Transcript of Jim Rickard’s Comments regarding AFE Vaulting and Refinery

Transcript of Jim Rickard’s Comments regarding AFE Vaulting and Refinery

Jim Rickards

The following transcript is a portion of the interview Jim Rickards did which covers to joint trip to Switzerland in Nov. 2013.

John Ward:  Jim, you recently accompanied Philip Judge and Alex Stanczyk on behalf of Physical Gold Fund on a visit to the Fund’s refinery in Switzerland, one of the world’s largest processors of precious metals. What did you take away from that trip and the conversations you had there?

Jim Rickards:  It was a great trip and very interesting. First of all, Philip and Alex were excellent traveling companions. We had a very pleasant sojourn in Switzerland. We were in Zurich and outside of Zurich at a place called Kloten where a lot of the vaults are. Then we traveled by train from Zurich to Lugano and went outside of Lugano to a place called Mendrisio where the refineries are. I like to say, analysts need to get out more. We, including myself, tend to spend too much time in front of a computer or TV screen looking at spreadsheets and blogs and reading this and reading that. That’s fine, because we need to do deep dives from a research perspective, but we also need to get out and ‘kick the tires,’ visit sites and talk to people. You learn an enormous amount that way, and that is indeed what happened on our visit.

We went to the vaults run by one of the world’s leading secure logistics companies and where Physical Gold Fund actually stores its gold. We were there to meet and visit with officials and also to audit the gold. We were accompanied by two partners from the Fund’s auditors, Ernst & Young. They actually brought the gold out on pallets with a forklift and took the top off the box. There we saw the gold bars, serial numbers, dates, the refinery, the assay and weight. The auditors went down bar by bar to confirm that all were present and accounted for. That was a really interesting process to watch. Over the course of doing so, we were able to study and learn about the vaulting system.

It was a fascinating experience; there are little things that seem almost out a spy novel. For example, they need garage doors at some point to bring armored cars into the vault. How do they do that? They need a bag and a large door and you think to yourself, why couldn’t I just take a battering ram and smash down that door and break into the vault? Well, of course, on the other side of that door is another door. They lower the first door behind you and open the second door in front of you. You pull into a second bay with cement and steel reinforced barriers, so if you tried the battering ram technique, you wouldn’t get very far. They offload the gold from the truck at a 90-degree angle, so any vehicle trying to ram its way through would quickly hit a dead end. There’s no way to pivot to a 90-degree turn without a runway, so to speak.

Just little things like that plus security cameras, motion detectors, concertina wire – it’s a form of a very sharp barbed wire – all over the place, and other detectors, eyes and ears, armed guards, everything you would expect, and multiple-security perimeters. I just described the first two — the first and second bay — but there are actually three because outside is a high wall and concertina wire. Even at that point, you’re only beginning to get into the vault. There are special portals, if you will, where the gold is put on one side, a steel door closes, and someone takes it out the other side. There are Kevlar bulletproof glass, multiple-security perimeters, and on and on. I can’t imagine it being more secure.  And they’re privately owned, and they are Swiss. They are outside the banking system and the European monetary system. Switzerland is a very secure, stable country. Some people prefer other locations, but for physical storage of large quantities of gold, I can’t imagine a better place than the one Physical Gold Fund has selected in Switzerland. It’s quite impressive.

In addition to that, we met with officials and had some very revealing discussions. They’re seeing a steady inflow from bank storage to private storage. In theory, bank storage is just as good in the sense that the vaults are fine, but that’s not the point. The point is that banks are heavily regulated by governments, and gold stored there might be subject to seizure by governments or at least it will be easier to seize, or impose regulatory  control or maybe prevent withdrawals if it is in the banking system.

Banks may fail and their claim to gold might get tied up in some kind of court proceeding. Would you be “bailed in” as happened in Cyprus where you become in effect a creditor of the bank and depositors’ assets were used to restore bank solvency and may be tied up for three years. Who knows, right? In private storage, we don’t have those issues. Quite apart from our Fund putting its gold in this private storage, which I think is a very sound choice, they’re seeing a lot of gold coming out of the banking system into the private system and are actually adding capacity. They almost can’t build vaults fast enough.

We went down to one of the largest refineries in Switzerland and learned the same thing there. We were able to view the operation from the inside as well as have very constructive and quite lengthy conversations with senior officials. The story is fascinating, which is that they are operating at maximum capacity. The refining process is heavily automated at this stage, and they’re working 24 hours a day, three shifts, round the clock to meet demand.

They can’t meet all the demand. Most of it’s coming from China. It’s coming from numerous sources, not just China, we should emphasize. But a lot of the gold being produced is going to China. China would like more, but the refinery can’t produce more. They have existing clients to serve, and they can’t walk away from them, so they are reserving some of the gold for existing clients and giving all the rest to China. But even at that, China wants more. This is just one refinery we visited. Now, multiply that by many large refineries in Switzerland, eight refineries in China, other refineries around the world, Johnson Matthey, the Perth Mint, etc. and we can begin to get some sense of how much gold China is actually taking in.

There was another highly revealing thing. With these refineries producing all this gold, where are they getting the gold to refine? In other words, where are the inputs coming from? There are three main sources. One is semi-refined gold, so-called doré, which is about 90 percent gold coming from the miners; there is so-called scrap, which is just jewelry, necklaces, bracelets, watches and things coming from a variety of sources; and then the other is bars that are being converted into smaller bars. These 400-ounce London Bullion Market Association good delivery bars are being turned into kilobars to Chinese specifications. Notice two things here:  Number one, they’re melting down the 400-ounce bars; Number two, they’re also refining them. A 400-ounce bar can be two nines plus, 99.5 or 99.7 percent gold. That’s not good enough for the Chinese because they want four nines or 99.99 percent gold. This means the gold has to be converted from the 400 ounce and also be refined further to get a higher purity.

China is really becoming the center of the world gold market and leaving London behind. The London stuff is out there and we hear about it in blogs or tidbits here and there, but nothing like hearing it straight from the horse’s mouth in details from a variety of sources. This was very valuable to learn as well.

As I said, getting out from behind the desk and the screen, kicking the tires, and meeting with experts with first-hand knowledge made for a very, very fruitful trip as a whole. From the point of view of Physical Gold Fund, it was comforting and reassuring to see that we’re dealing with the best quality, most reputable vendors in the world.