In the second part of my interview with Mr. Rob McInerney, we discuss a few of the colourful characters in the gold markets. As he points out in our conversation, a lot of the most publicly influential young people in the gold market today are self-taught. And I hope this transcript can go some small distance to help you understand the significance of investing in precious metals.
Check out Rob's profile on the Worldwide Precious Metals website here and send him an email to say hi!
PB: In the last part of the conversation, you mentioned Kyle Bass taking delivery on one-billion dollars of gold on the COMEX. I can't quite recall if I had heard of this before or not. When did that happen?
RM: I believe it was in 2011, when he was a fiduciary for the University of Texas. He's a brilliant guy. If you get a chance to watch any of his interviews, it's almost creepy how serious and calculated he is and everything he says.
PB: He's done some great stuff on Real Vision. Right, I recall the story now. He was on the Board for a Texas University and it was that entity that took the delivery of the gold.
RM: Right. He was planning on just taking delivery inside of the COMEX and just keeping it efficient and cheap. I can't remember who he met with from the COMEX, but he sat down with them and asked him some great questions. One of the them was: “On average, how much bullion is delivered annually because of futures contracts?” They said, “About 1% of physical gold departs the COMEX every year and it's replenished over time.” The total value of outstanding open interest contracts for gold on that exchange was around $80B plus $2.7 billion in deliverables. He asked them, “What is the total value of inventory that you have on hand?” They said, “A little over $4B worth of physical gold.” And he said, “Okay great, I'll take delivery.”
RM: They are running a fractional reserve system at the exchange. They had around 5% of the total value of the futures contracts in physical metal. Rough numbers, if everyone asked for their gold, then 95% of people would not going to get their metal. Kyle talks about how he's a fiduciary and how it is his job to not take risks with other people’s money, which is so different from many people out there.
PB: Do you see much of that fractional reserve idea popping up amongst the refineries or other dealers?
RM: No, not at all. This one of the things that Jim Rickards talked about in his books. The refineries hedge their position because they have to, but they aren’t using a fractional reserve model in any way. They always have an extensive inventory, but they have so much volume that they can’t just do cash and carry. There’s very small margin on physical bullion and they are very careful. For example, Dillon Gage is one of my suppliers. They have over 3,000 products on the shelf.
PB: That’s a lot of different types of coins!
RM: Different coins, different bars, all with different quantities. They have said to me, “Rob, if you have a Canadian client that wants bullion in Singapore then I can deliver them Canadian gold maples in Singapore – no problem.” They hold inventory in Singapore. They get gold maples from the Royal Canadian Mint. They are an approved refinery for the USA, as well, but they can move inventory all around the world based on demand. They recognize that their role is to move and store bullion. They are not in a position to take risk.
RM: Most bullion people are pretty risk averse. At least, with regards to their investment in bullion. We're not really interested in rolling the dice in the futures markets. There was a bullion dealer out of California that was taking orders at spot or just below spot for delivery of gold and silver. They were getting a significant amount of business because people thought, “What a great deal!” They were saving something like 3% on the way in. Now, that dealer actually had traders in the company who would try to make money with the client’s money before shipping the order. They ended up losing a lot of money, the SEC charged them and shut them down.
PB: Right. I would call it a rogue trader, but I’m afraid that it was basically part of the business model!
RM: That’s right. And it shows you just how tight the margins are on the bullion business. These guys were driven to find another way to make money. When you're dealing with an unregulated market, like this, it can be worthwhile to actually pay a premium to ensure that you're getting a legitimate product versus sniffing out that great deal with someone who will lose your money.
PB: Classic adverse selection, or a “lemons” problem there.
RM: Yes. It was it was rampant in 2010 and 2011. It was terrible. We were losing delivery deals hand-over fist. I remember thinking, “How are these guys doing this? How are they getting these prices?” We suspected there was something fishy going on, but we were surprised when we found out what it was. They were using customer’s capital to trade the futures contracts, try to make some money, and then provide physical delivery to the clients.
PB: It is ironic that they were using the paper markets in that way, after sourcing customers from the physical space. That was damaging to the whole space, I believe.
RM: Yes, I agree. That is where the big push for delivery came from. If you're taking delivery, then someone can't use your money for something else.
PB: But who wants to be doing midnight gardening anyways?
RM: Exactly!
PB: I sure don't. I want to know that it's in a secure deposit and one that can be moved around the world, yes please. That seems like the more rational case, but people aren’t always that rational about investing.
RM: I’m with you, Peter. If you've ever been in a position where you've owned something that you can't sell, then you know how illiquid bullion can become. Taking delivery achieves the opposite of what you're trying to accomplish by securing your wealth in ounces or bullion. When you take delivery, you handcuff yourself to the metal.
PB: Is there anything you can point to with third-party audits to assuage concerns that the gold is actually there?
RM: We have never failed an audit. Our wholesaler does an internal audit daily to confirm that we do in fact have all the cash and all the bullion on behalf of all our clients that we need to have. We've been in business with them for 14 years. We have an external, third-party audit that takes place every quarter by Meyers Norris Penny and we've never felt that audit. The icing on the cake is that we are written up in one of Jim Rickard’s books. He writes about Worldwide Precious Metals as “how to acquire gold”. He has looked around closely and is confident that we are not doing anything underhanded.
PB: Great. Now, a couple other things that just popped up to me there in the conversation. One is palladium – that's been a hot topic lately. The rally in that market pretty interesting.
RM: Narrow market. You would know better than I would, on the mining side. Most of it is out of Russia, right?
PB: South Africa is number one. I think it is half of global production. That’s the case for platinum, at least. Russia is significant, as well.
RM: The problem with Russia is not just their production – it's the reporting. They're about as transparent as China with their reporting.
PB: Another thing that came to mind was all the analysts in the gold space. Koos Jansen, for one.
RM: Koos great, yeah. We're all in this together, to a degree. The goal of educating people is very important for the long-term viability of the physical gold markets. We try to keep it simple. We're simple people. You’re buying physical bullion, you’re keeping it either stored or taking delivery either way you’re taking delivery in a private vault or home, that's it.
PB: And a couple other things that jumped out the Keith Neumeyer story about him trying to send a letter out to the silver producers and say, “Hey guys how about we don't sell at a loss here or whatever.” That's just such an interesting rabbit hole to get down and another thing that I just went through my old files and found I don't know if you've seen it, it's called, The Sprott Gold Book. It is a 200-page document that has all his letters from 1999 to 2014 about gold. It’s really a reference document at this point but I've read through it at one point in the past. I was just blown away to see him articulating the narrative over time and talking about events as they were happening.
RM: Awesome. The fact that he was talking about it in 1999 is telling. That was a great time to be getting involved. We started this company was created in 2001 and the timing was impeccable. The guy that started our wholesaler, Precious Metals International, used to own one of the largest futures and options trading companies in United States and he had the foresight. Even then, they knew that the system had way too much credit sloshing around and something was going to happen. I don’t think they expected to do much education when they started, but I started in 2007 and it was clear to me that education would be very important. There was so much hype and disinformation in the gold space at the time that I have seen the value of education since I started doing this.
PB: Right, you can get a bunch of new buyers who are enthusiastic but they may not know exactly what they're buying. They may have bought it for the wrong reasons and then the excitement may be short-lived.
RM: Exactly. I’ve come to this from a completely different angle. I spent a lot of time to understand the monetary system. I have had some conversations with people like Jim Rickards where I have been able to tell them things they didn’t know. One of the things I think Jim, in particular, really liked about me was that I’m born in 1973 and he said, “Rob, they stop teaching about gold in 1973!” He said, “Anyone that knows anything about gold in your generation is self-taught. The fact that you can tell me things that I don't know about the gold market means that you've been doing your homework.”
PB: Great. That reminds me of the Gold Book from Sprott. It was very helpful for me to see how things took shape over recent years, when I hadn’t been watching markets. To study these things that came before is so important for us all. The Gold Book doesn’t have everything, but it does have a pretty good, in-depth chronological coverage of things. And I don't have to go back and try to read Austrian economics to get it.
RM: No kidding. You have to dig around to really get a clear understanding of how this all works. Books like The New Case for Gold or The Death of the Dollar or Currency Wars help, but there is a lot out there that you have to consider.
PB: Rickards had an interview on Real Vision that was just great.
RM: It's unreal. Someone took a cheap shot at him on Twitter, saying that it was stupid to send the US aircraft carriers close to North Korea and Jim said, “War starts with the B-2 bombers going in first to absolutely annihilate a country and their ability to take out these aircraft carriers come in next.” The man the man knows war, too.
PB: Well, gold is very much tied up with war. We talk about gold being a long-term store of value, but I wonder if it also doesn't have a role in the short-term around crises.
RM: It is an interesting question, Peter. War is not good for economies, but selling stuff to other countries that are at war can be good for an economy. It’s a complicated set of issues with inflation versus price controls, and the way nations use gold itself for payments in extreme times. The simple answer is that gold is money and it becomes all the more important to have an ability to store it and move it securely around the world at your discretion.
