Lars Schall Matterhorn Interview with Ronan Manly, April 2016
I was recently interviewed by financial journalist Lars Schall on behalf of Swiss based Matterhorn Asset Management. Our interview covered the German and Russian gold markets, Venezuela’s official gold reserves, the secrecy of the London gold market, and the outlook for the gold price, among a number of other topics. Matterhorn kindly granted me permission to post the audio interview and transcript below. The original interview titled “Economics will dictate that the price of gold is going to rise" can be found on the GoldSwitzerland website.
Lars Schall: Howdy ladies and gentlemen, I am connected right now with Ronan Manly at the London Business School. BullionStar and Ronan have just recently published a major work of research related to the gold markets all around the world. Before we’ll talk about this let me ask you, Ronan, to give us some background on you. When, how, and why did you become interested in the precious metal markets to start with?
Ronan Manly: Hello. Yes, I think I became first interested in precious metals around 2003-04, when there was a bull gold market in precious metals mining stocks. About that time I was interested in investing in equities. And it was from the perspective of the bull market in gold and silver stocks catching my eye that I started reading about gold. And that really led me into thinking about gold as an investment asset class. In 2005 and 2006, when I was in the London Business School as a student, I did a research paper on adding commodity assets to existing portfolios of bonds and equities as a diversification technique. So it was during that time again I did a little bit more research about precious metals, and gold, and silver as an asset class.
And then I was working in the City of London in the equity investment management space for a few years. And I actually forgot about precious metals, because it wasn’t really on my radar at that time. When I left that role in 2011 I had some free time, and I started going to the Bank of England archives to start to research in gold again. I’d gone to a GATA conference in the summer of 2011 in London, and that sparked my interest in gold. And I thought well, because I’m living in London, with the Bank of England just down the road, I might as well go and have a look at their archives. So that started really me on the road of doing research about monetary gold. And I went on a number of occasions to the Bank of England. And I even went across to Paris to the Bank of France archives. And that again was very eye-opening. Because of the nature of archives, there’s a 30 year, or 35 year [access] rule. So you can’t really look at anything beyond say the 1980s, early 80s. But even then I could start piecing together the importance of gold, and the monetary system, and it just fed my interest, and the fact that gold was at the front and center stage of the financial system. But this role has unfortunately been lost.
Myself and a lot of other people who grew up being educated in the 1980s and 1990s thought gold had somehow fallen off the financial curriculum. And it was really, because I started realizing that gold was a fascinating area that was interconnected with so many other areas like economic history, the IMF, the financial system, and various industries, like banking and mining, that it attracted my attention. And also the fact that it was quite opaque. In a very strange way it was a challenge, because it’s difficult to find out information about the gold market without really putting in a lot of effort. But it’s very rewarding when you do find information that other people don’t have. And I think that’s what I’m trying to get across in my blog, sharing information that maybe is there, it’s available in public, but it’s very difficult to get. So once I find some good information I like to share it.
LS: Yeah. And as already mentioned you did something like that, because at BullionStar you’ve published recently some sort of an encyclopedia of gold markets around the world. Now, why did you consider it necessary to do this at BullionStar, and what is the purpose?
RM: That’s a good question, because we’ve actually just launched this a week, or two ago – BullionStar Gold University. It took a few months to get all the research together. The concept was one that BullionStar devised as a way of sharing information with the general public. You can look at it more as a portal of precious metals information, more time independent information, and factual information. You can even look at it as like a Wikipedia of up-to-date information on precious metals.
It’s actually a group effort. I was doing a lot of the writing. But various other people in BullionStar have been part of the project from day one including I.T. developers and graphic designers, and the BullionStar CEO who devised the whole concept.
So the first phase of this is a profile of gold markets around the world. It includes about 21 different profiles covering 25 markets, really captures the essence and characteristics of each of those markets from some of the very large ones the people know about to less well-known ones. So it includes markets like London, New York, Shanghai, India, Hong Kong, Japan, down to probably less well-known markets, like Malaysia, Thailand, Indonesia. And there’s a slight regional focus on Asia, because BullionStar is based in Asia. But it includes markets like South Africa, Germany, Italy, France, Saudi Arabia, Dubai, Turkey. So there’s really something there for everybody.
And the main reason was to create up-to-date information that people can go to as a source of reference if they’re writing articles. Journalists, for example, can use it as a source of reference. Because there was nothing really up-to-date in one place that captured that information. So really what we’re trying to do is make it easy for people to – if they have a question about one gold market in a different place they can go and consult the Gold University. This is only the first phase. We’re going to be having a lot of other topics and concepts rolled out as part of this umbrella information portal in the near future starting with precious metal vaults, central band gold policies, refineries and mints, then down the road adding other areas such as if you want to find out about the tax on precious metals in a certain area or jurisdiction, or the legal / legislative [position] of various governments, what their view is on allowing their citizens to purchase precious metals. So it’s really a wide coverage.
LS: Now, talking about those profiles, according to your analysis, which is the most credible gold market that you’ve seen as part of your research?
RM: Well, after 25 different markets I actually think that the German gold market is a very deep and thorough markets with a lot of liquidity. It’s very accessible to the public. Now, I have to say that I didn’t really know much about the German market before I began researching it. I was pleasantly surprised to learn there were so many different participants in the German market from commercial banks down to wholesalers, down to large retailers. And the German public really seems to get gold as an investment asset class.
But I started looking at Germany, literally I knew that maybe a few large banks were involved. But as I did more research I realized that there’s a lot of different levels of participants in the German market, starting with the Landesbanks, the Bayern Landesbank, LBBW, and Helaba, and some of the other regional banks. And there’s Reiffeisenbank, and Commerzbank, even though it’s based in Luxembourg, you could classify that as a German bank. And as you know, Lars, the customers of the Sparkasse savings banks can go in and buy gold quite easily. And Germany has like over 100 tons of consumer gold demand each year. So I really think that the market hangs together very well. It’s very deep and liquid. It’s interconnected with Austria, and Switzerland, and you’ve also got at least five or six very well-known and well-regarded gold refineries like Heraeus, and now Degussa has bought a new refinery in there. Is it Pforzheim?
RM: So I think the German psyche for a number of reasons has a very good understanding, grasp, and respect for gold. And I think this is exemplified by the very deep and widespread network within the German gold market. It’s one that I would never have thought about six months ago if you would’ve ask me. But now it’s definitely one of the more intriguing markets out there.
LS: Yeah. And your positive impression of the German gold market was also supported by a recent trip that you took to Berlin.
RM: That’s right, yeah. At the beginning of February I was invited by BullionStar to what’s called the World Money Fair in Berlin. This is an annual fair that takes place in February at which all the big refineries and mints from around the world go to exhibit. There’s a lot of numismatic dealers as well. But more interestingly it seems to be the event of which a lot of precious metal participants go to meet each other for commercial meetings, and to just meet, and greet, and update each other.
So for example, the reason I went there was to meet up with my colleagues from Singapore. But we were introduced to a lot of heads of refineries, heads of mints, some of the large wholesalers from the US. And it as a great to see the precious metals markets in action. The fact that it was in Berlin again, I think highlights the fact that Germany is a very important gold market, and people don’t really seem to realize that. If you asked a lot of people on the street outside of Germany they probably wouldn’t realize that Germany is such a buoyant gold market.
LS: And which of the markets that you examined will be the most interesting to watch going forward?
RM: I think there are quite a few interesting markets. But the one that fascinated me the most, and that I think will be very important going forward: Russia. And it’s more because the Russian gold market for the last number of years has been dominated by central buying purchases from the Russian Central Bank. And it’s sister organization called the Gokhran, which is the state fund for precious metals. And again, I wouldn’t have really thought about this until I started researching it. But at the moment the majority of the gold production that comes out of Russia every year is purchased by the central bank. But they do via a very clever process, where the commercial banks intermediate. So the commercial banks finance gold producers who mine the metal, which is then sent to the refineries, but it’s purchased by commercial banks like Sperbank, NOMOS, VTB, Gazprombank. And then they sell it on to either the Gokhran, or to the central bank.
So what you see is that, for example, seven or eight years ago in 2007, the Russian Central Bank only had 400 tons of gold in its official reserves, and now 10 years later it has just over 1,400 tons. And I think another part of the equation that people don’t seem to grasp, and it’s quite opaque, is the fact that the Gokhran is also purchasing gold. So I think what is happening is that sometimes if the central bank reserves are being updated it transfers from the Gokhran, like the way that we suspected maybe the PBoC in China is transferring metal from other Chinese state entities.
So from a supply perspective it’s also interesting because if the Russian state system is gobbling up a lot of Russian gold output, that means there’s less gold at the margin for world supply. So I think it’s going to be really important to look at this continued trend where a lot of Russian gold production is being taken by the state. And that will definitely have an impact on world gold supply if demand continues to outstrip supply.
LS: Yeah. Now, when it comes to the market that you look at in the most critical way I think the candidate could be London, correct?
RM: Yes. I think that’s because London is the largest market. So in one way you think that there is a lot of information out there about the London market. And in some ways there is, but in other ways there’s not, because it’s quite opaque, and the people who run the London gold market choose not to divulge very much information about it – be it the Bank of England, or the Bullion banks that are represented by the LBMA. So again, it’s because London is one of the two centers for gold price discovery that in some ways it’s so important and critical to world gold market that it makes sense to critically analyze it. And over the last number of years there’s been numerous times where I’ve become frustrated where I’m trying to do some research on the London market, and I just can’t get anywhere, because there’s a lack of data there. And that’s the biggest question, why is that? And I think it’s because the LBMA, and the banks that they represent do not really want anyone poking around and finding out what’s really going on in the London gold market.
And you and I, Lars, know both that because it’s such an important market for price discovery that if there’s any, for example, large transactions that are going on that aren’t in the public domain that’s quite important, because it is affecting the price globally, and it’s affecting every participant in the larger global market. So it’s something I think is worth putting a lot of effort into it to try to find out as much as possible about.
LS: Yeah, worth noting is also what you wrote recently about the gold of Venezuela. Can you tell us about this please, and why is this of significance?
RM: Like a lot of research that I do, it started off as a small focus. I found some information that had come out about the repatriation of Venezuela’s gold back in 2011-12. And for people who maybe don’t recall exact details Hugo Chavez wanted to repatriate all of his gold that was held internationally, which is about 210 tons. Eventually he repatriated 160 tons, and left 50 in London. And they added the repatriated gold to what was already held in Caracas, Venezuela, which was about 150 tons. So it made a very good case study, because very few central around the world will ever divulge information about gold. But Venezuela at that time chose to do so.
The Bank of Central Venezuela was quite forthcoming in telling people about how much gold they have, where it was located, how much they wanted back. And that in itself was a good case study. But what has happened more recently with all the economic problems in Venezuela is that a lot of that gold has started to go to where it probably was held originally. Some of it’s being flown into Switzerland; various banks like Citibank, Deutsche are supposedly doing swaps with some of that gold giving U.S. dollar financing to the Venezuela government.
And I think that particular set of episodes is very good as a case study, because what it applies to is that there could be a lot of similar for example swaps going on with Central American banks and international Bullion banks. And I know that there are a few. But that doesn’t get written about. Because again the information is withheld. So I think the repatriation and the subsequent re-export of Venezuelan gold back to Europe serves as a reminder that gold is a liquid asset, and that it is a very important asset in the financial system. But for whatever reason central banks and governments always try to downplay it.
LS: Yeah. But given that we have a debt crisis you think that gold will be a winner of this crisis?
RM: Yeah, I do think that it will start to become – to play a more central role in a future monetary system. As regards what exact role that will play it’s difficult to know, but I definitely think that I see gold really emerging to the front stage of a revised, or a reset monetary system. Because gold doesn’t have any counterparty risk. It doesn’t have any default risk. We’ve seen before though a stable international monetary system that had gold playing an important role.
LS: Yeah. But do you think that we will then see more efforts to repatriate gold from New York and London to the original countries?
RM: I don’t really think so, unless it’s done in a very gradual way. I think the Chavez episode was more of a nationalistic triumphalist symbolic exercise. And it backfired. Not because of the actual repatriation, but because of unfortunately for Venezuela, its economic standing has gone down. But I tend to think that all the different central banks around the world cooperate so closely that they wouldn’t really put pressure on each other in that regard by pulling out gold that might make it look like they’re unhappy with either the Bank of England, or the Federal Reserve. I think if it’s being done, it’s being done in a very surreptitious way.
LS: Yeah, just as the Germans do?
RM: Well, that’s a very strange one. I still haven’t understood fully what they are doing. Is it more of a gesture to the population, or – they could’ve easily done this without telling anybody, like they did in the early 2000s when Bundesbank repatriated, what was it, 900 tons from the Bank of England? Nobody knew about that.
LS: Yeah. Yeah. Okay, let’s come to our final point, and that would be the question what are your overall expectations for gold in 2016?
RM: Well, you know, that’s a good question. Seeing that we’re nearly at the end of the first quarter, and that’s been one of the best quarters in a long time. I still think that the gold price in USD terms will end the year higher than it is now. And I say that, because I think that there’s such a huge excess demand for physical gold for various places like China. If you look at the supply side there isn’t a huge supply increase. There’s a lot of gold gone through gold refineries in places like Switzerland, and unless there is some hidden source of supply that we don’t know about, simply economics will dictate that the supply outweighing demand would mean that the price is going to rise.
I was talking to Koos Jansen from BullionStar yesterday, and he’s actually working now doing estimates of Chinese gold importation from 2015 where he takes various trade statistics from Switzerland, U.K., Australia, and Hong Kong, and he’s coming up with a figure of 1500 tons are being imported last year into China. And if you add to that the Chinese domestic production of around 450 tons, and then some scrap recycling, that’s over 2,000 tons of gold. And the World Gold Council are only saying there’s a 1,000 tons of domestic demand. But if you also take the annual gold-mining output say for example 3,000 tons, if you take away China’s 415, you take 200 and something tons from Russia, then the rest of world is having to compete for dwindling physical annual gold-mining output. And really just from a simple economics point of view I think that the gold price should end up higher at the end of this year. Whether it will is a different question.
LS: Of course.
RM: I’m not really qualified to answer that. I think it’s very dangerous speculating on gold prices in general, because there seems to be a lot in the price action of the gold market that doesn’t follow common sense.
LS: Yeah. But you would say in the long run gold is a good investment?
RM: I think it is a good investment to have some of a total investment. And what I mean is that it’s a good investment to have, and to diverse my portfolio. And I think it’s also from a collector’s point of view, it’s nice to have some of your assets in a physical tangible substance that is nice to own. And you still have it at the end of the day even if it’s changed in fiat currency terms.
LS: Yeah. But we would like to underline this again: Gold has no counterparty risk.
RM: That’s right, yeah. And so for example, any gold products that may involve a few different layers of counterparties like an ETF, for example, physical gold doesn’t have that. As long as you have it in your possession, or store it in a reliable storage space.
LS: Okay. Thank you very much for this interview.
RM: My pleasure. Thanks Lars.
LS: Thank you.
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