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:
http://www.physicalgoldfund.com/the-physical-edge-episode-2-january-27th-2016-interview-with-alex-stanczyk/

1-27-2016

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:

https://www.youtube.com/c/Physicalgoldfund

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: http://www.physicalgoldfund.com/physical-gold-fund-interviews-director-of-one-of-the-largest-swiss-refineries/

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.