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Author Archives: Roy Van Til
My Endorsement of Mayor Pete Buttigieg for President
How great would it feel to have Mr. Buttigieg in the White House in January of 2021, for he is everything that Trump is not: Mayor Pete is young, honest, well educated, smart, experienced in how decent government works, humble, … Continue reading
Next Step After Parkland: Assault weapons must be banned
These recommended first steps on legal purchasing age and background checks are minimal and woefully insufficient gun control measures. The ownership of all semi-automatic or fully automatic assault weapons and high-capacity magazines for pistols and long guns must be totally … Continue reading
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Bastions of Bullion…the evolving role of bullion banks in the gold marketplace
Bastions of Bullion…the evolving role of bullion banks in the gold marketplace
by Roy Van Til, Ph.D.
Abstract:
For the last several decades, the bullion banks that are Market Making Members* of the LBMA have taken a pivotal role in the gold marketplace. A half century ago, a large number of merchant banks across Europe and North America created a competitive market. But eventually their numbers dwindled due to consolidation when a few of the largest bullion banks cemented their dominance by buying up their smaller competitors. As the old guard of merchant banks were absorbed or faded from the scene, these international banks enhanced their position at the heart of the market for physical gold, as well as dominating the larger OTC and futures markets. As one of their many roles in the global marketplace, the bullion banks hold both allocated and unallocated physical gold in their vaults for their clients.
But in recent years, the bullion banks have been pulling back from physical gold as the traditional London fix has been replaced by newer processes, and as many refiners, institutional investors, and other stakeholders in the gold investment world seek more efficient and responsive pathways to gold ownership. These clients, whether as demanders who purchase new gold or as suppliers who deposit their gold at one of the major LBMA banks, are eager to compare the costs and benefits of alternative ways of attaining an ideal allocation of hard assets.
In response to this growing demand for better access to investment gold, coupled with dramatic changes in messaging, automation, flexibility, and the arrival of many alternative solutions that entail lower costs, bullion banks are placing a lower priority on precious metals as they specialize in more profitable but unrelated sectors. Physical gold investment or the financing of mining operations and gold refineries were never their major profit centers in the first place. Gold dealers, miners, refiners, and other intermediaries in the chain of custody of gold benefit from access to a more direct route to the customers than through the bullion banks. Thus efficiency is increased as the global market for physical gold broadens.
As an alternative to approaching the bullion banks, these institutional investors gain direct access to physical gold and other precious metals through more direct means unaffiliated with the banking system. More agile than the bullion banks, robust technology platforms provide a more effective, transparent, flexible, secure, and liquid process for the procurement, ownership, trading, and redemption of gold bullion. They expedite and facilitates the widespread procurement and global exchange of physical precious metals. This modernizes the marketplace by opening up the real possibility of an asset-backed monetary system, with physical gold as the centerpiece serving as both a store of value and a medium of exchange.
*The 13 Market Making members of the LBMA that provide two-way pricing in gold are: Citibank NA, Goldman Sachs International, HSBC, JP Morgan Chase, UBS AG, Bank of Nova Scotia-ScotiaMocatta, BNP Paribas SA, ICBC Standard Bank, Merrill Lynch International, Morgan Stanley & Co International Plc, Societe Generale, and Standard Chartered Bank.
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Either Oar…rowing a golden dory through rough currents
Abstract: Despite recent fluctuations in both gold prices and demand for gold as an investment, the fundamental logic for including physical gold in wealth allocations remains strong and the long-term projections in gold’s favor continue. The underlying strategic case in support of precious metals as an asset class remains untarnished. This position paper uses a familiar nautical metaphor to emphasize the wisdom of maintaining a steady course that takes full advantage of the qualities of tangible bullion, regardless of short-run swings of markets Those who abandon the time-honored role of bullion, are precipitously rejecting its useful role in risk reduction, its legendary utility as a store of value, its value as a medium of exchange, and its flexibility for global financial applications. Seven features of bullion comprise a powerful argument for including physical gold in reasonable proportions in a balanced wealth allocation at this or any other time: Supply, demand, symbolism, constancy, bearings, equilibrium and survival. Continue reading
Four Ways to Own Gold…tapping into a richer vein
Abstract
There is wide agreement among investment professional worldwide, backed by statistically significant quantitative research, that together demonstrate the advantages of a small percentage allocation to gold as a core asset in a diversified approach. And there have been four principle ways to add gold to a portfolio: Purchasing securitized or paper gold or designated gold funds, trading in the gold futures market, taking positions in gold miners, and the purchase and vaulting of physical metal. Once too bulky to be competitive with the first three, the latest global vaulting and storage technologies enable time-honored physical gold ownership in the most flexible, liquid, and risk-controlled manner. Institutions and high-net-worth individuals now take positions in liquid, secure, accessible bullion for storage, exchange and delivery among multiple vaults in major financial centers worldwide. The savvy investor can take advantage of the enduring qualities of physical gold as a monetary medium with heretofore unavailable liquidity and simplicity of access.
Although all four pathways offer much to investors under certain circumstances, the well-informed institutional investor must be aware of the shortcomings of each. For example, so-called paper gold and its related instruments are often difficult to redeem in physical form for all but the very largest institutional investors, plus the value of the gold backing is vulnerable to attrition. The gold futures market suffers from higher risk and volatility than physical gold, limits the liquidity, and provides no principal protection. Moreover, shares in miners are uncomfortably high in investment risk and typically volatile in their returns. And especially in years past, the buying and vaulting physical metal in a static form in a location that is difficult to access exposes the investor to serious systemic risks and compromises the liquidity of the assets. But under the best of circumstances and institutional arrangements, bullion itself provides a unique combination of a safe store of value with sufficient agility to act as a flexible medium of exchange for use in finance with low risk.
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Ancient Highways…removing friction from gold as commodity and currency
Ancient Highways…removing friction from gold as commodity and currency
by Roy Van Til, Ph.D.
Abstract: Gold is both a timeless store of value and a trusted but underutilized medium of exchange. Its high value per ounce, durability, divisibility, uniformity, and portability are among the reasons it has served so well as an enduring asset. Unfortunately, the antiquated and clunky workings of the physical markets (delays and difficulty in redemption, costly shipping, uneven quality, limited liquidity) have hampered gold’s ability to function seamlessly to fulfill its potential as a currency.
Recent innovations in vaulting and transport have mitigated concerns about security and quality control, allowing gold to realize its considerable strengths as a prime commodity. Innovative technology with advanced messaging standards and clear identifiers for automation and liquidity can transform gold into a more appealing medium of global exchange…one that is immune to the risk of overprinting that can plague fiat currencies. Such technology allows gold to provide a tangible alternative to the insubstantial nature of securitized proxies or unallocated substitutes for the real thing. This can be achieved by applying the latest technology with the highest levels of transparency. And it can be done while remaining supportive of governments and regulators.
There is a need for a global process to facilitate ownership of physical precious metals worldwide; a situation where customers’ assets comprise an ecosystem for physical precious metals that is liquid, transparent, and compliant. And it is a process reinforced by excellent standards of care and diligence that adopt the most careful KYC (know your customer) and AML (anti-money laundering) safeguards and practices. An ideal technology platform can be shared by asset owners, fiduciaries, investment managers, bullion banks, and industry stakeholders.
Free of the many constraints and risks of paper assets, physical gold procured and redeemed on such a platform facilitates an agile, trusted, global medium of exchange. Gold becomes a currency in the fullest sense of the term. Unlike nearly every other gold solution, physical gold is an asset on the owner’s balance sheet rather than being a liability on someone else’s.
Gold’s utility as a currency requires technology that mobilizes the physical asset as collateral via a secure process where title is seamlessly transferred with reassuring transparency and safeguards. The ideal technology platform for physical gold positions would be integrated with a global clearinghouse (for physical gold, not paper gold) that allows these four features:
1. Segregated ownership of the asset to perform an active currency overlay
2. Pledging physical for trade finance as the superior format for credit
3. Using physical gold as a payment mechanism for everyday transactions
4. Holding clear title to the gold, free of counter-party risk and other barriers to true ownership
This essay provides a revealing analogy for your consideration, followed by the case for using gold as a monetary medium, and a concise course of action for the investor as the global gold industry becomes modernized. Continue reading
GLD vs. Allocated and Segregated Bullion…all that glitters is not gold
Abstract
This paper compares the merits of two appealing pathways for adding gold to an institutional or individual portfolio. One is a securitized gold fund, the other is a means to access full ownership of the bullion in physical form. Each of the SPDR Gold Fund’s six central assertions is evaluated on corresponding features of direct ownership of allocated and segregated bullion. A compelling case emerges for investor consideration of the relative effectiveness, viability, and features of pure bullion as an alternative to the ownership of shares of the ETF known by its ticker, GLD, a security often referred to as “paper gold”.
Conventional wisdom and historical precedent suggest that strategic factors would tilt the decision toward the more tangible product. Physical gold positions are advantageous to investors by offering greater liquidity, easier accessibility, relative cost effectiveness, superior transparency, enhanced flexibility as a monetary medium, and maximal security from systemic risk. Although both pathways offer appealing characteristics, a strong case can be made that institutional investors seeking to add precious metals as an asset class to their investment universe, as well as those who appreciate the unique powers of gold as a medium of exchange as well as a store of value, would be well-advised to consider allocated and segregated bullion in tangible form.
Key Findings:
Physical gold is a more versatile than paper gold as an asset within a portfolio
Allocated and segregated bullion carries a higher degree of liquidity than paper solutions
Physical gold is an asset on the investor’s balance sheet without also appearing as a liability on someone else’s balance sheet
Allocated and segregated bullion reduces systemic risk and many other uncertainties for institutional investors
Physical but not paper gold functions effectively both as a medium of exchange and as a store of value Continue reading
Posted in Economics/Geopolitics, Gold industry
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Echoes of Eight Centuries
I thought of my dear mother and father who sat at that exact perch on the ruins in 1937 when Austria was teetering on the verge of Anschluss and all of Europe and much of humanity was poised on the knife edge of imminent armageddon. Continue reading
On Cape Cod Hill: the Fog of Life
Viewing the scene from above, I sharpened my awestruck gaze to see if the Headless Horseman or the Hound of the Baskervilles would come charging out of the gathering armada of misty fingers to cap off this nightmare display, a compelling vision that unfolded before me as I slowed to a halt at the crest of a lonely country road. Continue reading
The Reluctant Giant: Origins of US investor fears of owning physical gold
Abstract
It is puzzling to many world investors that the largest economy in history (at least for a few more years), a confident nation of unrivaled military power and respected for its bold entrepreneurial spirit, has been hesitant to embrace physical gold as a component of allocations of institutional and personal wealth. After all, physical gold has been the most enduring symbol of affluence through the ages, and the role of the metal in stabilizing portfolios by reducing risk has been convincingly documented and reaffirmed over many years. This paper examines seven compelling reasons for the paradoxical paucity of gold demand in the US for investment purposes. These arguments attempt to explain why American individuals and institutions invest an amount in gold and other precious metals that is far smaller than their own financial experts consider to be ideal.
The research concludes that a portion of the reluctance to hold gold is based on culture, some on politics, and some on a lack of appealing investment alternatives in the precious metals space. The essay accentuates the absence of a long cultural tradition of holding physical gold, the fear of repetition of the confiscation of gold that occurred in the nineteen-thirties, and the clunky nature of existing physical gold products compared to the sleek securitized versions. The recent development of more convenient and flexible ways of holding gold bullion represents a gold solution that overcomes most of the persistent hesitation of US investors to own tangible precious metal. The giant need not be reluctant anymore. Continue reading
Voyages of a Flying Dutchman...................... blog by Roy Van Til of Vienna, Maine 