Dear friend and client of Physical Gold Fund,
We are pleased to release this next episode of the Physical Edge with Alex Stanczyk. In this episode, Physical Gold Fund’s Managing Director explains the importance of jurisdiction choice for vaulting, as well as why vaulting outside the banking system is a prudent safe-guard in today’s financial environment.
Please enjoy with our compliments.
- According to the IMF, gold is the only Case of a financial asset with no counter party liability
- Gold will not default like some other financial assets could during a liquidity crisis
- Over 30% of the bond market is now negative interest rate bearing, with over $7.9 Trillion at negative yield and gold is looking more attractive
- The meme that gold is a bad investment because it produces no yield does not stand up under scrutiny, all forms of money generate no yield unless invested
- A modest allocation of a portfolio to gold acts as a diversifier and a truly non-correlated asset
- Gold is not subject to hacking or cyber warfare
- Gold is truly non-correlated
- There is a physical market for gold, regardless of what financial markets are doing
- Gold protects against sovereign risks such as rapid currency devaluations, examples Russian Ruble, Brazilian Real
- It’s a hard asset with no counterparty risk, and it has excellent liquidity compared to other hard assets, such as real estate. Gold has almost a 24-hour, very deep, and highly liquid market
- Criteria when evaluating vaulting jurisdictions
- Political stability, economic stability, rule of law, history of confiscations, precious metals industry infrastructure, strategic defenses
- Switzerland as a vaulting jurisdiction
- Long standing relationships in the precious metals industry in Switzerland
- Switzerland is the core of the precious metals industry, and is a solid foundation for liquidity globally
- Reasons for electing non-bank vaulting
- Rule of Law matters regarding gold as a financial asset or physical property
Listen to the original audio of the podcast here
Jon: Hello. I’m Jon Ward on behalf of Physical Gold Fund. We’re delighted to welcome you to the third podcast in a series we’re calling The Physical Edge.
In these interviews, I’ll be talking with Alex Stanczyk, Managing Director of Physical Gold Fund. Our focus will be the fund itself and related questions about the physical gold market. This series is primarily for non-U.S. investors who are considering participation in Physical Gold Fund.
Alex Stanczyk has been involved in Physical Gold Fund since its inception by providing core aspects of the fund design and structure as well as coordinating strategic relationships required for launching the fund.
Prior to this, Alex played a key role as designer and advisor to the world’s first non-bank, private-custody precious metals fund, the Luxembourg Precious Metals Fund. For the past eight years, he has served in a range of capacities for the Anglo Far-East group of companies focusing especially on the logistics of gold acquisition, transportation, and vaulting.
Throughout this time, Alex Stanczyk has lectured globally to family office, institutional, and government audiences on the role of gold in a portfolio, and the international monetary system.
Hello, Alex. Welcome.
Alex: Hello, Jon. It’s great to be with you again.
Jon: Today we’re going to discuss a critical aspect of the physical gold market, and it’s the question of jurisdiction; that is, the location you choose to purchase and store your gold. Would you first explain why jurisdiction matters when an investor or institution is dealing with significant amounts of physical gold?
Alex: Let’s begin by laying a foundation for what gold is. According to the IMF, gold is the only case of a financial asset with no counterparty liability. In other words, gold is not going to default on you like some other financial assets could or might under situations like a liquidity crisis, institutional failure or anything of that nature.
Another aspect of gold that investors are finding interesting, especially at this time, is that in a negative interest rate environment – right now some $7.9 trillion in government bonds is giving a negative yield – gold is looking more and more attractive. Some argue that gold has no yield, so it’s not a good investment, but the particular argument that gold has no yield is actually true of all forms of money including the USD.
However, as I just mentioned, in this negative interest environment, owning gold is now no different than cash or bonds for many people around the world, only it doesn’t have the risk of default.
In our view, a modest allocation of a portfolio to gold acts as a diversifier and a truly non-correlated asset. I’ll explain what I mean by that in just a moment. It acts as insurance versus paper and digital assets in the portfolio.
Here are some reasons why gold makes sense as insurance:
First, it’s not subject to hacking, cyberwarfare, and disruptions in a particular exchange. Any kind of financial asset a person or institution might possess, obviously if they want to have liquidity, they must be able to buy and sell and trade that instrument on an exchange, unless of course they’re dealing directly with a fund like ours.
Second, during a liquidity crisis, gold is not going to fail as an instrument holding value. It will maintain its liquidity, because there’s a global market for physical gold regardless of what’s happening in financial markets. Gold is truly non-correlated. What I mean by that is it protects against failures in banking or financial services counterparties because it ensures liquidity even when other things may become locked up or perhaps are crashing in value.
For example, if we look back at the 2008 global financial crisis, there were many hedge funds that were completely unable to trade because their primary broker or primary dealer had stopped trading. Gold is not correlated to financial systems at all. There is a physical market for gold regardless of what financial markets are doing. If you’re dealing with the right counterparties, as Physical Gold Fund does, you may not be subject to those kinds of things.
Most gold funds are buying and selling their gold directly through banks. Under a liquidity crisis, the banks could have those kinds of problems. If you’re dealing directly with refineries, as Physical Gold Fund is, then you’re bypassing banks and bypassing that potential risk.
Thirdly, gold protects against sovereign risks, for example, changes in currency values. Recent examples are the Russian ruble, which basically crashed in value. If a Russian citizen or institution had invested a portion of their portfolio in gold, it would have protected their position, because the value of gold in that currency went up substantially as the currency crashed. The Brazilian real is another recent, similar case where exactly the same thing happened.
In summary, gold is in an asset class all its own because of its physical properties and use. It’s a hard asset with no counterparty risk, and it has excellent liquidity compared to other hard assets such as real estate that may take you a while to sell. Gold has almost a 24-hour, very deep, and highly liquid market.
Some jurisdictions provide a better framework than others to take advantage of gold attributes, and that’s what we’re going to talk about today.
Jon: The question of jurisdiction is clearly important for Physical Gold Fund, of which you are Managing Director. The fund has choices about where it manages its gold operations. What criteria have you used to select the optimum jurisdiction, and which location did your review of those criteria eventually lead you to?
Alex: We have looked at a number of different jurisdictions and have chosen Switzerland as our primary jurisdiction for vaulting as of now. We also reserve the ability to add additional jurisdictions in time if it becomes warranted to do so.
The criteria we used when evaluating the jurisdictions we could choose from included, first of all, political stability. Obviously, we wanted to make sure there was a stable government system in any jurisdiction we were considering, that it had longevity, and that it wasn’t subject to continual regime change and those types of things.
Next, we looked at the economic stability of the jurisdiction. This was clearly an important criterion. Another thing that we looked at was the proximity of the jurisdiction to global precious metals markets for refining, transport, security, etc.
Next we looked at the precious metals infrastructure and history in that particular jurisdiction to determine what they had in place in terms of financial markets supporting gold, physical markets supporting gold, and physical operations supporting gold.
Further, we looked at the rule of law. Does the law in practice in a particular jurisdiction provide for the protection of assets and provide for recourse? In particular, we looked at how that works when it comes to gold, because gold is looked at differently depending upon where it’s stored whether in a bank or not and whether it’s considered a financial asset or physical property by a particular country.
The next thing that we looked at was if the jurisdiction had any kind of history of confiscation of gold. A lot of people think this may not be that important or they don’t take it very seriously. While we don’t necessarily think the likelihood of something like that is high, it is something we weighted into the equation nonetheless. We tried to take as many factors into consideration as possible. Some jurisdictions have a history showing a willingness to confiscate gold, so that was something that concerned us and was part of our criteria.
Finally, gold is a strategic asset. This means that during wartime, gold actually becomes the money of sovereigns. I’m not talking small, perhaps regional wars. I’m talking about in a world war scenario. Countries typically stop accepting each other’s paper and go to gold. In that kind of situation, countries start looking at gold as a strategic asset. There’s a reason that the CIA fact book listing of strategic reserves of a country talks about cash reserves and gold. For any jurisdiction we were considering, we wanted to look at its defensibility during wartime.
Jon: In that context, let’s talk about Switzerland itself. What are the attributes of this jurisdiction that make it especially attractive for a gold investor?
Alex: The values of the Swiss people regarding freedom and ownership of private property were very interesting to us. This stems from their history as a fiercely independent and free people. Switzerland, in particular, is politically stable. The Swiss have resisted efforts to bring it under the euro system. Many Swiss feel that doing so would jeopardize their freedoms and sovereignty.
Switzerland is economically resilient. It has done fairly well considering the morass of debt and solvency issues facing much of the euro system today. Aside from gold, Swiss currency is still considered globally as one of the safest assets a person can own. It retains a strong rule of law. We consider this to be extremely important for the protection of physical private property such as gold.
Finally, although not everybody knows this, Switzerland is the global hub of precious metals refining. Unlike some other jurisdictions that are new to gold, Switzerland has a substantially developed precious metals infrastructure. They have over 200 years of experience doing it, the largest refineries in the world reside there, and they handle a tremendous amount of precious metals flow.
Speaking of gold as a strategic asset, I want to emphasize this to highlight the way the Swiss think since it became part of our consideration. As I mentioned before, during large-scale war, gold becomes money between sovereigns, so we looked at this from a gold-as-a-strategic-asset standpoint. What many do not know is that the Swiss have a longstanding military history and have not been successfully invaded for almost 700 years. They have maintained neutrality through several world wars.
There’s a story about a German military attaché during World War II who approached the Swiss Chief of Staff right after the surrender of France and basically said to him that it was time to accept a German-led Europe and that the Swiss should allow German troops access to Switzerland to come through.
The story goes that the general looked the attaché up and down and simply said, “No one comes through here.” Then he went on to explain to him that if Germany invaded, the first thing they would hear would be the simultaneous demolition of every strategic rail system leading into the country.
This belligerence to invasion and determination in resisting affronts to their freedom is really deeply rooted in their culture. To this day, in Appenzell, Swiss men still carry swords when they turn out to vote to symbolize their willingness to fight for their freedoms. They have a very martial or military culture. National sports that are highly revered in Switzerland are things like wrestling and rifle marksmanship. They have hundreds of years of experience in military science. They were known to field the best soldiers available. This goes back all the way to the 1300s.
There’s another story from 1315 about 2,000 heavily armored Austrian knights that tried to invade Switzerland through the Morgarten Pass with the intention of imposing taxation and territorial control, etc. The Swiss peasants defended that pass versus these 2,000 heavily armored Austrian knights. As these knights came through the pass, the peasants came down on them with tree trunks, halberds, axes, used rock slides, and basically destroyed these knights almost to the last man.
Today there’s a saying: “The Swiss don’t have an army; the Swiss are an army.” What that means is that every Swiss citizen is part of a standing civilian army in which they’re required to serve for 30 years. Every military-aged male is required to keep a well-serviced military grade firearm in their home and are trained in how to use it. All 650,000 members of the army are prepared to mobilize for war and be at their mobilization points in less than 24 hours.
One Swiss army officer is quoted as saying, “The foremost battle is to prevent the war by making the price of victory too high. You must understand that there is no difference between the Swiss people and the Swiss army. There is no difference of will. The people are prepared to fight, even against their own government if the government where to capitulate.” This tells us something about the Swiss mentality, and these types of things were part of what we looked at.
There are some other things that are interesting to know about Switzerland. While doing our research on Switzerland and other jurisdictions we looked at, one of the books we came across talked about geographical, tactical, and strategic considerations.
Switzerland, in particular, is basically ringed by mountains that form a natural geographic defense system. All of the roads, bridges, rail systems, and valleys leading into Switzerland are intentionally pre-staged with explosives. The reason they do this is that if Switzerland were to ever be invaded, it allows for the Swiss to intentionally destroy all access moving into the country. They will blow up every road, every bridge, and every mountain pass if necessary in order to prevent anyone from invading. The officially printed number is over 3,000 points of demolition, although some experts think this number is higher, possibly even twice as high.
There are over 12,000 pieces of artillery stationed in the mountains around Switzerland that are manned around the clock. These pieces of artillery are actually aimed at their own infrastructure such as tunnel mouths, bridges, rail systems, etc. All of these guns are pre-gridded for fire. For example, if they did demolish bridges or rail lines coming into the country and anyone were to try to repair them, these guns are aimed, pre-gridded, at those locations, so you can’t approach them anymore.
Whole mountains in Switzerland have been hollowed out and can hold entire divisions of soldiers. They store munitions to fuel and supply a fully mobilized army for over a year. Every public building in Switzerland doubles as a bomb shelter or a fortified military facility and over 95% of the population has access to bomb shelters designed to withstand nuclear blasts.
I’m emphasizing these points to highlight the way the Swiss think and the way they approach matters of security. It’s simply a part of their culture. The vaulting security for valuable property, such as gold, diamonds, and art, in Switzerland is considerable.
When reviewing other popular jurisdictions for vaulting, none of these jurisdictions come even close to comparing to these factors. For example, Hong Kong is a very popular destination for people vaulting gold and so is Singapore. While there’s nothing wrong with these jurisdictions – we may in fact vault there at some point in the future – the point I’m trying to make is that none of these countries have a history of defending against invasion and they’re very close to, for example, China. If I’m going to store gold, Switzerland stands head and shoulders above the other options.
Jon: Thank you. That’s an extraordinary portrait of the country. I’m curious now to know if there are any particular advantages of Switzerland as a jurisdiction for Physical Gold Fund in particular.
Alex: Yes, there are. For Physical Gold Fund in particular, we have longstanding relationships we’ve developed in Switzerland with some of the largest refineries in the industry and with what we consider to be some of the best vaulting operators in the industry.
Another thing that is important as far as Physical Gold Fund is concerned is that the vaults and refineries are very close to each other, so we can transport metal back and forth between them in very short distances. One reason why this may be important, which many people don’t realize, is that these Swiss refineries process around 70% of the world’s annual metal refining capacity. We consider Switzerland to be at the core of the precious metals industry, and it’s a really solid foundation for liquidity globally.
What stands on the other side of these refineries are all of the bullion banks and largest jewelry manufacturers in the world. Because of that, regardless of what’s happening in financial markets, there’s demand on the other side of these refineries. That’s a really important aspect to us, because it gives us an extra degree of resilience to potential crises in terms of liquidity crises or fluctuations in market stability. Finally, it also helps us reduce cost of operations.
Jon: One last question. Whenever we discuss the vaulting of gold, I notice you and your colleagues at Physical Gold Fund always place a huge emphasis on vaulting outside the banks. Why is this so important?
Alex: This is a great question and something we’ve emphasized in the way we’ve structured products for many years now. There was a time when we said that it was important to vault outside of the banks to protect against liquidity crises, and people would look at us without really understanding what we meant by that.
It has become more and more clear today that if you have your assets held with the bank and there is some sort of a liquidity crisis, then there may be some issues in terms of those assets being locked up or unable to be traded or whatever the case may be. We saw that in 2008.
Another important reason for this is that, in many jurisdictions around the world, bail-in legislation has already been passed. This allows banks to seize assets of depositors to recapitalize the bank in the event of a failure. While this may or may not apply to physical gold now, it’s still a really disturbing trend and something we are concerned about.
In Switzerland, in particular, gold in banks is considered a financial asset versus physical private property. That’s a really important distinction for us.
According to the Swiss Bank Act and Swiss Bank ordinances, banking business activities are defined in the Swiss Bank Act. The Swiss Bank Act does not govern private storage of gold bars. We’re talking about non-bank vaulting in Switzerland. Private property, including precious metals that are stored with private security storage companies, is protected under the Swiss Private International Law Act and also the Swiss Civil Code.
Under Swiss law, there is no difference regarding what physical property is stored. It could be precious metals, fine art, wine, etc., but those things are not considered financial assets. They’re considered private property, and that is one of the key reasons to store outside of a bank.
This is one of many things we’ve looked at that in our view makes Physical Gold Fund a leader and innovator among the gold funds and ETFs in the world today.
Jon: Thank you, Alex Stanczyk, Managing Director of Physical Gold Fund. And thank you to our listeners. We look forward to joining you again soon.
Listen to the original audio of the podcast here
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