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What is the best way to SELL gold or silver bullion

There is a TON of useful information on how to buy silver and gold, much available on CM's site.  I wonder if anyone has useful advice on the best way to SELL precious metal bullion.  I don't think it's a good idea to purchase PM without understanding the mechanics and cost of a 'round trip.'  In my case this would be selling small numbers of 1oz. coins at a time (American Eagles, Maple Leafs, etc.).  Among my questions: Should I be paying a commission?  What are reasonable commisions with respect to spot price?

Transcript for Turd Ferguson: The Inexorable March Higher For Precious Metals

Below is the transcript for the podcast with Turd Ferguson: The Inexorable March Higher For Precious Metals

Chris Martenson:  Hi. Welcome to another PeakProsperity.com podcast. I am, of course, your host, Chris Martenson. And today, we're speaking with Turd Ferguson, founder and proprietor of the precious metals weblog, tfmetalsreport.com. Turd was a licensed securities professional for nearly 20 years until leaving the profession in 2008 -- disillusioned, apparently, -- to become a self-described serial entrepreneur. Since then, he's become one of the more popular, and for sure, one of the most colorful voices advocating for gold and silver ownership by the average investor. Every month, hundreds of thousands of readers visit his weblog eager for his analysis, as well as his very specific short-term price predictions for where the metals are headed. Two-thousand-eleven has been characterized by tremendous price volatility, both gold and silver experiencing that. And at the time of this recording, it looks like both are starting to show maybe some breakout potential here.

Turd, I'm thrilled to have you on this week [to] help make sense of all this volatility and drama in the precious metals. Welcome.

Turd Ferguson:  Thank you, Chris. It is my pleasure, and it's a real honor to get a chance to visit with you. So, fire away.

Chris Martenson:  Oh, the pleasure's ours. So, listen, you dedicate your website to, and quoting here, "the end of the great Keynesian experiment." So we can already infer a lot about your level of confidence in the economic status quo here, as well as why you're so focused on precious metals -- by the way, the same reason I focused on them awhile back. Before we dive into the details here, can you give us a little more background about your macroeconomic worldview, your expertise in the direction at which you come at this material?

Turd Ferguson:  Well, I guess we come at it from a number of different directions. I guess in the end, it's almost just a real-world experience. The numbers are what they are. The facts are what they are. And to the extent that the media or the shady powers that be that we all talk about would want to convince you otherwise. And I think we are rapidly approaching the endgame. And it is an endgame of an exponential growth of debt that cannot possibly be serviced and can't possibly be grown out of, as they say. 

And so knowing that that moment is coming, I guess it kind of falls upon all of us to – if we've seen, if we've had a vision of that future, we're not supposed to just keep that candle under a bushel basket. We're supposed to go out and try to tell as many people as we can to warn them, and that's what we try to do at TF Metals Report.

Chris Martenson:  So the exponential accumulation of debt can't go on forever, you say?

Turd Ferguson:  No. I guess if you ask Paul Krugman, he probably would tell you that it could. 

Chris Martenson:  Yes.

Turd Ferguson:  But at some point, no. With the average maturity now on Federal debt has actually crept up some, it's closer to five years. But the average, I guess, interest rate on that debt that the Federal government's paying is somewhere in the neighborhood of four percent, and it equates to $300 to $350 billion dollars a year of interest debt service alone in the budget. 

Those rates, as everyone knows, are historically low, and certainly aren't reflective of economic conditions or ongoing inflation. If rates were ever to – well, let me step back. If the Fed were to exit the interest rate market and rates were allowed to seek their own natural equilibrium of buyers and sellers for bonds, interest rates could go to 10 percent, could go to 15, whatever you would think that buyers of fixed income would demand for the risks that they are taking, especially inflation risk. And then again, if you triple the interest rate that the Federal government is paying on its debt, well, then the debt service is going to triple, and then you have to borrow more money to try to fund the ongoing operations. And the whole thing rapidly spins out of control, and that is where I think we're quickly headed.

They always say as a credit card holder, you're supposed to pay off your interest, at least your interest, every month, because you don't want that law of compounding interest working against you. And, well, unfortunately, it is working against all of us at the present time.

Chris Martenson:  Yeah. I've written about that great endgame debt spiral as well. It's just a natural one. It's the one Greece finds itself in, in what? Two-hundred-twenty percent plus for one-year paper. And it's a very simple spiral to understand. The more your interest rates go up, the more you need to borrow to cover the interest rates. And the more you borrow, the more your interest rates go up, and we just spiral around that. Off we go. So I...

Turd Ferguson:  Exactly.

Chris Martenson:  I see that as kind of an endgame. And so if the Keynesian experiment is approaching its end, which means that we can't just constantly inflate our way out of every difficulty – and by the way, we tried to inflate our way out of good times too. It didn't matter. Right? Good times, bad times, money was created well – and by money, I mean credit – well in excess of underlying nominal GDP growth, and it really was independent of whether it was a crisis or a good moment. And so here we are, addicted to this grand credit experiment coming to an end, which in your view also means the collapse of the U.S. dollar's purchasing power as we know it.

Other analysts, myself included, have also been advocating that investors gain a lot of exposure to gold. Silver, a less extent in my case, has some defense against this outcome. I like both metals, but for actually entirely different reasons. How do you think of gold? And when you look towards the future, what do you predict there? And the same questions for silver when you're done with that.

Turd Ferguson: Well, let me stop you for a second, Chris. You mean in terms of price?

Chris Martenson: Yeah. Yeah.

Turd Ferguson: Or trend?

Chris Martenson: Or purchasing power preservation, however you want to look at that.

Turd Ferguson: Okay. Well, and again, I try not to make it too complicated. You mentioned earlier that the 20 years I spent in, we'll call it the financial services industry, in securities industry. I found that so many of these topics really get confusing to people very quickly. And not to make it sound like we dumb it down or anything, but I think to get people to really understand, you got to keep it on a rather simple level when you're approaching the masses. And so the way I put it for gold and silver so that people understand why you would buy them, the gold protects your wealth. It is the only currency that doesn't have – well, then here's a term for you and I. For everybody, it doesn't have counterparty risk. It is what it is, and it has been money for thousands of years. And so if you want to protect your wealth versus some wealth destructive event, you own gold. If you want to protect your purchasing power, a similar precious metal that functions as money is silver.

Purchasing power of anything, just because it's less in price. You can't walk around with one gold coin worth $1,600, or $2,600, or $4,600 in your pocket and expect any barter with it. But in terms of if the day ever came that you did need to, for whatever apocalyptic reason, you needed a store of money that you could trade with, silver accomplishes that. And again, because they are money, they can't be devalued. And as the U.S. dollar and other fiat currencies are devalued, you continue to see the value of gold and silver go up. 

Where do they go from here? Gosh, that sure is hard to say. And it's hard to say exactly how fast they will go, but if anything, I know they're not going to be going down over long periods of time. People have given me a lot of credit for being able to help people control their emotions when we get into corrective cycles, which invariably come in any bull market. You get short-term corrections. And the reason I'm always so confident that a correction is going to turn is, well, because the fundamentals are so strong. 

Prices may go down reflecting a short-term change in trading sentiment, but the long-term fundamentals are so strong because of that debt spiral that you and I just talked about and the devaluation of fiat currency. Therefore, as long as those fundamentals stay the same, gold and silver are going to keep going higher. How fast is going to depend on – and how far – is going to depend upon how quickly the spiral continues to play out.

So I have my targets for 2012, and frankly, they are targets because they are a continuation of the trend that we've seen from early part of this century. Gold has averaged about 20, maybe 25 percent a year. It allowed me a year ago at this time to project $1,750. We certainly have seen that and beyond, and we're trading as we talk near $1,800. 

Let's take the closing price on December 31st and add 25 percent to it. And don't be surprised to see it trade somewhere near there in 2012. That's for sure – $2,300, something like that.

Chris Martenson: Yeah. I asked about prices and targets because a lot of people expect to see it. I actually switched off the targets a while ago. I'm more in the view of – Eric Sprott gave a nice presentation at the KC Summit, and he said, "Look. Who cares about price? Let's look at the ratios that matter. How many barrels of oil can an ounce of gold buy? How many ounces of gold does it take to buy a house, a car?"

Turd Ferguson: Yeah.

Chris Martenson: Other things. And so when you look at many of these things that you care about, because that's what I care about. I care about I earn money. I save it. And when I get to the future, I'd like to be able to obtain the things I hope to obtain. So what I really care about, how are the trends out there? And right now, all of those key trends in terms of houses, oil, food, stocks, anything I care about, when you measure it in gold, you find you're just really in a very, very powerful bull market at this point in time with fewer corrections in it than you see with the dollar price. So instead of worrying about the dollar price of gold, I'm worrying about the gold price of other things. And it's been a useful sort of flip for me.

Turd Ferguson: Right. And, well, and along those lines, it really gets back. On my side, it gets back to are you stacking it? And why are you holding it in the first place? If you're going to get all upset because the fiat price of gold went down a couple hundred dollars in September, well, why are you holding it in the first place? Because I can assure you by next year at this time, or two years at this time, it's going to be higher than it is today. So if you're going to be upset about a drop, it's only probably because you are trading futures, or ETFs, or something, and it caught you in a downdraft. But if you're buying it simply as protection, if you're buying it because you know what's going on in the world and you can see how this is all going to end, hey, take advantage of those drops and use it to accumulate more physical while you can.

Chris Martenson: Yep. Yeah. If you can, do it.

Turd Ferguson: Yeah.

Chris Martenson: So, well, where do you fall on the heated topic of price manipulation? I mean, if you're a big believer and the trend says it's going to be higher next year, then clearly, if there is manipulation, you don't view it as being successful. Where do you fall on that for gold and silver?

Turd Ferguson: Well, it is successful, actually. It's successful in keeping it in check. It's probably part of the reason why it's been such a consistent trend higher. I mean, every year almost. It's not like it's 50 percent and it's – or 25 percent and it's 50 percent one year and zero the next. It's just pretty consistently 20 or 25 percent a year. And it's because of that presence of what we call the cartel, the bullion bank cartel, or on my site, we refer to them as the evil empire. It is their suppressive tactics that keep price in check. We can hope that one day they will exit the market and leave gold and silver free to trade, and actually find a true valuation, but unfortunately, that isn't coming anytime soon. 

And I stress, and I've been very open and forthright about this ever since I've had a Web site. People wondered how it is I'm able to – well, you mentioned earlier, Chris, the short-term price targets with some relatively high degree of accuracy. I can do that because the markets are manipulated. The gold and silver markets are manipulated. What I do does not – believe me. If you looked at my trading account and looked at my success chart to trade gold, or not gold, but corn, or soybeans, or crude, or something like that. I make choices just as badly as the average guy. The reason why I am successful in forecasting gold and silver is because they are manipulated. Because once you understand that the bullion banks, particularly JPMorgan in silver, are in there trying to stack the deck in their favor, then you use some simple technical analysis. And you begin to see where they're going to act, where they're going to place some sell orders to try to start a cascading waterfall selling by tripping stocks. It's not real hard. I mean, its pretty basic stuff. But once you, again, like I said, once you admit to yourself that if this does take place, it makes forecasting where price is going pretty easy.

Chris Martenson: Mm hmm.

Turd Ferguson: I'm in the camp – it's funny. I haven't really ever met Bill Murphy of GATA. We talked once on one of my podcasts. And I've not really read a lot of his work, or Chris Powell's work. It's not like I read that stuff, and a light went off, and I said, aha, yeah, these guys. But I respect what they do, but it's not like I'm just simply parroting what they've said. I've come to all these conclusions myself just in years of following gold and silver. What my experience has been just jives what their experience is and their data show. And so, to me it's a quite clear case of what takes place.

Chris Martenson: I traded pretty actively for a while and I saw manipulation all over the place, not in just gold and silver. I mean, all kinds of markets. So part of my market philosophy is that they're rigged. And one of the ways I know they're rigged is when you see the four biggest banks turning 100 percent trading win ratios off their prop desks. Right?

Turd Ferguson: Yeah.

Chris Martenson: Obviously, they're not trading because trading involves risk. So they're doing something else. Right?

Turd Ferguson: Yeah.

Chris Martenson: And when I was very actively short homebuilders in 2006, '07, and '08, I would watch them absolutely go the wrong direction on earnings reports that were absolutely in line with what I was expecting, and very painful short moments to sort of ride out. And I realized through that experience that there is very, very asymmetrical information. That's part one. So I had access to the information at the retail level that was very much different from the books that the rest of the world could see, I guess.

And the second thing I learned was that if the price moves went in the direction that I'm going to call the powers that be would favor, there was really no inquiry. There was no looking into those things. They were just sort of left unexplained and that people would throw their hands up and say, those are markets, I guess. Right?

Turd Ferguson: Uh huh.

Chris Martenson: And so, a simple example. I would notice that when there were big down days in the markets, the systems would get pulled. Right? They somehow didn't work when computers had to put a minus symbol in front of stuff. You know? 

Turd Ferguson: Right. 

Chris Martenson: And on big up days, there was never any sort of like circuit breaking, or systems going down, or rule 48s, or any of this other stuff. It was just I noticed this asymmetry that as long as things were going in "the right direction" – I've got air quotes up, "the right direction." Once I developed that view, I actually became a better trader because I stopped trading on technicals and fundamentals and I started trading like a criminal.

Turd Ferguson: Yeah.

Chris Martenson: I would just ask, where do I think somebody might want these prices to go? And often, that was a better, more useful sort of a trading position for me than all of the technical and fundamental analyses put together.

Turd Ferguson: Right. No. And absolutely correct. I agree with you 100 percent. And you can see it. I just wrote this afternoon, before we started visiting. I finished up a post to my site about the events of just today in gold and silver. We see this quite often where the prices of gold and silver – they decline rather sharply after hours, after COMEX trading hours on the GLOBEX.

Chris Martenson: Yeah.

Turd Ferguson: It's akin to – because volume is so thin there.  A little bit of money thrown at the market – any new paper shorts can have a rather dramatic impact in that, and fundamentally, I guess, your readers probably know how this works, or your listeners probably know how this works. But at any given price, there's an equal number of buyers and sellers. 

In a thinly traded afterhours market, there is just a few on each side. Well, if you come in there with 1,000 contracts of silver to sell, it might fill 100 at $35, and it might fill another 50 at $34.95, and it might fill another 100 at $34.90. And the price just keeps getting marked down until there's enough bidders found to satisfy that whole order. Well, by the time that's done, it might be $34.50 or $34.25. And in the afterhours market when no one is there, when the volume isn't there to absorb those big orders, you can take a dollar out. You can take 75 cents out really quickly. You start – well, it just happened two hours ago. And that's money you don't get back. It's not like their going to reset tomorrow morning when the COMEX opens back up to where it was when the COMEX closed the day before. So if they can come in and raid the price of silver for 50 or 75 cents when nobody's around, hey, well, that's the new price.

Chris Martenson: I know it. We saw that in that big rundown from when it lost 25 percent, from 50 down into the 30s. Right?

Turd Ferguson: Exactly. When that... 

Chris Martenson: And where did that start? That started Sunday night at 1:30 in the morning, Monday morning. Right? 

Turd Ferguson: Yeah.

Chris Martenson: And who's trading then? It's like they were trading cattle in Hawaii, and all of a sudden, cattle get sold like crazy in Hawaii. And Oklahoma wakes up and finds out it's 25 percent poorer. I mean, how does that work?

Turd Ferguson: Exactly. Exactly. And then, that is where the manipulation has a lasting impact. And you can't get that money back. You take a dollar out and it's a dollar gone. And it takes a whole bunch of new buy orders, a whole bunch of new speculative longs and commercial longs to come in and bid it back up to where it was before that raid. And so, they're always going to be in there. Again, I guess the ultimate question is at who's behest are they doing this? But, nonetheless, they're in there controlling price, managing the assent, if you will, to create this illusion that there's still confidence in the dollar, that they're still – that everything's – all is well. And that it's okay to go buy a new car. 

Chris Martenson: Yeah.

Turd Ferguson:  And that the economy is still humming along. It's an active part of maintaining that illusion. And one day that will all – the whole – the house of cards will fall in on itself. But it's hard to tell when that's going to be.

Chris Martenson: I don't know this for sure, but I have very strong suspicion – I'd put money on this – that if the reverse were true and Sunday night at 1:30 in the morning, all of a sudden, silver vaulted up 25 percent. You'd wake up and they would undo a bunch of trades. They would close COMEX. They would launch an inquiry.

Turd Ferguson: Right.

Chris Martenson: They would – all kinds of things would happen. They'd look for who was responsible. They would say that was unacceptable. But when it went down 25 percent, they were just like, oh, well, you know markets. That's markets. Right?

Turd Ferguson: Yeah.

Chris Martenson:  We're not going to look into that, really. So that's what I mean by an asymmetry. I just believe that as long as things are moving in the right direction, and I believe you're right, the down is "the right direction" for precious metals because of the signaling event. I mean, come one. When Ben Bernanke writes an op-ed in the Wall Street Journal and says, "Listen. We're very pleased with where stocks are and we're very happy with our support to the markets that enables stocks to be higher because higher stock markets signals the right things to the people." Right? He didn't say anything about stocks should have a correct price for the risk involved and for the opportunities that are looking forward.

He said that it's an important signalling device, and that's how they look at these things. And, of course, if you don't believe the Fed has thought about gold as a signalling device, you need to go back and study history starting with the '69 Gold Pool, and Ruben's Strong Dollar Policy, with Taylor's Paradox, all that stuff. Right? So they've been focused on it a long time.

Turd Ferguson: Oh. Absolutely. And they'll continue to. I mean, if gold was trading at $5,000 an ounce tonight, what would that tell you about the global level of confidence? Yeah. And when it was getting ready to go to $2,000 just 60 days ago, what does that tell the world about the level of confidence in fiat money? Or somebody needs to perform this exercise. Take a look at the U.S. Dollar Index for the last five years. It's essentially flat. Again, the dollar index is, I guess, a picture of the U.S. dollar versus a basket of global currency, so in relation to other fiat currencies, the dollar is about the same as it was five years ago.

Chris Martenson: Yeah.

Turd Ferguson: But gold has gone from $400 to $1,800 tonight.

Chris Martenson: Yep.

Turd Ferguson: It's lost, what? If you want to look at it that way, well, it lost 75 percent of its value versus gold. Is that the right math? So they have to maintain this illusion. And most importantly, and I guess I kind of touched upon it earlier, if the true measure of inflation was actually out there – not this CPI nonsense at two percent.

But an actual of real goods that have impacted a real, in this case, American family in the pocketbook. If you had that true measure of inflation premium, what it really is – 10, 12, maybe 15 percent – you can't. There is no way. There would be no bids for treasury notes at two percent. Why would you guarantee yourself an annualized loss of 13 percent net real interest rate. Nobody would do that, so rates would have to go higher. And as we discussed earlier, rates moving above these historically low levels just rapidly – just increases the speed of which the Ponzi unravels. And so they can't have it, and so they'll continue to maintain this charade of the kind of economic normality. And one of the elements of that charade is suppressing the price of metals as best they can.

Chris Martenson: Well, I think it's a great thing because I get to accumulate more at a better subsidized price.

Turd Ferguson: Yeah.

Chris Martenson: I think that's incredible. But history is very clear on this. Negative real rates of interest are just an incredible time to hold gold. Just on that one thing, if you want to keep it simple. I know you said you like to keep it simple.

Turd Ferguson: Yeah.

Chris Martenson: Right there. For somebody who doesn't want to talk about monetary policy, or potential manipulation, or how markets work, or any of that, if you hold gold during negative real rates of interest, historically, that's a very good thing to do. Simple.

Turd Ferguson: Yes. Exactly.

Chris Martenson: Very simple.

Turd Ferguson: Exactly. And that's where we are right now and will – well, that's not going to stop next week.

Chris Martenson: No.

Turd Ferguson:  It's going to be like that quite a ways into the future. So...

Chris Martenson: If it does, I'll be very surprised. It's like, whoa, Paul Volcker came back. That's crazy.

Turd Ferguson: Yeah.

Chris Martenson: Yeah.

Turd Ferguson: And he pulled that off 30 years ago at a time when – I mean, he couldn't pull that off today. Let's put it that way.

Chris Martenson: Oh. I know. I know. I know. We had too many things to list. We were a net positive trade export nation.

Turd Ferguson: Yeah.

Chris Martenson: We were a net creditor to the world, you name it. There was much less leverage in the system, everything. Yeah.

Turd Ferguson: Yeah.

Chris Martenson: It wouldn't work out.

Turd Ferguson: But someone hoping for that type of miracle 30 years on. I mean, it's just not going to happen.

Chris Martenson: I know. I know. So here we are. So the great experiment, it's going to reach its conclusion here at some point. Here's an interesting question for me is what indicators are you going to be looking at to determine that it's time to get out of this metal?  And the PM bull market is more or less over, and it's time to get capital out of PMs into something else. What's the exit strategy? 

Turd Ferguson: Well, for me, the ultimate exit strategy is you are converting your paper money into physical money now. And I guess what I'm planning for is that someday there will be a new currency regime, a new global and maybe a regional reserve currency, like a North American currency, a Eastern Pacific currency, and some type of newly formed Euro. And then those will have to be asset-backed once we've all learned our lessons about the dangers and the fallacy of fiat money. 

So if you transfer your money out of fiat into hard assets now, into physical metal, then at some date in the future, you'll convert your physical metal back into whatever the new money is. Or you'll take your physical metal and you'll trade it for some other hard asset like land, something like that. So I don't see a time, Chris, where, okay, hey. All the problems are fixed, so let's trade out. I'm going to sell all my gold and silver and convert it all back into Federal Reserve notes. Again, I mean, I'm just Turd. I mean, what do I know? But that's the way I'm planning it. I just don't see that happening. I think only you'll convert your hard metals back into a hard asset base, hard asset-backed currency, or into some other hard asset.

Chris Martenson: That's what I'm looking to do. I've had a ratio that I've been telling my subscribers about for, oh, probably five or six years now, which is that when – and this was the original ratio at which I moved into gold. I said that when I could trade an ounce of gold for an acre of productive land, I would start making that trade because that's a ratio that goes back centuries.

And I thought, well, that's a decent starting place. And, of course, people were laughing at me because that was during the run up in the whole real estate thing, when I was holding that view. That was crazy talk. I'm starting to – I'm looking around. I can actually start to make that trade this year for certain pieces of land. So...

Turd Ferguson: Yeah. Yeah. It depends on if you're in Iowa, or Nebraska, and places like that. Yeah. It's getting pretty close.

Then that would probably be, like you said, the historical – there's a reason why there's a historical relationship there.

Chris Martenson: Yep.

Turd Ferguson: Because it's been that way for a long time.

Chris Martenson: Yeah. And I'm not going to go all-in at this point. I'm going to nibble because I think overshoot is a possibility here. 

Turd Ferguson: Right.

Chris Martenson: So, I mean, the beach ball's been held under so long, I just think that when it does go, I'll have better opportunities. But I've never really made my investing style all-in, all-out. I tend to move in. So I first started moving into gold and silver in 2002, and I did it in '03, and '04. I just kept accumulating. So for those who are looking to increase their exposure to precious metals, or maybe start, do you have any strongly felt guidance for how they should go about building that exposure? Physical versus vaulting versus paper. How you accumulate? All of that.

Turd Ferguson: Well, it depends on the individual first and foremost, obviously. But for the average guy that's trying to figure out a way to kind of put his kid through college, or get him there, or pay for his daughter's wedding, and trying to figure out how he's going to get mom and dad in a nursing home. I mean, you got all these different concerns. And maybe he has an IRA that he's rolled out an old 401(k), and is looking at that going, what? I don't have – you can't buy gold or gold funds in a 401(k) at work, but I've got this IRA that I rolled out the last time I changed my job. 

There are ways you can invest in that IRA, if that's your main asset whether – if you wanted to stick with a traditional route, you can buy miners, high quality miners. You buy a basket of them. Kind of almost like how people talked about back in the dot com days where you'd buy 10 Internet stocks and hope that one was going to take over the world kind of thing.

Chris Martenson: Mm hmm.

Turd Ferguson: You might buy 10 miners knowing that one or two may come up dry holes, but the rest of them will eventually take off. You could buy ETFs. I really encourage people to stay away from the big ones, GLD and SLD, and look instead at the Sprott Physical Trust out of Canada, and things like that. There are companies where they will help you buy your own gold in your IRA. That’s possible as well. And then, as it comes all the way down to just simply stacking the metal. Getting a dealer that you trust. There are several of them that are available online that I've worked with before. You can just go on and they'll send you a nice shiny sleeve of Canadian Maple Leafs, or a Silver Eagle, or something like that. 

But for most folks, that's how they do it. It's through their traditional investments of their IRA, but instead of owning the Vanguard S&P fund, they own the First Eagle Gold fund instead, something like that. That's probably the main base exposure most people do is they try to kind of put their words into deeds. You know what I mean?

Chris Martenson: Yeah. Yeah. I noticed, too, over the years, I've had the opportunity to work with people who got paralyzed by gold prices. Because one of the things you can't do is open a paper without reading about how gold's in a bubble. It's been in a bubble since about $500. And every $100, it's in a bubble again. And that's just some really sloppy journalism and displaying a bias and a set of beliefs. And that's all fine, but still I find people often, particularly if they haven't yet pulled the trigger. They get a little paralyzed because they say, oh, I can't buy it now because it's at $1,900. And then, it pulls all the way back to $1,550. And then, they go, well, it's really falling now. I'm scared where it's going to go. Anyway, they get paralyzed because it's either down too much, or up too much, or something like that. What would your advice be for these people?

Turd Ferguson: I get that all the time, too. I have friends that know that I'm Turd and I do what I do. And they'll, "Hey. I hear you write this Web site. Well, why should I buy gold now? It's going down. It can't stay up here. It's too high." And I look at them, and I say, "Well, who told you it's too high?" "Well, I read in the paper," or "I saw it on CNBC," or whatever. Well, whatever. All I can tell you is it's going to be higher a year from now than it is now. I mean, it might go down first. It might go up more. And what I encourage people to do is – many people are familiar with the concept of dollar cost averaging which is kind of an old financial planner – financial advisor – term for people that are working their way into the market. To set aside and set up an investment plan, kind of like your 401(k) where you're just putting in money every two weeks or every – once a month, you buy some shares of a mutual fund or stock. Thinking that sometimes you're going to buy high and sometimes you're going to buy low, but it's the regular disciplined purchases that kind of averages it all out to kind of a lower average price, and take some of the emotion out of it. I would encourage people to, and I do encourage people to set up almost a dollar cost averaging of physical metal. To just say, look, I'm going to take some money and I'm going to buy some on the first of every month, or the 15th, or whatever, and just continually do it. And that way, you will take it. You'll buy high sometimes, but you'll also buy some dips too.

Chris Martenson: Yeah.

Turd Ferguson: So that works for me as well.

Chris Martenson: Yep. I totally agree with that approach. Just, again, I'm never an all-in kind of a guy. Now, I've been trading. I traded gold and silver when I was a trader in futures trading, in addition to my shorts position on homebuilders. And I found that I just couldn't predict those markets. I tried. I just couldn't do it. They have a mind of their own.

Turd Ferguson: Yeah.

Chris Martenson: At any rate, so I found that dollar cost averaging in that market was my best bet, and then hanging on and holding on. And one of the reasons I advocate physical, and this is because for me is that when I hold paper stuff that I can sell at the click of a mouse button, I tend to do that. I tend to be a little active that way. And my best holdings have been the physical holdings, which I have accumulated. And then, because it's kind of a pain to – it's not impossible. I have sold it, and bought it, and stuff, but it's just enough of a barrier that I kind of go, ah, not worth it.

Turd Ferguson: Yeah. Yeah. But if you're going to take your sleeve of Eagles and go marching down to the whatever or put them on eBay. No. You're absolutely right.

Chris Martenson: Yeah. So that's helped me because riding the bull is the most important thing, not getting shook off. That's hard. That's hard work right there.

Richard Russell would agree. So in addition to all these precious metal ideas, you cover a number of other topics on your blog, such as the recent implosion of MF Global. Thank you, John Corzine. Very well done there. And all the implications that those things forebode. For those that are looking to preserve as much as their wealth, say quality of life too in the next decade as they can, what other key trends should they be paying attention to here?

Turd Ferguson: Well, as we talked about, it's that macroeconomic stuff first and foremost. And that the only, I guess, Keynesian recipe that works is if you're able to grow your economy faster than you're growing your debt, to kind of keep that debt to GDP ratio low, or at least below 100. And so you've got to really pay attention to what's going on in the economy. That would be the first big indicator. Again, suddenly, if they try to tell you the GDP is growing, but at the same time infla-...or not inflation, but unemployment is still at nine percent and higher, it gets back to what we talked about earlier. I guess, on the side of it earlier about the perception management of the government to try to convince you that all is well. 

But I think you got to look at the macro. You've got to try, as hard as it seems for the average guy, you've got to try to pay attention to what's going on globally. And I think it's very easy to say why do I – I don't care about Greece. Oh, and now they're trying to tell me that Italy's bad. Who cares? I mean, I'm still going to go to Italy every once in awhile. I love going to Rome.

Chris Martenson: Mm hmm. Yeah.

Turd Ferguson: I'm not going to worry about it. No. There's more to it than that. I mean, everybody's connected now. And Germany can bail out Greece, but the Italian economy is almost two-thirds the size of Germany's. So they can't bail out Germany, or they can't bail out Italy. You've got to pay attention to that. And, again, as you pay attention, you've got to try to think of the endgame. Well, what's going to happen? How can they manage all that debt? And then the counterparty risk that comes with all that debt, and then all the outstanding derivatives. In the end, it all becomes about how much money can you print to try to paper over these problems and just keep kicking the can down the road, if you will. And as long as they are going to continue printing money that's just going to continue to make investments in precious metals that much more attractive. You got to look at the U.S. economy and what it's doing, the political structure of it. You got to take time to understand that what happens in Europe is going to have a major impact on how things go here too.

Chris Martenson: Yeah. Everything is so cross-correlated, and crosslinked, and interlinked. And we've got our 600 to 1 quadrillion in derivatives still standing out there. And nobody really understands all that. So it's almost like if somebody said they're looking at this one organism, this one body that happens to be the world economy now. And they say why should I care if my right leg is infected? I don't know. Well, it's connected. So it really matters a lot. And the chief risk that really concerns me at this moment in time – here we are in early November of 2011 – is the idea that the banks themselves are so interlinked, and they're so wrapped up in the sovereign debt issue, and all of that sort of very complicated fancy stuff that's going on with the EFSF. It skews just one simple fact, which is that there's too much debt, that deleveraging is going to happen. Somebody's going to take the haircut. 

The longer they wait to see if they can push that haircut onto an unsuspecting taxpayer, which I think they have less chance of doing in Europe, by the way. And if they can't do that and the whole thing sort of falls apart, we face the risk of a really interesting moment of financial system instability. That's another thing that correlates beautifully with a rising price of gold is just uncertainty and system stress. Those two things I think we've got in spades right now.

Turd Ferguson: Yeah. Look.  And we mentioned it early. It sounds – and I know the funny looks I get from family and friends sometimes when I talk about this stuff.

Chris Martenson: Yeah. Yeah.

Turd Ferguson: I mean, it sounds like you're some kind of nutcase. What are you talking about? You'd have some silver for barter. What? What? How is that? And I'm not saying going to happen, but I remember, I was on a flight one night back in September of 2008. And I distinctly remember looking down out the window someplace over about Tennessee, thinking, I wonder if those people know down there that we're on the verge of complete financial – global financial collapse where the ATM just doesn't work, or the bank is closed. And you can't just get some cash and go to Sam's Club and buy yourself some food and some – I mean, we were that close. And we'll probably be that close again. Maybe we will, maybe we won't. But having gotten three years of an awakening to prepare. I have to use that time and prepare myself for that possible eventuality. And it's, like you said, everybody's interconnected. And all these banks do business globally, and they all share each other's – that counterparty risk. And so all it's going to take is one domino to fall and they all kind of start tumbling into each other. And then, you got to be mentally and financially prepared for that, and almost like a just in case. What is it? You hope for the best and plan for the worst. Right?

Chris Martenson: Yep. Absolutely. Absolutely. And a little bit of preparation goes a long way. And here's the funny part. Many of these preparations, the opportunity cost of them is low. So I advise people to keep some cash out of the bank. What are you missing out on? Zero percent on your demand account?

Turd Ferguson: Right.

Chris Martenson: So it doesn't really matter if it's in the bank or out of the bank from an opportunity standpoint, except you actually are more liquid with it out of the bank if you can get your hands on it.

Turd Ferguson: Yeah.

Chris Martenson: Same thing with gold and silver. I mean, these assets – like if you held stock. I can show you a bunch of stocks where if you held them, they went to zero. Gold will never go to zero. Never.

Turd Ferguson: That's right.

Chris Martenson:  Right? It might go to something lower, but it's not going to zero. So when I look at these and I just think about the risks – and here's the interesting part about this to me. It's the idea that what you and I are talking about is just simple, prudent risk management that anybody ought to be thinking about and planning for. And still a lot of people won't do it. Mostly, because it's an emotional barrier. It's a belief-based – it's something, but it doesn't have anything to do with prudence and really thinking through the risks and managing those risks. And that's fine. More and more people are waking up to this story. I find people who a year ago, I couldn't engage in this conversation are now engaging in it. We're there in that conversation, so I think you're doing good work in helping people figure out a way to preserve their wealth, and stay on top of these things.  

For those readers who want to find out more about you and your work, where do they do that and how do they follow you?

Turd Ferguson: Well, the Web site is tf, as in Turd Ferguson, metals report, M-E-T-A-L-S report.com – all one word. We try to – it's a different site. It was not anything that I sat down with pen to paper and drew up a business plan and said, okay, here. Now, this is really going to be a neat deal. This all just kind of developed out of the blue. And I realize, frankly, from being on the Internet that – and from having been a financial person, there's not a wealth of readily available unbiased precious metals information out there.

Chris Martenson: Mm hmm.

Turd Ferguson: You can go see your typical stockbroker and tell them that you want to buy all the stuff that you and I just talked about and so, therefore, you want to buy some gold, or you want to buy a gold miner. First, that stockbroker's going to look at you like you got two heads and think you're some kind of nut. And if you persist, then the stockbroker might patronize you in a way, and reach back into his credenza, and pull out a report on some miner with whom the firm has an investment-backing relationship, and therefore has their rating and their research report. And you don't know if – I mean, we found all that out 10 years ago, about the conflicts of interest between the sell-side firms, and their analysts, and the companies that they follow. I mean, it's a joke. You can't get good information. And so that's why I started the site. Because I thought, well, with the success of things like Wikipedia where it's user-provided content, and it's not always going to be 100 percent accurate, but at least you know that – well, maybe that's not the best example with Wikipedia, but at least you know people are trying. They're trying to tell you their honest opinion. 

I thought, well, what if we built something like that in the metals arena. Where, yeah, you got my content, but the real wealth of knowledge is in the forums, and the bulletin board section where you can go in and find user or other member-provided information on certain miners, or certain commodities, or bullion dealers, or coin dealers, things like that. That's where all of a sudden it dawned me there was an opportunity. So that's why we built the site. That's what it's there for, and it's for people to go interact with like-minded people. We have a rule there. You got to treat others the way you want to be treated because so many Internet sites turn into these kind of verbal sword fights...

Chris Martenson: Yep.

Turd Ferguson: ...name calling, and it just turns me off. And so the number one rule of the site is you got to, like I said, treat others the way you want to be treated. So we try to always keep it cordial and helpful. And I think that kind of draws people to the site too. So it's, again, tfmetalsreport.com. We're just trying to help as best we can to, like you said, help people prepare for what is most assuredly coming. 

The last thing I would add to that, Chris, and one that's challenging, and I'm sure you've seen this too in working with your subscribers is where we are headed is unlike anywhere where we've been, at least in recent memory. I mean, there may be some octogenarians out there that remember what it was like before the Great Depression and during the Great Depression and before World War II. But it's a world like that where we're headed to. All I've ever known, all my friends and family, even my parents really have ever known is this hegemonic United States that was the world power, and provided the world's reserve currency. And we could print as much as we wanted to, and then export the inflation to all the other poor staff that had to – took our dollar. And so we bought their cheap stuff. And those days are over, and it's a really hard concept. If you haven't had personal experience with something else, it's a really hard concept to get your arms around. That we're not always – that the United States isn't going to be this huge economic and military superpower. Just because it always has been doesn't mean that it always will be. And as we talked about, the numbers and the fundamentals suggest that it's not always going to be. And so you got to kind of prepare yourself that tomorrow's not going to be like today, that we're in a new paradigm. And try to intellectually figure out, okay, how do I survive and prosper in this new world knowing that it's coming? And that's what we try to do. I know that's what you try to do. And it's our job, Chris, to try and help as many as we can.

Chris Martenson: I absolutely agree. And like you, I didn't have a business plan and I didn't pencil any of this out. I just started doing something that – and frankly, I created what I wanted to see on the Net but couldn't find, just like you did. I was like, "Where is it? Oh. I'll create it." 

Turd Ferguson: Yeah. Yeah.

Chris Martenson: And so it turns out that the growth industry out there right now happens to be purveying accurate information as best we know it. Right? And you're probably like me. When the information changes, you'll change too, whatever that happens to be. But right now, we've got a set of trends that are pretty clearly in place where there's been precious little to deflect me from my main storyline over the past few years. And so here we are in the middle of it. I used to say that the future is going to be really different from the past. We're in it. I think we're in the middle of it is my view what we're seeing in the world now, what we open the newspaper to in the morning, that's – it's here. 

And so I really want to thank you for your time. And the idea here is that there will be more official responses to try and fix an unfixable problem. History's pretty consistent on this. We're going to try and print our way out of that. And even though we try and do that, the amount of system level stress, and risk, and all these other things just say, listen. Maybe it's time to take your chips off the table, or some of them. Go get a drink until you understand how the cards have been dealt in this hand. And gold presents one way to do that. Silver, too. 

Turd Ferguson: That's absolutely right.

Chris Martenson: So, Turd, I just want to thank you so much for your time, and I hope we can do this again.

Turd Ferguson: Chris, my pleasure. Anytime you'd like to do it again, we'll do it. Please keep up the good work. I enjoy your site. I know a lot of the folks that read my site go to your site. And so please keep up your diligent hard work. We all appreciate it.

Chris Martenson: Fantastic. Thank you. This is Chris of PeakProsperity.com signing off.

"Turd Ferguson." is the proprietor of TF Metals Report. Turd approaches the subject of PMs (precious metals), the markets, and the economy with a certain amount of irreverence. Even though we are dealing with serious subjects here, we don't take ourselves too seriously.

"Turd Ferguson" was a licensed securities "professional" for nearly twenty years. Disgruntled by the fraud known as "financial planning", he retired to a career as a serial entrepreneur in 2008. Though otherworldly in his ability to forecast price movements, The Turd is NOT a soothsayer, a psychic or a witch. After all these years, he simply has a decent understanding of the forces at play in the precious metal "markets".


Our series of podcast interviews with notable minds includes:

switters's picture

Dollar-cost average - or go all in?

I already have a substantial portion of my savings in bullion, and I've decided to increase my position.  I know that dollar-cost averaging is generally the best way to do this.  However, it's very hard for me to imagine circumstances in which gold would decrease significantly in the next few months. I'm concerned that if I spread these purchases out over 6 months as is commonly advised, I'll end up buying in at a much higher price.  

Transcript for Eric Sprott - Paper Markets Are a Joke: Prepare for Bullion Prices to Go Supernova

Below is the transcript for Eric Sprott – Paper Markets Are A Joke: Prepare for Bullion Prices to Go Supernova:


Chris Martenson:  Welcome, Eric; it's a real pleasure to have you today.

Eric Sprott:  Chris, good to be here, and thank you for all the work you are doing in apprising your investors of what's really going on in the world.

Chris Martenson:  Oh, thank you. We’ve been at it many years and unfortunately much of what I think both you and I saw coming – though unfortunately not enough others along the way – is really coming to pass. If I could, let’s start with your views. You have been advocating and creating investment vehicles for people to own gold and silver for a long time. How did you get to that position and what are your views on owning gold and silver at this point?

Eric Sprott:  Sure. Well it all started, Chris, with our studies back in 2001 where we were entering into a secular bear market and wondering how you deal with that. And a typical response would be to own gold and silver, which is what we decided to do. I think the one thing that really tipped us into it was an analysis of the physical supply and demand for gold and some work by Frank Veneroso that suggested things would have to change dramatically in the physical gold market because the central banks were selling four to five hundred tons a year. And as you know, here we are eleven years later and now they are buying four hundred tons a year on balance, and this is in a market where the mines supply only twenty-six hundred tons a year. So that is a huge change that had to take place that Frank identified back then. He also identified that the gold companies would stop hedging. We’ve had the ETF’s come along. So we have had a lot of dramatic changes in the physical balance between supply and demand in gold. And that is really what took us there in 2000; to get actively involved in that particular market.

Chris Martenson:  And looking at it today, has anything changed in that analysis? You mentioned a secular bear market, are we still in one and also has anything changed in the fundamental supply/demand equation that has actually tipped it one way or the other, further or less, since the initial analysis you looked at?

Eric Sprott:  Sure. Well, I do think we are still in the secular bear market and basically what people describe with the phrase “extend and pretend”. And we had the zero interest rate policy, the housing boom, the lending boom, TARP and TALF and all those things which try to delay what naturally should happen. When I look at the headwinds for gold and silver, I really believe that we have been aided and abetted by a lot of these policies, particularly QE1 and QE2 and the various printing mechanisms of the ECB and the Japanese government and almost all governments in the world. So as much as I would not have anticipated those types of developments happening, they have happened and they provide an even stronger headwind for people realizing that currencies are not going to survive and to maintain your purchasing power you have to own precious metals.

Chris Martenson:  You know, I too have been surprised by how long all of this has stretched out. If you had told me five years ago – Eric if you had said “Chris, the Federal Government in the U.S. is going to be running a $1.6 trillion dollar deficit and the Federal Reserve is going to monetizing 75% of that and the bond markets will be relatively tame and the dollar will still be roughly where it is at”; I would have said you’re nuts. But here we are. And my view on this is that what we are kicking the can down the road. We have bought some time, – which I am thankful for personally – however the risks are now increasing. And the risk that I have identified that concerns me a lot is that, sooner or later, much is happening in Greece right now where suddenly the world wakes up and says “Hey, wait a minute. They can’t possibly pay that back. And at 22% interest rates on 2-year paper, they really can’t pay that back.” So suddenly the illusion is lifted. We have collectively suddenly gone, “Greece is not solvent. Oh, that’s terrible.” And now we are grappling with that. But that same dynamic can be extended to, I think, any of the governments that you just mentioned. It varies across Europe somewhat, but in Japan and the U.S. there certainly are fundamental mismatches between current productive economic output and the levels of indebtedness. We are printing our way to that. Is there a way that you can see that this could actually be turned around where it all sort of pencils out? Is there a solution to this that does not have to pass through a fiscal crisis and possibly a currency crisis?

Eric Sprott:  Well Chris, it is very hard to imagine that happening. And then I look at really what has happened over the last eleven years since we hit the high in that, we basically created a problem in the world of banking business and I always think of banks as being levered 20 to 1. And when your paper assets start to decline, of course it does not take much of a decline to get rid of all the capital. And we have seen that in so many instances whether it is Iceland or Ireland or now the Greek banks. And all the moves that have happened so far really have been in response to the problems in the banking system. That is why you have TARP and TALF and all those things because the banks basically were losing deposits and somebody had to come in and support them. That is what happened in the UK, it happened in Iceland, it happened in Ireland, it’s happening in Greece as is transpiring right now. And I think the big fear is that you cannot let one banking system go down without an impact on all the other banking systems. So collectively everyone is trying to support the banking system and I think people see through the ruse. And the natural reaction is “Well, why have your money in a bank when you earn nothing, why not have it in something that might at least maintain its purchasing power?”

Chris Martenson:  Well absolutely. So all kinds of productive assets spring to mind as well as wealth preservation vehicles, gold and silver being obvious. But also we are seeing some of that dynamic in the commodity complex in land prices, particularly for farmland and timberland. There are, I think, many people who have come to the same conclusion which is, that there is something structurally flawed both internally to the whole economic and fiat money model, and also externally, which is my metaphor for bringing in Peak Oil and the idea that we are really going to be facing an enormous headwind of rising energy prices no matter how we slice it at this point, unless we discover something really magnificent. And so these are all upon us. And here we are, when you look forward into this, there is a big debate out there: does this end up in an inflationary crunch, or do we go down a deflationary crunch? In my mind, I hold gold under both circumstances. What are your views?

Eric Sprott:  Well, first of all, I can’t agree with you more. I think three of the safest areas to be involved in are the precious metals, agriculture, and energy. Energy, unfortunately, might, if there is some kind of economic crisis, go down in the short term. But I think if you would withdraw funding for the energy industry with the decline rates we have in oil and gas production, if people stop drilling, we would certainly see a very, very quick recovery. So I could not agree with you more. There is obviously does not seem to be any solution at hand of the problems and I think people should stay focused on those particular areas.

Chris Martenson:  And how would they do that in your mind? I know you have got a couple of funds that deal with these pieces. I know that I get questions all the time from people who are concerned about geopolitical risks, there are jurisdictional risks, taxes – it is a very complicated environment. And I think increasingly complicated as governments struggle to maintain revenues and receipts and all of that. How do you suggest people begin to approach getting into these areas, many of which like agricultural land are very, very difficult. Most people are stumped about how they would get into that particular area at all. What is your advice there?

Eric Sprott:  Well, agriculture is the toughest because there are not really that many public companies I know of. In Canada, there is not much. I mean, for example, we have potash companies which we have been active in, but there is not a lot of opportunity there in the public domain. I guess in the private domain, people could own farmland which you have already alluded to. But there are way more opportunities in precious metals and oil and gas. And I particularly emphasize precious metals because they are amongst the most liquid markets in the world. There are many, many vehicles available. Some have way better attributes than others, that is why we created funds where if you buy our gold or silver trust, you can actually receive the gold or silver. Of course, they could always buy coins, which they have been doing in great quantities here. So those would be my primary recommendations to people, buy something where you can get access to physical metal.

Chris Martenson:  Physical metal. And do you ever give out – I know this is a complicated topic, depends by age and economic bracket, other things – but do you have a range for a percent of somebody’s portfolio that should be allocated to precious metals?

Eric Sprott:  Chris, it’s a favorite question I am asked all the time. And I always respond with what I do. And I know in our equity funds, we are probably 75% involved in precious metals. And probably 30% of that is physical metals and the other 45% is in precious metals equities. In my own instance, I am seriously involved in owning physical gold and silver and I do always point out that I do not have any trouble going to sleep at night knowing that I own these metals because there is no way that they are not going to hold their value in whichever environment you have, whether it is deflation or inflation that you mentioned earlier. And I happen to be of a view that we will see deflation in paper assets, but we will see inflation in real assets. 

Chris Martenson:  Deflation in paper assets, inflation in real assets. One distinction, do you include real estate in your description of real assets?

Eric Sprott:  I do not include real estate. And the reason I do not include real estate is because it is basically a function of interest rates and the economy. You know most real estate is backed by loans and that creates a great problem. So I would certainly distinguish as you have, that owning farmland, which is something that produces something real, is more important than owning let’s say, a commercial building that really is not producing anything but is backed by some mortgage where ultimately the mortgage lender is going to have concern that his loan will not be repaid and the price of that property would go down.

Chris Martenson:  Yeah, I share that view. In this story, we get a lot a questions from people who are just sort of new to the game and they look at gold at $1,500+ dollars, they look at silver right around $36 now. They look at the historical chart and they gasp, and they say “I can’t buy now.” How do you talk to people; what is your advice around buying gold and silver now at these particular levels or at any point in time? How would you advise people to go about building a core position if they did not have one?

Eric Sprott:  Well, I think that the prices will continue higher. I mean the amount of money printing is unbelievable. I just think you have to take that initial stand in terms of buying it. I use the James Turk analogy: just keep dollar averaging. We have gone up eleven years in a row, this year it looks like it will be no exception; I would certainly think next year will be no exception. If we ever have QE3 announced, I think gold and silver will just go absolutely bonkers here. And so I just think you have got to step in there and own it; we’ve had these fears all the way along. You know, $400 and $500 and $700 and $800 dollar gold, everyone was afraid it was a one-time thing. I don’t think it is a one-time thing, I think it is a secular thing. It’s going to carry on for quite a while here until we find some resolution of these problems. And the resolution probably will be some form of default where people just have to expunge debts that cannot be repaid. So, you have got to be in some asset which will not be affected by that.

Chris Martenson:  I agree. You know I hear a lot where people will say “gold is in a bubble” and they use price as the indicator to prove that. Bubbles are not indicated by price to me. They are indicated by psychology. A bubble is a component of social psychology; finance is sort of an afterthought, we put prices on it. I still can go to parties and find almost nobody who actually owns any physical gold themselves or even anyone who own paper representations of gold. It is still a very tiny minority I think, in the overall investing public at this point. What I do see a lot of are ads to buy all of your ‘junk’ gold, as if there is such a thing you know. Yeah, I keep all my junk gold in a barrel out in the garage waiting to haul it off to the local motel where they are holding a gold buying spree. I do not feel we are in a bubble yet, because the psychology is not there. The housing bubble had that psychology; we had hairdressers in Las Vegas with 19 homes. I do not know anybody who is a gold trader, who has taken up gold trading at home or has become a broker or even owns any. What are your views here on gold being in a bubble?

Eric Sprott:  We’ve done some work on that and we looked at the amount of money that had been invested in gold from 2000 to 2010. And I think the waiting in gold went from 2% of people’s portfolio to 0.8% of people’s portfolio. But if you just look at the rise in the price of gold over that time period, it accounted for by far the majority of the increase in the total investment in gold and silver. Which really means very few people were making new investments in the area. And I think that is still the case. Yes, we have had some early movers in gold. You know we had some of the hedge funds in the States buy gold. We recently had that Texas pension fund buy physical gold. But these are a few outliers here and I do not think it has hit the mainstream to any extent whatsoever. And I might say in silver, I do not really see the institutional participation in silver. When we went out marketing our silver fund in October 2010, we had very, very weak response from the institutions, which sort of told me, you know, they have not really taken the time to study silver and the supply and demand situation there. And I think that is all yet to come in both gold and silver, that it will hit a tipping point where people do realize exactly what is going on and that these investments would have a lot of merit in all funds.

Chris Martenson:  Oh, I agree. And I think that particularly longer-term funds who have a bigger view – these are endowments, these are pension funds, these are people who are looking out across decades – I don’t know how you can look across decades at silver and its fundamental supply demand equation, its industrial utility, and its potential monetary utility – for all of its pieces, I see an enormous structural shortfall over time and that is, to me, a perfect investment opportunity and something that anybody with a longer view would get involved in. My silver, personally I have every intention of at least passing it to my children, but possibly my grandchildren, should I ever have any. It is my Rip Van Winkle portfolio. Because everything that I look at there, says there is really not very many places for that to go except to become far more valuable as we progress through time.

Eric Sprott:  When I look at the physical silver market, I mean, there are some stunning developments. The world supplies over 900 million ounces of silver a year. But if you simply go back to the Chinese, in ’05 they were an exporter of 100 million ounces; today they are an importer of 100 million ounces. That is a shift of 200 million ounces.

Chris Martenson:  Wow

Eric Sprott:  From one source, in a 900 million ounce market. Let’s go back to 2005, there were no ETF’s. Now we have ETF’s that have 500 million ounces. You had hedging which you do not have now, although there was some action put on late last year, particularly by Carlos Slim. But I think all of the physical data we see on silver is just screaming that there is a shortage. And in fact this morning, I just looked at the Silver Institute’s study of supply and demand for silver and I mean I find it almost ridiculous that they always show supply equals demand and they have a plugged in number for investment demand. Our own analysis suggests that demand for silver far outweighs supply and ultimately the price has to go higher. As you have mentioned, the industrial uses, I think last year were up something like 18% to 20%, the investment demand was skyrocketing. I do not know where all this silver is coming from, you have to ask yourself, well, who in ’05 was getting silver that today is not getting silver? The Chinese are buying so much and coin sales are so high. I mean it just boggles the mind that somebody has not come out and said they cannot access silver. And that is the day I am waiting for, when let us say Eastman Kodak says, they cannot buy enough silver or there is not silver available. That will really stun the silver market.

Chris Martenson:  Hmm, so I really want to wade into the CFTC and all of that in just a second but I remember reading that your silver fund had bought quite an amount of silver, I think it was several million ounces, I forget the number. And that it took a number of months to actually receive it. Is that true?

Eric Sprott:  Yes, when we started the fund, we had to go into the market and buy fifteen million ounces of silver, which is not a lot in the 900 million ounce market. The stunning thing is that took about two and a half months to receive that silver. And when we looked at the bars we see some of that silver we ultimately purchased, was manufactured after we purchased it. In other words, it was manufactured in November and we bought it in October. So it just told me there is no silver lying around to be delivered against contract. And when you look at the Comex inventory for length of dealer inventories they are something like 28 or 29 million ounces, I mean that is $1.2 billion. I mean that is nothing. Any one of 500 institutions could buy it and there would be no Comex silver. I mean the whole takedown of silver, the manipulation of silver that has been suggested in lawsuits, I think, stands a good chance of proving to be the case. The raid that took place on May 1st was a joke. We are just in the process of analyzing it now and there was no way that speculators and the long sides could maintain their position when you wake up on a Monday morning and you are already down $6.00 an ounce which would have basically would have gotten rid of all your margins already. And then they bang on four subsequent margin rate increases. It was a perfectly orchestrated raid by the people who were short, but I think it indicates that there was a real physical problem in the silver market. I expect that to manifest itself as we move into the latter part of this year.

Chris Martenson:  Yeah, I watched that one in real time. I was up late that night on Sunday and I saw that huge plunge and actually recovered a bit of that plunge. But the plunge started, I think the only markets open at that point were maybe Hong Kong or maybe Sydney. And they are tiny. So the raid started in the very thinly traded Globex Market and to me it is kind of like the analogy would be the price of beef plummets in Hawaii one night and the next morning, all of Oklahoma wakes up and finds out that their beef is worth 20% less. It just did not make any sense to me at all. Is that what you are seeing there?

Eric Sprott:  Well, just imagine the margin calls. You know you drop $5.00 or $6.00 bucks like that, I mean most people against a $48.00 contract probably only had up $5.00 or $6.00 bucks of collateral. So you have to double it overnight. And then they bang out the four margin rate increases. By the time it was all over you are down $15.00 off the high. Just imagine the flow of money needed to maintain your position. And of course, now we see the evidence of what happened. I think the SLV lost 50 million physical ounces. The specs were forced to liquidate and the commercials, who were short the whole time, were able to buy back a lot of paper silver in the process and book profits. But it is such a classic setup in the silver market, to force the speculators to cover. I mean yes, they won that little battle, but I certainly do not think they are going to win the war.

Chris Martenson:  And your view then is that somehow this is, we have got the commercials, we have got the big banks, I presume you mean the bullion banks in this case. The players, if you do not want to name names that is fine. But your view is that they have some outsized abilities to influence this market and let us call it what it is, they manipulate the market in order to extract economic advantage for themselves. Are they doing this simply because this is a bear raid strategy they know how to pull off and it has been successful and they make money at it? Or are they doing this to hold prices down, or is it both? What is your view on this then?

Eric Sprott:  Well, I think, Chris, when you realize how much money these shorts were losing. I mean, we had silver rally from $18.00 to $50.00 or $49.50. I mean the losses would have been monumental. They were being forced to deal with the short position. It was a perfect night for a raid because as you mentioned, China was closed that day, the UK was closed, nobody was really up when this decline took place and I gather it took place on very, very few contracts. So it is a typical tactic in the precious metals market. We have seen it all along in gold. I mean I cannot tell you how many raids we have seen from the gold price over the last eleven years but they occur with great regularity. But ultimately they fail and again I refer to James Turk and he describes the gold price as a measured retreat by the central banks and the bullion shorts. They just know that there is a shortage of physical gold and I would like to use analogy: imagine if in the world, everything was the same today save one thing. Let us say the silver price was still $5.00. Imagine the amount of money that is going into silver today and how much silver you would buy at $5.00. You would be buying ten times more than you would have imagined. But the supply was relatively the same so they have to let the price go up to decrease the physicalness of the market. That the money wanting to go in, can buy fewer and fewer ounces as the price goes up.

Chris Martenson:  Well, certainly, you mentioned increased Chinese demand. Also, India, an important source of demand. And this is just Economics 101: if you hold the price down, demand will go up. And I am sensitive to the idea that central banks have long been interested in the price of gold and politicians too. They like it to stay relatively tame. They like inflation to stay relatively tame because a hair-raising, spiking signal from gold says something. And it says something that I think casts dispersions on their policy decisions and other things. And we know this from the London Gold Pool in ’69 and Ruben’s strong dollar policy and all kinds of things that this has been a one of many things that the banks look at. So I know they look at it and I am sure they do not cry many tears when the price of gold is held in check but the flip side to that is, that then we have more demand than we would otherwise have. And part of that process then involves, I think, a hemorrhaging of the gold and silver away from those places of low prices and towards the people who want to buy it. Are you seeing it change patterns of flows in the overall global precious metals market? I mean grossly speaking, is it leaking from West to East?

Eric Sprott:  Well, I don’t think there is any doubt about it. As people assess the economic policies throughout the world, they realize that fiat currency is just paper. The demand for physical silver and gold is of course is strongest in India and China. I think as you noted the interest in gold and silver in the developed countries is not nearly the same as it is in the less developed countries. So I think those trends are going to continue when the developed countries catch on which might start happening pretty quickly here with the recent data we have seen which basically shows that we are falling off a cliff. And one of the things I challenge investors with these days is: If you do not know what is going to happen on July 1, when QE2 ends, are we all just like a herd of lemmings going over a cliff here? Because there better be a QE3, or you are going to have some economic crisis. And of course, economic crisis are not good for banks and my ultimate view of what happens to gold and silver is that people decide to take their money out of the banks and there is only one place to go. And we have seen this happen in various countries that run into trouble. We hear about money flowing out of Greek banks, and why wouldn’t it? And the next one was the money will be flowing out of Portuguese banks. And sooner or later, instead of just moving from bank A to bank B, people might start moving it from bank A, B and C to precious metals. Which I think is what ultimately will happen here and provide this huge supernova for gold and silver.

Chris Martenson:  I want to talk about what this endgame might look like. I have been expecting at some point there might be a day when I wake up and there are two prices for silver. One that is set at the COMEX, and the other one which is what I actually have to pay to get some. And the wider that spreads, the greater the pressure on the overall market. You have already hinted, you have said that you think that there is not that much in the COMEX, the CFTC has been complicit in some way in helping to preserve – the CFTC might actually be just trying to preserve the amount of silver in the warehouses by going through their margin hikes and all of that and supporting all of that. What is your view of how this actually comes into fruition if we suddenly see this shortfall? Eastman Kodak says “Hey, where is the silver? We want it, we have to stop our industrial processes until we get it.” Tell us about that moment and how that comes about.

Eric Sprott:  Well first of all I think COMEX is a joke, and I think all the paper markets are a joke. As you are probably aware, we trade a billion ounces of silver a day. A billion ounces. The world produces 900 million a year.

And you know, rather than us saying, well, the buyers are speculators, what are the sellers thinking? He is trading a billion ounces in the sell side, and there is all 28 million in the COMEX, there is obviously a shortage of silver. What is the guy selling it thinking? He is the guy with the unlimited losses. At least the guy long silver, he knows what his loss can be, but the guy shorting silver? We have already seen silver from a year ago go up by 150%, I mean, just think of the outside losses. So I do not really think that the COMEX and the LBMA are serving much purpose in terms of supposedly being involved in the physical market. They are not physical whatsoever. They are just paper markets. And on a daily basis, at most, we probably have got about a million ounces of silver everyday available for investment. Because most of it is used for industrial. So here we have a million ounces available, we trade a billion ounces a day. I mean it just, it is almost beyond belief. It is surreal in a way that it would be that much trading. It is all paper.

And I do not know how we resolve what is obviously a physical shortage here. I mean, there is not much primary silver production, it is not a big part of all silver production. And you see the kinds of moves we have, where coin sales are up 30% and the industrial demand is up 20% and demand for solar goes up 100%. I mean, the numbers are astounding in terms of growth of silver demand, but the supply goes up by 3% or 4% a year. So there is no way out of the physical imbalance in my mind. Maybe we end up with two markets, one physical, and one paper. I think the more likely thing is that COMEX probably defaults somewhere along the line. If somebody just stood up and said “Fine, I will take the 28 and 29 million ounces” – it would be all over. So that may happen some day.

Chris Martenson:  Well, you raise an interesting point for me, which is why I actually prefer to own physical gold and silver. I was a pretty active futures trader for a while, but that was just a game. I am convinced that when that event comes – and it will at some point – that what they will do, the CFTC in this case and other rule setters, is they will just change the rules. Like they did with the Hunt Brothers. Like they always do, right? When the going gets tough, what they do is they just change the rules and say “Oh were you long this contract? We are very sorry, we’re doing a cash settlement at some arbitrary level.”

I think the warning shot across everybody’s bow should have been the flash crash, May 10, 2009, what the NYSE did was arbitrarily write in and say “Oh, any trades that happened below this level, it’s as if they did not happen. But up to this level, they happened.” And what I would love to be able to do in this case is peek into the books and find out who really benefitted from having the floor of the broken trades be set at that level. And I will be shocked if it does not turn out that it is the most well-connected players who ended up at the best advantage off of that.

 So my view, and this is perhaps cynical, is that the rules get changed rather frequently and this erodes the most fundamental underpinnings of a market, which is that it needs to be free and fair. As soon as you have arbitrariness in there which clearly – it is not arbitrary, because arbitrary sounds random – as soon as you have rule-changing that clearly benefits one set of players over another on a consistent basis, it’s only a matter of time before people lose faith, refuse to participate, and do what I did which is just default into the physical market which was a set of decisions I made a while ago.

Eric Sprott:  Sure, well, I think that just the fact that the CFTC did what they did in the Hunt Brothers situation, where you could only liquidate, which is a bit of a joke. And even its most recent example, where you just pile on these margin rate increases as it is working for the shorters. And the fact that they have had this CFTC investigation into the silver manipulation of 2008 with no results, not withstanding Bart Chilton coming out and saying it seems obvious there was some manipulation going on. So the CFTC, I think, has abandoned their principles here.

Chris Martenson:  Yeah, well certainly, there is some complicity in there. And where there is smoke there is fire. It is not a clean story at this point. That much is absolutely clear. So what I would like to do now is ask another important question for people I think you have got some insight into here, for sure, is gold versus silver. I have always maintained a 2/3 to 1/3 gold to silver ratio on a value basis as sort of my general rule of thumb. And I invest in them for different reasons. Gold for me is a monetary asset. I invest in it because there is always the option value that gold will be remonetized on the international scale. Pick a number for what it might be worth under that scenario. Silver to me is still primarily an industrial metal and one without useful substitutes in many critical applications. So I split those metals and do not lump them both as precious in the sense that they have the same characteristics. What is your view there?

Eric Sprott:  Well, my view is this. That I think silver should trade something like 16-to-1 ratio to gold. If the gold price was $1,600.00, silver should be $100.00. It has always historically been the rate. If gold was made a currency, which I think it will be, I think the market has already made it a reserve currency, the general market. You still need something for exchange that is workable. In other words, you can’t be exchanging one tenth of an ounce of gold for $150.00 bucks, I mean, try to get it down to $10.00 bucks. I mean, it is impossible, because whatever you have in your hand would be so small it would be unrecognizable. And therefore I think that when that day comes, silver would also be included as a currency. And we are sitting here with theoretically a billion ounces of silver available, which today is only worth $36 billion dollars. You cannot have something in the currency that is only worth $36 billion dollars because it serves no purpose. There is just not enough of it around. So I happen to be of the school of thought that silver should out performgold and we came of that view strongly in the middle of last year, just about this time. And it has sort of demonstrated that certainly in the last twelve months. And I think that that will continue. So I tend to favor silver over gold these days.

Chris Martenson:  Right, just on a price appreciation and a ratio basis, we’re agreed, and the fundamental supply-demand equation there is also I assume driving that decision at some point on that point of view.

Eric Sprott:  It is

Chris Martenson:  So here we are, and it is 2011; where do you see – if you are willing to do this – where do you see gold going to? Pick a number, 2015 – 2020. I mean where do you see it ultimately getting to? What I am really trying to back around into in this question is understanding when do we know it is time to sell? Like, there is always a time to be long and then there is a time to exit. What does that look like for you?

Eric Sprott:  First of all you can’t tell where it is going to go, because you have to assess events that will happen in the future that have not happened yet. So for example, if we both agreed there is going to be a QE3? Wow, no doubt it quickly goes to $2,000.00. If it is QE4, 5 and 6, it is almost unlimited. So it is hard to identify a price. I just think it is for sure going higher, depending on the actions of the government. But that rate of escalation may accelerate here. When people ask me when it is over, I sort of look at three things: one would be if you saw some kind of exponential move and you just thought that the gold and silver market will become maniacal and you might just say okay fine, it is over, that is number one. Number two would be if governments around the world and central banks of the world started acting responsibly, then they are taking away momentum out of the gold and silver markets. I do not see that happening however. And of course, the third thing, which is kind of obvious, is if they make gold and silver reserve currencies, well you do not need to own them anymore, depending on the circumstances at the time. So those are the three things I kind of look to. The most obvious would be governments and central banks getting responsible. And I just see no signs of that whatsoever. In fact, I almost think that their irresponsibility is increasing as time going on here.

Chris Martenson:  I completely agree. I have several of the same signposts, and I have one other one, which is keeping my eye carefully on the role of the dollar as the world’s reserve currency. If that starts to slip in earnest, that is where I pile a lot of dollars into things, gold and silver being two very obvious choices for me at that moment. So I really need to thank you for your time here. And I follow your writings very closely. I love your missives; they are always packed with information. If people want to follow you, or find out more about the funds you offer and operate, how do they do that?

Eric Sprott:  Well, they can go to Sprott.com and all the things that we write on the various markets. And as you are aware, we have been focusing in on precious metals, particularly silver lately. And we have some pretty interesting analysis of the silver market. We also have given many, many commentaries on the economic outlook over the last fifteen-odd years and most of those articles have been reasonably prescient in predicting most of the things that have happened. So if they go to Sprott.com, all the information is available. If they are interested in the purchase of gold and silver Maple Leafs we have a little web site called Sprott Money where we are involved in that market.

Chris Martenson:  Fantastic. Well, thank you so much for your time today. I hope we can do this again, and best of luck this year.

Eric Sprott:  Thank you very much, Chris; all the best to you.

For more on the rationale for owning precious metals, read Chris' recent report on The Screaming Fundamentals for Owning Gold and Silver

jumblies's picture

Gold/Silver price differentials

I'm looking at the prices of gold bars and their price differentials. Looking at the 1kg gold bar prices at bullionbypost.co.uk I can see that a Metalor bar (£30841) is more expensive than the Umicore bar (£30982). But they are both 1kg, same fineness and have no numismatic value.  They're investment grade bars. So why is one more expensive than the other? (by £141 per bar). 


The Martenson Insider - May 3, 2011

In This Newsletter
  • What The Recent Volatility In Gold and Silver Means
CurtU's picture

A Golden Tipping Point: University of Texas Takes Delivery Of $1 Billion In Physical Gold

This was posted on Zero Hedge last night.  Along with the last week's rise in the PM's could this be the start of mainstream demand...

Per Bloomberg: "The University of Texas Investment Management Co., the second-largest U.S. academic endowment, took delivery of almost $1 billion in gold bullion and is storing the bars in a New York vault, according to the fund’s board."

Transcript for Paul Tustain: Gold Is Sending A Signal That The Monetary System Is In Grave Danger

Below is the transcript for Paul Tustain: Gold Is Sending A Signal That The Monetary System Is In Grave Danger

Chris Martenson:  Welcome to another PeakProsperity.com production. I am your host, Chris Martenson and today we have the pleasure of talking with Paul Tustain, founder and CEO of BullionVault, and a respected gold market analyst and commentator. Welcome Paul, it is a real pleasure to have you.

Paul Tustain:  Well, it is a pleasure to be asked.

Chris Martenson:  Terrific, I would love to start with a brief history of yourself and how it is that you came to create BullionVault and why you did.

Paul Tustain:  Well, I was a Computer Science graduate and I spent about twenty years in systems in the city of London. I built my first business between 1990 and 2000 and I was selling that about 2000. Just as the British government was selling our national gold reserve and that sort of drew my attention to gold for the first time. Then I tried to buy some. The price then was a little under $300.00 an ounce and it was very difficult, very expensive, and perhaps, worst of all, the gold that was being sold to me was unallocated. And I fairly quickly realized that the gold market infrastructure was significantly underdeveloped and that was probably because gold had been on the slide for twenty years and nobody had been investing in it - that was up to about 2000. And, it was particularly underdeveloped for private investors.

Chris Martenson:  But how did you have to buy it when you say buy it? What was the process for you?

Paul Tustain:  I went to a Swiss Bank and it was amusing actually, because the private banker was very insistent that the gold was, or that everything that they did, was all custodian. And so, I dutifully bought gold from them and it turned out that gold was the one exception. It was the one thing which was done on their balance sheets through an unallocated gold program. So, we had to switch out of that, which cost still more money, and eventually ended up with some of the big gold bars.

Chris Martenson:  Hmm, so all right, so you are trying to get gold in this market and first of all, there is something not quite right about it. Allocation, for people who are not familiar with it, means that when you own gold, there is a bar, it has a number on it, and that bar is fully “allocated” meaning you are attached to it. There is a legal connection between you and that bar. “Unallocated” means somebody says “hey, I have just sold you some gold, and it is mixed in with all these other people’s gold, and I may or may not be able to tell you what numbers are on the bars or anything specific”. Is that about right?

Paul Tustain:  It is about right. The key difference between the two of them is that unallocated gold means you are a creditor, you are on the balance sheet of the provider, which means if the provider goes bust, you lose your gold. That is the key thing, the key difference. Allocated gold means your gold is stored in a custody relationship, which is fundamentally different in law. You own it outright, you pay for the service of having it looked after in what is called safekeeping, and if the provider were to go bust, you continue to own it outright. And so, the liquidator has to give you all your property back, not just you know, six cents of the dollar.

Chris Martenson:  Excellent, now that is a very important difference. So you recently released a video presentation that was titled, Gold, Where to Now and it was detailing your outlook for gold. We will get to the specifics of that in a moment but first I want to step back here. Introduce our listeners to your thesis for why investing in precious metals is a good idea. You know, what are the important fundamentals to be aware of here?

Paul Tustain:  Well to me I think the most important fundamental with gold is just how rare and stable the gold supply is. I think many people know now, all the gold in the world would form a cube of about twenty meters in edge, and that would not quite cover a tennis court. People love saying how useless gold is, and of course, it is more or less useless in industrial terms. But yet, the same people happily pay for something with a hundred dollar bill and how industrially useless is a piece of paper? So I guess the point in terms of the fundamental quality is that both money and gold are industrially useless, but they have their very good social use, which is holding value, which is essential to trade. But they only work while they are in very stable supply. And of course while currency is fairly regularly corrupted, gold cannot be, you just cannot print more of the stuff.

Chris Martenson:  Right so central banks have famously, were on record during the London Gold Pool period of trying to manipulate the price of gold after Bretton Woods was sort of falling apart. And then there were notions of calling it a barbarous relic and all of this, but despite all of this rhetoric, central banks seemed to have held on to quite a bit of their gold through that process. And I am a big believer in following what people do before I follow what they say. Would you, I mean, is it fair to say that central banks are still holding gold as a monetary asset and for no other purpose?

Paul Tustain:  Well, I think that is about right. I would say that perhaps ten years ago, particularly the European Banks, under the Washington agreement, had agreed to dispose of some of their gold reserves which in European currency terms had become irreverently small as a part of their currency base, so they were selling it. Now that became increasingly embarrassing for them because of course, all other currency assets and foreign exchanges were falling in value while gold was rising. So that has pretty much fallen into disuse now. The European Banks are no longer selling and of course, the Far East is buying, Russia is buying, the oil exporters are buying and so if you would take the gold used in central banks as a whole across the globe, you would find it was pretty stable at around about 30,000 tons. And there is this gradual shift, which has now slowed to a trickle from west to east and with east buying, they are really buying new supply so now what has happened is the Central Bank gold holdings has started to increase again.

Chris Martenson:  Right so this is a probably a pretty important trend. I mean that is a seismic shift going from being dis-hoarders to re-accumulators of gold at the Central Bank level. You started buying below $300.00; here we are at $1,400.00, bumping into $1,450.00 today I believe at this point. So what are the other trends that were in play through that time to drive us from $300.00 to $1,400.00, what else was in there besides this shift in attitudes at the central bank level?

Paul Tustain:  Well if you look at the data again, the key shift has been the change in the demand for gold from private investments. So if you wind the clock back about eight years, you will see that private investment was probably bumping along at 400 tons a year. Now, that is running around about 1,300 to 1,400 tons a year. And last year it overtook jewelry demand for the first time, so that means in the course of about eight years, there has probably been about a 10,000 ton increase in private reserves which has taken it up to more or less the same level as public reserves or central bank reserves of gold. So that has been a seismic shift, as you put it. And of course, at the same time, we are seeing monetary corruption in all the major currencies. One of the things that I tend to think of here is that this word protectionism from history, from back in the 1930’s, which is widely a dirty word. But protectionism was all about raising import tariffs or barriers to imports so that you could protect local jobs and the local economy. Essentially, devaluing your currency is exactly the same thing. You devalue your currency to raise a price tariff against imports. And that is what has been going on competitively throughout the Western World for the last, technically, for the last six or seven years. So you have got the currency, all the major currencies of the world, in a race to the bottom, all being corrupted by increasing supply. Then you have got gold just sitting there, expanding its supply through mining output at a rate of about 1 ½% per annum. So it is a much more stable monetary store than the currencies that we have had.

I think there is another point, which I quite like to mention which is what has happened over a twenty-five year period, from about 1980, which of course, is what I call the golden age of the microchip. Now the microchip was increasing productivity around the world at something like 4% per annum, which meant that all other things being equal, we would have seen the cost of goods reducing by something like 4% per annum, but during that period, the central bankers had a pretty easy mandate to control inflation. Usually, it is only between one or maybe two percent in the UK and that gave them something like six percentage points to play with, and that meant that they could expand the monetary aggregates fairly freely and yet not see inflation because computer microchips were lowering the cost of production everywhere. So that monetary expansion basically all got frozen into typically long-term bonds, which were very attractive, because interest rates were falling and inflation was low, and that has produced a ton of bonds, basically a hundred, trillion dollars worth of bonds, which are attractive only while you have got this low level of inflation and a low level of interest rates. But the golden age of the microchip is probably increasingly running out of steam now, and what you are left with is a habit of producing monetary excess at the rate of 6%. And in the meantime, you have got this great pile of money stored in bonds, which is becoming unstable.

Chris Martenson:  Well the bonds in aggregate, kind of depend on getting paid back in order to have their value. And in order to pay bonds back, you have to have a future that can deliver the goods there. And so what we have baked into our giant bond portfolio, is an assumption about future growth and economic growth, which has not really born out in the past number of years and now there is an enormous set of wrinkles in that story with energy, oil particularly, etc.. But even now, if we look at what is happening in Japan, with the world’s third largest economy, basically is going to downshift I think from third into reverse, rather suddenly. The growth story gets difficult so it really does complicate the expansionary monetary policy. And coupled to that, I think the debt policies of various governments all around the world that got quite used to easy times, being able to spend beyond means year after year after year, that kind of got baked into expectations, institutional philosophies, even investment philosophies, all of that. So, all of that has to be rethought, and I have always considered gold was going to be one of the early barometers to sort of maybe call the charade for what it was. And so that is part of the message I received from gold is it is telling us something and it is telling us something about both past policy and what we are likely to experience next. How hard is it going to be for us to shift from that, from the past twenty years of how we have been expanding into whatever we have to do next? Which I assume cannot expand nearly as fast. How does that work for us?

Paul Tustain:  Well I am not sure that it does work. I am not sure that it is possible which is why gold is like a beacon, it is a signal that the monetary system is in grave danger. I agree with you that you have to find a source that is going to match or exceed the rate of growth that we had in the microchips golden age, but I do not see anything that is capable of producing that. So what you end up with is a very high debt economy, which we have clearly got. And I think it is worth looking at those numbers in terms of public debt. The U.S. Public Debt, I am going to talk about the U.S. although the UK is on broadly speaking, similar terms.

Chris Martenson:  Right

Paul Tustain:  The U.S. Public Debt is currently somewhere around fourteen trillion, that is the government’s debt: fourteen trillion dollars. Now, the schedule is an interesting thing in itself because this is anticipating 4% per annum, GDP growth in each of 2011, 2012, 2013, and 2014. I do not see the engine of that growth, particularly not with falling house prices. But if they get that growth, and only if they get that growth, they could hold the deficit down to budget deficits of about eight hundred billion dollars a year. That means in about eight years, on schedule, we should hit a twenty trillion dollar public debt in the United States. Now, when numbers get that large, you have to start doing some transformations to make them make sense, well at least I do, to make this thing make sense to me. And the way I do that is, I assume that twenty trillion dollars that I just assume, “Okay, what would happen if we had to pay interest rates of something like 6% on that?” Now that is not an unreasonable rate, 6%. It is historically reasonably typical and 6% of twenty trillion is 1.2 trillion dollars. Well if you divide that by 120 million U.S. households, you come up with a figure of $10,000.00 per household. Now that is the tax bill just for paying the interest on a twenty trillion dollar debt. Now the 6% assumption I used in that needs to be compared against Paul Volcker’s chosen rate when he decided to get inflation under control. He took interest rates up to 18%, which was about 4% above the then level of inflation. It just shows you that 6% is a very conservative assumption, but it is completely uncollectable. And what this means is that when you have got a public debt, up to the twenty trillion dollar level, upwards to those sorts of numbers, it becomes effectively impossible to run a meaningful counter-inflation policy. So I think what you are going to see is evermore quantitative easing, and I think it will be very difficult to exit. There is nobody to buy the debt, which is being printed by the government. I think it is very difficult to exit it and steadily things get worse and worse.

Chris Martenson:  So, in 1729, Voltaire said that “paper money eventually returns to its intrinsic value: zero”. And from this recent commentary here, it sounds like what we are on is, we are on a path towards basically destroying the currency because we are in a box at this point in time. You know we have to print up this amount in order to keep the game going but if we print up that much, what we are going to end up doing is ruining the currency. If we do not print up that much, we risk sliding into watching that debt go into a default scenario, a cascading default. Honestly, between the two, I think that a default is feared more in the U.S. than an inflationary outcome. Everybody fights their last battle I guess - the great depression is what we are fighting. Even though inflation is possibly the great monster; in deflation, that’s your opportunity to rinse out all the bad decisions you have made. Inflation is I guess, your opportunity to kick the can down the road. I think we are going to kick the can down the road, most likely. Is that your assessment, if I characterize that right?

Paul Tustain:  I think it is very likely because I think it is almost an inevitable consequence of the modern construction of democracy. I am a huge fan of democracy but I do think that democracy needs to be strongly constituted. And the sad problem with the way it is constituted both in Europe and in the United States is that all elections are fought at the boundary of responsible debt. If you do not go up to that boundary, if you try to offer austerity to an electorate, the other guy looks far more generous and he gets elected and for all your good intentions, your monetary discipline is consigned to the dust bin. That is the problem and that is what sort of leads you inexorably towards an inflationary future. But in fact, the point that I have been trying to make is that what we will get, what we will hear from governments as they print money, is that it is a relatively modest amount of money that they are printing. And in fact, it is, that is perfectly true. But it hides the thing that is really going on. And this is the thing that really worries me. When you just print even a little bit of money, if you just print whatever it is, seven hundred billion dollars, or whatever, it sounds modest next to coins and notes of some fifteen trillion dollars in circulation, but it sends a very powerful message to savers. Now if you look at that monetary stock, it has got this time element built into it. You think of the hundred trillion dollars of bonds, they are basically spaced out over broadly about a twenty-year period. Most of that money was frozen into the bond market freely by people who owned the debts. But they basically had this signal from QE that it is no longer safe to put money out to twenty years. And indeed, you will see that the likes of PIMCO have basically withdrawn all their money from U.S. Treasuries because they think that it is so fatal.

Now what that means is that you give the markets that signal that you are going to print money whenever the going gets tough, but eighteen-year bonds or twenty-year bonds are all still eighteen and twenty-year bonds. And the clock has to wind down, allowing those bonds to get to the short end. And you see steadily, and this of course already happened in Greece, you see a mountain of money, as it gets redeemed, even a twenty-year bond which gets redeemed, is going to be re-invested in the short end. Nothing goes back out to twenty years. And so you get this hump of money at the short end and short-end money behaves very much like cash. That is why it is kept at the short end; you can sell a short dated bond for very near its cash value, its nominal value. You cannot necessarily do that with a long-term bond. So with this pile of money at the short end, you have got, instead of having twenty trillion in coins and notes and near-term money, you suddenly go up to one hundred and twenty trillion in coins and short-term notes but getting there, is going to take fifteen years. And that is the point. The switch has been flicked and it is not possible to un-flick it. So that shift to the short end is clearly happening. If you look at quantitative easing now, it is essentially making the financing of bond purchases very cheap but the bonds themselves are still, lets say in the fifteen-year end, anything from seven years up, which is basically in the quantitative easing stock. But they are only being bought by banks, because the banks can put them back to the central bank because the central bank has got a mandate now to buy illiquid long-dated quality bonds. So that is where they all end up, everyone connects it and goes back into cash which is provided by the central bank when it buys these long-term bonds and converts all the holder’s money back into cash. So it creates this mountain of short-term money. And this is why you get inflation and deflation at the same time.

What you have got now, is an increasing glut of short-term money chasing all the things that people buy with short-term money, and that seems like your shopping basket or the gasoline for your car. But you have got a shortage of long-term money and that is what you would use obviously to buy a house. So your house, there being a shortage of money, is falling in price but the things that you buy in your shopping basket, they are all increasing in price. So the inflation has switched round from where it was in 2005 but it was the other way around as all of the money was swept out to the long end to finance house purchases. It has switched round now and it now both ways, it hurts people who have savings. Their cost of living goes up, their assets go down in value, and their standard of living steadily slides as they compete on world markets for their commodities, their food, their clothes and their oil that are the compulsory purchases of life. And for which you are competing for, on international markets, with Asians who now are sitting on a stock of two trillion dollars.

Chris Martenson:  This is a great idea, I had not quite thought of it this way because I get in fairly routine - arguments is perhaps too strong of a word - but debates, intellectual debates and writing contests as it were around this whole inflation or deflation. As if it is an either/or and I say it is yes, because I can point to both happening quite clearly at this point in time. And if you take the CCI, the Continuous Commodity Index, and run it back ten years, and start drawing a line under it when it takes off in 2002, today it is a pretty straight line. And it is at 14% per annum over that period of time. And so that is in periods of a recession, all kinds of things. The deflationists look at the large monetary aggregates or credits and say look, both are falling, therefore, ergo by definition we are in deflation. I say “yeah but look at all the things that are inflating” and the argument that I have been trying to introduce is that Government Bonds behave like money. But, I had not quite sectioned them into the short versus the long, I love that distinction.

Paul Tustain:  You see what is happening, it is sliding, the long-term money is sliding slowly towards the short-end and it looks to me like it is an unstoppable journey. It will get there but it will not get there tomorrow. The clock has to wind down on that long-dated debt and it all piles up at the short end. I mean I do not know if you know the story from Germany when they had their hyperinflation back in 1923, they started printing. That made long-dated debt extremely unattractive. And then it got to be the extreme, so the long-dated debt starts to wind down, there is plenty of it, they have financed their First World War on long-dated debt, and it started to wind down. And it all piled up at the short end. It was the same effective combination of the Government, the central bank, and the banks. They were doing it in much the same way as we are doing it now. But as the money starts to pile up, everybody was looking for short-term wealth stores rather than long-term ones because fearing inflation, through printing; they were worried that holding their money long-term obviously would lose value. And then it got really extreme because in the final analysis, you had money in current accounts, which you would think of as cash, but it was not cash, because it took five days to pass through the banking system. So that the seller of something could use that money he just received a check for. And five days was too long. So all people who had current accounts would go in and say I need the bank note today. So you ended up with a twenty-year stock of money all held in bank notes. Everything had compacted up to the short end. And the game was ‘pass the parcel’. What you would do, you would not ever go into cash, unless you had already realized, you had already decided, where you were going to spend that money. And you would pass that cash on to the next person, who had also decided where they were going to spend that money, so, the great big piles of cash being passed from person to person, for very short periods, and that is how prices went through the roof. Effectively, the entire monetary stock was being turned over within a period of about three or four days because nobody was holding onto cash.

Chris Martenson:  So, to get inflation velocity of money has to increase, I love this idea that first the money has to slosh slowly, you know, like we have just tipped up a bathtub, right? It is half-full, and we have to wait for it to slosh down to the short end where it all piles up and then the velocity is just going to be increasing as it goes. And what you have suggested here is that, it is a process, it is not an event, and that process has been initiated. That yes, the event, we flipped a switch, QE did that and the money is currently piling up, you know heading towards the shallow end of the pool here, where it will stand up into a giant wave and velocity will increase in all of that.

Paul Tustain:  That is right.

Chris Martenson:  So, in your mind, that process has kicked off, let us get to the heart of it then. What does this mean to gold and when? I think you are on record, you projected a price of gold for it is $3,800.00 per ounce, how did you get there? I assume we have just talked through some of the logic. But tell us how you get there and when. You can use a range if you want.

Paul Tustain:  Yes, I am going to be a little bit picky because I did not really, I do not predict a target in the way that most people do. What I am interested in doing is coming up with a reference price where there seems to me to be some basis of saying that there is a fundamental value to gold at this level. And depending on where it is, with the respect of the current price, I will either buy or sell. Anyway, the calculation I used was based on risk and reward scenarios, depending on inflationary outcomes. All of which are uncertain. There has been a probability in it, there is a bit of net present value calculation in it. But they are the sort of things which insurance actuaries use when they are working out the value of risks. It is very easy for anybody who is reasonably numerate to see how the calculations work and in fact, I put this on a spreadsheet so people can download it. Anyway, I used this calculator in primarily two different scenarios. And the first thing I did was I took historic economic data, which goes back over about 200 years thanks to a very good book by Professors Reinhart and Rogoff –

Chris Martenson:  Uh-huh, it is a great book.

Paul Tustain:  --that you may have heard of. It is called “This Time is Different.” And it has got 200 years of data to play with. And I used that data as best I could, to evaluate the probabilities of different levels of currency devaluation over the coming fifteen years. And that was a scenario used in the raw data from Reinhart and Rogoff, which resulted in me coming up with a net present value for gold based on risk reward, of $3,844.00, which is a number that everyone is talking about. But in many ways, it was the next scenario which I did, which I thought was more interesting. Because I had just did the risk probabilities to force the calculated value down to the current price of somewhere around $1,400.00 and what jumped out then, was that to get down to about $1,400.00 you have to be incredibly generous on future inflation scenarios. And you have to discount the hyperinflation risk effectively to zero. And I think that this is the error that the markets are making. The risk of serious inflation is much, much higher than people realize. People always get probabilities wrong, it is what caused the subprime crisis, if they had never experienced something directly, they tend to think the probability is zero and that is wrong. I think the market has got our future inflation scenarios risked all wrong as well. And once you get to see that picture of what is happening to the debt mount and how it is steady shifting to the short end, the risks become very obvious and very material. So I thought that was the interesting part, the fact that the market, at this price, seems to be discounting zero risk of hyperinflation. But when I look at the history and the data, I think that risk is not zero, in fact, in my $3,800.00 valuation, I put the risk only at about 5%, and that is pretty tame next to the historical scenarios of people who started printing money and who always find it very difficult to stop that. So I think $3,800.00, if you look at the presentation and if you look at the spreadsheet, I think you will see, they are largely cautious projections of data that I have used in coming to that number. And they are based around this abuse of our currency systems by principally quantitative easing of what that has done.

Chris Martenson:  Cautious? 5% hyperinflation risk over fifteen, that is not cautious, that is beyond cautious. You could make a case to make that number much higher. Maybe add a whole zero to that. Given current policies, it is phenomenal. The amount of printing that we have seen, I do not know, has historical precedent because of the nature of the fact that a reserve currency is involved in this one.

Paul Tustain:  Well, I think that is right. I agree with you, I think I am being very cautious when I talk about a 5% hyperinflation risk. But if you put those, all we are doing with this number $3,800.00, all we are doing is saying, look I have got a choice: I can hold my $1,400.00 in cash, or I can hold an ounce of gold at the current price. Looking at all these risks and trying to pass things forward by ten or fifteen years, which is the better decision? And if the probability of hyperinflation, is anything like 5%, you can take it from me: the best bet, is to hold in your hand an ounce of gold than $1,400.00, because essentially, your $1,400.00 are doomed to be worthless.

Chris Martenson:  Right, this is a really hard concept for people who have not directly experienced it, and I am sure, even for myself, but reading the history books and doing the best I can, having read “This Time it’s Different” and studied a few hyperinflationary periods, they just have a habit of doing what they do. They are like fires, they burn and at the end of it, everybody wakes up and they have a lot of zeros on their currency that they do not recognize. And it has happened, it has happened a lot. In fact, I would go so far as to say that it is something that you should expect to happen, not something you should be deeply surprised by if it happens. It seems to be rather the terminal fate, as Voltaire said, of almost all paper money. There is some dynamics there, which just seems to reassert itself through all generations, through all moments of economic history, whether in the middle of an industrial boom or whether we are in the middle of a depression. These things seem to just sort of raise themselves, again and again. 

Paul Tustain:  Interestingly, it is not just about seaming because, one of the great things about the Reinhart and Rogoff book, in fact I do know if you know Neil Servison, who is a Harvard Professor and a Scot originally, but he used to be over here. But he has done a little TV work and he did a very good summary of the Reinhart and Rogoff book. And when you look at it, it is not just this sort of thing that seems to come out of nowhere, it is very strongly likely, ones public debt, exceeds 90% of GDP. That is the sort of magic number. You get to 90%, there is no way back, and that is the number that the U.S. is going through pretty much as we speak. It is also the number, which the UK has gone through; all of the PIGS are going through it as well. They are all going past the 90% debt to GDP ratio. Obviously, Japan is miles past it already. It is up to 200 and something percent. There does not appear, in the historical analysis, to be any great likelihood of getting back from that level of debt safely. So it is not just about seeming to be something which turns up, there is this strong evidence that above 90% debt to GDP, you will experience either a cataclysmic default - which is only really going to happen if you have got a rock solid nerve backing like gold currency or something like that – either you’re going to experience default or you are going to experience some form of very serious inflation.

Chris Martenson:  Right, and that risk is one that I have actually had my eye on for quite a while. It is part of the reason why I started investing in gold, also silver. Although silver has dual characteristics to me, I love its industrial applications. What are your thoughts on silver in this story?

Paul Tustain:  Well, I am a bit of a, I do not really know silver at all. We started doing silver bullion vaults about eighteen months ago. And I do not really know silver, I just went out and bought some and I ran with it for about eight months, and it seemed to have gone up an awful lot by the summer so I sold half of it. I am glad I only sold half of it, because it has gone up an awful lot faster since then. So I do not really feel like I am a silver expert. The big difference for me, for the two of them, is that gold has a very large and stable base. Now as you know, the silver inventory, is much smaller. So because it tends to be used up, the silver inventory can pretty much be consumed by willing investors very quickly. And the storage story of the moment is that the vaults, the bullion vaults are all completely full of silver bars, most of which are privately owned or ETF owned. And that can produce very sharp spikes. So I think silver is always going to be more volatile. I think there is also a psychological element which is that, silver tends to be more attractive to the general investing public. And that is because they do struggle to buy something as small as an ounce of gold for $1,400.00. And just somehow the silver seems more substantial for your money so what we see here at Bullion Vault is a mixture but probably I would say the bigger sums of money tend to be going to gold and they tend to be long term and they tend to be. And one of the things that we see here is a lot of bankers buying gold, which is sort of mildly surprising. None of them would have bought it before 2008. But we do see quite a lot of them buying it, and they sort of get something, which they never understood before. Silver is just, to me it is a harder thing to understand. There are more variables and the problem is certainly more volatile, and I am just glad I did not sell all the silver I bought last year.

Chris Martenson:  [Laughs] I’m sure. I think it is over $38.00 right now, it is certainly on a tear. But it is a different metal and it has got its own dynamics and characteristics and I like it for a bunch of reasons. But sticking to gold for a minute: I still run into people who have essential zero exposure to gold or precious metals, and so I am looking for your advice on how investors should build a position in the precious metals. Now for me that meant going out and buying some physical coins because I wanted a core portfolio of actual physical metal. And then I started dabbling in miners and then I actually have a BullionVault account and then I started looking into allocated storage in a variety of places. So I started to spread things around. My core started with physical metal but how do people get started in this. I mean people thinking about physical versus allocated, places like BullionVault, maybe ETF’s mining stocks, all of that, how do you get people started in this and what specifically does BullionVault answer to and help remedy in that story?

Paul Tustain:  Well it seems like there is about twenty questions there Chris. I will try and remember some of them anyway. I am obviously a bit biased because the way BullionVault came into existence; it was essentially, exactly what I was looking for. So it obviously suits me and I am pleased that it suits quite a lot of other people, too. Personally, I do not like coins. I have three or four ounces at home, my problem with coins is, well is three problems really. There is the cost, retail gold tends to have huge markups and I want to buy gold at the price I see published on the internet or in the paper and not pay a 7% premium to a dealer. Secondly, there is insurance, I do think that bullion that you own should be insured and it is very, very expensive to insure gold at home. So before you buy any coins, my feeling is that you check out the cost of insurance or try to get your broker to give you an insurance quote. But most of all, by far the biggest problem I have with coins is the potential for exchange controls. If you think of all the places that have broken down in our lifetimes, places like Argentina or Zimbabwe, or Portugal; you end up trapped behind exchange controls. And usually, with intense regulation of gold, which means you have got to hide it very well and you cannot use it at the time of its maximum utility to you as a saver. So my opinion, the best place to own gold is safely at arms length. And that is probably why so many of our customers choose to vault in Switzerland. I think you mentioned ETFs as well, I do not have a big problem with ETFs, I think they are quite useful. They are not ideal for me; I do not particularly like my gold being controlled through a trust. That is probably my main objection. Trusts tend to wrap you in a jurisdiction where they are set up. So if a trust deed is drawn up in London, then it will be subject to British Law and I do not particularly want to worry about what a challenge to that trust deed, whether that might come from a government or a trustee or anybody else, I do not feel the need to have a trust deed between me and something as simple as gold. I just want to own the gold, period. We spoke briefly about unallocated before, I would not touch unallocated gold, the whole point of the gold investment to me is that you are off balance sheet risk. So I am only interested in allocated bullion and that is the only bullion that we deal at BullionVault.

The other thing, from the point of view of ETF, I think they are a little bit pricey in the storage costs. I think .4% cost of carry which is very typical is, well I know it is about four times the wholesale rate, we do take a small margin out for our storage but we are charging 12 basis points, not 40, so we are less than a third of the cost of storing. But the main issues for me would be to own physical bullion in a country which does not have a big trade deficit or a big budget deficit. I would like to be able to go and claim withdrawal if I needed it. But what is more useful to me is to be able to sell it in the form, which is accepted on a liquid international bullion market. And the reason for that is quite simply, I will not have to accept a discount when I sell. I will be able to sell at the world market price in a legal marketplace and get full value for what I have been so careful to buy and store, not ETFs, that is coins,

I think you mentioned mines. The difficulty mines have been having and you can see this very clearly on the if you have got a five-year price chart for example of a gold mine, certainly most of the majors, the difficulty is the political cost which has steadily built up on the mining production. So for example, if you find some gold now or if you are trying to bring some mine into production, you are going to get that extraction license, you are going to have to bid up things like, you are going to pay for schools, hospitals, roads. You are going to have to set a huge budget aside for re-greening a landscape and I suppose that gold mining has deserved that over the years because it has left many landscapes poisoned and utterly ruined. So I do not think that we can oppose that, or the politics to oppose that. What it means is that governments will tend to allow or demand for an extraction license, ever more money until the cost of production is pretty marginal. And what that means is they have ratcheted in very high returns for the government and there is probably only two or three hundred dollars left for the miner. And because the costs have been ratcheted in, any dip in the bullion price, rarely impacts the profitability of the mine. In fact, it throws into loss. I was at the LBMA Conference in the autumn and the all-in cost of exploration and extraction had risen from about $350.00 eight years ago to $950.00. So this is taking all sorts of mines into loss-making territory. If it were not for the fact that the gold price had moved so far forward, and the fact that if you look at the share prices, if you look at the dip in the gold price in 2008, It was greatly amplified in all the mining stocks to the point where if you look at them now over five years, even on a massive bull market for gold bullion, the mines underperform bullion. All of the major mines underperform bullion unless there is one or two that have just gone into royalty arrangements and they still out perform - just. But bullion, mines are supposed to be a geared play on bullion. They should have fixed production costs and variable revenues, which vary with the gold price. But it turns out that what they have got is very, variable production costs. Because these extra costs keep on being applied by governments on people who want to extract gold from the ground. So that is the problem with mines, and it is in the data, you end up with the share prices as I say over five years and you will see the un-geared, safe option has out performed the geared play which is very strange. What else did you ask me about? Gee, I have done some coins, and I have talked about . . . you asked me about BullionVault itself.

Chris Martenson:  Right. I want to find out a little bit more about BullionVault and in the interest of full disclosure, I want anybody listening to this to know that not only am I a customer of Bullion Vault and have been for a number of years, that my website has an affiliate relationship with BullionVault. Meaning that if somebody clicks on a link on our site and goes to BullionVault, funds an account, and then buys gold, some, a little bit comes back and helps support our efforts. And this does not add any cost to anybody on their end but it is a wonderful program to help support us as well. And it is something I believe in. I truly think that enabling people to get into gold in a very liquid, very facile, very easy way where you can actually do it through the Internet as well and see what you are holding. It solves a lot of problems and particularly the jurisdictional pieces you mentioned, the insurance pieces, making sure it is allocated, having it in custody, so that you can avoid any sort of legal entanglements should there be some sort of trouble with a parent company. All of those are elements that I look for and needed to see in any arrangement that I would get involved in. Because I think, it is the safety of my holdings is paramount to me and - is there something that I have left out of the BullionVault story in there that is really important?

Paul Tustain:  Well, it was very kind of you to say all of those things. We just like to be very simple and very efficient and that is really what the BullionVault model is. Just to summarize, we have got a deep stock now of professional market physical bullion stored in our vaults and it is owned directly by about 20,000 people. And of course, you did not mention the exchange. These holders of gold, they all compete on online exchange to buy and sell gold and silver between each other. And that keeps the pricing very, very competitive, both for the buyers and sellers. And of course, we keep our own stock in the vault too, and we offer it for sale on that exchange. And if we are cheaper than all our customers, people will buy their gold from us and then we simply reload the new stock from the professional bullion markets. So it is fairly seamlessly integrated with the deepest bullion market in the world and it acts basically as a window to private investors onto the professional bullion markets. So that is pretty much it, obviously you have to pay your money up front, usually by bank transfer, but then you are online and buying your gold, and most people own physical gold, usually in Switzerland, which is our most popular vault. They usually own it the day after they find our site and sign up. And then the following day of course, they see their gold on our public reconciliation, which proves the gold is there and that it is accounted within our complete stock, and they can get their reconciliation record downloaded automatically to their computer every day, which is a bit like a daily gold balance certificate for them. But I do not think there is anything like it anywhere else in the world. Obviously, we have been carefully vetted by the World Gold Counsel too, and we are now the only recommended retail investment bullion service.

Chris Martenson:  Oh, absolutely and then just to be very clear, if somebody wants to take possession of their gold, they could do that.

Paul Tustain:  Yes, they can but it is worth saying, we are deliberately designed, not to be a route for gold in your hand. Gold in your hand is what causes retail gold to be so expensive. If we put into somebody’s hand a large number of coins or even full bullion bars, we have to go into a lot of expense in terms of entering money laundering and security. So you are allowed to, but we charge a fee for both. The current position is that the fee for taking possession of the 400 ounce bar, is 2.5% and the fee for taking possession of small coins or small bars is 7.5%. And that takes us up, that is beyond just slightly above the cost that you would pay if you went straight to a coin merchant. But that with almost all of our investors - so far we have done four deliveries into physical possession. What almost all of our customers want to do is invest in gold, hold it remotely, typically in Switzerland, and then they expect to sell it on that main market. It is worth; perhaps I should mention ‘good delivery’ and how good delivery works. The reason the professional market is so efficient is that the bars, which they use, are manufactured by a closed list of refiners. They are then sent directly into a closed group of vaults, which are called good delivery vaults. And then from there, as they are traded between the professionals, they only pass between those accredited vaults and they always move via accredited couriers. And the effect of that is that there is a full audit trail of where every bar has been and it means that on a spot sale, you simply deliver one of those bars to the buyer’s vault and he immediately pays you in full. Now, that just does not happen, at least not in the same pricing, if you go to a retail coin merchant. So what we are trying to do, or what we are doing for people is we are enabling them to participate in that incredibly efficient delivery and very safe system, which lets people get paid very quickly. That is the primary source of the savings people get on BullionVault.

Chris Martenson:  There is a trust factor in there as well so I am pretty comfortable buying coins because I am almost positive I could spot a fake by myself. But a bar, uh-uh, there are a lot of ways you could fool me with a bar. There is a very sensitive set of assays to figure out if it is a fake or not with a drilled core or maybe these tungsten things we have heard about, who knows. So again, if you are trading in larger amounts, I just cannot imagine how you would do that outside of the good-for-delivery system. That part would be mysterious to me and it would be fairly complicated and fairly intensive I would think.

Paul Tustain:  And worrying, permanently worrying. But in the good delivery system, no false bars have been found in anyone’s memory. So, they do not circulate. Some people get worried about it; I know there has been a lot of writing about tungsten bars. What happens with most gold, just so you know, there is a permanent check on the quality of the good delivery system. What happens, about 60% of gold production eventually gets converted into jewelry. And quite a lot of that comes out of the good delivery system. So a standard size, 400-ounce bar would come out and actually be converted probably into kilo bars, which would then be sold to jewelers, for jewelry manufacture. Well both that process while producing one-kilo bars and the subsequent working of those bars, you could not work a tungsten bar. No jeweler would be fooled by tungsten. It is very difficult material to work with and gold of course is famously easy to work with. So the fact that these bars are always parting out for good delivery system and into industrial use, so I use the word industrial loosely there because it is primarily for jewelry production, means there is a very tight control on the fact that this system is very, very reliable indeed. And of course, there is a guarantee on it. So for all the people who know that bullion has never left that chain of integrity, there is a chain of claims that exist. So when we buy good delivery bullion from a bullion bank and they deliver it, if there is any question mark over that bar, it goes all the way back to where it first came in, which of course is the refiner. And the refiner is accountable. So there is not only our funds guarantee the quality of the bullion, but so does the chain of integrity. So for me, it is obviously, I would not be very comfortable with several thousand bars in our vaults if I felt that there was a danger of some of them not being right.

Chris Martenson:  You know, I love this helping demystify what goes on in that world. Obviously, it has been operating for a long time, there are safeguards, there are mechanisms and processes by which chain of custody and quality are both assured all the way throughout the process. And that is really an important thing. Particularly for people who are dealing with fairly large amounts of money. This is just an absolutely vital piece. So, you know, gold is not as easy as just picking up the phone and buying 100,000 shares of IBM, which has its own set of processes and other things to insure safeguards of your money there. But it sounds like there are ways to do it very safely, very easily, and fully involved has sort of mastered that in some way.  

Paul Tustain:  Well, that is what I hope anyway. I think that is the case.

Chris Martenson:  Well fantastic, so is there any question I did not raise or forgot to ask? Is there something else here that we should know about?

Paul Tustain:  Well, sometimes I get slightly frustrated by people who think that the world is going to melt down entirely. And if I am allowed, I would like to finish with a short story.

Chris Martenson:  Please.

Paul Tustain:  About a guy I met. Can I do that?

Chris Martenson:  Yes, please.

Paul Tustain:  This story comes from Portugal, back in, around about 1984 and if you know anything about Portuguese history, what happened to the Portuguese is their society essentially melted down in the 1970’s. Their politics, their budgets were all in a mess, their politics swung from extreme left to extreme right. The escudo, which is their currency then, rapidly devalued through inflation and the process pretty much wiped out the Portuguese middle classes. This meant that Portugal was in incredibly cheap place to visit in the early 1980’s when I was about twenty-three or twenty-four I guess. And a little group of friends, we used to like playing golf and bridge, we use to fly to Portugal on the Portuguese National Airline, which was TAP. And the Portuguese National Airline never had any Portuguese people on it at all and the reason was, that no Portuguese people could afford the plane ticket. So TAP was busily marketing to tourists from London, from Stockholm, from Paris, from Bonn and we were flying down to southern Portugal to play golf and in our case, bridge as well. Anyway, I had been doing this for two or three years and never had seen a Portuguese person on the plane. And I was sitting there one day when a 50 year-old guy was sitting down next to me and looked very, like he was doing very well. And the air assistant came up and asked him, well what would you like to drink, and he answered in Portuguese, which was a huge surprise to her because she had not had a Portuguese customer for years. And he was a very engaging traveling companion and we chatted for about two hours during the flight. And this guy has got a lesson for all of us because, in 1970, he had a concrete business. It was not a very big one, it was sort of you know, took after a small town in the south of Portugal. And he was making a bit of money but he was not a wealthy guy. And then one of the big local, regional companies decided to buy his business and he thought about it and then he thought well I actually, do not like the political or the economic situation here, it looks unstable. So he took the decision to sell. And he sold the business and he put all the proceeds into gold in Switzerland, mainly because he was not quite sure what to do.

Chris Martenson:  Uh-huh

Paul Tustain:  Well, for the next ten years, the escudo went through the floor and of course gold, because of monetary concerns all over the place, it went up about 15 times in real terms. And that is in dollars, not in escudos. So at the end of 1980, this guy was so wealthy he went back to Portugal and he bought out the company which had bought him, with lots of change left over. So he got himself a 10-times bigger company and still got a whole lot of money in the bank. And then of course what happened is, a building boom took off because Portugal was recovering. So this was the guy who was taking concrete to all the villas that were being built in and around the south of Portugal when the area called the Algarve. And the reason I like this story is because the total failure of Portugal in that period, did not mean you needed a gun or a stockpile of food, there were still people driving around in Mercedes, just not very many of them. There are still businesses in Argentina for example, in 2001 when things melt down, there are still people, and it is a normal thing all over the World. There are a small proportion of wealthy people. And the currency devaluation in which I think we are going to experience, we should all view as a massive opportunity. Because if we understand it, we can effect the same switch in position from being relatively modest businessmen, to being one of the local tycoons, simply by sidestepping the slump that goes with currency devaluation. And then stepping back in when things improve. We do not need a gun and we do not need a stockpile of food, the best thing we need, is something like gold. I am not saying it has to be gold, but something like gold, which we have put out of harm’s way, that we can call on again when the time is right to invest in our local economies where we live. And create jobs for people and grow businesses all over again, perhaps for the second, or third, or fourth time. And so that is why I like the story, I do not know if that was useful.

Chris Martenson:  Well, that story is almost my story but much more modestly in my case. Gold to me has always been a transition element. It is helping me manage the transition from a love and fascination of all things paper to some different reality, and we will get there eventually. And gold is my way of sidestepping. But it is not a one-way be-all dead-end kind of thing for me. It is definitely got to come back out and go out and do its productive things, but I am still in sidestep mode at the moment personally. There is not anything hugely compelling to me in the landscape but other people see it differently. That is what makes markets.

Paul Tustain:  Yeah, I share that entirely. I do not intend to spend my life in gold, it is a backstop while things are bad and I look forward to being able to do much more with my modest reserve and when the economic landscape is fundamentally healthier again.

Chris Martenson:  Excellent. Well on that note, I need to thank you from the bottom of my heart for your time, you have been very generous, and this has been illuminating. I learned some very important things here and so thank you very much.

Paul Tustain:  Chris, thank you very much indeed.

Chris Martenson:  All right, we will talk to you soon, I hope.

Adam Taggart's picture

Buying gold & silver from here

As I watch silver crossing $26/oz (feels strange just typing that...) and gold approaching $1,400/oz, I'm curious to know how other precious metals investors are reacting to these prices.

1) Do you see this as a major buy signal? Perhaps that we've entered a new phase where more & deeper pockets are entering the market, and pushing PMs up in the direction of the true value we know they represent?

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