FRA: Hi welcome to FRA’s Roundtable Insight. This is Richard ..  Today we have Alasdair MacLeod and Bosko Kacarevic. Alasdair is the head of research for GoldMoney and an Austrian economist. He has a background as a stockbroker, banker, and fund manager. Basko is the president and CEO of Kindigo Capital, a Canadian based private equity firm in Windsor, Ontario, Canada. The whole financial licenses and commodity derivative stocks mutual funds and private equity. Welcome gentlemen.

Alasdair Macleod: Nice to be here.

Bosko Kacarevic: Thank you for having me.

FRA: I thought we’d do a focus today on physical gold. Why physical gold why does it make sense where to store it, how to store it. And then perhaps a comparison to what’s happening in the Cryptocurrency world, sort of Gore versus cryptocurrencies debate and further where we kick it off with if you want Alastair with why physical gold why does it make sense?

Alasdair Macleod: Well the the the basic sense behind physical gold is that it’s nobody else’s liability. It is Money, is money not an investment. And I think that’s an important point. But as money it tends to retain. In fact, over a period of time it tends to increase its purchasing power measured against commodities and if you like the items that are manufactured of commodities. And if you want proof of this basically from 1969 to the present day the dollar priced in gold has lost over 97 percent of its purchasing power. So that’s how strong on gold is. But if you’re going to hold gold in paper form someone can come away and change the rules. Your paper might go bust if let’s say you’re in an ETF, which invests in synthetic gold. If you try and invest in gold on the futures exchanges, sort of rolling contracts. That again is subject to really try and take delivery. You may not get your delivery. The one thing that really matters is that you have the physical gold. Now obviously you can store all your gold at home if you’ve got any significant level of assets. So you need to find if you like a really good LBMA registered faulting company who will store all your gold and that’s basically what we do is go money. We act as custodian; our customer’s gold is not on our balance sheet it’s it. It operates on the Canadian Belman laws. I think that’s the technical term. So if we have some sort of financial accident, there is absolutely no dispute about the ownership of gold which we have as custodians, it belongs to our customers. We have both a metal audit and also financial audit every quarter. So that again you know it’s all recorded, it’s yours and you’ve got a choice of vault around the world. So if you’re an American and you have a fear that the American government might be in a sort of command you to submit your gold in America. It’s not under the American government control, it be put it into a foreign jurisdiction. I mean we you know Switzerland or Singapore or somewhere like that. I wouldn’t say that you break the rules but it just makes it a bit more difficult for your government to get the gold. So there are all sorts of ways in which you can ensure that your money capital if you like is is is safe at all times and that basically is the function of gold stored in a proper vault.

FRA: And your thoughts Bosko.

Bosko Kacarevic: Yeah I have to agree with Alasdair. We approach the gold as a form of currency. We already regulated securities dealer in Canada as an exempt market dealer. So we provide as well storage facilities for investors in physical gold. Our one of our recent announcements was a we have a platform where RSP investors retirement accounts can put physical gold into their retirement accounts and have it stored in LBMA approved vault and they can trade the gold buy and sell it at any time. When the gold is in your RSP account because it’s in trust for the retirement then it can’t and the clients can’t take delivery of it. But the physical gold is there it’s accountable, it’s audited, and there we offer a basically a non fungible system. So when our clients purchased their gold it’s in a specific container, it’s allocated, and segregated to their account. So the exact same gold Maple’s gold bars that someone purchases is the exact same that they’re going to be selling. So we try to explain to people that you know a properly diversified portfolio should have some physical gold and silver in it depending on suitability. You know you might have 10 percent or 20 percent, but it all depends on the rest of the portfolio that the client is holding and at Kindigo we focus on our clients are mostly accredited investors. So there’s considerable due diligence that we do. And the KYC forms that have to be filled out, according to the compliance requirements in Canada.

FRA: And Alasdair what are the risks for for storing gold or ways in which you can have it from your perspective in terms of the industry. Like what are the advantages and disadvantages of different ways of storing gold?

Alasdair Macleod: Well obviously that I think we’ve just agreed the best way to store it, but you know unless you’re talking about small change at home if I can describe it that way is in LBMA registered vault. And again if you have it in a different jurisdiction from the one in which you live that you like is another safeguard. The other safeguard that’s a proper LBMA registered vault gives you is that gold that goes into the gold basically is proper bullion. We ensure that anything that comes in for our customers is bullion and not Tungsten painted gold colour, that unfortunate experience that happened in Canada earlier this week. So that’s terribly important say you’ve got to ensure that you know the gold comes from proper refiner. So it’s not conflict gold. This is another thing which is becoming an increasing issue in our politically correct world. So I would when it comes to dealing with set incentives, such as some of the refiners in Dubai. I sometimes wonder what the source of that gold is. So it is important I think to to deal with reputable people. Storing gold at home does give you potential problems because if you’re careless and you let someone know that you might have an gold at home then you know you’re probably open to being robbed. And if it’s a lot of gold then you know the story gets out then you could actually be robbed by some very very nasty people. So I think that is what I would keep at home is probably fairly limited. I would actually look past having a proper vaulted gold. Physically yes I think we’re OK. But you’ve got to understand that that you don’t have possession of the gold, you have possession of a piece of paper which gives you an entitlement to some gold and you may not even have a direct entitlement to some gold because when it comes to submitting your ETF shares, well stock in return for gold usually it can only be done through authorized banks who are on the list to be able to do it. So that again is is a bit of a problem.

FRA: And your thoughts Bosko.

Bosko Kacarevic: Yeah. You know our system is a closed loop system so we eliminate any possibility of any counterfeit gold products entering our platform because it’s all done through our office. I inspect every product that goes into the vault for my clients and we are providers to the Canadian man to other gold refiners. We have direct relationships. So there’s no that gets out into the public. The the article that Alasdair mentioned regarding the Canadian Mint at RBC you know it seems there was a case I think a few years ago that they found the gold bar or counterfeit bar at a jeweler and always seems that it’s a jeweler or a pawn shop that these things are discovered. You know I haven’t experienced any counterfeit products coming through our business. I don’t think any anyone who wants to pawn off any counterfeit products would go through our business or Alasdair’s business. I’m sure that these people that are attempting this are staying away from reputable dealers because they’ve been caught right away. The Canadian Mint has issued a statement to their defence. I mean I guess we’re an approved a billion and a dealer with the Canadian Mint. So they said that that the gold product was and wasn’t even produced by the Canadian Mint in the Royal Bank is saying that they didn’t even sell their product. So how this came into being I don’t know. But I think people need to understand too that you know the the ownership contract that you own the gold and you know people have to do their due diligence in their background checks on who they’re dealing with. Because at the end of the day when you want to sell you have to make sure that you know the gold is available for you that you’re selling. So when it’s in our vault you have title ownership of the gold and even the clients that are keeping their gold at home. You know we don’t pay out to people when they come into our office right away. We have the gold inspected and we always just to cover ourselves. We tell them they have to wait 24 hours before they receive their funds. So anyone trying to pawn off a fake gold bar isn’t going to leave our office and let us inspect it for 24 hours so we’ve never come across anything like that. And I think this is an isolated incident. But I think people need to be aware of it. If the ownership contract when you’re storing your gold in a vault the title ownership of your gold is what the important thing is.

Alasdair Macleod: Richard can I just add to Bosko saying there, one advantage that you guess of having gold in a proper LBMA vault is that it should be properly insured. And we also have to ensure all our customers gold. So I think that’s a very important point. Another important point to realize is that if you take delivery if you go ahead and you want to sell it, you have to effectively make sure that you know to convince the buyer that it is authentic and that will involve it being tested. So the marketability of gold which leaves the vault is not nearly as good as gold that is kept in the vaults. I just wanted to add those two points.

Bosko Kacarevic: I agree with that it’s very important, the insurance aspect too. We have clients that are storing, some people even for a large quantity of gold and silver at their homes and it’s just too risky and then what eventually happens is when they want to sell it you know in the case of silver. People are holding a few thousand ounces of silver. It gets pretty heavy and it cumbersome moving it you know. And when it’s in the vault for us it’s very easy to identify. Each container has a specific number. I have clients you know across the country and in Europe that they just pick up the phone they call us. We sell the specific holdings and wire them the funds so that people are unable to do that when you have your gold at home and you’re travelling or you’re you want to liquidate it quickly because one of the other issues that comes about is when people call and they want to sell it. If the market’s moving fast or are very volatile I won’t lock in a price for a client unless the gold is in our office. You can’t call me. But if the gold is in the vault I know it’s there. I know the identity of it so I can lock in a price for a client over the telephone and send them the money. But if they have it in their basement and they want to lock in the price you know it’s not possible they have to bring it in person. And once it’s in my possession then we can discuss locking in price.

FRA: Now in this day and age with the advent of cryptocurrencies does physical gold still make sense? So if we look at what’s happening with Bitcoin and other Cryptocurrencies. Is there a migration of investors holding physical gold towards holding cryptocurrencies either together or as an alternative, Alasdair?

Alasdair Macleod: What a fascinating question. I think Richard the answer to your question whether there’s a migration from buying gold into buying Cryptocurrency. I think there must be. Yes. We can’t deny that. The reason I would say that is because so many people who deal in anything really don’t actually understand the underlying economics of what they’re doing. What they understand I think a trend and quite simply if you see a trend moving or speculating you just jump on the trend. So you are going to have people who will see who take the view that gold is less exciting than Cryptocurrencies, has potentially less return over at whatever time frame that they’re putting in their mind. So they will sell gold and buy Cryptocurrencies, of that I have absolutely no doubt whatsoever. What is interesting in this however and I did actually write a piece on this in I think dated August the 10th. So for anyone who’s interested if you go on to Goldmoney sites and go into research and go into the insights then you will find. August 10th I wrote “Cryptocurrency- its status as money”. Now this is very important because I won’t get through the article. Basically my conclusion is that Cryptocurrency are not money. I mean it is not just a question of volatility, its the origins of it and all the rest of it. But cryptic currencies are the media for speculation par excellence. And you know with the limited supply and all the rest of it and the fact is that so far the people who got into it are basically geeks. If I can be that rude to call them that. The hedge funds are beginning to wake up to this. The authorities are beginning to wake up to it. I mean they even bought it yesterday the CMA decided that they’re going to introduce a bit you know a Bitcoin future. Various governments have sort of taken on the technologies, some are being frightened away by the volatility in the things in it. So I think the Chinese have sort of tried to close down Chinese based operators, but basically the public has yet to buy it. And if you look at any bubble which is essentially what the Cryptocurrencies are, it’s only when the public are really into it that you can say this is time to get out. It is getting dangerous. It is going to collapse. We are some way from that. But what I can’t see is what’s going to stop these Cryptocurrency is rising in the meantime because you know if it’s becoming you just my street futures exchanges and so on and so forth you are going to get asked a lot of hedge fund type money, speculative institutional money if you like yet to buy these things. So I see them going considerably higher than this. You know please don’t hold me to that. That if you like is the theory if you like the madness of crowds as Charles Makai wrote back in the 19th century. We are seeing it and this is pure. It’s like tulips without the bulbs. I mean it is amazing. I get very unpopular for saying this by the way because everybody in Cryptocurrency is convinced it’s money, convinced it’s some sort of new paradigm. And it was ever thus, every bubble is like that everybody involved believes that this is a new future and whatever. What fascinates me you know we’ve looked at it so far in terms of Crypto versus gold, which was the basis of your question. But I think at some stage it’s going to move on from there. What we’re going to be looking at is that potential for Cryptocurrencies to destabilize paper currencies. I’m trying to get this one. Trying to get my head on this one at the moment and I’m planning to write an article on this front shortly. So this to me is a fascinating topic. It really is.

FRA: Could the momentum into Cryptocurrencies keep a lid or a cap on the price of gold in U.S. dollar terms Alasdair?

Alasdair Macleod: As a follow-up, no I don’t think so. There is actually a far bigger story going on gold and it’s all to do with the declining use of the dollar in international trade and this is something that’s being forced on to the rest of the world outside of America by China and Russia working together as head of the Shanghai Cooperation Organization. I think that we’re likely to see. I mean my information is that we’re going to get in an oil contract settled in Yuan on the Shanghai futures exchange by the end of this month, November, and between Yuan on contracts countries like Iran, who either off a bit to deal in dollars or out of their choice, would not want to go anywhere near a dollar. Will have the facility to buy gold in Yuan. And that I think is something that is likely to lead to a significant rise in the price of gold. The other thing about the price of gold is that there are an awful lot of dollars outside America. We’ve got some people running around saying well you know the American economy is rubbish and the rest of it is just going to collapse and then the end of the purchasing power of the dollar will go up. But the latest figures we have which are over a year old now is that the total portfolios in dollar cash outside America is in excess of 17 trillion dollars. That was midway through the last year 2016. It was barely changed from the level Midway 2015. My guess is that with the dollar having eased over the course of this year we will already be recording a decline in the total value of foreign portfolios, the dollar elements in foreign portfolios. Those figures will be released in next April or May. So we won’t know until then. But just imagine if you go 17 trillion dollars outside America and you have got an economy you’ve got about 19 trillion dollars GDP something like that. This is too much money outside. I think for the situation to be sustained, so I would say the dollar is weak and that is what’s going to drive gold up. And I think it is something which is independent of the Cryptocurrency story, but what does fascinate me is the potential for the Cryptocurrency is to destabilize paper currencies if you like as well. And as I said I’ve got to get my head around that before I write it.

FRA: And your thoughts Bosko.

Bosko Kacarevic: Alasdair and I seem to be in the same camp. I’ve heard actually a number of my clients who have actually sold their precious metals to purchase Bitcoins because it seems like an alternative currency. But you know it’s not officially a currency, but it seems to be operating like one. And you know judging from what’s happening, the attraction to Bitcoin is similar to the attraction to gold. It’s it’s an alternative currency outside the banking system or in government and so on. But the problem with that is is when you’re when you’re comparing it to gold. Gold is still a physical commodity. You can take possession of it. I have a problem with Bitcoin because it exists on the Internet. It doesn’t exist in the real world. You can’t take physical possession like gold or even paper currencies. So there’s a huge cyber threat to the Bitcoin. I mean I find it strange that the person who invented Bitcoin, Satoshi Nakamoto, is still anonymous, nobody knows who he is or where he came from or whatever. That kind of raises a lot of flags for me. Then when you have issues with Bitcoin or let’s say that there’s a hacker that hacks into Bitcoin who are you going to call. There’s no nobody you can sue. When you invest in a company or you buy gold and silver or invest in the stock there are people behind that. When you invest in currencies, there’s a currency broker. The government issuing the currency, there’s essentially nobody behind bitcoin. It’s operating and it exists on the Internet and apparently from what I understand it’s a series of encrypted keys. But you know I think one of the fundamental changes that Bitcoin is introducing, is the blockchain technology that it’s produced on, which I think that there’s a lot of people in the financial institutions are adopting this new form of a distributed ledger and even that’s questionable as to the advantages of that. I think the credit card companies and the banking system the the technology that’s behind their ledger entries and their software accounting systems are doing fairly well. Introducing a distributed ledger, I’m not sure what the advantages of that are, but it seems that a lot of people are attracted to it. And you know mind you people are always attracted to new things like Alasdair alluded to earlier, but you have to remember that when the Internet was introduced and people were adopting there was a lot of, along with the advantages, it brought in a lot of problems. We have high-frequency trading now. So it’s not always a great thing to not have a central authority. In some cases, you want to have a central authority to be the mediator between two parties. So I’m still sceptical about Bitcoin. Obviously, it’s doing very well on a price level but on a value level. You know I still have a lot of reservations about investing in it, but currently, the CMA group thinks that the futures contract would be in demand and people will have the opportunity to hedge their risk in Bitcoin. So for me, it’s too early to get in. I’d like to see how it develops.

FRA: And I saw today an article by Jim Rickard’s on a new research report out by Goldman Sachs discussing this very issue of gold versus Cryptocurrency. Goldman Sachs appears to be leaning on the side of gold. Well as a preservation of purchasing power. They mentioned that Cryptocurrencies are vulnerable to a hacking, government regulation, and infrastructure failure during a crisis. Those are issues of concern and because of the volatility in Cryptocurrencies, they still see gold as preserving purchasing power better than Cryptocurrency, so that those are the results of the research report by Goldman Sachs and any thoughts on that and. Your final thoughts there.

Alasdair Macleod: Well I’d go along with what Goldman Sachs have concluded. I haven’t read their report, I must say, but as you’ve described it it’s hard to disagree with it. But I don’t know. I know that for people who are trading in it, this is all sort of a big issue. But from an economic point of view there is no doubt about it. Gold is money, always has been money whereas Cryptocurrencies are not then merely a medium for speculation. But you know we don’t actually care about that. Perhaps we always say is Bitcoin going up and we’ve got to get in there or in theory or whatever. We’ve got to go and buy it you know because you can’t stand aside and not buy these things. And this is why I think it’s terribly important to understand that actually it is just a whole load of hot air and nothing else, but this balloon I think, if I’m reading market correctly it is in the early stages rather than the final stages of its inflation. And as I said, I mean so far the people who got into it all the people in the know if you like the people who have been following this story from the outset, the early adopters, the institutions yet to get in. And I think that I mean this is this is the thing about the CMA contract it doesn’t settle in Bitcoin at all. All it does is it uses that bitcoin as a reference price. So that’s actually not going to be anything like gold futures contract where the gold is actually deliverable. This is a very very different thing. So I can’t see really that there is going to be the arbitrage between the futures contract and Bitcoin. I can see how that’s going to happen because there’s nothing deliverable. So that is not going to take demand out of the Bitcoin story so much I don’t think as inflating the number of gold contracts in outstanding on Comix definitely takes demand out of the gold market. So to my way of thinking, you know the the the institutions have yet to get into this. They will get into it because these new instruments look like you know go into contracts themselves so forth are beginning to take place. I think the other thing that’s going to happen is that the regulators are going to come in and insist that anyone maintaining accounts for people with Bitcoins or other Cryptocurrencies are going to have to do their due diligence. And I think the industry as a whole itself is likely to turn round and think we’ve got to clean up our act to make ourselves mainstream. I think all that is still ahead of us. And then you know when you think about the public investing in this, investing is the wrong word, speculating is probably better word, they think they’re investing. This is not just a bubble let’s say in the Shanghai stock market or you know if we go back to the tulips in Amsterdam that’s what 1640s or whatever it was all the Mississippi bubble which was France or the South Sea bubble which was which was England and most particularly, not just you know I mean just sort of England within coaching distance of London. That was the source of this. We’re talking about something that is catching the imagination globally and I mean already we’ve got so many imitators I think there are over a thousand Cryptocurrency I read somewhere. Where is proper paper currencies or something like a 170 only so already we’re you know there’s a lot of funny deals being done around in these icy roads and all the rest of it. This is an act which if it gets cleaned up and they will try and clean it up I’m sure that they will though try and clean it up. They the authorities will want to see cleaned up because they want to tax it apart from anything else. And the other thing is I think that the industry itself will want to see it cleaned up and that will open the gates for everybody to get involved. This is this is a theoretical bubble for any student of psychology in the future. They’re going to look back on this as an absolute wonderful example of a pure speculative bubble which is totally out of thin air.

FRA: And your final thoughts Bosko.

Bosko Kacarevic: You know when you compare the standard deviation of gold versus Bitcoin, I read a report recently that over the past 12 months’ gold has had a 12 percent deviation, where a big coin is over 60 percent. So you know I agree that it is a speculative instrument. It’s going to be quite volatile and the attraction of many people to Bitcoin to elude the financial markets. I think that’s going to be taken care of with the regulators are going to get involved obviously to see him now as is adopting it. So this idea of people being able to have a peer-to-peer and to trade outside of regulation or the government size. I think that’s just an illusion because of you ultimately you have to settle these Bitcoins for currency that’s going to be used in the real world. And you know you have to receive it in a bank. It has to be wired from whatever Bitcoin exchange or so there’s going to be financial institutions involved, regulating it. So I mean is it going to go up further. It’s very possible. I mean I think it is in the early stages and you know it’s it’s going to go through the process like anything else that’s brand new. It’s going to weed out the all the weak currencies and will Bitcoin be the winner in the end. I don’t know. Maybe a theory or the other thousand that are available. Who knows how it’s going to turn out, but there is definitely an attraction to it. And it seems to be distracting some gold investors are distracted and selling their gold and silver for Bitcoin and I disagree with it. But you know people like to follow trends and in some cases, they’re going to have to experience the negative part of following a trend and being wrong. So I don’t really know what’s going to happen but it’s interesting it’s a new technology and we’ll have to see.

FRA: OK great. Great insight gentlemen. How can our listeners learn more about your work, Alasdair?

Alasdair Macleod: Well the easiest way is to have open an account Goldmoney, no, but on Goldmoney site I write weekly is published on Thursdays I usually say if you look if you go onto the site, Goldmoney.com, research and then insight, you’ll find that. I also write a weekly market report and that again can be found under the research column.

FRA: And Bosko?

Bosko Kacarevic: People can reach me at our Website at Kindigo.com and you know on there this information about our company, my background, and they can email us through there. We don’t do a call in, but we do keep in touch with our clients and keep them up to date on what’s happening in the gold market.

FRA: Great thank you very much gentlemen for your insight. Thanks for being on the program show.

Submitted by Boheira Manochehrzadh <bmanoche@ryerson.ca>

Download the MP3

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.