The most important gold industry interview of 2015

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

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

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

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

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

Head of Refinery: Hello, Jon.

Jon: It’s great to have you with us.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Overall, I can say scrap has decreased remarkably.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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: