Comparing gold price to an Index Fund is a delusional construct based on bad data

Lets start off with how inflation is calculated to give a frame of reference.

When calculating CPI, well documented flaws in the calculation methodology compromises the integrity of the data used. Changes in the measurements and values of the basket of goods used to determine pricing has resulted over time in a series of data creep having a cumulative effect of the reported statistics no longer matching with what is observed in reality.



These changes include Geometric Weighting, Hedonic Adjustment, and Substitution.

Substitution is where a government analyst might remove some item such as salmon, and replace it with say, catfish (hat tip to Chris Martenson). The items in the basket are picked at the pleasure of the person(s) determining the basket to reflect reality in prices for everyone.

This can be compared to the way an Index fund reports its view of value.

An Index fund is trying to match the performance value of a basket of items, however cannot ever accurately achieve this task. The fund manager is performing an iterative task where he is selling and buying instruments in a portfolio with the intention of matching a basket of items based on a spreadsheet decided upon by some analyst. The problem is, that as the Index changes, the fund manager must sell from his portfolio and add the new items in the index. The loss/gain on those trades is the delta from the actual Index performance if no trading were taking place. The cumulative effect over time is substantial creep from a base value measurement. The net result is just garbage data if one is trying to compare an investment in an Index Fund versus gold.

The second problem with trying to measure gold performance versus an Index Fund, is that the index itself is composed of a basket of arbitrarily decided items, it is not measuring a single item such as the USD gold price. Therefore, using it to compare performance with gold is an “apples to oranges” comparison. The comparison that is almost always used (I have never seen otherwise) focuses on USD / Gold as the trading pair. To be a fair comparison, the Index Fund performance, which we already know is questionable data for this purpose, should be compared to an Index of Gold in various currencies. The numbers used would have to be gold across a basket of currencies, and the “Gold Index” would have to allow for substitution of various currency pairs in the trading basket based on the whims of the Index Manager.

So for example, in 2014 I might drop USD/Gold from the basket and add EURO/Gold – this would clearly give a different performance value, and the cumulative effect so much more pronounced.



Comparing the USD gold price to an Index Fund is therefore disingenuous at worst, and naïve at best.

So the next time you hear someone parroting up this meme, keep this in mind.




Transcript of interview: Alex Stanczyk – The Physical Edge January 27th 2016


Topics include:

*About the London Bullion Market Association (LBMA) – What is it?
*LBMA Standards have been used globally as the benchmark standard for gold and silver bullion
*Details on members of the LBMA, Bullion Banks, Refineries, Security Logistics
*The role of the LBMA, and the importance of understanding what it does
*LBMA is a standards body that establishes uniformity in purity and form factor to provide a framework for global trade in gold
*Understanding the Good Delivery lists
*How refineries become LBMA accredited refineries
*What are LBMA referee refineries
*Where the members on the Good Delivery lists are located
*Understanding the Chain of Integrity
*How gold enters the system
*Advantages of having the entire history of custody for gold
*Understanding “clearing risk” in gold funds
*Unique positioning of the Physical Gold Fund

To download the original audio visit here:


Jon: Hello. I’m Jon Ward on behalf of Physical Gold Fund (PGF). We’re delighted to welcome you to the second podcast in a new series we’re calling The Physical Edge.

In these interviews, I’ll be talking with Alex Stanczyk, Managing Director of Physical Gold Fund. Our focus will be the Fund itself and related questions about the physical gold market. This series is primarily for non-U.S. investors who are considering participation in Physical Gold Fund.

Alex Stanczyk has been involved in Physical Gold Fund since its inception by providing core aspects of the Fund design and structuring as well as coordinating strategic relationships required for launching the Fund.

Prior to this, Alex played a key role as designer and advisor to the world’s first non-bank private-custody precious metals fund, the Luxembourg Precious Metals Fund. For the past eight years, he has served in a range of capacities for the Anglo Far-East group of companies with a focus on the logistics of gold acquisition, transportation, and vaulting.

Throughout this time, Alex Stanczyk has lectured globally to institutional and government audiences on the role of gold in the international monetary system.

Hello, Alex, and welcome.

Alex: Hello, Jon. Thank you. It’s nice to be chatting with you once again.

Jon: Today, we’re going to talk about a central player in the physical gold market, and that’s the London Bullion Market Association (LBMA). Would you tell us first, what is the LBMA?

Alex: LBMA stands for the London Bullion Market Association. This organization was founded back in 1987 by the Bank of England, and its purpose was to maintain the so-called Good Delivery Lists, which we’re going to talk more in detail about shortly.

If you look at the LBMA website, it is described as an international trade organization or a trade association representing the London market for gold and silver bullion. This is interesting, because while London by volume has the largest paper trading gold in the world, the reality is that more physical gold trade is occurring outside of London, and this trend is continuing, moving towards the east.

While the purpose of the LBMA is to be a London-focused organization, in actuality the standards it has created have been exported and used all over the world. There are some people – for example, some non-institutional commentators in the precious metals space – who often refer to the LBMA as some sort of nefarious cabal with ill intentions. I don’t think this is an accurate portrayal of what the LBMA really is. It may just be due to not knowing who’s involved with it or what they really do.

In practice, the LBMA is a working group of institutions that trust each other. Because of this, they form a core network that provides the foundation for global wholesale trade in gold and silver bullion.

Jon: Tell us a little more about this network. Who participates in the LBMA? What organizations make up this important association?

Alex: The LBMA is made up of a number of participants spanning across several industries. First are the bullion banks. These are some of the largest banks of the world and settle over-the-counter trades, or OTC trades as they’re called in the bullion markets. These banks include UBS, Barclays, Scotiabank, JP Morgan, and HSBC. Those five major banks make a market for numerous other smaller entities that trade in the bullion markets.

Most of their trading occurs on an unallocated basis, meaning they do not actually settle in physical metal but rather net out a day’s trades and settle them on their books. On occasion, trades are settled in physical, but due to costs involved in armored transport, auditing, vaulting, and the volumes that are transacted, these banks seem to prefer to settle trades on the ledger versus constantly sending armored trucks back and forth, which does make some sense.

The next major category of participants is the security logistics firms. These are firms such as Brink’s, Loomis (which used to be VIA MAT), Group 4 Securicor (which is out of the UK), and Malca-Amit. These security companies have a global footprint and provide a global network of secure transport and vaulting. This allows for large-scale physical gold and silver transactions. Essentially, they’re the conduits by which physical gold moves around the world.

For example, some of this gold might be coming from mines or some of it might be coming from scrap sales – those dealers who offer to buy old jewelry or scrap jewelry. Other transport might include going from refiners to jewelers or to and from refineries to the vaults and end customers.

The gold is typically transported by aircraft and armored vehicle, and they have the appropriate armed escort to go with that. The vaults being operated by these logistic companies include some of the most secret and secure storage facilities in the entire world.

I have personally been to some of these as part of my due diligence in my capacity with previous organizations I’ve worked with and also with Physical Gold Fund. I can tell you from personal experience that the security is very impressive. Some of these organizations go so far as to work with governments around the world to secure vaults in facilities that were prior military installations, some of which are rated to withstand nuclear attack, etc., so they go to quite the extent.

The third major category is refineries. We refer to these as the core of the industry. The LBMA is controlled primarily by bullion banks, but those banks can’t really do anything without the assistance of the refineries. The refineries refine the metal, cast it into acceptable forms, and are, in my opinion, the most important link in the entire system.

Finally, there are a number of dealers and other associated businesses that play a smaller role but are still important to the overall global ecosystem in the LBMA.

Jon: Looking at this from the point of view of investors in physical gold, why is the London Bullion Market Association important to know about? What purpose does it serve?

Alex: For most gold and silver investors, the LBMA may not ever come up on their radar. In fact, many smaller investors may never have heard of the LBMA, and that’s because the LBMA is not really visible at what we call the retail level. Most small bar and coin investors can access gold and silver through their local coin dealer, or maybe they’re ordering it through some kind of wholesale coin dealer, and they may never deal with a member of the LBMA.

However, once you start dealing in six- and seven-figure and larger sales in gold, then it’s likely you’ll be dealing with an LBMA member. If not directly dealing with an LBMA member, you’re probably dealing with a business that is dealing directly with an LBMA member, even if that’s not apparent to the customer. Because of this, knowing what the LBMA is and does is really important for some investors.

The role the LBMA plays in the global market is that of a standards body. What I mean by that is the LBMA maintains an industry standard for purity of gold and the form factor that’s produced by LBMA member refineries. This is no different than any other industry standards body in the world.

Every industry will have standards bodies that set rules for global businesses to achieve uniformity. An example would be for the shape of your electrical outlet or the USB port on your computer or laptop. The shape of that and the standards by which it operates are set globally so that manufacturers, no matter where they are in the world, can produce technology that meets the same standards for interoperability.

It’s this industry standard that sets the stage for compatibility and trust in the market. If it weren’t for these standards, you might have gold arriving in unrecognized form factors. Anyone might create gold in whatever shape they want and/or the purity may or may not be questionable. This would obviously create delays in trade plus additional complications. The LBMA standards allow a well-orchestrated and fully free-flowing trade on an institutional level in gold.

Jon: The LBMA produces something you mentioned called the Good Delivery Lists. What are those?

Alex: The LBMA’s main purpose is to maintain the Good Delivery Lists. There is one list for gold; there is one list for silver. These records are detailed listings of the names of the refiners that meet stringent assaying and quality standards for what they can produce in terms of gold and silver bars. They’re accredited to refine and produce these bars that meet the LBMA standard.

The good delivery standard has become the de facto global accepted standard for purity and form factor around the world, although this has recently been reshaped a little by China, who is the world’s largest gold customer.

The original specifications for good delivery bars required a minimum gold content of 350 fine troy ounces up to a maximum gold content of 430 fine troy ounces. (By “fine” we mean “pure.”) These are approximately 12.5 kilo bars. Also, there are specifications for the kind of dimensions they have to have. They can only be so long, so tall, they have to have a certain luster, they can’t have sharp edges, and things like that.

As far as the purity is concerned, the old standard is that the minimum acceptable fineness or purity is 995.0 parts per thousand of fine gold. In other words, if you were to divide the content of a gold bar into 1000 parts, 995 parts out of 1000 have to be pure gold to meet that fineness standard.

China, however, prefers a new standard and has created their own. They require 999.9 parts per 1000 pure. This is called “four 9s” in the industry. They also prefer to have bars in one-kilo size. This isn’t news – the gold market has been talking quite a bit about this over the last couple of years – but that is the direction all of this is headed in terms of what standards are acceptable.

In order to become an LBMA-accredited refinery, that refinery has to submit what are called dip samples. These are small specimens of gold that it has refined. These samples have to be submitted to one of the five global referee refineries.

Referee refineries are identified by the LBMA as the refineries that are able to certify other refineries around the world to meet LBMA standards. The current list of refineries includes: (1) Argor-Heraeus, located in Switzerland, (2) Metalor, located in Switzerland, (3) PAMP, located in Switzerland, (4) the Rand Refinery, located in South Africa, and (5) Tanaka Kikinzoku Kogyo, located in Japan.

These referees are among the most technologically advanced and reliable refineries in the world. They test dip samples and certify them for purity in order for every refinery who wants to be on the good delivery list to be accredited and placed there.

The reason why all this exists is that when a gold bar is issued by a refinery on the Good Delivery List, it’s accepted at face value for purity and the weight that’s marked on the bar by the refinery at the time of fabrication. This, along with the strong custody history we have because of the security logistics firms, is what provides the basis of trust on which global trade in gold is built.

Jon: Although the London Bullion Market Association has the name “London” in it, it’s clearly not restricted to that one location. Where are the organizations on the Good Delivery Lists located?

Alex: That’s actually a really good point. Most of the refineries on the Good Delivery Lists are spread throughout the world and not located in London at all. You can find them in Russia, Canada, Australia, the United States, and China. There are good delivery refineries in over 28 countries.

Very few outside of my industry know, however, that the majority of gold refining each year passes through Switzerland. This is because that’s where the largest refineries in the world reside. It’s also no surprise because three of the five LBMA referee refineries are all located in Switzerland.

Switzerland, from my perspective, is the core of global gold refining. The way I think of it is if you liken the world’s physical gold flow to many small tributaries and streams that eventually create a river, Switzerland is the deepest part of the river.

Because of that, we believe that if there are any kinds of major air pockets in the gold market on the physical side, Switzerland refineries will be the least impacted. In other words, if there is some kind of buying panic, Swiss refineries are going to be the least affected. This is also why we have established relationships with the refiners and vaulting partners there in Switzerland.

Jon: Would you explain another LBMA phrase, the “chain of integrity”?

Alex: That really isn’t an LBMA phrase. I started using that phrase many years ago to describe the closed network of refineries and security transport companies that make up a trusted system and provide these large-scale physical bullion services. Since then, it’s been picked up by others in the industry. What it really means is that as long as the gold stays in this closed system of the chain of integrity, it provides us with specific advantages.

Number one, the gold only enters this system by coming in through the refineries. Now, it may come to the refinery in the form of doré from mines, which is basically refined ore, it might come in the form of scrap, or it might come in the form of older gold bars that are being re-melted and re-refined. But because it comes from a good delivery refinery and enters the system, we can be confident of its purity and its origin.

The second part is that as long as it stays in this closed system, it’s transported by accredited security logistics firms. It’s always insured while in transit, and these firms are trusted in the network.

Finally, for us, it is stored in private, non-bank vaults operated by these accredited security logistics firms.

So we have the complete history of the gold’s refining, fabrication, transport, and vaulting. Because of this, we’re able to easily sell this gold to another LBMA-trusted party. In PGF’s case, we’re selling directly to the refinery, and this provides a really deep well of global liquidity for us.

Jon: Alex, there’s one last phrase I’d like to ask you about, and that is “clearing risk.” What does “clearing risk” mean in the context of physical gold transactions?

Alex: Clearing risk is a phrase I use to indicate the risk of a fund or the risk an investor has if they’re required to clear physical gold trades through a bank. This is what happens if markets hit an air pocket and counterparties are unable to trade.

For example, there were hedge funds that cleared trades through various prime brokers back in the 2008 global financial crisis. If their primary dealer/primary broker became insolvent or were frozen, these hedge funds were completely frozen out of the market at that time. In my view, that is the Achilles’ heel of gold funds in the industry today. It’s because they buy and sell their gold through banks.

There are many who feel that bullion banks will never have a failure or insolvency or anything like that, but to me that’s just wishful thinking. It’s the same “unicorns and rainbows” mentality that has the entire world’s financial system in complete chaos right now with everyone literally depending on the omnipotence of central bankers to save us all. It’s not realistic, and it’s not practical.

The facts speak for themselves. These banks are now more consolidated, more leveraged, and have larger derivative books than they did before the 2008 global financial crisis. This reminds me of underbrush that’s been built up and concentrated in a forest just waiting for a stray campfire spark or lightning to strike a fire and set it ablaze.

If a gold fund or an investor is relying on clearing trades through a bank, that is not a position I would like to be in when the next liquidity crisis hits.

Jon: We’ve looked at the LBMA, the Good Delivery Lists, the chain of integrity, and, lastly, clearing risk. They’re all obviously important factors in the market for physical gold. What I’d like you to do now is give us a snapshot of where your organization, Physical Gold Fund, is positioned in relation to this market system.

Alex: In order to structure our fund, we’ve leveraged some exclusive and longstanding strategic relationships with members of the LBMA framework. The relationships we’ve developed in the industry have become the basis for what we call our chain of integrity.

That essentially means the ability to purchase gold reliably at the core of the industry, the deepest part of the river. We know that it’s pure, we know that when it’s being transported, it’s safe, it’s insured, and we know that it’s being vaulted outside of the banking system.

This has been important in the way we’ve structured products for many years now. I recall back five or six years ago talking to some investors who did not really understand that part. They looked at vaulting outside the banking system and were like, “Well, I don’t really understand why this is important.” Today, it’s obvious why this is important, and this has actually become the de facto standard for how private allocated services are now vaulting gold.

PGF clearing is done directly through the refinery. In other words, we’re buying and selling directly through the refinery instead of going through banks. This is reducing our clearing risk in light of what I talked about before, and this gives us access to liquidity both on the buying and the selling side.

There are some people, including experts, in the industry who believe that if there is any sort of buying panic, physical gold will become very hard to obtain. I think this may be true. We obviously have yet to find out if that’s going to occur or not, but because of our relationships with our refineries, we feel more confident in being able to access liquidity.

Next, Physical Gold Fund has options for physical delivery and options for subscription in kind. On the physical delivery side of things, this means if someone wants to redeem their shares with the fund, they can request to have either cash or, if they prefer, we will deliver their gold anywhere in the world. There’s a cost to it that the redeeming party will pay, but that option is available.

Also, we have an option for subscription in kind. This allows an investor to place physical gold they already own into the fund and, in exchange, that gold is now part of a regulated vehicle. This is really important in the future.

In our view, this is going to become more and more important because we believe this is the direction gold ownership is going. There are governments around the world that are becoming increasingly more aggressive in the way they regulate individual private assets, etc. We think this is something that’s going to be strongly looked at by government regulators moving forward.

Another unique point is that we have contingencies in place to cover things like riots, wars, and governments trying to interfere with the Fund’s access to gold. Ultimately, we believe that this is the most thoughtfully constructed and robust gold fund in the world today, and we fully expect it to become one of the largest globally in the years ahead.

Jon: Thank you, Alex Stanczyk, Managing Director of Physical Gold Fund. And thank you to our listeners. We look forward to joining you again soon.

As a reminder, here is the link to the original audio file:

The Physical Edge Episode 2: January 27th 2016 Interview with Alex Stanczyk

If you would like to access this interview on our YouTube channel, you can do so here:

You can follow Alex Stanczyk on Twitter @alexstanczyk

The most important gold industry interview of 2015

Physical Gold Fund SP Logo

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.


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.



New Audio Interview – 4 Urban Myths About Gold – Available for download

In today’s fast paced lifestyle, sourcing high quality, relevant news and information has become increasingly difficult. AFE Audio delivers to you quality, accurately filtered news, intelligence and information, domestically and globally, as well as interviews with content that impacts you. These audio files bring you the information you need to get correctly positioned in a rapidly changing and increasingly uncertain world.

This free audio download is available here: Four Common Urban Myths About Gold – Audio

Great New Words From Egon Von Greyerz

Great New Words From Egon Von Greyerz
by Egon von Greyerz – October 2012

1. Worldwide money printing continues unabated

2. Just In 10 years $120 trillion have been printed making global debt $200 trillion

3. World GDP has gone from $32 trillion to $70 trillion 2001-2011

4. Thus $120 trillion debt is required to produce a $38 trillion annual increase in GDP

5. The marginal return on printed money is negative in real terms

6. Thus the world is living on an illusion of paper that people believe is money

7. This illusionary paper wealth will implode in the next few years

8. The initial trigger will be the collapse of the world’s reserve currency – the US dollar

9. The dollar is backed by $120 trillion of US government debt and probably NO gold

10. All currencies will continue their race to the bottom and lose 100% in real terms against gold

11. This will create a worldwide hyperinflationary depression

12. All assets financed by the credit bubble will go down in real terms

13. This includes stocks, bonds, property and paper money of course

14. The financial system is unlikely to survive in its present form

15. The banking system including derivatives has total liabilities of around $1.2 quadrillion

16. With world GDP of $70 trillion, the world is too small to save a financial system which is 17x greater

17. This is why there will be unlimited money printing and hyperinflation

18. The only asset that will maintain its purchasing power is gold Click here for chart

19. Gold has been money for 5,000 years and will continue to be the only currency with integrity

20. Western countries’ 23,000 tons of gold is probably gone. See recent article by Eric Sprott.

21. The consequence is that most of the gold in the banking system is likely to be encumbered

22. This means that Central Banks one day will claim it back against worthless paper gold IOUs

23. Thus gold and all other assets within the banking system involve an unacceptable counterparty risk

24. Gold should be held in physical form and stored outside the banking system

Bernanke Claims there is not enough gold to support the US Currency system on a Gold Standard – total rubbish

As our regular readers know I have discussed this topic on a number of occasions. For Bernanke to say this is very disingenuous and is a clear indication of his motives because it is highly unlikely that he does not understand this concept…which means he is lying.

This is not rocket science. You do not need a PHD in economics to understand this. A 6 year old child with a calculator can divide the number of US Dollars in circulation¹ of roughly $1.8 Trillion USD by the number of ounces the US claims to own, which is 261,498,899.316 according to the US Treasury².

The number we arrive at is $6880 per ounce and some change. The problem is not that there isnt enough gold, its that having gold at $6880 per ounce would send a clear signal to the world that the Fed is actually totally incapable of managing the US economy, has a broken monetary policy, and that there is something seriously wrong with the US Dollar (assuming the government didn’t come right out and set us on a gold standard).

This is the typical argument presented by any Keynesian economist yet it is the weakest argument they have and takes very little logic to discredit it. For Bernanke to resort to this argument shows just how desperate and under pressure he may be.

WASHINGTON (Dow Jones)–Federal Reserve Chairman Ben Bernanke defended the central bank’s effect on the dollar Tuesday, pushing back at the idea that policy makers should consider alternative proposals like the gold standard.

Bernanke, appearing before the Senate Banking Committee, was pressed by Sen. Jim DeMint (R., S.C.) on the viability of a return to a gold-backed economy or the idea of the Treasury Department issuing bonds payable in gold. Bernanke, who has studied the issue, said a return to the gold standard wouldn’t work.

“It did deliver price stability over very long periods of time, but over shorter periods of time it caused wide swings in prices related to changes in demand or supply of gold. So I don’t think it’s a panacea,” Bernanke told DeMint.

Additionally, Bernanke said there were a number of practical issues that would prevent the return of gold as the world standard. Namely, there’s not enough gold in the world to effectively support the U.S. money supply.

“I don’t think that a full-fledged gold standard would be practical at this point,” Bernanke said, declining to opine on the gold-backed bond issue because he was not familiar with the idea.

Sen. Mark Kirk (R., Ill.) also engaged Bernanke on the currency issue, questioning whether the Fed’s $600 billion bond-purchase program is in effect monetizing the U.S. debt. Bernanke noted that the U.S couldn’t have currency outstanding if there were no Treasury securities to back it up, and that even the most steady economic times the Fed engages in the buying and selling of U.S.-backed securities.

Kirk, however, noted that the U.S. did have currency not backed by federal debt at one time in its history: under the administration of President Andrew Jackson, the nation’s seventh president.

Bernanke, appearing amused, was quick to respond.

“So this was before the Civil War, this was during the period where individual banks issued currency. We didn’t have a national currency,” Bernanke said.

Not to be outdone, Kirk asked whether it was possible for a country to have a currency without a trillion dollar debt. Bernanke said that was the case.

Article Source

¹Monetary Base

²US Gold Reserves

Sumitomo Mistui Chief Strategist: US Dollar will cease to be the world reserve currency

When you start to see long term supporters of the USD making statements like this, you know this isnt just a drill.

The inverse trade to the USD is gold.

Dollar to Hit 50 Yen, Cease as Reserve, Sumitomo Says

By Shigeki Nozawa

Oct. 15 (Bloomberg) — The dollar may drop to 50 yen next year and eventually lose its role as the global reserve currency, Sumitomo Mitsui Banking Corp.’s chief strategist said, citing trading patterns and a likely double dip in the U.S. economy.

“The U.S. economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger,” said Daisuke Uno at Sumitomo Mitsui, a unit of Japan’s third- biggest bank. “The dollar’s fall won’t stop until there’s a change to the global currency system.”

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DOW passes 10,000 – Talking Heads Rejoice – Dont Get too Excited

The DOW moves back above 10,000…..

Problem is that its measured in dollars…so if you factor in the rate of money creation and assume that affects buying power you get a DOW thats worth about 5000 in buying power.

When measured against gold however, it looks more like this:

DOW / GOLD Ratio Chart - 10 Yr

DOW / GOLD Ratio Chart - 10 Yr

That tiny little uptick is what all the Wall St cheerleaders are excited about.

If history repeats and the DOW and Gold meet at a 1:1 ratio at the top of golds run up, and the DOW keeps rising (due to inflated dollars more than anything else) , then where is that meeting point going to be? Maybe these guys calling for a 20,000 DOW are right…but what also does that mean for gold? What also would that mean for the buying power of the dollar?

To me that looks like a buying opportunity in a major trend.

The Fuse is Short and Lit – China Goes Hostile

China - Hungry Dragon

China - Hungry Dragon

I have been saying for a long time that China has been aggressively stockpiling commodities, buying mineral rights all over the globe, and buying up companies that produce products of the earth.

This signals a new tactic for the Chinese: outright unsolicited offers for mining companies.

Normally the Chinese are more reserved, tactful, willing to be patient and win via masterfully executed maneuvers – much like Sun Tzu’s Art of War.

It seems their patience, as well as their willingness to depend on the dollar retaining its value (and thus the buying power of their portfolio) is coming to an end.

I think this is the beginning of an ever more aggressive stance towards purchasing commodities and raw materials. They know the dollar is going to the deadpool of currencies, and want to buy while it still commands the value it does.

Gold will again reign as the king of currencies.

China makes unexpected grab for Canadian miner

State-controlled Jilin Jien launches a surprise bid for Canadian Royalties, a stark change in tactics for the Asian superpower


From Tuesday’s Globe and Mail Last updated on Wednesday, Aug. 12, 2009 02:44AM EDT

China’s insatiable hunger for natural resources has officially turned hostile.

State-controlled Jilin Jien Nickel Industry Co. Ltd. launched a surprise $148.5-million unsolicited takeover bid for Canadian Royalties Inc. yesterday, marking one of the first times the Asian economic superpower has gone after foreign resource assets without first winning a friendly agreement with management.

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Majority of Fund Managers Looking At Gold

Again, this is right in line with all secular bull markets.

First investors are the contrarian sophisticated investors. We have clients who were selling tech and buying gold and silver in 1995.

Next comes the institutional players. The price action from this causes the final wave.

Mom and pops pile in last, usually ending in a blow-off top, but by then all the money has been made.

Gold fast becoming asset class in every investment portfolio – Gold Fields

By: Martin Creamer
7th August 2009

Nick Holland - CEO Gold Fields

Nick Holland - CEO Gold Fields

JOHANNESBURG ( – Gold is fast becoming an asset class in virtually every fund manager’s investment portfolio, which is going to take the gold price to the next level, says Gold Fields CEO Nick Holland.

Holland, who visited 60 fund managers in the last year, says that virtually every one of them is seeking the best investment entry point into gold.

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Give me your lifes work to invest…trust me….I am a machine with your best interest at heart

This is theft. You still trust these people?

Unjust weights and Measures are an abomination unto the Lord.

The Lord delights in just weights, all the weights in the bag are his.

It took me a long time to figure out that last part. Do you realize that out of the thousands of various types of paper currencies to paper derivatives of every imaginable stripe and color, that only gold and silver were here before man?

Traders Profit With Computers Set at High Speed

July 24, 2009, 4:10 am

It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices. It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets, writes Charles Duhigg in The New York Times.

Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.

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Switzerland sold 1550 tons of gold between 2000 and 2009, roughly 127.78 tons per year

Switzerland sold 1550 tons of gold between 2000 and 2009, roughly 127.78 tons per year according to this article.

They also say that no further sales are planned for the foreseeable future.

That is a whopping 127.78 tons per year LESS supply to the worlds demand.

Is this bullish for gold?

Swiss to sell 127 tons less gold this year

Swiss to sell 127 tons less gold this year

Original Article:

Translated from German to English via Google Translate:

Gold Price to hit $1000: World Gold Council

Alex’s Notes: When you see the WGC talking about gold going up, then it is probably going up. Why? Well because for a firm that is supposed to represent the interest of some of the worlds largest mining companies, it is usually pretty bearish on gold. If these guys think its going up, then it has hit the fan.

Gold will hit $1,000 again

Gold will revisit $1,000 as investment demand and jewellery purchases rebound and supply decreases annually, a senior World Gold Council official said.

On the supply side, gold mining production has been decreasing at a rate about 4 to 5pc per year after reaching a peak production in 2001, Jason Toussaint, managing director of exchange traded gold, said today. “Even if demand stays the same, prices must go up.”

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China gold demand may eclipse Inda gold demand

Chinese have a memory of fiat currency failure as it has happened a handful of times. The chinese cultural memory goes back a long ways. Metal is flowing like a river from west to east.

There is an ancient saying of ‘He who has the gold, makes the rules’. This isnt just a cliche, but rather proven out by historical evidence. Wherever the largest stocks of gold were, the nations who have held it were usually the most influential nations of their time period.

Egypt, Rome, Byzantium, Western Europe and England, then the USA.

The US gold stocks have not been audited since the 50’s, and many analysts believe that what is claimed to be there is alot more than what is actually there.

China is still making strong strides to make the Yuan a fully convertible currency. When the veil spun by the mass media comes off, people will run to whats ultimately safe, which is gold and silver.

China May Overtake India in Gold Demand, Council Says

By Sophie Leung

July 24 (Bloomberg) — China may overtake India to become the world’s top gold consumer this year, the World Gold Council said, as the nation became the first of the major economies to rebound from the global recession.

Jewelry demand in China expanded in the first quarter while dropping in India, Marcus Grubb, a managing director at the London-based council, said today at a conference in Hong Kong. Chinese gold demand will keep rising, he said.

China’s economy grew 7.9 percent in the second quarter after a 4 trillion yuan ($586 billion) stimulus package spurred record lending and consumption. India’s gold purchases slumped 54 percent in the six months ended June after a decline in the rupee pushed up the cost of owning bullion, cooling demand from housewives and jewelers, the Bombay Bullion Association said.

“There is a possibility that China might overtake India as the world’s largest gold consumer this year,” Hou Huimin, deputy head of the China Gold Association, said by phone from Beijing today. “India’s gold consumption is reportedly dropping this year due to the financial crisis.”

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Gold and silver have been money for almost 6000 years of history

Do you trust the Federal Reserve?

Do you trust Wall Street?

Congressman Alan Gray discusses the Federal Reserve lending to foreign countries in the last year with Chairman Bernanke.

The reason people are running to gold is because it isnt paper…it doesnt depend on a bank or a government for it to have value.

There is a reason gold and silver have been money for almost 6000 years of recorded human history. Is it really possible that mankind has become so enlightened in the last 200 years that the accumulated wisdom and experience from the prior 5800 years has become obsolete?

Or maybe is this just hubris?

US Mint Suspends Sales…Again

Alex’s Notes: The last time the US Mint suspended gold sales it marked a start point for a rise in volatility and major sell-off in commodities.

You may notice that the date I posted that article in the link above perfectly co-incides with a spike in the ‘Fear Index’.

This chart is the ‘VXO’ also known as the ‘Volatility Index’ – it typically represents when there is a great deal of fear sentiment in the marketplace, or lack of.

Volatility Index Chart Chart

Volatility Index Chart Chart

The interesting thing I would like to point out is that although we saw a rise in fear as well as a general sell-off in commodities, retail demand for gold soared and it was not un-common to see anywhere from 10% to 300% premiums on gold coins for sale on Ebay.

Are we about to see another massive spike in retail gold demand?

U.S. Mint gold, silver coin sales ‘temporarily suspended’ – again

Sales and suspension of gold and silver coin or bullion coin sales by the U.S. Mint are becoming a regular part of doing business as overloaded refiners and mint facilities struggle to meet continuing high demand.
Author: Dorothy Kosich
Posted:  Tuesday , 14 Jul 2009


Unprecedented demand, a shortage of blanks, and restrictive policies and regulations continue to exacerbate what is almost becoming a chronic shortage of gold and silver coins authorized by the U.S. Mint.

The U.S. Mint has again “temporarily” suspended sales of almost all of its gold uncirculated and proof coins, along with nearly all of silver uncirculated coins because of the limited availability of blanks.
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China applies golden touch to diversify forex reserves

CHINA’S revelation that it has been stockpiling gold signaled it may accelerate the diversification of its foreign-exchange reserves as a hedge against the global economic downturn, but it’s unlikely to stop buying US-dollar assets, analysts said.

China applies golden touch to diversify forex reserves
Created: 2009-5-11
Author:Zhang Fengming

China has added 454 tons to its gold reserves since 2003, bringing the total to 1,054 tons, through domestic purchases and the refining of scrap gold, Hu Xiaolian, head of the State Administration of Foreign Exchange, said in late April.

It was the first public comment on the top-secret gold holdings in the past six years. The figure confirmed what many gold bugs have suspected for years – that China has been quietly amassing a stockpile of the precious metal.

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