It is my pleasure to share the first in a series of interviews with Mr. Rob McInerney, Executive Vice President of Worldwide Precious Metals Vancouver. Rob is a senior dealer at the firm and is particularly bullish on silver. You can follow him on twitter @SilverBull21.
I know a bit about the case for owning precious metals, but I don't know much about the bullion business itself. I look forward to bringing you a series of interviews with Rob and others to provide a glimpse into this important business. Please note that I have been compensated to prepare this material.
In this first interview, Rob walks me through some of the basics of the bullion business. Read on and visit the Worldwide Precious Metals website here.
PB: Hello Rob, thanks for joining me. I look forward to talking precious metals with you today. First off, please let me ask you – what does a normal day in the life of Rob McInerney looks like?
RM: Thanks, Peter. Great to be with you.
RM: My typical day starts pretty early in the morning -- I'm up at 5 o'clock in the morning to be ready for when the bullion markets on the East Coast opens up at 5:20 a.m. and we need to be ready to trade the market as it moves from Europe to North America. As you know, the physical bullion market doesn't sleep.
RM: We have clients that actively trade the market and they don't need to see a significant amount of movement in things like the silver market to generate a profit. We get in to the office early, have a quick check of the news and the economic calendars, and listen to Bloomberg and CNBC for a few minutes. We keep our ear to the ground and track what's going on.
RM: We work with our wholesaler Precious Metals International, who is an international physical bullion wholesaler with offices in several different places. We are in constant communication with them. As clients come in and request trades, we process those through our wholesaler and store in different depositories around the world.
PB: The getting up early part sounds familiar! One thing that occurs to me is that the bullion markets are different from the from the futures markets and other paper markets.
RM: Yes, indeed. The futures contracts are traded on exchanges, whereas the physical bullion market is different. We acquire precious metals from LBMA-approved refineries and store it in private vaults. We do not conduct trade on the exchanges, but we do use those exchanges as a starting point for pricing of physical bullion purchases and sales. When we are buying and selling metals at our vaults internationally, we use the latest trading prices for gold, silver, or platinum on a particular exchange and use that as a base price to fill orders for our clients.
PB: Are there any subtleties for the pricing side of the transactions based on the refineries? Are there any additional charges or even discounts to futures prices associated with different refineries?
RM: There are times where premiums will vary, both inside and outside the normal levels. If a specific depository is receiving a significant amount of business, then they may offer a lower premium on the sale or vice versa. If the market is running, then there can be supply issues. I've been doing this for 10 years and have experienced some of those events firsthand. In those times when prices are screaming, you can see higher premiums for premium product, which are fully-allocated bars in 10-ounce, 100-ounce, or even 1000-ounce increments. I've seen $50 premiums on gold maples, for example.
PB: What's the turnaround time on delivery and your ability to lock-in those prices?
RM: From the moment a client walks through the door or fills out an application online from anywhere in the world, the account approval process takes about an hour. Once its approved, the funds are typically wired to our holding account with The Bank of Canada and go into our trust account. From there, the funds are wired to our wholesaler Precious Metals International. At that point, the funds are approved in the account and the client can instruct me to place an order to buy or sell, depending on what they're holding. If they have a new account, then they would be buying new product.
RM: The moment when I instruct our wholesaler to buy bulk bullion or allocated product, it takes roughly 30 seconds for the order to be filled. There is a slight difference in timing between bulk bullion or allocated product. When the order is filled, the bullion has been purchased. Should the client decide to take delivery to their home, the turnaround time is typically 3-4 days. In that case, bullion is sent out via a bonded courier, which is fully insured. We certainly cannot send any physical product to a P.O. Box.
RM: Most clients decide to keep the bullion safe and secure in one of our private vaults. In that case, it takes about 30 seconds to process the order and the bullion appears in the client's account within the hour.
PB: And the refineries will take both sides of the transaction?
RM: Yes, they will. For example, Dillon Gage Metals is a refinery that also has a futures platform that they use to hedge their positions. When there's a lot of bullion exiting the refinery, they need to be compensated for that and vice versa.
PB: When you start taking bullion out of refinery, you can get into some complicated issues around custody and authentication.
RM: All bullion that exits any type of private vaulting or depository is subject to an assay. At the moment, the assay fee is 3% of the weighted value of the bar. There are several different ways to verify whether or not something is pure. The only real way to authenticate a bar that has been outside of a depository would be a full melt. Our 3% fee is based on the cost of a full refine and re-fabrication of the bar. My suspicion is that those premiums will rise as we see prices start to appreciate and get to a place that I would consider fair market value.
PB: Really, you would expect to see the assay charges increase as prices rise?
RM: Yes, I think so. Anyone that's holding physical bullion outside of a depository now should expect to pay more than 3% when the price of silver increases to $50 an ounce and the price of gold increases to $5,000 an ounce. There are a couple of reasons for that, in my opinion. First, the costs associated with re-refining the bars will likely have gone up between now and then. Second, you have to consider the market. Is there a massive influx of bullion? If gold was $10,000 an ounce today, then there is a high probability that you wouldn't be the only one that would want to take a little bit of profit from the market. The depository has to mediate the flow of bullion coming back into their vaults and the assay fee is one way that they can deter potential clients from sending bullion to be refined.
PB: The capacity of the refineries is an interesting topic that is very important.
RM: A lot of gold has been coming out and not a lot has been going in. The mining companies have had a tough time over the last nine years, so there isn't a lot of raw product heading into these refineries as well. The refiners are not overwhelmed with product, but a spike in prices could convince the bullion holders to sell some of their holdings and could create a supply issue.
PB: We hear a lot about the lack of physical gold in the West and the migration to the East, but it is interesting to consider how a spike in prices could bring physical supplies back to the physical market in the West. I guess that is one of the things that makes boom-bust cycles in markets.
RM: Absolutely. There’s a lot to be said about all this stuff, Peter. There is one story that helps clarify some of the things we are talking about here, which involves Kyle Bass. He is well-known for his opinions on physical gold and is one of a few people to ever take delivery of a large amount of gold from the COMEX. He has described a meeting he had with one of the Directors of the COMEX who said, “price solves everything.” There may be $80B worth of open interest futures contracts in circulation backed by on only $4B of physical gold, but if it will cost you 50% or more just to verify the value of your bar then you're going to be reluctant to remove it from the system.
PB: Hence, the need to be early.
RM: Yes, you do want to be early. This is not a trade that you want to be late for, whether it is going in or getting out. No doubt about it.