The Doc spoke with Cheviot Asset Management’s Ned Naylor-Leyland Sunday regarding the Euro-zone crisis and the €100 billion Spanish banking system bailout announced over the weekend, extreme supply constraints in the physical bullion markets, the new allocated silver exchange launching in China this summer, and unallocated gold and silver holdings, which Ned states are fine…until they’re not.
Ned states that the new Asian silver exchange he is working alongside Andrew Maguire to launch (which has been kept tightly under wraps up to this point to prevent western banking interests from derailing the launch as happened with the PAGE) will trade 1:1 fully allocated silver contracts, and will suck physical metal out of the LBMA system.
The new Asian silver exchange could prove to be a paradigm changer, as Ned estimates that Chinese savers took up 1 billion ounces of silver & 100 million ounces of gold via gold & silver backed savings accounts in 2011!
Ned also discusses the Spanish bank bailout which he describes as the European financial community merely admitting we have contagion, as well as shocking information regarding the actual owner of the ‘GLD’ gold bar held up by Bob Pisani infamously, which Leyland states has been confirmed to be owned by ANOTHER ETF!
The Doc with Cheviot Asset Management’s Ned Naylor-Leyland- full interview below:
Ned Naylor-Leyland:New 1:1 Allocated Silver Exchange to Suck Metal Away From the LBMA
When asked whether this weekends 100 billion euro Spanish bank bailout would be sufficient to stem the crisis Ned responded:
To me it reads as a stop-gap measure, effectively. It has a lot to do with the fact that clearly the problems are accelerating in the background in Spain, and obviously that led to a big conference call between the different finance minsters.
In truth, as far as I can see, this is an intent to make a bail-out, the Germans need to ratify the EFSF mechanism anyway, and yes sure, I think the numbers are completely well as wrong, I think you’ll find in due course that this is just a first tranche for Spain in the same way that Greece has been going back to the trough in a repeated basis.
I think the most important thing here really is that it does start to smell of contagion. You’re now in a situation where it’s been Greece, Greece, Greece, Greece for so long, and those in the background, and those investing in precious metals particularly have been saying wait a minute, this is just Round 1.
It’s just obvious that we are now into Round 2. The numbers (which is often the case for those of us who have skepticism towards these numbers) are less relevant than the top line of ‘yes we’re going to do it’ and initially it’s a 100 billion euros.
Regarding Ireland’s immediate request for a renegotiation of it’s bailout terms and whether Spain’s condition-less bailout sets a new precedent, Ned stated:
Absolutely! Of course , let’s see what becomes crystallized. At the moment all it really is a ‘yes we’ll do it, there won’t be macro-economic conditions’.
Recently we’ve had proposals from the Germans that they would want to try to claim sovereign gold reserves as collateral against any new rounds. I think that will chime into this whole issue of whether or not they’re willing to ratify the new (EFSF) mechanism. So this (the Spanish bailout) is political speak at the moment. So we’ll see what comes out of this, and what sort of format is agreed to, because like you say, the Irish quite rightly are saying ‘Well now wait a minute, I’m not quire sure about this’ as one would expect them to do, and that effects everything because you can’t act one way towards one country and a different way towards another.
So all that’s happened really is the European financial community has admitted that we are now in a contagion environment. At least that’s the way I’m reading it.
When asked whether the contagion is likely to spread to Italy next Ned replied:
The market is so zombie-like in my opinion that there will probably be an initial beneficial reaction of the markets, and that probably that won’t happen instantaneously. Once the sugar high, and of course these sugar highs are lasting less and less time, and who knows how long the markets will take this fresh round of recapitalization- of course where’s the capital coming from…it’s a total uncapitalized system.
We’re in a wait and see environment now, it will be interesting to see how the markets respond next week, the key is the bond market of course. Ultimately the bond fund managers are the ones that matter- how they react to the framework of this new inverted conditions free arrangement will be very interesting to see.
Regarding the likelihood that major bond fund managers will soon be flooding to physical gold for protection Ned stated:
Undoubtedly. I’ve been banging about this for a long time. The bond market is where the action is, particularly as the equity market is now driven so much by HFT’s, the algos and very light volume.
The markets can be moved by what these big bond fund managers do.
I know a couple in London, one in particular who’s a very close friend, I had lunch with him a couple of weeks ago and we were talking about it, and he’s deeply invested in physical gold and silver himself, in fact he’s of a similar viewpoint of most of the people on your site and other similar websites in real terms. But of course he has a mandate that he has to operate to. I had a chance to have lunch with him and I told him, ‘You’ve just got to move first! You’ve got to man up, and basically pitch to your investment committee, you know that sits behind the fund and say look, I really feel I must have 1 or 2% as a nominal position in gold as a hedge against tail risk…which is barely tail risk now, it’s sort of body risk!’
Particularly as these guys do understand these concepts, I think its amazing that somebody with a public profile hasn’t already made that move. I imagine it will happen fairly soon, and I think it will be difficult for other bond fund managers. Let’s say someone does it and they then see considerable inflows into their fund on the back of that change. I think that could be very, very telling.
Regarding his outlook on gold and silver Naylor-Leyland responded:
If the secular bull market is anything to go by, there’s no doubt that we are in a buy zone at the moment. I think the charts look really good actually, I’m quite relaxed about the technicals, or at least rather what the technicals are showing. I see a triple bottom in gold around $1550, there’s a clear, very large wedge in silver which looks ready to consolidate, and I would anticipate based on what’s going on in markets overall and with the likelihood of considerable further stimulus that they will go a lot higher.
For gold to do what it’s done every year for the last 10 years it’s going to go up $400 odd dollars before the end of the year. It will be interesting to see whether it does that.
Backwardation in gold in the LBMA system is screaming a large rally between here and the end of the summer! For me, you can consider that we’re still in a negative real interest rate environment and that is certainly going to be continuing for awhile, long term, I’m very positive on both (gold and silver).
When asked by The Doc how long gold futures prices can continue to decline in the face of massive physical buying of gold Ned replied:
Actually I have a little bit of data which may be of interest. I know you’re aware I’ve been involved with the guys who were originally behind what was the Pan Asian Gold Exchange (PAGE), and the new silver exchange which they’re setting up which is in progress at the moment.
Something came out the discussion I had with them the other day which is very interesting. One of the guys I was talking to- an individual from one of the main 5 Chinese banks, and they were talking about the demand within the country for the two metals. Something very interesting came up, which is they have these gold and silver backed savings accounts in China, in fact all of the banks have these offerings.
The demand for them is just extraordinary! If you extrapolate the demand from this one bank across the other 4 majors, you’re talking a billion ounces of silver demand last year, and 100 million ounces of gold demand! Now of course what’s coming as the next comment is the thing that won’t surprise you, which is that the guy did confirm that yes, they don’t actually physically buy any of that metal- effectively it’s just offset 1 for 1 in the unallocated spot or futures markets- I’m not sure exactly which mechanism is used by those banks.
But it’s just amazing to see all this real demand for real metal just feeding into this system whereby unallocated is fine until it’s not, and in due course that will be the case!
In response The Doc asked Ned that with Harvey Organ’s recent allegations that the GLD’s inventory has been rehypothecated and with the financial crisis accelerating, how many gold and silver investors will wake up one day to discover that the bullion they thought they owned is rehypothecated paper?
I’ve been saying that to clients, to potential clients, and to my colleagues in London and in the investment world since 2003-4! Effectively, you MUST BE CAREFUL WHICH VEHICLE YOU USE!!
There’s no question that at some point this is going to be a HUGE problem!
You’ll remember that amazing video interview with Bob Pisani that CNBC ran where they went into GLD’s vaults in London- I’m sure you saw that Doc. You know they took his mobile off him and he ended up in the vaults and he held up this bar and he said ‘this is the kind of thing that GLD holds custody for you!’ And then immediately everyone jumped all over it and said ‘wait a minute, that bar isn’t on the bar list!’. Now I don’t know if you know this, but they never said anything about that- they basically went all quiet on that issue.
About three weeks after it happened, I happened to have ETFS (ETF Securities), which is another ETF product company come into see me at Cheviot. Quite why they wanted to pitch a gold ETF to me is anyone’s guess because they should have known that it wasn’t exactly going to be a success, but we had an interesting chat, and I brought up some problems with ETF’s, and I mentioned this video to them and I asked them whether they’d seen it. They said no, they hadn’t, but that sounded quite interesting, could I forward it on?
So I forwarded that to them and said ‘I’m very interested to have comment from you on what you think about this’. I got an email back which stated ‘That was interesting, and what’s even more interesting is IT’S OUR BAR!’
So let’s clarify. He (Bob Pisani) was actually holding up a bar belonging to a separate ETF, WITH NO PERMISSION FROM THEM!! To me, that tells you everything you need to know!
Ultimately, with all financial products, buyer beware, you must read the prospectus carefully, you must look at what you’re investing in, and for some people who have big, big pockets and want to be trading the market , who knows, maybe a gold and silver ETF is a good vehicle for a savvy investor who has huge money to move backwards and forwards in the short term. But for me, the problem with ETF’s is a very simple one, which is there’s no additional reward in owning an ETF, but there are very substantial additional risks, in my opinion. When it’s a risk/reward decision that I look to make on every investment for clients, it doesn’t make sense, because there’s no additional reward!
Saving the best for last, The Doc asked Ned Naylor-Leyland to give an overview on what happened with the PAGE, and an update on the debut of the new 1:1 allocated silver exchange he is developing with Andrew Maguire along with Eastern interests.
Ned Naylor Leyland:
It’s quite unsurprising what happened with the PAGE, although ultimately we’re in a better situation than we were before, and I’ll explain why.
The Pan Asian Gold Exchange was a sort of dual functioning exchange based in the Hunan Province down in southern China. The thing about it is it was a regional program to develop that area into a trade zone within SE Asia. The main part of the exchange was for domestic use, leveraged products, etc., but they also had this very, very interesting plan for a fully allocated spot contract in gold.
Now two things happened. The first thing is the bit you alluded to that other shareholders within PAGE, because PAGE is effectively made of up 10 shareholder groups. One is the one that I’m involved with, and then the other 9 were effectively Chinese SOE’s or Chinese companies. The one Chinese company that was listed on NASDAQ is an information technology business. They were the ones that blocked it. Effectively they started saying that they insisted (and they owned slightly more than the others in truth) on building the platform from ground up using Chinese tech and Chinese workers.
Now that would have taken a very, very long time and that wasn’t the original plan, which was very frustrating for the people I know who wanted to roll-out the fully allocated contract by buying a platform off the shelf.
So that happened, which for the guys in China they were a bit confused. I wasn’t, I thought it stunk straight away. But then interestingly, following that was then a change in Chinese laws as well.
They turned around in the Central Government and said we’re now not allowing any trading in gold outside of Shanghai. So it got smashed on two levels.
The reason I say we’re in a bit of a better situation is that the guys behind the allocated contract then understood what they were trying to achieve better, and understood the dynamics of the market better.
They realized that they weren’t necessarily going to be welcomed with open arms by the rest of the bullion trading community, or at least on the custodial side.
So they thought about it carefully and they’ve gone about setting up a new exchange which unfortunately I can’t give you the name right now, but it should I’m very much hoping, mid-summer we’ll be there, and I intend to go out there at some point as well. It’s a fully allocated spot receipt in silver which will have monthly offerings, and the idea is for it to offer an alternative for those guys who are trading spot in size through the LBMA system, to own something which is transparent, tradable, and should in due course suck metal away from the LBMA system across to this new exchange.
Now Eric (Sprot) would be able to tell you this himself, it’s not a straightforward process setting something like this up. It requires a lot of hard work that goes into it. There are always little gremlins here and there that need to be ironed out, particularly with something like this where it’s an international offering. There’s a lot of serious people behind it, it’s very much on schedule to happen this summer, and I’m very excited about what it could do once it’s up and running!
Ned Naylor-Leyland is an Investment Director and advises a specialist precious metals fund for Cheviot Asset Management in London, UK.
Investment Director MCSI
020 7438 5683
Ned graduated with a BA (Hons) degree from the University of Bristol in 1998. He began his career in 2001 at Neilson Management, later moving to Smith & Williamson (formerly NCL Investments) in 2003 where he was an Investment Manager. Ned joined Cheviot in July 2008 and is Advising a specialist Precious Metals fund.