The end of 2011 feels unusually dark.
Things are getting worse. There is now maybe a 30 percent
chance of a steep financial and commercial decline on a par with
the Great Depression. Our governments are very weak financially
and such protection as they can offer is not dependable.
The underlying problem of the 2008/9 financial crisis has never
gone away, because fixing it is too painful. There is far too much
debt, and eventually creditors will have to resign themselves to
very significant losses, probably through money printing and
devaluation, but possibly default, if the Germans hold their course.
Many savings transactions involve being a creditor, and nearly all
involve seeking a yield or interest payment. Such ‘rent seeking’ is
becoming increasingly risky to capital, even for traditionally safe
investments. With bank deposits – for example – we must now
consider the issue of bank failure. Other rent-seeking transactions
are even more problematic:
1. Commercial properties are increasingly empty, and costing a
fortune where business taxes now continue on empty buildings.
Values could fall to zero or negative. Imagine what that does to
2. Increasing numbers of corporate bonds will go into default if the
financial tide goes out much further.
3. Buy-to-let residential property could easily suffer rent protection
to help low-paid tenants. Few landlords realise just how frequently
this happens in a harsh economic downturn.
4. Retirement savings look like they will be forcibly re-directed into
government bonds, while the government carries on printing
money. Their value will drain away in inflation.
5. Pension annuities already assume almost no investment income
because rent-seeking at decent rates is so risky. They are now
largely capital repayment programs and pay less and less.
6. On top of all the other risks, money lent in the wrong country
could easily be trapped by exchange controls.
This is all typical of environments where debtors simply cannot
pay. Even governments cannot pay; in fact they are top of the list
of distressed borrowers. Only the creditors can pay. Eventually it
is always the creditors who pay, and this is why banks are hauling
back credit extended all over the world through the credit boom.
They don’t want to be creditors any more. Nor does anyone who
chooses to use BullionVault.
In the words of Robert Smitley, who lived through this sort of event
in the 1930s, “The complexity of this era of credit liquidation is too
great for the mind to grasp.” None of us can see the whole picture
when $100 trillion worth of exotic financial assets are trying to
convert into reliable money.
BullionVault’s role is to help people use physical gold to remove
themselves from the web of debtor/creditor relationships which are
steadily unwinding in this extended and deepening credit crunch. I
stress (I spend a lot of time stressing this) that we are not at all like
a bank. You are your bank’s creditor. The bank owns what was
your money, and owes it back to you. That is the deal with
banking and it means the bank might not be able to pay. But it is
not the deal with BullionVault, where you own your gold. We are
not lending your gold. We have acted as your agent in organising
professional and insured custody of your gold – as your property –
so it is not subject to default risk.
The point is that through BullionVault you have extricated yourself
from the creditor/debtor nature of rent seeking, and it is for this
reason that I believe I am justified in saying that BullionVault is a
particularly safe way to store wealth right now. I keep my own
savings in BullionVault to avoid worrying about banks. Okay, I get
no interest, and I am exposed to gold price falls (and rises). I
accept this because I am trying to avoid rent-seeking risks and
money-printing risks at the same time. BullionVault does it the
way I want it.
Which brings me to bank balances. When BullionVault users have
deposited funds, but have not yet invested that money in gold or
silver, their money is in a Trust Bank Account. As with all deposits,
the bank owns this money and owes it to BullionVault users
collectively. You are safe while the bank is solvent and liquid, but
that is not guaranteed in these difficult times.
So is your un-invested money safe in the Trust Account? I think
so, but I cannot be sure, because I cannot be sure about banks. I
believe we are using one of the safer banks in the world, on the
strength of reputation, and stress tests, and because of the credit
of the British government, which I believe would print money to
rescue Lloyds Bank depositors if that were necessary. But
BullionVault cannot and does not guarantee your cash held at
Lloyds in the Trust Account, so until you own bullion in one of our
vaults, your uninvested money is subject to default risk. If this
worries you, you should either buy gold or silver, or withdraw your
money to your own bank.
What about 2012? Will gold and silver go up from here?
Notwithstanding sharp reverses it is easy to show that the direction
of the gold price has been resolutely upwards for the last 7 years.
It is much harder to predict the future direction of the gold price,
and harder still to predict the price of silver, which is more volatile.
Clearly gold’s higher price is reflecting deep concerns about the
credibility of political action to find a way out of crisis, so if
someone finds a credible solution which does not involve printing a
huge amount of money then I expect gold will fall. But that looks
too difficult a problem to me.
That’s why I am still buying both gold and silver. I remain mindful
that both will probably go down when, eventually, the financial
crisis eases, and I hope you will be mindful too. But I think this will
not happen until the creditors have paid through defaults or
inflation, and so far they have not.
Christmas and the New Year can crystallize a crisis, and there is a
bigger than usual risk of some financial fireworks over the
holidays. It probably won’t happen, but we wish to be as prepared
as we can be. Special plans have been made here at BullionVault
which I want you to know about.
Some of you may remember that last year we could not get our
hands on physical silver over the New Year period. Some people
thought it showed the market was ‘out of silver’. Well, it wasn’t. It
was simply that there were so many staff on holiday from the
secure transportation companies, and at a time of unusually high
physical demand from India, that a shortage of transport capacity
left us waiting 10 days for a shipment.
That was why we had no silver to meet our users’ demand. So
this year, just in case of holidays and extraordinary events, I have
opened temporary allocated storage facilities at one of the major
London bullion banks. If delivery gets tight we will aggregate
physical metal over the holiday period at this site, and collect the
bullion for transfer – to our normal vaults – once the holidays are
over. This should protect our ability to respond to unusual events
over the holidays, if they happen. You may notice an additional
bar list on our Daily Audit. That is the reason.
Finally, a quick review of BullionVault’s steady progress.
Since I founded BullionVault in 2003 we have grown to look after
$2 billion on behalf of 35,000 private investors from all over the
world. We are widely regarded as the fairest and most transparent
bullion acquisition service in the world. We are recommended by
the World Gold Council (www.gold.org), we won the Queen’s
Award for Enterprise Innovation, and this year we entered the
Sunday Times TopTrack 250 of the UK’s largest privately-owned
businesses. So we are a substantial company and, I am pleased
to say, a financially conservative and unleveraged one.
I value solidity more than profits growth. We made solid if
unspectacular profits of £3.7m ($5.8m) in 2010 and £5.6m ($8.8m)
in 2011. Apart from a small dividend of £150,000 ($232,000) paid
to shareholders, who made BullionVault possible, we retain that
money to build an ever stronger financial base. As a result our net
assets, which are all cash and bullion, are now £19m ($29m) –
sufficient to run our company for 8 years in its present form,
without a penny of revenue. Few organisations are better
prepared for lean times, and certainly no banks on the High or
Main Street. I’m fortunate to have shareholders and a board of
directors who support a cautious policy. Solid security is tough to
find out there in the financial world, and I shall be happy if people
see we are doing everything we can to help those of you who are
looking for it.
The outlook may still be dark but it’s no excuse for not having a
good time at the right time. I hope you have a happy, peaceful and
prosperous Christmas and New Year.
Founder and CEO