money has value because of its utility (cryptocurrency in particular). The argument stems from the idea that money has value because of the system that grows up around it. For example the USD has value because of banks, internet purchasing, stocks, bonds, credit cards, etc. If you compare this reasoning to the arc of history however, it does not stand up under scrutiny. How exactly is utility the reason Rai stones for example have value as money?

rei stones - yap

If you are not familiar with Rai stones (1), they are huge stone wheels weighing up to 4 tons that have been used by the micronesian people of Yap as money. They were quarried as far as Palau and transported back to Yap, over 2600 kilometers away by primitive sailing vessels. This is hardly good utility, in my opinion.

Some cryptocurrency advocates also argue that “hard money guys”, aka “metallists” declare gold has “intrinsic” value. Although I am probably a hard money guy, I dont think gold has any intrinsic value at all (as money). The reality is, gold, and every other thing from seashells to beads to rare feathers or cows, that have been used as money had value because people believed and agreed they had value.

The question is, why would people agree on this? The founder of Xapo Wences Casares touches on the reason when he says, “Look, what would you prefer — free access to information [which they’re getting now with their phones] or a secure place to store the fruits of your labor and to receive and make payment?”(2)

People want their labor to mean something. People toil, day in, and day out to earn a living, and they do not want it to be for nothing. This is the true essence of freedom, of capitalism, the opposite of slavery. Money is closely tied to mans labor, and every human on the planet, deep in their heart, knows it.


Some cryptocurrency advocates deny this, and claim that the “labor theory of money has been generally accepted as being false”(3). Generally accepted as false by whom, I would ask? Cryptocurrency speculators who have a financial stake in it being false? Economists espousing the conventional wisdom? The same economists who have pretty much made a mess of the entire global economy? Certainly not accepted as false by me?


To anyone who claims that money does not have value because it is linked to labor, I dare you to go to work tomorrow and tell your boss you will be working for the next five years for free. No, indeed, money is tied to labor, and that is in fact why gold has value, and every other form of money known to man for the last 5000 years. The argument that Warren Buffet uses to claim gold is a horrible investment, is the same reason that gold is actually money. It once took the labor of a man digging in the ground for many hours to produce a single ounce of fine gold. Today, it is done by machines hauling tons of rock and ore, but this is still a form of energy expended, and that energy is equivalent to many human hours of labor if there was no such thing as fossil fuels and the internal combustion engine. It is simply a measurement of stored labor, and thus, we instinctively know it has value. What is more valuable, a hand carved piece of furniture or a particle board item from Ikea? An excellent article which goes into the energy value in gold can be found here: . The common denominator of all forms of money that humans have believed have value, is that they require labor to produce.


“But the USD is practically free to make, all they have to do is punch some numbers into a keyboard!”, I am imagining some will say. Yes, this is true. But I would suggest that the USD is still a trusted form of money that most people believe has value. The critical question is, why do people believe it has value? If you were to go out into any-city in the USA and ask 1000 people why the USD has value, likely there will be a large number of them that say it has value because it is backed by gold, even if this has not been true since 1971 when Nixon severed gold convertibility to the dollar. My point is, people trust that the USD has value because gold has acted as a trust bridge. The system that grew up around the dollar inherited its trust from gold. Utility, therefore, had little to do with it. The trust of value was already baked into the cake.

If this is not true, then why does every single argument I have seen for bitcoin make comparisons to gold?

Which brings us to the current dilemma. Even if Bitcoin and related technologies are the money of the future, the fact remains that cryptocurrency is not yet widely trusted. It is going to require a bridge. A trust bridge.

I would argue that some of the sharpest start-ups in the space have already caught on to this fact, because they are allowing users to “park” their value in stores of value other than bitcoin.


1. Bitreserve

2. Bitgold

3. Vaultoro

4. Coinapult

And many more. By offering the ability to “park” bitcoin into another form of value storage, whether that be Euro, Dollars, gold, or silver, it mitigates volatility and allows users to feel more secure about where their money is. This is not a bad thing. This will fuel adoption, and when enough people are using it, maybe some day the volatility will reduce and people will feel more secure leaving it in bitcoin, or whatever the cryptocurrency is by then. Maybe this process takes 10 years.

In the mean-time, adopters of Bitcoin will be migrating towards using the tech primarily as a freeway to move money from place to place, but once it is done moving it might just get parked in gold until it needs to drive someplace again.

Bitcoin, for now at least, needs a trust bridge. I think gold fits nicely. So any of you huge startups (Xapo?) that wants to provide parking in gold to your customers, please say hi, I am happy to assist you with a superior turn-key institutional gold custody back-end ;).





More convinced by the day Bitcoin (the technology, not necessarily the currency) is going to change the world

Every day I read more about how the amazing technology which underlies Bitcoin works. For most people who have gone down this road far enough, there comes an “aha” moment when you realize this technology has the power to change, well, everything.

All technologies with the power to disrupt society on a global scale are met with incredible resistance. To quote Marc Andreessen of silicon valleys renowned VC firm Andreessen Horowitz in response to the point that Buffet sees little value in Bitcoin, “The historical track record of old white men who do not understand technology crapping on new technology is about 100%”. For context, here is a video of the Coinsummit fireside chat where he said it: (42:20)

This resistance to new technology manifests itself in debates and argument, and especially around technologies which change how humans globally interact even more so when it intersects with how we do business and when it involves money. There are many passionate debates about money in all its incarnations whether it be dollars, gold, or Bitcoin. Humans are deeply entwined with it, because it represents their labor, their sacrifice, their hopes and dreams. Money makes the difference between freedom and slavery, the difference between life and death in many cases globally for billions of people, so it is no wonder people are so passionate in their discussion of it.

Let me present some foundational information to support my posts title.

1. There are currently as many as 2.5billion un-banked people globally. This means that this huge portion of the worlds population does not have access to banking, and frankly are not likely to get it. In many cases they are simply not able to get it. If a person in Afghanistan for example (or even America) has zero credit history, no passport or drivers license, no banking or professional references, and may not even have a copy of a birth certificate (and cant get one), they are not going to be opening a bank account under the worlds current AML/KYC requirements anytime soon. If there were a way however to add 2.5billion people to the worlds economic ecosystem by granting them instant access to financial transactions and a way to store the fruit of their labor, it could create a surge of economic activity never before seen on earth.

2. People in places like Afghanistan do not go to their neighborhood super-mall and buy laptops, ipads, and desk computers. Much of the developing world does, however have ever growing access to smart/feature phones, with market penetration reaching as much as 4.55 billion consumers worldwide in 2014. (1) Developing countries are skipping the entire computer/laptop/tablet phase and moving straight into much more affordable smart/feature phones with internet access. In the Middle East and Africa, nearly ALL internet users are mobile. (2) According to IDC, global shipments for smart phones has exceeded 1 billion units in a single year, and the numbers are only rising. (3) “In a remarkably short period of time, internet and mobile technology have become a part of everyday life for some in the emerging and developing world” (4)

3. In time, all of these smart devices may be linked to the internet and the rest of the global economy via satellite networks which offer blanket coverage to every inch of planet earth. Elon Musk and Richard Branson are currently backing an initiative to create the worlds largest ever geo-stationary satellite constellation providing internet service. (5) This will only serve to magnify the penetration and accessibility of crypto-currency to the worlds un-banked billions.

virgin satellite constellation







4. (Update) The use of digital currencies is already a well established trend in some developing economies. By some estimates, over 50% of the GDP of Kenya is conducted in a homegrown created digital currency called M-pesa which was introduced by Kenyan Posts & Telecommunications in 2007. Today “people now make about 80 billion shillings in monthly M-pesa transactions and move more than 130 billion shillings in and out of the mobile system via 45,000 independent agents throughout the country. ” (6)

So why does all this matter?

It matters because when 2.5billion un-banked people gain access to interact economically with the rest of us, it is going to change everything about everything. Population-wise, it is the equivalent of adding another China + India to the global economy.

Perhaps even more importantly, this technology does away with the need for a centralized banking system which acts as a rent-seeking parasite on the back of humanity. It creates a means to achieve what the entire banking system does for us today, which is to provide a system for tracking transactions, debt, and other financial constructs between people, only banks wont be needed to do it anymore, because the entire world will have transparent access to that transaction record in the form of a public ledger backed by cryptography (blockchain) technology. The absolutely critical and pinnacle aspect of blockchain technology is decentralization, it will take the power out of the hands of the banks and give it back to the people, where it arguably belongs.

Imagine a world where a teenage girl in India can start a business, sell her wares or services, and then through her phone, internet, and crypto-currency technology then store the fruit of her labor. She can then buy an item on Amazon and have it shipped to her half way around the world without ever having to open a bank account. This is the future we are looking at, and it is coming faster than you think.

I am not suggesting there will be no future need for banks, nor am I suggesting that they are all of a sudden going to just fold up and disappear. They will fight, tooth and nail, kicking and screaming, every step of the way. And they will get governments involved as much as they possibly can to slow, stop, hinder, and derail its progress. But in the end, just like distributed file sharing, they will be utterly powerless to stop it. In the end we may have something like a hybrid system where banks serve the banked, and brilliant tech startups bridge the gap between the banking world and the non-banked crypto-currency world. The signs of these new companies are already there, with tens of millions in funding for these startups and backed by people who are not stupid.

I will write more about the current biggest hurdle that crypto-currencies today face versus established means of transacting such as the USD in a future post.








Round Table Interview w Philip Judge, Simon Heapes, Alex Stanczyk

Audio of our recent round table discussion after the most recent trip to Switzerland for the annual gold audits has been posted.

At the PGF website (Flashplayer only):

At the AFE website (downloadable MP3):

Topics covered:

* Summary of physical gold flow 2014
* Chinese gold demand
* Price of gold has dropped below cost of production
* Gold in Backwardation
* Negative Gold Forward Offered Rate
* LBMA will no longer report GOFO as of Jan. 30th 2015
* The refineries are the core of the industry
* Difference in market today vs 90?s
* Potential for mining companies to start shutting in production
* Structual problems with physical gold supply
* Demand by country
* Difference between the physical and paper market
* Swiss refinery running 3 shifts, 24/7
* Currently delivery delays of up to 6 weeks due to physical scarcity
* Mis-match between physical tightness and pricing will result in dramatic price change to clear
* Premiums for rapid delivery
* The mindset of the eastern versus western investor
* New generation of futures traders are unaware of the physical industry
* Focus on the physical as derivative reference indicators may no longer be accurate
* Market narrative and sentiment by demand spheres or regions driving price

There is no such thing as a “Gold Shortage”

As part of my (affliction?) area of interest, I read a great deal about the gold market daily, and one thing that I think is confusing people is this consistent dialogue of there being a gold shortage. Combined with my observations over the years in this industry and a recent insightful chat I had with Bron Suchecki of the Perth Mint, I felt compelled to pen this entry.

There can not be a gold shortage because it is one of the few things on earth still referred to as a commodity that does not get used up as part of an industrial process of some type; the majority of it is still with us. Sure, like many who write/speak/study gold, I have used that word in the past, but I am now repenting of my sins because it does not accurately describe reality.

How much gold is there, really

There is, by some estimates, as much as 175,000 tons of gold above ground, mined since antiquity going back thousands of years of human history. If you consider the tiny amount of gold used each year in electronics applications, medical, and microscopic coatings on the visors of astronauts, virtually all the gold ever mined is still in existence today.

If we subtract from that an estimated 30,000 tons known to be held by Central Banks/IMF/Etc (being generous), another approx 16,000 tons in China, another 15,000 tons in India (all rough guesstimates), there is no doubt some lost which is sitting at the bottom of the ocean in the belly of a ship, but for the most part it leaves us with more than 100,000 tons conservatively speaking that someone, somewhere owns. All of this gold is available for sale, the only question is at what price, and that depends primarily on one thing: The narrative. The narrative is the story people are telling themselves, and each other, about what gold is worth, or what it is about to be worth at some point in the future.

It is my opinion that this narrative is occurring in three major separate  demand spheres, these being

  • China and other Asian countries
  • India
  • The west, which would include primarily the United States and every country whose narrative relies on US based financial “experts” for their cues into whether the building is actually on fire and they should be running for the exits, or if the party will continue on and its ok to have another drink

Yes, there are other demand spheres besides these (such as Germany), and while they contribute to the overall picture they are not market moving from my observation as these 3 major spheres are.

There are other major (and a plethora of minor) factors which affect the price of gold as well such as

  • Geo-political events – examples include US gold confiscation in 1963, gold ownership being against the law such as it was in China until recent times, India imposing import taxes and import export ratios on gold, the recently failed Swiss Gold Initiative, the failure of Bretton Woods convertibility
  • Deflation/Inflation, expectations of inflation
  • Interest Rates
  • Basic supply and demand of physical gold availability in the “float”, or what is for sale immediately in the institutional market depending on the current price
  • Central bank purchasing/sales

Ultimately all of these factors feed back into the narrative.

I have read a lot of what seems like gold haters (or maybe just gold bug haters? I wont name any names ) who appear to like to troll the idea that China is playing any kind of major role in the market. This is clearly untrue as anyone who bothers to do any research on physical demand compared to mining / scrap / etf / central bank sales supply will find out. What this does tell me however is a great deal about their narrative.

Just as so-called “gold bugs” can adopt a narrative so strong that they are unwilling to look at the facts because it conflicts with what they wish to believe, so too does many a western minded trader construct a narrative about the markets which at times cannot be shifted with facts, because the trader in question is falling victim to his own worst enemy of confirmation bias. This my friends is how bubbles are formed, and no amount of reason/logic/facts is going to change the minds of people caught up in it.

Gold Demand Spheres

To dive a bit deeper into the narratives in play in these demand spheres:

China (and other Asian countries)

  • Gold is a long term way to store wealth
  • Have long histories of experience in failures of fiat (paper) based money
  • Desperately need additional investment vehicles to diversify their portfolios
  • Government advocates gold ownership


  • Gold is culturally imbedded and a deep part of the psyche
  • Gold is a trusted long term means of storing wealth
  • Gold represents prosperity, honor, and station in society
  • Gold makes an excellent gift, and holds special religious significance


  • Gold is a barbarous relic which earns no yield, is dug from the ground and re-buried at great cost. An excellent example of this narrative can be found in this recent segment on Bloomberg, in which one of the people being interviewed has obvious emotional disdain for gold and anyone idiotic enough to consider it valuable
  • Has no redeeming investment qualities
  • Is going to continue to fall in value
  • The world economy is getting better with the US leading the charge

Measuring the narrative

To measure the narrative occurring in each of these demand spheres, I pay attention to import/export statistics for China and India, and for the west I keep track of daily inventory tonnage in the wests flagship gold proxy GLD ETF. I also pay attention to headlines and commentary from media in all three demand spheres which gives some indication of sentiment.

So why do these three spheres in particular matter? For me, its because the portion of measurable annual gold demand that they represent.

If we start with a rough annual supply (mining, scrap, etf sales, excluding float) of 4250 tons in 2013 (updated thanks to a reader),  China by some accounts ate half of it at over 2000 tons, India another fourth with 1018 tons, roughly three fourths of our narrative demand is from the China and India demand spheres. This leaves one fourth (half if you want to use the conservative figures of Chinese gold imports) of available supply to satisfy physical demand for the rest of the world which happens to mostly align with the western narrative.

It is a pretty well accepted and understood process at this point that since gold’s price peak in 2011, a substantial amount of physical gold is being sold by western investors, converted into “four nines” kilo bars and shipped off to eastern buyers.

We can substantiate this if we choose to use the GLD inventory as a proxy for the western narrative, and observe that at its 2014 peak of 818.77 tons back in March, the physical stocks have been drawn down and are now sitting at 717.63 tons, which jives with my general western narrative above. If we look back, the record holdings for GLD came in at 1353.3 tons and has been drawn down on since then as western interest and narrative in gold shifted to negative.

From my professional experience and sources within the industry, we know that a substantial amount of gold flowing through the worlds largest refineries is coming out of the UK which is where the inventory for GLD is warehoused. How much of the GLD bars are actually shipped out versus put aside to be re-added to GLD stocks is not clear, and cannot be determined until GLD adds a large chunk back to its inventory, but I think it is safe to say that some (alot?) of this inventory of 12.5 kilo good delivery bars have been melted, re-refined and cast into kilo bars and is now sitting somewhere in or very close to China.

A Simple Equation

So here is a very basic summary of my thoughts on this:


Annual Supply (AS) = mines, scrap, etf sales, central bank sales
Float (F) = gold that becomes available for sale from existing above ground stocks as the price rises

Simplified Equation

Gold price is primarily determined by  AS and F minus demand by the three demand spheres. If that number goes substantially negative, we are going to have a rising gold price.

There seem to be many who have been scratching their heads over how there can be such incredible physical demand from Asia (historically speaking it is off the charts), and yet have a sinking to flat gold price.

The key narrative here, if you haven’t figured it out by now, is the west. Assuming the current demand levels from each narrative remain the same, the price will likely bounce around in the same range. What will shift this up or down is contingent largely upon what western investors/traders are telling themselves (and each other) about the future for gold.

It is possible that these demand spheres can change, they certainly did when China stepped onto the scene. It would however take a really significant buyer or seller to enter the picture.

Extreme Tightness in Physical Supply

I will add, before I conclude this post that it is definitely possible for there to be extreme tightness in the physical gold market, which is measurable both by data and by anecdotal experience of myself and colleagues in the industry who have authoritative visibility into significant portions of the market. There is extreme tightness now, worse perhaps than at any time in the last 30 years or so in the physical gold market on a global level.

I am aware there are alot of traders out there who think the idea of a physical and paper price dis-connect is conspiracy theory. I also know authoritative people in the industry with more than 100 yrs of combined experience that think todays young gun futures traders have no clue what is truly happening in the physical market. If the movement of COMEX physical inventory (or I should say lack of it, compared to how GLD inventory moves based on price) is their lens on physical realities they might as well be holding a stethoscope to a corpse, IMHO.

Should anything occur which changes the general narrative of the west such as a roll over of equities or other substantial sea-changes in the markets which causes the west to adopt a negative view of economic recovery and shift the narrative on gold, the combined pressure of western buying and the other demand spheres will exacerbate the current physical supply tightness and force dramatically higher prices to clear this situation. That will only feed on itself as investors come back to GLD which will act as an accelerant on a brushfire.

Watch for the shift in the western narrative, and watch GLD inventory. These canaries in the coal mine will signal change is in the air.


Notes and updates:

1. Just found this regarding estimated gold in India of approx 22,000 tons:!market-development-en

2. To clarify a bit, I think it makes sense to not ignore mining supply, scrap sales, and etf sales sales as a source of consistent supply. This offsets global demand to the degree of tonnage provided by these supply sources. Gold in the float tends to increase at times based on the price of gold and more-so when the price rises versus when it falls.

3. Expanded commentary on the current supply tightness in the market at our recent PGF round-table discussion:

Media Spin on Swiss Referendum over Gold Reserves Getting Ridiculous

If you do not know already, the Swiss are voting on a referendum which will force its government to pass legislation to the following effect:

  • Back 20% of its reserves in gold,
  • Repatriate the gold that Switzerland owns from abroad,
  • Prevent the Swiss National Bank from selling off any more gold.

The Swiss have a very interesting form of government, where the people can vote directly to force their government to create legislation. A majority of more than 50% of the Cantons must agree.

The reason this is so important, is that if this measure passes, it will force the Swiss National Bank to purchase gold from the market, which is already stretched thin on the supply side. According to a note from the SNB, they would have to buy roughly 10% of annual mining supply each year through 2019. Some estimate this to be over 1700 tons of gold, over a 5 year period.

This is where it gets dicey. Since gold dropped below the average global cost of production in June ( ) , the amount of gold available in the supply pipeline has been getting tighter. To make matters worse, according to the CEO of the worlds largest mining company, because the price has dropped so low mining exploration has taken a huge hit and will result in less gold production moving forward. He claims the industry will hit “Peak Gold” in 2015 ( ).

I have read a few articles which claim that if the physical supply was tight, then the price would reflect that because as we all know, traders who deal in these markets are efficient, and above all very smart, therefore gold should be priced in a way that reflects its true market value…kind of like triple A rated mortgage backed securities….right?

Just in case anyone has forgotten what financially incentivized traders are willing to do, I present without comment the following recent articles:

1. Regulators in US and UK mete out record fines after finding a ‘free for all culture’ on currency trading floors at RBS, HSBC, Citibank, JP Morgan and UBS

2. Six Banks to Pay $4.3 Billion in First Wave of Currency-Rigging Penalties

3. Swiss regulator finds “clear attempt to manipulate fixes in the precious metal market

4. UBS agrees to settle charges in gold and silver manipulation

5. Reuters: EU fines JPMorgan, UBS, Credit Suisse for taking part in cartels

6. SEC charges High Frequency Traders with Fraud manipulating prices

There are many more recent examples in this fact freight train, but I am sure you get the point.

Vote Yes Argument

The group that wants this initiative to pass says that if it is not passed, then Switzerland’s economy will be dictated by the EU, the Swiss Franc will (continue to be) tied to a weak Euro, inflation will increase dramatically, the Swiss National Bank will print hundreds of billions of Francs (to maintain the Euro/Franc 1.2  peg), the Swiss Franc will weaken, and the Swiss citizens will be stuck with hundreds of billions of devaluing Euros.

A few comments:

  • Even if the measure passes, the SNB might still print hundreds of billions of Francs to retain the Euro 1.2 peg, it will just have to buy an amount of gold equal to 20% of the Euro’s it buys. This shouldnt be that much of a problem, they do have a printing press, they could just do what my friend Jim Rickards says and print fiat / buy gold. It would of course create other problems, explained below.
  • Yes, if it doesn’t pass, the Franc will weaken, but that is the entire point of currency wars and the reason the SNB (and the government) hates this idea, aside of course from the fact that it destroys the credibility of the Central Bank (not just the SNB, but globally).
  • What will happen if this measure passes is the Swiss Franc will be reinforced as being a safe haven currency with real value, and that will cause a massive inflow into the Swiss Franc in times of fear, which does indeed create problems – the Swiss have experienced this in the 1970’s and were forced to resort to negative interest rates (charging you to hold your money instead of paying you interest) to discourage capital flow into the Franc. The amounts of Euros the Swiss would have to buy to maintain order could end up being …I have no words for it…huge…and therefore also force them to be big buyers of gold. In time, this could erode confidence in the entire system as the pressure could cause the price of gold to skyrocket which would cause people to start asking questions.

Vote No Argument

For this section, I am going to reference an article in Yahoo today which closely reflects the attitude and presentation of other articles I have read regarding this subject.

For starters it says “economists warn a ‘Yes’ vote could wreak havoc in financial markets” – but then conveniently fails to reference those economists or why they think this.

“Industry organisations have also warned that the move would tie the central bank’s hands and damage its credibility” – With the loss of credibility part I agree. After all, if the central bank itself starts buying gold to support its currency as demanded by the citizens, then it messes with their job stability doesn’t it? Are central bankers really needed if all you have to do is buy gold and call it good? This may be why the Fed has tried to convince the world that gold has no monetary use for the last 45 years. It would not, however “tie their hands”. They could still print up all the Francs they wanted and buy Euros to maintain the Euro peg, they would simply have to buy more gold when doing so, which comes back to that destroying their own credibility thing again.

Most observers expect the Swiss to snub the motion, and low global gold prices indicate investors agree – Some facts here would be nice.

According to the Swiss Central Bank Chief Thomas Jordan, if the measure passes then “The central bank’s capacity to take action would be weakened. This would also lead to higher unemployment”. – Not weakened, again it would reduce credibility because actions taken to devalue the currency intentionally by printing and buying other currencies would force them to buy gold.

He has appealed to Swiss voters to pay attention, warning that if the gold initiative passes the consequences could be disastrous. – Yes, for the credibility of the central bank.

However, “if the ‘Yes’ side wins, gold risks reacting strongly, since the market is not expecting that result,” Nannette Hechler-Fayd’herbe of Credit Suisse. – I also think the gold market will react strongly, but not because an affirmative vote is unexpected, further explanation coming up.

Strategists at Commerzbank (Xetra: CBK100 – news) said the ban on selling gold would put the very credibility of SNB at stake. – Near the end of the article, and there we have it. Economists are heralding doom, but cant seem to be found in the article after that. This whole thing about concern over a loss of credibility is pretty consistent though. If people start looking at gold as money, then that paper becomes less important, and if that happens then so does the role of the paper printer.

If SNB’s gold “reserve can no longer be sold in the event of a crisis it no longer constitutes a reserve in the stricter sense,” they said, stressing that “if the gold reserves cannot be sold they are ‘lost’ for the Swiss.” – You can always take one last swing at this issue with a straw man. This is complete non-sense. Central Banks have been using their gold reserves in a leasing capacity for decades, it serves as collateral of the highest caliber bar-none and can be put to use as such without being required to sell it.

Talking to the Swiss

Last night I was having dinner with a Swiss client and the subject of the gold initiative came up. He said that in the early part of the month it did not seem anyone was taking it seriously. Since then, there has been alot of debate, and the issue is gaining more awareness to the point that his feeling is the Swiss Government and SNB are now panicking. They are advertising in the trains to vote no, while the group that wants the measure to pass had its donation accounts frozen.

You have to know a Swiss to understand this. They are a stubborn and fiercely independent people. The idea that they are becoming lackeys to the Euro is disturbing to them. His comment to me was that if the people think the government is panicking, they will vote yes by instinct, even if they do not fully understand the underlying issues.

Gold Physical Supply

Once a year (or more often as needed) AFE travels over to Switzerland to participate in the audits of the gold in custody, as well as handle other administrative work and meet with our strategic partners. Each time we do this we are able to talk to key people within the industry.

One of the gentlemen we regularly meet with is a Director for one of the largest refineries in the world. He has perhaps one of the best views into global physical gold flows from a practical hands on perspective than any other I am aware of, and has more than 30 yrs experience under his belt. The way he puts it, paper trading in gold (on exchanges such as COMEX) is being done by young men who have no interest in the physical fundamentals, and have very little concern nor care about physical movements. My thought is he may be right, after all despite what is happening in physical flows, reservoirs of gold such as COMEX which should act as a gauge on available physical don’t seem to move much, regardless of moves in the price.

We will be doing a round table interview soon with the Board of Directors of AFE where we go into more detail about this, but I will make a few comments about the available physical gold float now.

In October, backwardation re-entered the gold market

The best explanation of backwardation in gold I have found is this, hat tip to Bron Suchecki of the Perth Mint (from ) :

Negative gold forward rate (GOFO) is a true backwardation of gold prices.  It means participants can sell physical gold now and instantaneously buy it for delivery in 2 months time at a 0.145% discount.  Not only that, but the entrepreneurial arbitrageur can also invest the proceeds from the spot sale in risk-free securities over the period.  In two months time, they will have their gold back, have banked 14.5 basis points profit, have banked the risk free security return and will have save on 2 months storage and insurance of the physical gold.

This is why backwardation of gold is so fascinating, it just should not happen.  The arbitrageur may not be so smug if the future delivery never occurs (in trying to make 0.145% he has lost 100% of his gold), and that is the risk which backwardation effectively prices in.

It implies a very tight physical gold supply in what we call the “float”, which is gold available for sale. It is important to bear in mind that the amount of gold in the “float” changes, based on the price of gold and if owners of existing gold turn into sellers. Float gold consists of gold from mines, gold outflows from ETF’s such as GLD if they are selling, scrap, and also from an estimated 165,000 tons of gold above ground which was mined since antiquity, all of which can come available for sale if the price is high enough.

A point some of you may find interesting is that the LBMA has decided to stop reporting GOFO as of Jan. 30th 2015, claiming banks do not want to report rates dues to increased regulatory scrutiny ( ).

I will not say more on this topic at this time as we are reserving some important information we have to share for the upcoming round table interview, but I will say that if the current situation in the physical float continues and then this referendum passes, it will have a substantial impact on price and it will not be because “it was not expected”, but because the float is so tight right now.