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.