AN INTERVIEW WITH PHILIP JUDGE AND GERRY SCHUBERT
INTRODUCTION AND CAREER BACKGROUND
Philip Judge: I’m happy to be joined today by Gerhard Schubert who, I’m pleased to say, is a member of our advisory board. Gerry, you’ve had a career spanning over 40 years in precious metals, so could you give us a some background in terms of your career?
Gerhard (Gerry) Schubert: Of course, but firstly, when you say over 40 years, that shows how old I am. I started in the international precious metals market in Frankfurt, a silver dealer in market making in the interbank market, and then most of my life I worked and lived in England, because obviously the precious metals market there is very little substance or involvement from German banks. Relatively early in the early ‘80s you had to make a decision, London or Zurich, and London is really the center of the OTC market, so I moved in the early ‘80s to London and basically stayed there ever since until I moved to Dubai at the end of 2010.
Philip Judge: You also served on the Management Committee of the London Bullion Market Association while you were in London.
Gerry Schubert: Yes, and I was on the Management Board and the Membership Committee of the LBMA until I moved to Dubai, and I was also on the Management Committee of the London Platinum Palladium Market (LPPM) before I moved to Dubai. Once I was in Dubai, I was – I want to call it – drafted in by the Dubai Multi Commodities Centre (DMCC), a government regulator for the gold and precious metals business in Dubai, straight into their Gold Advisory Committee and also I served on the DMCC Independent Governance Committee.
MIDDLE EAST TRENDS
Philip Judge: Since your time in the Middle East, you obviously have extensive work experience in places like India or other parts of the Middle East itself; in the MENA region. Can you give us a bit of a background on some of that?
Gerry Schubert: Of course. India obviously is one of the main customers of Dubai, and I’m regularly speaking there at conferences and a part of panels. Actually, at the end of this month, I’m going to Amritsar where the India International Gold Conference takes place the first to the fourth of August. And, yes, India is obviously a very interesting physical market.
Once you’re here in Dubai, different to the London OTC Market, you get very involved in the physical market, and I think for a few years now, the gold market – the physical gold market – is really moving from West to East. You can describe the physical gold market as very prominent from Turkey eastward up to and including China. That is really the physical world, and this is now getting stronger and stronger and will have serious impact on price finding in the future.
RECENT GOLD PRICE MOVEMENT
Philip Judge: Yes, that’s interesting, because late last year when we got together in Dubai, we were talking about the physical market, and you felt very strongly that this year, 2019, we would see a significant move up in the gold price. When we opened 2019 – early January I think – we were trading around $1280-$1285 dollars an ounce, and now on July 11th, we’re trading up consistently around this $1410-$1420 area. So, what do you think some of the factors have been to see this 10% move up? Really, since late May into June through to July we’ve seen this move up. What do you put that down to? Is that a physical situation or how or what can you really identify as the key factors here?
Gerry Schubert: Now the price finding currently is not driven by the physical markets of let’s say the eastern world. This is still driven mainly by the futures market like obviously COMEX which is a very strong influence in the prices. But if you look at the geopolitical and the economic situation, then I think the move is very very easy to understand. I mean, the last two days you had Chairman Powell from the Fed giving signals that the Fed might still be loosening and reducing interest rates with some people speculating on a half percent. I personally do not believe that on the 30th or 31st of July they’re going to lower it by half percent. I mean, all the way down and all the way up the Fed has mostly done everything in quarter percent steps, and I really can’t see why they should change that behavior at the moment.
But it’s irrelevant. The liquidation which you saw a week ago, basically down from $1420 which brought us down to $1382, that was the week-longs getting out, profit-taking, people took their money. And then came strong buying also from governments, let’s say like central banks, into the market again who were supporting and holding the market, and then you saw this very good move up after we couldn’t break down $1382, and we closed yesterday well above $1400, $1422. I think that is an area which will now basically hold and be used as a stepping stone to hopefully break on the upside $1440. $1440 is a double top. If we breach $1440, then nothing until $1474, but I go further and think we will see $1600 in a straight line after that.
I also want to mention very very clearly the geopolitical tensions with Iran. We here in Dubai are sitting very close to Fujairah Ras Al-Khaimah where yesterday the incident happened with the Iranian boats, the British tanker oil vessel, and the involvement of the English warship. I think all these things are very much contributing to uncertainties. But saying this, the real factor is still, and we shouldn’t underestimate this, the purchasing – the continuous buying from central bank – and to be honest, they’re rather getting more central banks who are buying gold for diversification of their reserves than less.
I mean, you always have the prominent Russia, Kazakhstan, China but now you have Poland, Hungary, and quite a number of central banks now buying more gold. I think it’s time that people understand what that is. If I had some hedge fund 500 tons, they then will sell it when gold goes up $50 to take the profit. This buying from central banks is glacial buying; this is buying to diversify their reserves. This is not coming to the market for years, and that changes the balance between supply and demand significantly and for further years.
CENTRAL BANK GOLD PURCHASES
Philip Judge: We certainly saw a huge uptake of central bank purchasing of gold in 2018, and that’s obviously as you’ve just mentioned continued into this year. In April for example, India reportedly bought upwards of six tons, but then as you’ve mentioned you’ve got Russia, Kazakhstan, China, India, Turkey, and so on. That was definitely a significant factor in 2018, and it looks like it’s continuing into this year, correct?
Gerry Schubert: Oh absolutely. The central banks have so far in the half-year stage bought more gold than they did at the same stage in last year, and last year was a record year for almost 60 years when they bought 650, I think 659, tons in total. So, that will continue. This is changing the behavior of the physical markets, because if gold goes up $100 and is not coming back into the market because it is staying in the central bank vaults, that is a significant shift. Imagine you going up $100 and also hedge funds and pension funds getting involved in addition to the central bank buying. This will change the balance.
You shouldn’t forget now recently the two names of Poland and Hungary who bought gold to diversify their portfolio and to bring the level of gold holding up to the level of other comparable central banks. They can do that because they are not part of the euro. They’re part of the European Union but not part of the euro currency, so therefore they do not have to ask the ECB for permission of what they do with their gold holding or if they want to buy or sell.
SUPPLY AND DEMAND IN THE PHYSICAL MARKET
Philip Judge: You mentioned a few minutes ago that the physical market over the last 25 years or more has really shifted to the East. Can you talk a little bit about what you’re seeing first-hand in terms of Middle East buying? I guess a large part of physical flows also end up in China, we’ve talked about that many times in the past, but also India, Pakistan, and places like that. What’s your view on what’s happening there from a non-central bank standpoint?
Gerry Schubert: The central banks, if you look at India for example, is irrelevant. I mean their 600 tons or whatever is pretty irrelevant. The private population in India holds somewhere – and this is anybody’s guess – between 22,000 and 25,000 tons, so three times more as let’s say the Feds or the American reserves holdings are in gold. The difference is that last week we had the Indian government in the budget raising the import duty from 10% to 12.5% whilst it was expected that the duty would have been cut, but this wasn’t to be the case. I think it clearly demonstrated that the Indian government is resigned or accepting the import of gold through alternative channels other than the official channels. That means that the Indian budget will have more space to import oil, because oil and gold are the two biggest factors on the current account deficit. Oil they need for the economy. The government doesn’t think that gold imports for the population is the necessity for the government to do, so they are accepting that. Make no mistake, India will still probably be somewhere between 750 to 900 tons over the year, but it will be less official buying and more gold will come through alternative channels.
Having said that, the 2.5% increase from 10% to 12.5% gold in India is on record all-time highs which also might take a little while for people to get used to this price level. I would expect after the monsoon, so looking at September, October, November, for significant purchases again from India. But for the time being, I would probably say there might be a little pause.
China, obviously everyone knows, is the largest producer with 450 tons of their own production plus reported another 1000 tons imported. So, between China and India, you have already the world’s primary production being used up. And then take into addition from secondary market what comes in, scrap jewelry has to satisfy the rest of the physical market, physical world, and as you just said earlier, Turkey, the Middle East, and also other countries central bank buying. If you take again 600 tons, then you see where the balance goes.
Ultimately if you look into Zurich or into London, Zurich is so-called the physical center of the world because they have the refineries, but from there all the gold that comes out of the refinery goes straight on planes to the physical area, Turkey up to China. So that means that western holding and OTC vaults will ultimately be drained of physical gold.
SHARIAH STANDARD 57 FOR GOLD INVESTMENTS
Philip Judge: Right, and obviously the more the buy side grows particularly in the MENA region, the Middle East region for example, that’s going to just put further and further constraints on the physical market, so you know long-term that’s got to affect price.
I’m also curious, and I’m guessing this is 2016, you’re originally part of the AAOIFI Law 57 which is what we call the Shari’ah Standard on Gold for Middle East and Islamic financial products. Do you think the impact of the Standard being passed and Law 57 becoming a Standard for gold investment products has moved the investment market like the financial buying side of the market in the Middle East, and do you think it will continue to do so? What’s your thoughts on that?
Gerry Schubert: First of all, I just want to mention I had the honor of being there at the World Islamic Banking Conference (WIBC) of Iran in December 2016 and also to be there when this AAOIFI Standard Law Number 57 was launched. I have seen quite a few new products being presented in the Middle Eastern region that are gold based, because we shouldn’t forget, before the removing of uncertainties about gold investments for the Islamic community, (the old) Islamic investing community had mostly only the choice of investing in real estate or in sukuks. Now with Law 57, all uncertainties have been removed and within this rule book, gold products can be developed and should pass all Shari’ah boards relatively easily as long as this law is being administered and monitored.
The Islamic investment community, if you look at Malaysia, Indonesia, there’s huge potential, and as it more and more slowly comes into the market, it becomes I would say household acceptance. This is one thing that over a period of time will additionally drain a lot of physical gold from the market and basically put the derivative market very much into the background.