THE MATTERHORN INTERVIEW: Ronan Manly – April 2016
“Economics will dictate that the price of gold is going to rise”
For Matterhorn Asset Management, Lars Schall spoke with Ronan Manly, who
is an investment professional and research analyst with an interest in the
monetary gold market. He is currently working as a consultant precious metals
analyst for BullionStar Singapore. Ronan’s studies include financial and
economics related undergraduate and Masters degrees at University College
Dublin and London Business School. His career has spanned roles in portfolio
management, stockbroking, and technology, working for companies including
Dimensional Fund Advisors and Morgan Stanley.
Video podcast: 25 mins
Transcript
Lars Schall: Howdy ladies and gentlemen, I am connected
right now with Ronan Manly at the London Business School. BullionStar
and Ronan have just recently published a major work of research related to
the gold markets all around the world. Before we’ll talk about this let
me ask you, Ronan, to give us some background on you. When, how, and why
did you become interested in the precious metal markets to start with?
Ronan Many: Hello. Yeah. I think I became
first interested in precious metals around 2003-04, when there was a bull
gold market in precious metals, mining stocks. About that time I was
interested in investing in equities. And it was from the perspective of the
bull market in gold and silver stocks catching my eye that I started reading
about gold. And that really led me into thinking about gold as an investment
asset class. In 2005 and 2006, when I was in the London Business School as a
student, I did a research paper on adding commodity assets to existing
portfolios of bonds and equities as a diversification technique. So it
was during that time again I did a little bit more research about precious
metals, and gold, and silver as an asset class.
And then I was working in the City of London in the equity investment
management space for a few years. And I actually forgot about precious
metals, because it wasn’t really on my radar at that time. When I left that
role in 2011 I had some free time, and I started going to the Bank of England
archives to start to research in gold again. I’d gone to a GATA conference in
the summer of 2011 in London, and that sparked my interest in gold. And
I thought well, because I’m living in London the Bank of England just down
the road I might as well go and have a look at their archives. So that
started really me on the road of doing research about monetary gold. And I
went on a number of occasions to the Bank of England. And I even went across
to Paris to the Bank of France archives. And that again was very eye
opening. Because of the nature of archives there’s a 30 year, or 35
year rule. So you can’t really look at anything beyond say the 1980s,
early 80s. But even then I could start piecing together the importance
of gold, and the monetary system, and it just fed my interest, and the fact
that gold was at the front and center stage of the financial system. But this
role has unfortunately been lost.
Myself and a lot of other people that grew up being educated in the
1980s and 1990s thought gold had somehow fallen off the financial curriculum.
And it was really, because I started realizing that gold was a fascinating
area that was interconnected with so many other areas like economic history,
the IMF, the financial system, and various industries, like banking and
mining, that it attracted my attention. And also the fact that it was quite
opaque. In a very strange way it was a challenge, because it’s difficult to
find out information about the gold market without really putting in a lot of
effort. But it’s very rewarding when you do find information that other
people don’t have. And I think that’s what I’m trying to get across in
my blog, sharing information that maybe is there, it’s available in pubic,
but it’s very difficult to get. So once I find some good information I like
to share it.
LS: Yeah. And as already mentioned you did
something like that, because at BullionStar you’ve published recently some
sort of an encyclopedia of gold markets around the world. Now, why did
you consider it necessary to do this at BullionStar, and what is the purpose?
RM: That’s a good question, because we’ve actually just
launched this a week, or two ago. It took a few months to get all the
research together. The concept was one that BullionStar devised as a way of
sharing information with the general public. You can look at it more as a
portal of precious metals information, more time independent information, and
factual information. You can even look at it as like a Wikipedia of
up-to-date information on precious metals.
It’s actually a group effort. I was doing a lot of the writing. But
various other people in BullionStar have been part of the project from day
one including I.T. developers and graphic designers, and the BullionStar CEO
who devised the whole concept.
So the first phase of this is a profile of gold markets around the world.
It includes about 21 different profiles covering 25 markets, really captures
the essence and characteristics of each of those markets from some of the
very large ones the people know about to less well-known ones. So it includes
markets like London, New York, Shanghai, India, Hong Kong, Japan, down to
probably less well-known markets, like Malaysia, Thailand, Indonesia. And
there’s a slight regional focus on Asia, because BullionStar is based in
Asia. But it includes markets like South Africa, Germany, Italy, France,
Saudi Arabia, Dubai, Turkey. So there’s really something there for everybody.
And the main reason was to create up-to-date information that people can
go to as a source of reference if they’re writing articles. Journalists, for
example, can use it as a source of reference. Because it was nothing really
up-to-date in one place that captured that information. So really what we’re
trying to do is make it easy for people to – if they have a question about
one gold market in a different place they can go and consult the gold
university. This is only the first phase. We’re going to be having a lot of
other topics and concepts rolled out as part of this umbrella information
portal in the near future starting with precious metal vaults, central band
gold policies, refineries and mints, then down the road adding other areas
such as if you want to find out about the tax on precious metals and the
certain area jurisdiction, or what the legal legislative various governments
what their view on allowing their citizens to purchase precious metals. So
it’s really a wide coverage.
LS: Now, talking about those profiles, according to your
analysis, which is the most credible gold market that you’ve seen as part of
your research?
RM: Well, after 25 different markets I actually think
that the German gold market is a very deep and thorough markets with a lot of
liquidity. It’s very accessible to the public. Now, I have to say that I
didn’t really know much about the German market before I began researching
it. I was pleasantly surprised to learn there were so many different
participants in the German market from commercial banks down to wholesalers,
down to large retailers. And the German public really seems to get gold as an
investment asset class.
But I started looking at Germany, literally I knew that maybe a few large
banks were involved. But as I did more research I realized that there’s a lot
of different levels of participants in the German market, starting with the
Landesbanks, this Bayern Landesbank, LBBW, and Helaba, and some of the
other regional banks. And there’s Reiffeisenbank, and Commerzbank, even
though it’s based in Luxembourg, you could classify that as a German bank.
And as you know, Lars, the costumers of the Sparkasse savings banks can go in
and buy gold quite easily. And Germany has like over 100 tons of consumer
gold each year. So I really think that the market hangs together very well.
It’s very deep and liquid. It’s interconnected with Austria, and Switzerland,
and you’ve also got at least five or six very well-known and well regarded
gold refineries like Heraeus, and now Degussa has bought a new refinery in
there. Is it Pforzheim?
LS: Yes.
RM: So I think the German psyche for a number of reasons
has a very good understanding, grasp, and respect for gold. And I think this
is exemplified by the very deep and widespread network within the German gold
market. It’s one that I would never have thought about six months ago if you
would’ve ask me. But now it’s definitely one of the more intriguing markets
out there.
LS: Yeah. And your positive impression of the German gold
market was also supported by a recent trip that you took to Berlin.
RM: That’s right, yeah. At the beginning of
February I was invited by BullionStar to what’s called the World Money Fair
in Berlin. This is an annual fair that takes place in February at which all
the big refineries and mints from around the world go to exhibit. There’s a
lot of numismatic dealers as well. But more interestingly it seems to be the
event of which a lot of precious metal participants go to meet each other for
commercial meetings, and to just meet, and greet, and update each other.
So for example the reason I went there was to meet up with my colleagues
from Singapore. But we were introduced to a lot of heads of refineries, heads
of mints, some of the large wholesalers from the US. And it as a great to see
the precious metals markets in action. The fact that it was in Berlin again,
I think highlights the fact that Germany is a very important gold market, and
people don’t really seem to realize that. If you asked a lot of people on the
street outside of Germany they probably wouldn’t realize that Germany is such
a buoyant gold market.
LS: And which of the markets that you examined will be
the most interesting to watch going forward?
RM: I think there are quite a few interesting markets.
But the one that fascinated me the most, and that I think will be very
important going forward. Russia. And it’s more because the Russian gold
market for the last number of years has been dominated by central buying
purchases from the Russian Central Bank. And it’s sister organization called
Gokhran, which is the state fund for precious metals. And again, I wouldn’t
have really thought about this until I started researching it. But at the
moment the majority of the gold production that comes out of Russia every
year is purchased by the central bank. But they do via a very clever process,
where the commercial banks intermediate. So the commercial banks finance gold
producers who mine the metal, which is then sent to the refineries, but it’s
purchased by commercial banks like Sperbank, NOMOS, VTB, Gazprombank. And
then they sell it onto either the Gokhran, or the central bank.
So what you see is that, for example, seven or eight years ago in 2007,
the Russian Central Bank only had 400 tons of gold in its official reserves,
and now 10 years later it has just over 1,400 tons. And I think another part
of the equation that people don’t seem to grasp, and it’s quite opaque, is
the fact that the Gokhran is also purchasing gold. So I think what is
happening is that sometimes if the central bank reserves are being updated it
transfers from the Gokhran, like the way that we suspected maybe the PBOC in
China is transferring metal from other Chinese state entities.
So from a supply perspective it’s also interesting because if the Russian
state system is gobbling up a lot of Russian gold output, that means there’s
less gold at the margin for world supply. So I think it’s going to be really
important to look at this continued trend where a lot of Russian gold
production is being taken by the state. And that will definitely have an
impact on world gold supply if demand continues to outstrip supply.
LS: Yeah. Now, when it comes to the market that you look
at in the most critical way I think the candidate could be London, correct?
RM: Yes. I think that’s because, like London is the
largest market. So in one way you think that there is a lot of information
out there about the London market. And in some ways there is, but in other
ways there’s not, because it’s quite opaque, and the people who run the
London gold market choose not to divulge very much information about it – be
it the bank of England, or the Bullion banks that are represented by the
LBMA. So again, it’s because London is one of the two centers for gold price
discovery that in some ways it’s so important and critical to world gold
market that it makes sense to critically analyze it. And over the last number
of years there’s been numerous times where I’ve become frustrated where I’m
trying to do some research on the London market, and I just can’t get
anywhere, because there’s a lack of data there. And that’s the biggest
question, why is that? And I think it’s because the LBMA, and the banks that
they represent do not really want anyone poking around and finding out what’s
really going on in the London gold market.
And you and I, Lars, know both that because it’s such a important market
for price discovery that if there’s any for example large transactions that
are going on that aren’t in the public domain that’s quite important, because
it is affecting the price globally, and it’s affecting every participant in
the larger global market. So it’s something I think is worth putting a lot of
effort into it to try and find out as much as possible about.
LS: Yeah, worth noting is also what you wrote
recently about the gold of Venezuela. Can you tell us about this please, and
why is this of significance?
RM: Like a lot of research that I do, it started off as a
small focus. I found some information that had come out about the
repatriation of Venezuela’s gold back in 2011-12. And for people who maybe
don’t recall exact details Hugo Chavez wanted to repatriate all of his gold
that was held internationally, which is about 210 tons. Eventually he
repatriated 160 tons, and left 50 in London. And out the repatriated gold to
what was already held in Caracas, Venezuela, which was about 150 tons. So it
made a very good case study, because very few central around the world will
ever divulge information about gold. But Venezuela at that time chose to do
so.
The Bank of Central Venezuela was quite forthcoming in telling people
about how much gold they have, where it was located, how much they wanted
back. And that in itself was a good case study. But what has happened more
recently with all the economic problems in Venezuela is that a lot of that
gold has started to go to where it probably was held originally. Some of
it’s being flown into Switzerland; various banks like Citibank, Deutsche are
supposedly doing swaps with some of that gold giving U.S. dollar financing to
the Venezuela government.
And I think that particular set of episodes is very good as a case study,
because what it applies to is that there could be a lot of similar for
example swaps going on with Central American banks and international Bullion
banks. And I know that there are a few. But that doesn’t get written about.
Because again the information is withheld. So I think the repatriation and
the subsequent re-export of Venezuelan gold back to Europe serves as a
reminder that gold is a liquid asset, and that it is a very important asset
in the financial system. But for whatever reason central banks and
governments always try to downplay it.
LS: Yeah. But given that we have a debt crisis you think
that gold will be a winner of this crisis?
RM: Yeah, I do think that it will start to become – to
play a more central role in a future monetary system. As regards what exact
role that will play it’s difficult to know, but I definitely think that I see
gold really emerging to the front stage of a revised, or a reset monetary
system. Because it doesn’t have any counterparty risk. It doesn’t have any
default risk. We’ve seen before though an stable international monetary
system that had gold playing some type of important role.
LS: Yeah. But do you think that we will then see more
efforts to repatriate gold from New York and London to the original
countries?
RM: I don’t really think so, unless it’s done in a very
gradual way. I think the Chavez episode was more of a nationalistic
triumphalist symbolic exercise. And it backfired. Not because of the actual
repatriation, but because of unfortunately for Venezuela its economic
standing has gone down. But I tend to think that all the different central
banks around the world cooperate so closely that they wouldn’t really put
pressure on each other in that regard by pulling out gold that might make it
look like they’re unhappy with either the Bank of England, or the Federal
Reserve. I think if it’s being done, it’s being done in a very surreptitious
way.
LS: Yeah, just as the Germans do?
RM: Well, that’s a very strange one. I still haven’t
understood fully what they are doing. Is it more of a gesture to the
population, or – they could’ve easily done this without telling anybody, like
they did in the early 2000s when Bundesbank repatriated, what was it, 900
tons from the Bank of England? Nobody knew about that
LS: Yeah. Yeah. Okay, let’s come to our final point, and
that would be the question what are your overall expectations for gold in
2016?
RM: Well, you know, that’s a good question. Seeing that
we’re nearly at the end of the first quarter, and that’s been one of the best
quarters in a long time. I still think that the gold price in USD terms will
end the year higher than it is now. And I say that, because I think that
there’s such a huge excess demand for physical gold for various places like
China. If you look at the supply side there isn’t a huge supply increase.
There’s a lot of gold gone through gold refineries in places like
Switzerland, and unless there is some hidden source of supply that we don’t
know about, simply economics will dictate that the supply outweighing demand
would mean that the price is going to rise.
I was talking to Koos Jansen from BullionStar yesterday, and he’s actually
working now doing estimates of Chinese gold importation from 2015 where he
takes various trade statistics from Switzerland, U.K., Australia, and Hong
Kong, and he’s coming up with a figure of 1500 tons are being imported last
year into China. And if you add to that the Chinese domestic production of
around 450 tons, and then some scrap recycling, that’s over 2,000 tons of
gold. And the World Gold Council are only saying there’s a 1,000 tons of
domestic demand. But if you also take the annual gold-mining output say for
example 3,000 tons, if you take away China’s 415, you take 200 and something
tons from Russia, then the rest of world is having to compete for dwindling
physical annual gold-mining output. And really just from a simple economics
point of view I think that the gold price should end up higher at the end of
this year. Whether it will is a different question.
LS: Of course.
RM: I’m not really qualified to answer that. I think it’s
very dangerous speculating on gold prices in general, because there seems to
be a lot in the price action of the gold market that doesn’t follow common
sense.
LS: Yeah. But you would say in the long run gold is a
good investment?
RM: I think it is a good investment to have some of a
total investment. And what I mean is that it’s a good investment to have, and
to diverse my portfolio. And I think it’s also from a collector’s point
of view it’s nice to have some of your assets in a physical tangible
substance that is nice to own. And you still have it at the end of the day
even if it’s changed in fiat currency terms.
LS: Yeah. But we would like to underline this again: Gold
has no counterparty risk.
RM: That’s right, yeah. And so for example, any
gold products that may involve a few different layers of counterparties like
an ETF, for example, physical gold doesn’t have that. As long as you have it
in your possession, or I’ll store it in a reliable storage space.
LS: Okay. Thank you very much for this interview.
RM: My pleasure. Thanks Lars.
LS: Thank you.
Here is the link to Bullionstar’s profiles of gold markets around the
world, mentioned in the podcast: gold-university/london-gold-market-trading
