Speech by Dan Tapiero – CAIS Funds

December 14, 2011

Why gold? 

Most of the countries in the developed and emerging world have zero or negative real interest rates. What this means is that if one has deposited one’s cash in an American bank at zero percent interest, and assuming that the current rate of CPI growth is 2% per annum, one is actually losing 2% of one’s capital per year on a real basis. In many places around the world, the situation is much worse. In Russia for instance, the overnight rate is 3.5%  and the inflation rate about 8%; this means Russians are losing 5.5% per year on a real basis every year. Other countries with negative or zero real rates include China, India, Germany, Korea, Canada, Mexico and there are many more. Gold is not losing its value every year.

The growth rate of Emerging market wealth is the greatest that it has been in centuries. Historically, many of these countries, which have experienced default, devaluation and financial turmoil, consider gold equivalent to money. Gold already makes up a certain percentage of most individuals wealth in these countries. It is noteworthy that 50% of gold demand in the 1h2011 came from China and India. These new high net worth and retail investors will continue to allocate a certain percent of their assets to gold. Whether or not Western countries investors decide to follow suit is less relevant to the prospects for gold. Many such investors will be left behind as they continue to think about gold in traditional and historical terms.

In the past 20 years, many countries, which did not exist in an economic and financial sense have now become the world’s growth engine. Many of these emerging countries have newly formed central banks. China’s PBOC, for instance, was hardly an economically relevant entity in 1990, or for that matter even in 1999. All of these central banks, in aggregate, have created a large amount of paper money to grease their own growth engines. The total supply of available world currency and liquidity has increased hundreds of times in the past 20 years. The world money stock is so large that there has never been a proper accounting of it. This fact is, in stark contrast to the supply and stock of gold, which has hardly changed in the past 20 years. It is not difficult to say that one should own something that is in less supply rather than something that is oversupplied. Emerging market central banks already consider gold as a currency. We have seen massive gold purchases by them in the past two years, turning net buyers of gold for the first time in ten years.

For the first time since the 1970s, there is also a strong possibility of sovereign default–with Greece the most likely country and several others could follow suit. The reneging on sovereign obligations is the worst sort of credit failure as it confirms the moral, political and social failure of an entire economic system. The acceptance and existence of this sort of failure reduces the stigma of corporate and individual rejection of claims owed and sets a bad precedent for other debtors. The huge buildup of the total world debt stock in the past 20 years, and especially among sovereigns, leads investors to question the serviceability of that outstanding debt. If the largest and most important countries in the world cannot meet their obligations, the viability of the entire world financial and economic system will be called into question. The possibility that there is no risk free rate, that there is no guaranteed issuer, changes the pre-existing value relationships that have existed for many years. Without strong financial architecture and monetary framework, financial markets thrash about, as they are now, in an attempt to value assets that have lost their anchor. The inherent value of gold stands in contrast to the world of paper assets, whose value is unknowable. Gold is what you think it is; it has never changed what it is: it cannot default nor cannot it be devalued by an existing government for political purposes.

Most importantly gold is not an obligation but an asset. It is instructive to read the words on the US currency.  It says, that “this note is legal tender for all debts, public and private.” The dollar is an obligation. It is not an asset. It is also interesting to note that before Nixon ended the convertibility of the dollar into gold, that the paper bills used to read, “This note is legal tender for all debt, public and private and is redeemable in lawful money at the United Stated Treasury or at any Federal Reserve Bank. Even the United States Treasury as recently as 1971 considered gold as lawful money. Lawful money or legal tender does not have the ability to be debased. The supply of lawful money cannot be increased enough to impact the underlying value of the asset; it is a pure reflection of the demand over the supply for that monetary asset.

In most of the emerging world and some of the developed world, gold is used as and believed to be a true currency. Although this is not currently the case in the United States, the perception of gold is in its early stage of changing. A few months ago the Utah state legislature passed the Legal Tender act, which makes gold legal tender in that state. Given the rules laid out in the Constitution of the United States, no legal tender is allowed to be taxed. The state capital gains tax in Utah has been reduced from 5% to zero on all purchases and sales of gold. Currently there are 12 other state legislatures which have similar bills being discussed. In fact, three United States congressmen, Rand Paul, Jim DeMint and Mike Lee introduced legislation in June that would eliminate all taxes on gold and silver, elevating them from the status of collectibles to legal tender, of the same status as Federal Reserve notes. Although this is unlikely to become law, there is a growing chorus of Americans who are beginning to consider gold as a viable alternative currency, not to replace the US dollar but as a currency to sit alongside the paper currencies of the world.

Choosing the dollar and not the pound, yen, ringgit or zloty in which to hold one’s assets, is not, in a certain sense, a choice with that much difference. In each case, the respective governments and treasuries can greatly influence the value of its own currency. Some governments make good choices and some make bad choices. Gold is simply an alternative currency with macroeconomic fundamentals just like any of the world’s currencies, except that those fundamentals do not rely on the human decision making process or political influence. Gold should become a currency, just as Alan Greenspan suggested two weeks ago, because it is simply another choice. It is not a threat to the current world financial architecture but an option that should be available to people living in a democracy where choice forms the substance of life.

It is interesting that some of the world’s financial institutions have already begun to choose gold over certain paper currencies. The central bank of China, the world’s largest dollar reserve holding central bank, has decided to increase the percentage of gold in its holdings. Many other of the world’s central banks have been doing the same. We are in the first inning of this process as the emerging countries’ central banks currently own so little gold that if they were to own the same percentage of gold in their reserves as the United States or European countries central banks, there would not be enough gold in the world to satisfy that demand alone. Currently, the percentage of gold in China’s reserves is 2% versus roughly 70% in the US and 50-70% amongst European nations. Russia owns 7%, India 9%, Saudi Arabia 3%, and even Japan only holds 3% of its reserves in gold. If the world’s central banks are shifting their preference why would we not expect individuals and other institutions to do the same?

The current great bull market in gold is still in its infancy because it has yet to become an institutional product. Most of the world’s wealth is managed by large institutions which have not yet adjusted to the reality that gold is not only an asset that maintains its value over long periods of time but one that will soon become viewed as an alternative currency. The possibilities are staggering. Total global pension assets alone are 30 trillion dollars. The average pension fund is estimated to hold 0.3% in gold or gold mining equities. If they were to increase their exposure to gold and gold stocks to just 3%, that would amount to 1 trillion dollars, which is 13 times the size of the current GLD ETF and 5 times larger than the market cap of the entire sector of gold mining producers. If one includes other institutional capital and wealth holders, such as insurance companies with 18 trillion dollars, sovereign wealth funds with 4 trillion, high net worth individuals estimated at 30 trillion and then add in the remaining world retail assets, one can easily estimate that on top of the 30 trillion in pension assets there is another 100 trillion in investable assets in the world. So, of the 130 trillion in total assets, if managers decided to allocate 3% of their portfolios to gold that would amount to 4 trillion dollars, roughly half of all the gold that has ever been mined since the beginning of time and twice the total amount of what is called investable gold (which is non-jewelry, non central bank holdings of gold). If the world’s central banks are increasing the share of gold in their reserves, there is no reason to think that other institutions will not follow their lead at some point. Even a very small increase in allocation could lead to a doubling, tripling or who really knows of the price of gold. The point is that investors can either get ahead of the inevitable institutional allocation decision or they can wait for others to seize the opportunity, as has the University of Texas endowment which recently allocated 5% of its assets to physical gold.

Physical Gold

If one is convinced by the thesis to own gold, now you may ask why is it worthwhile to own gold in its physical form. There are several reasons which I will highlight briefly.

The first is that when you own the physical asset you own something that is yours–like your car, your house and your other worldly possessions. What  you do not own is someone else’s obligation that can be defaulted upon. You do not rely on the viability of an exchange, which may or may not be able to deliver on its promises. Furthermore, you do not own a share in a trust, in which the physical gold is not verifiable at the sub-custodian level and that is not insured. You also do not own paper gold which is not required to meet London Good Delivery Bar standards. What you do own is your own asset.

Also, it should be noted that physical gold is not a security and therefore not under the purview of securities laws. It has limited other regulatory risk. Furthermore, you own an asset that has inherent geographic flexibility. Legal and tax standards are also not uniform and are relatively underdeveloped compared with paper and electronic alternatives. Historically, it has been very difficult for individuals and institutions to hold and store physical gold. Most large banks have minimum transaction sizes that are in the tens of millions. There are fewer than 5-10 legitimate avenues for people to own and store their physical gold, regardless of the size of purchase.


Gold Bullion International-GBI- is the company that I co-founded to make it simple for any individual or institution to own and store physical metal relatively cheaply. I founded the company because I wanted to have a way for myself to own physical gold in the way that I wanted to own it.  Purchasing gold through GBI is the only way to own whole bar allocated physical gold, down to the smallest sizes. I am unaware of any similar company that provides a customized product to so many different types of investors.  When one purchases physical gold through GBI, one truly owns the asset in one’s name. It is audited by KPMG and insured by Lloyds of London. The bar or coin meets London Good delivery standards and cannot be lent out or hypothecated as collateral against a loan, as it is when it is sold and owned by the commercial banks and brokers on behalf of clients.

When one buys and stores physical gold through GBI is it vaulted outside the banking system, with Brinks or Viamat, the two largest non-bank vaulters in the world and held in Zurich, London, New York or Salt Lake City. Furthermore, when one buys physical gold through GBI, one can actually go to visit the gold in its vault and even take it home if one chooses. This is a unique feature that few banks or other gold companies allow. I should also highlight that for larger purchases, the price that GBI charges to store metal is less than or equal to the price that the GLD ETF charges for storage.

Another unique feature of GBI is that it has created the technology that allows for greater pricing transparency in the physical gold and other precious metals market.  Our network of 14 bullion dealers and refiners, whom we rely on to submit their best bids and offers electronically, is the most efficient and fair way to serve the needs of our customers. GBI is the first institutional quality firm that gives people the ability to choose whether to hold a certain percentage of their assets in physical metal in a secure way. We allow customers to call us directly to purchase and store physical metals. We hope to become the blue chip standard in the wealth management business and to direct clients throughout the world. 

Thank you for your time.



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