Podcast

Paul Tustain: Be Wary of Balance Sheet Risk

Your priority right now should be minimizing counterparty ri
Friday, April 13, 2012, 5:13 PM

"I always tell people when they look at their bank account, they think they have got maybe $50,000 in the bank. It says $50,000 CR. Credit.

You are a creditor. It is the bank’s property, that $50,000. And they recognize in that document that they owe it to you.

So, you have to watch out for that word 'creditor'. When you see CR, you are on the balance sheet. You are at risk."

So says Paul Tustain, founder of BullionVault and advocate for minimizing counterparty risk in a world of rehypothecation and 100-to-1 leveraged paper markets.

In this interview, Chris and Paul discuss gold's current range-bound trading. In general, he's in favor of a stay-the-course approach for bullion investors at the moment as world markets work through their liquidity-induced "sugar highs":

I do not think there has been a great change in the fundamentals. I think we know pretty much what is going on:

We have ongoing quantitative easing. It may or may not come again. The markets get bored of doom and gloom. People get bored of it. We had a bellyful of it over the back end of last year. Certainly the economic data out of the US is better than it was. That is happening again at a backdrop of an extremely loose monetary policy. So, we are in a world where the Europeans have given an almighty kick of the can down the road: a one trillion Euro reflation effect on the European banking system. That will come back to haunt us in a big way before long.

They are already starting to worry again about Spain and certainly in a year or 18 months we will have to have a long, hard look at Italy again. By then it will only be 18 months until all that money has to be paid back again. In the meantime, we are looking at a banking sector that has got all the same problems as before.

But markets do this. They have a certain rhythm. I do not think the fundamentals have changed. I certainly do not think anything has been fixed. Sometimes you have to be patient. 

Chris and Paul also spend a lot of time discussing price manipulation in the metals markets, the perplexing difference in price action in the US spot market vs the overnight international "fixes", and counterparty risk within the futures exchanges.

Click the play button below to listen to Chris' interview with Paul Tustain of BullionVault (runtime 36m:52s).

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BullionVault's Director, Paul Tustain, founded BullionVault as a response to a widespread perception of increasing systemic risk in the financial world. He remains in full day-to-day control, and in his view global systemic risk has become still more acute. He is committed to directing the business in such a way that at every step it retains its first objective of using gold to secure customers against the threats in the international financial system. He is also the editor and publisher of Galmarley.com, a well-regarded and free educational resource for prospective gold buyers.


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6 Comments

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1232
Kudos to Chris and Adam for objectivity

Excellent interview, Chief! I particularly want to complement you for welcoming a guest with an opposing view, and for allowing him to fully express it.

I thought Tustain was spot on with regard to manipulation claims being, for the most part, overblown. I'm not convinced that the AM vs PM fix is necessarily the same thing as the US-vs-overnight anomaly. Maybe, but not necessarily. More research on that topic would be great!

All the best,

Erik

KugsCheese's picture
KugsCheese
Status: Platinum Member (Offline)
Joined: Jan 2 2010
Posts: 562
Fleecing

So with the gold swings up and down are these five banks fleecing their customers?  Yup.  Sounds like Goldman Sachs playing its own hand while be also market maker.  Must be sweet business to be in since the computer does most of the work.

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 2071
An Attempt at Understanding.

Thank you for trying to shine a light on the obtuse subject of the London metals market.

I am afraid that a lot of the motivations and mechanisms were beyond me. However I did pick up that the am and pm price differentials were due to the rotation of the planet and wether the gold was flowing east or west.

If the gold flowed north/south would it be affected by Corriolis forces? That would explain why my money seems to circle anti-clockwise down the plug hole.

Quercus bicolor's picture
Quercus bicolor
Status: Silver Member (Offline)
Joined: Mar 19 2008
Posts: 216
Coriolis force, rotating money, spinning heads

Arthur Robey wrote:

Thank you for trying to shine a light on the obtuse subject of the London metals market.

I am afraid that a lot of the motivations and mechanisms were beyond me. However I did pick up that the am and pm price differentials were due to the rotation of the planet and wether the gold was flowing east or west.

If the gold flowed north/south would it be affected by Corriolis forces? That would explain why my money seems to circle anti-clockwise down the plug hole.

The Coriolis force acts on objects moving north, south, east or west.  The banks use this to advantage.  All that moving money starts spinning which sets you head spinning.  While you're still dizzy, they reach in with the other hand and grab a share of your pile.  Maybe they've even hired meteorologists to help them calculate the most efficient way to work this scam.

SteveW's picture
SteveW
Status: Gold Member (Offline)
Joined: Jan 21 2010
Posts: 490
Hmm

Interesting explanation of the am pm price differential.

Wonder what his explanation would be for the two sides of the histogram showing daily % moves, where the drops show significantly more extreme outliers.

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 2071
India withdraws from Gold (Temporally)

Chris Sayce of Money Morning offered another explanation for the supression of the price of Gold.

India

The Rupee looses value making it more expensive to buy gold. The Indian Government puts a tax on the importation of gold. There is blowback from the dealers. They strike (and win}. The Indians are keeping their powder dry. India goes off the market. The price of gold droops.

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