The Physical Gold Fund has released a new interview with the head of one of the five major Swiss gold refiners. The Physical Gold Fund also sponsors monthly webinars with Jim Rickards (here is the latest one of those).
In this interview, the ongoing relatively low price for gold given reports of tight supply is discussed. Below are a few selected questions and answers from the interview.
---------------------------------------------------------------------------------------------------Jon: Hello. This is Jon Ward with Physical Gold Fund. Recently I was privileged to hold a candid conversation with one of the most connected and influential people in the physical gold market. The gentleman you’re about to hear from holds a senior position in one of the five largest precious metals refineries on the planet. Because of his current position and his decades of prior experience, he has a deep inside knowledge of today’s physical gold markets. His insights and unique perspective on these markets goes way beyond what you will ever find in the mainstream press. Due to the sensitivity of the information he reveals in this interview, his identity and that of the refinery he works for have been withheld. . . . . . .
Jon: In your day-to-day work in this industry, what are your primary sources of information about the precious metals market?
Head of Refinery: We have, by nature, a lot of direct information. If you look at the trucks driving in and out, look at the bar lists, and look at the capacity utilization, that gives you some information already. It could be misleading, however, if you try to correlate the physical business with the prices. You have to be very careful there.
Information is also dependent on the network you have. At my age, there are a lot of downsides, especially if you get up in the morning and you feel your bones! But age also has advantages in the network we have here. It is huge. We have been an internationally oriented company since the beginning, so our contacts really are all over the world. We are proud of this network, and therefore, I would say our information is coming less from the newspapers and more from the market.
Jon: Yes, it’s from the people you talk to personally day-by-day across the world. In 2013, I recall you commented on the tightening of physical supply in the gold market and even the difficulties you were having in sourcing material. In fact, as I remember, you remarked that in 30 years, you’d never seen anything like it. Is that situation still true in 2015? How difficult is it to source the metal you need today?
Head of Refinery: The situation has not changed. It is truly difficult. This is also reflected by the price. It is getting more and more expensive to get material out of the market, and also there is less liquidity in the physical precious metals market than there used to be in the past.
Jon: Wouldn’t you say there’s a paradox here because the price of gold on the spot market is seen as low? What’s your understanding of the current price of gold? How well does the price today reflect the realities of physical supply and demand you just described?
Head of Refinery: The price does not reflect the realities at all. Don’t forget, we have a huge amount of artificial gold or paper gold floating around the market. If you look at the numbers of futures exchanges, there is a lot of metal you can’t even detect because it is within some derivative product, which in the end, you have no clue how much it is and on which side it is.
The other point is that nobody is interested in any physical delivery at the end. These products are all cash settled. People are happy just to use the spot market as a benchmark, and the product itself never ends up in the physical market. This looks dangerous to me. If we were to have a situation where everybody said, “Okay, now I have a long position that expires, so I want the physical,” for sure, the physical would not be around.
Jon: That’s a big ‘if,’ of course. Is it your belief that this paper market can be sustained indefinitely with a huge mismatch between the price in the market and the supply and demand in the physical? Can this go on forever, or do you think will it break at some point?
Head of Refinery: It depends very much on the behavior of market participants. Generally, if you look at the situation we have now, nobody understands the price of gold. We have serious geopolitical, not only risks, but already issues. We have a financial world with debt crises we have not seen for decades. We have a relatively low gold price that is in no correlation with the physical market. So there is question mark after question mark.
Will this continue? I think it depends very much on the behavior of the people. As long as market participants are happy for cash settlements, this can go on forever. The spot market price of gold is nothing more than a number, a benchmark. People are happy with cash settlements or they take the currency. If this behavior should change, then it could become dramatically dangerous.
Below is a summary of the issues discussed
Topics include:
*Why trying to correlate physical flows with the price can be misleading
*On-going tightness in the physical gold markets
*There is less liquidity in the physical market
*The physical tightness of flow is reflected in the price “not at all”
*As long as the spot market is settled with cash settlement, the physical flows are not determining price
*If investors dealing in cash markets begin to take delivery, the physical is just not around
*The current pricing mechanism can continue indefinitely unless investor behavior changes to taking delivery versus cash settlement
*The gold price has “no correlation to the physical market”
*If this behavior changes (to taking physical delivery) it could become dramatically dangerous
*Gold is moving in one direction from west to east with small exceptions over the last year
*90% of the refinery’s business is currently supplying demand from the east (India, China) and 10% to western markets
*China has imposed a new standard on the LBMA good delivery system of 1 kilo, 999.9 fineness
*400oz bars being melted and refined to 1 kilo 999.9 fine bars and shipped into China are coming out of London and particularly the ETF’s such as GLD
*In the next gold upleg, scrap may not be readily available – overall scrap has decreased remarkably
*Declining investment in the mining sector and geo-political issues affecting mining viability will unavoidably reduce gold supply moving forward
*The danger of less supply moving forward is more likely than the comfort of more supply
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