Gold Confiscation? Will the Chinese Yuan replace the US Dollar? Julian Phillips on TV

Uploaded by goldseektv on 18.12.2012

Host: Julian, thank you very much for joining me here in Johannesburg today. It's a real
pleasure to have you on the program.
Julian Phillips: It's a pleasure to be here.
Host: I want to start out, you're one of South Africa's preeminent experts on gold. Can you
give me a macro perspective on what's been going on in the gold market here globally,
and as well as what's happening in South Africa?
Julian Phillips: Well, if we go back to 1971, when Nixon closed the gold window, at that
time, South Africa was producing a thousand tons of gold a year. It's now down to approximately
180 tons a year. So South Africa's importance has diminished, but at the same time, the
depth of mining they have to go to has gone above three kilometers in a lot of the mines,
and the most significant ones in particular, which of course adds tremendously to the cost
dangers, and we've heard about the labor problems in the last few weeks. This is a departure
which might swing people, miners, mining houses, back to being mechanized as opposed to relying
so much on labor.
However, there is a compensation in that every time the ñ there's a problems in the mines,
cost problem, and clearly costs rise, we see a sagging in the value of the rand overseas,
and the mines get paid in rands. So there's that compensation. You'll see that in fact
the mines will pick up income against losing costs. It's been that way since the early
seventies, and I expect it to remain that way.
But mining in South Africa has become much more difficult, but in that same contact,
go back to 1971, when the ñ just after Nixon closed the gold window. Just before, the gold
prices were around about $35.00 an ounce. Today, it's $1,725.00. It's 50 times more.
I don't know of an investment that has done so well.
Host: Mm-hmm. And you obviously see the potential for gold to continue to rise in the long term?
Julian Phillips: It becomes interesting. At a certain point the concept of gold rising
has to become currencies falling, and I see that the decay in the confidence in even the
leading currencies has become so deep that it's ñ their value as a means of measuring
value is declining alongside the rising price. So where do you say the gold price is rising?
Where do you say it's actually staying still but currencies are falling? And we're there.
And if it keeps going that way, I see governments, and particularly the banking system, turning
on the value of currencies quite intensely, as we've seen now. There are big discussions
going on in Switzerland and at Basel III.
We see discussions in the States, changing gold from a level II asset, where only 50
percent of its value is credited to the bank balance sheets, to a level I, where 100 percent
of its value is credited to bank balance sheets. Well, the moment that happens, you're going
to get commercial demand coming in.
Host: And what's the impetus that's underlying the decision moving it towards that direction?
Julian Phillips: It is loss of confidence in currencies that are need for the banking
system, without actually changing to reinforce the value of those currencies, and that's
where gold steps into a deep hole at the moment.
Host: Now you've touched on a whole number of ñ raft of issues there that I want to
talk to you about, but just ñ let's just stick to the US dollar for now. What you're
talking about there, is that mainly because what we've seen is a global I think questioning
as to the validity of the US dollar as the world's reserve currency? And I know that
you've talked about the fact that we could see within the next couple of years the Chinese
yuan move into a reserve currency status globally. Where are we at?
Julian Phillips: It has to do that. If you look at the US balance of payments, this persistent,
structural trade deficit, whether it goes up or goes down, it's a structurally permanent
trade deficit, has to hurt the dollar in the end. It was fine when it started back in the
seventies, because there, the gold window closed, and gold ceased to be banking currencies.
But the fact that the only way you could buy oil was by using the US dollar reinforced
its position as a reserve currency.
Now we're seeing that basis being chipped away by China, and Russian's open to taking
other currencies. There are fragmentations in that area, but the control the US has over
the Middle East and the bulk of the oil producers is still solid. I mean, the arms deal done
in the last few days with Saudi Arabia reinforces that relationship between the two nations,
and therefore oil, which underpins it, has been the reason why the US currency has done
so well.
But confidence in the US dollar has been sagging over the last few years, as we've seen, and
that's where the danger lies. That's where the focus should be. It's not a case of the
dollar being a reserve currency. It's an unbacked currency in a 40-year-plus long experiment
with paper money, and that of course relies on the confidence you have in the governments
backing that money.
But that ñ because that's sagging, I personally feel we're very close to the time when gold
will be drawn in, back into the system, to reinforce the present system. The concept
of reform and going back to the gold standard, I don't buy that.
Host: You don't think that's ever going to happen? And I've read that you've said that
you don't ever see gold itself becoming a currency.
Julian Phillips: No, I don't. It's ñ you see, the power of governments and banking
systems is so total that they will never accept anything that undermines that power. Therefore,
it has to come in in backup. It can't do ñ this concept of a reformation of the system,
I think we've got to throw that away. It takes a massive upheaval for people to reform, and
we're not near that. And there's no need for us to go near that, and I do believe that
by just reinserting gold into a pivotal position, not in a fixed relationship, but in a floating
relationship, it would reinforce the present unbacked system with a reference point, a
measure of value.
And with gold floating against currencies, we've seen the US reserves of gold, same in
Germany, same in Switzerland, same in France, move from around about 50 percent or below
to above 70 percent, simply because the gold price has risen. And it's this countering
that produces the stability in the portfolios of the central banks that is so necessary
at this time. So if confidence were to sag deeply, you'll see currencies coming into
ñ sorry, gold coming into a pivotal position quite quickly.
And to give evidence of that, go back through years, look at the Bank of International Settlements.
This is a central bank of central banks. They did between 500 and I think it was 635 tons
of gold currency swaps out of the blue. This barbarous relic suddenly being used by the
central bank of central banks, and in what context? They won't disclose the precise details,
but it was very clear. It was used in backup for currency deals between the weaker nations
and stronger nations. And what you saw there was gold added liquidity to the actual transactions
and added a far better interest rate, which made you ñ made it tenable.
And that role was a background role, much in the same way as a guarantee or collateral,
alternative collateral. It was put into a position where it can act as a reinforcement
to those deals. Now that blazed a trail for gold and its comeback to the system, and I
think it's part of an experiment that is still ongoing, and with the discussions in Basel
III, we are seeing the banking system, not individuals in the retail market, the banking
system discussing and using gold as a reinforcement to the present system. And I think that has
to be expanded and become public at some time in the not too distant future.
Host: Okay. I want to touch on some of what you just talked about there, but I want to
rewind back a little bit and talk more about the United States itself. We just saw President
Barack Obama be reelected. People aren't really sure where he stands in terms of which way
the US is going to go economically. They're not sure if he's a deficit hawk. Like he's
not really making it clear as to what he seems to want. We have the fiscal cliff coming here
very soon. What do you see as the impact of Barack Obama being reelected as the President
of the United States?
Julian Phillips: Well, I have a slightly different perspective to other people. I didn't look
at the electoral college results. I looked at the popular vote, which tells the story.
And Barack Obama lost nine million of his ten million surplus against his last election.
Now as a ñ if I were a Republican ñ I'm apolitical. If I were, I would say this has
improved our position; therefore, maybe I have a case for being more intransigent.
Now whether it's Barack Obama or Romney is almost irrelevant, because we've got a gridlock.
They can't get decisions made effectively. There's no central driving force to the US
economy, because of this gridlock, and that ñ
Host: Do you think that's a reflection of the actual populous, though? I mean, because
literally, we saw that vote split right down ñ I mean, the margin is razor thin.
Julian Phillips: I think that upped the stakes. I think that's made the future more tenuous.
And I would say that it's a ñ not a good thing at all for the US economy or for the
US dollar, because they need clear direction. Mr. Ben Bernanke's done a terrific job in
trying to fill the gap left by non-government.
Host: You're a supporter in terms of what the Fed's done?
Julian Phillips: I think ñ
Host: Up till this point?
Julian Phillips: ñ he's done what's necessary. He had little alternative to do it. But I'm
not in support of the very experiment, because I think it's now reliant on government, and
as we've seen, not just in the States, but in Europe, when it comes to politics and finance,
they clash. The two are structurally opposed and with different objectives, and because
of that ñ this is such a fundamental issue. It's such a structural one, that whether it's
Barack Obama or Romney is irrelevant. We are facing a structural problem in terms of the
dollar, and unfortunately, when you have to weigh politics against finance, politics has
to dominate, which is bad news.
Host: You wrote something very recently. You talked about the fact that central bankers
are trying to deal with the problems that we have, and they're left with fewer tools
in their toolbox because governments aren't stepping up to the plate and doing what's
necessary on their side. What is necessary on their side?
Julian Phillips: Well, it's a ñ there's an even deeper problem. When the crisis first
broke, I wrote that for it to change, we have to see the consumer seeing his house price
rise, we have to see him feeling confident about his job, and as a result of those two,
feel free to spend. Seventy percent of the US economy is reliant on its retail section,
and there's no getting away from that. There's no switching to anything else. It would take
a major crisis to switch away from it. So they have to get that right.
With the gridlock, they can't. Mr. Ben Bernanke's doing what the accountant, as it were, does
in the business, but the owner of the business isn't doing his job. And until that happens,
it's not going to change. So in other words, what I'm saying is whether it's Democratic
side or the Republican side, one has to dominate to the point where they can act as true government
Host: You're saying we need to see leadership and we're not seeing leadership?
Julian Phillips: The system prevents it. It's the system, the gridlock, is preventing it.
It doesn't matter how good the leaders are. They're locked into an ineffective position,
and that must change.
Host: Do you not feel ñ this is a question for you, because I take a look at the ñ at
what's happening out there, and it doesn't look like we have a leader spelling out a
clear path to where we need to go, and nobody's laying out that clear path because there's
political risk in doing that. You know, if somebody actually stepped up to the plate
and did that, would that not at least give clarity to the markets in saying, okay, at
least we know where they want to take us?
Julian Phillips: It would ñ it would have ñ if the system allowed it, but the system
per se is preventing it. The structure is the fault, and that's where the dollar comes
in. That's where the danger to the dollar really lies. The best news for the dollar
has been this fracking of oil, because the concept of America being self-sufficient will
change that trade balance. The balance of payments look much better; therefore, the
credibility of the dollar you would think would be better, provided it happens before
China is such a force in the international community that it tends to eclipse the US
And so as the overall dominant world power wanes and China rises, so the fragmentation
of the global system has to happen. And I put it to you this way. If now China said,
all trade worldwide will be in the countries of the people we deal with or the yuan, where
would the dollar be?
Host: Right.
Julian Phillips: There'd be such an excess. So the danger's facing the dollar and the
currency system per se, the 40-year experiment, have been growing by the day.
Host: How close do you think we are from that actually potentially happening, to the Chinese
actually saying, this is the way it's going to be?
Julian Phillips: It's a big like driving a car, where you know there are faulty systems.
When the accident going to happen? It could be caused by a small thing. It could be caused
by something large. But where something is going to happen, but to put a timeframe on
it, very difficult. I would say in the near future, not immediate term.
Host: Look, I think there's a general consensus that China is rising and that they are there
to compete with the United States, and, I mean, we've seen the US shift their military
power from, you know, the Atlantic and Europe, and now they're ñ President Obama has moved
it into the Pacific, and the Chinese view that as a potential threat, but the US is
trying to contain them. All of this said, China also has a lot of structural and systemic
problems within their country, and there are some analysts that say China has to deal with
so many internal problems, they're not going to be able to worry about dominating the world
quite yet. What's your take on that? Because I know you're plugged into what's going on
in China.
Julian Phillips: Absolutely right, you know. If the new leaders step into a place where
they've got to govern 1.3 billion people, bear in mind, the Eurozone's 400 million,
and the States is 300 million, that's half of what they've got to deal with. They've
got to bring growth to such a point that the bulk of the country are benefiting, and those
who remain in the country are getting a better income, because of the demand for their products.
So they have to lift the whole economy. They can't afford to worry about outside issues.
So my focal point is at what point will China become internally self-sufficient. The moment
they hit that point, and they don't have to rely on exports per se, then that's trouble
for the West. I mean, we're talking ñ people say, but American incomes are dropping, Chinese
incomes are rising. It's going to balance out, and the yuan is going to ñ not so. China
will not let its yuan rise. Why throw away ____ ñ
Host: No matter what? You just don't see it?
Julian Phillips: No matter what. It's not in the interest of China, and they're totally
focused on that, not on the interest of the West. And they're trying to replicate what
the West has been doing. So there's no sudden demand for products from the West. That is
so at the moment, but they're trying to get away from that and become internally self-reliant,
provide an export base. So the structure of world power is changing, whether it be from
oil fracking to allow Europe and America to regenerate, as it were, old reserves, or whether
it be this self-sufficiency in China.
The risks to the world economy are rising all the time, and I look at it from a gold
perspective. I have no interest in siding with one ñ
Host: Sure.
Julian Phillips: I just want to extrapolate what the results will be.
Host: You're an economist. Right.
Julian Phillips: And I see gold taking a very critical role, because of what it did with
the BIS, it will do in international politics, it will do ñ it will add the liquidity. It
will take some of the risks away. It'll make it more tenable for the future, to stay with
the present system.
Host: Over the last several years, China has been the world's number one producer of gold.
How has that impacted that gold market?
Julian Phillips: Hong Kong is going to be the world's financial center in a relatively
short time. Singapore is going to follow it. London is going to wane. I personally see
a time when we will have two sets of gold fixing. So one's in London and the one's in
either Shanghai or Hong Kong, and it'll be a 24 hour market. But China will be the hub
of the gold world, through production and through demand.
If you take that to 1.4 million people, the pattern of saving of the Chinese is to put
40 percent of their income into savings, of which of the total 100 percent, 7 percent
goes into gold. Now that's a function of getting more wealth. It's not an investment decision
per se, because that's their nature. And if that pattern continues, and you'll see retail
demand in China dominating, but more than that, look at their reserves.
We hear this story that, oh, well, China hasn't published its reserves. What they do is they
buy gold through an agency. Every five years, that agency hands the gold to the government
and the government publishes what they bought. Now the last time they did that was ñ
Host: Why the wait of every five years? What's behind that?
Julian Phillips: I don't know. Whether it ties into the Chinese plan, their five-year
plans ñ
Host: Oh, sure.
Julian Phillips: ñ or what, I'm not sure. But they are inscrutable. And I think that
because of that, they'll keep up that pattern. But if you look at the last time they published
their results or their reserves, it jumped 600 tons, from 454. That was an accumulation
of the previous five years, and that pretty well matches growth of production in China.
If you now extrapolate the next five years, add China's production to that, suddenly it
makes sense for China to buy its own production, and not on in the international market. Better
for the price ñ
Host: Right. Right.
Julian Phillips: ñ better for stability, and more discreet. Nevertheless, their retail
side is buying gold in the international market, as we've seen through the licensing of the
different international banks. Those international banks are now spreading the gold trade throughout
China, particularly to the West, so that the number of cities that have gold retail outlets
is growing. And if you look at the number of cities in China over 1 million people,
the figures are that at the moment there's 100. With ñ by 2020, there'll be 220 cities
with over a million. Now this is the ñ this is the concept of potential growth.
By that time, the middle class of China will equal the size of America's population. So
it would be foolish to underestimate the impact of that.
Host: Absolutely. Now how much of that growth in terms of the retail gold trade in China
is being driven by the fact that the average Chinese citizen is looking around him or her
and seeing a political situation that's a little bit unsettling? How much is that ñ
because so much of ñ I mean, maybe ñ this actually brings the question down even a couple
of more points, is that what actually drives the retail investor to buy gold? Other than
it's a hedge?
Julian Phillips: I would say that the Chinese way of thinking is more similar to the Indian
way of thinking. They buy gold for financial security. They've just come out of poverty.
They want to protect their future generation. There's no political thought in it. There's
no systemic thought in it. There's no ñ they're not, investment-wise, a very literate people.
Host: They're not savvy along those lines. No. Okay.
Julian Phillips: So when they buy, they buy it because it's going to be a rainy day sometime
in the future.
Host: Right. Right.
Julian Phillips: And I think that will continue going forward. I would ñ the point at which
they become as savvy as the American investor I think is a long way off. And the shape of
the market there is catching up, and we keep our eyes on Shanghai, we keep it on Hong Kong,
but follow it West. Follow the banks' retail behavior. Follow the yuan and its path towards
this reserve currency. And I believe at some time it's going to be a switch, a quick switch
to it being a reserve currency used in trade.
Host: Wow.
Julian Phillips: They've been working for two years with various agreements, with different
countries, Japan, China, sorry, Russia, whereby they internalize the swaps. They've done it
with Australia.
Host: Right. Right.
Julian Phillips: So they're building up the experience needed for them to go global.
Host: Right.
Julian Phillips: When they're ready to go ñ
Host: They just did that with Japan, I think, not that long ago, as well.
Julian Phillips: They did.
Host: Right. Right.
Julian Phillips: And this is education, rather like the US movies are shown in a small town
before they go countrywide. So they're doing the same with the yuan.
Host: So I want you to speculate a little bit. When that happens, what will the US response
be? What can it be?
Julian Phillips: I think they're looking at it now. I think they're between a rock and
a hard place, because what do they do with all those excess dollars that are now not
needed? I think that the self-sufficiency in oil is a big part of it, because that will
reduce the damage in terms of the net sums of balance of payments. But I don't think
they've got a big choice.
American power waning. What happened to the British Empire when its power waned? Well,
we saw in Britain it turned to exchange control in 1971.
Host: Right.
Julian Phillips: And the dollar premium, which was quite a traumatic phase for Britain, and
from which Britain has never recovered. It's always now ñ it's a minor friend of America,
but it's no longer a significant friend. It's a financial center, yes, but Britain as a
political nation is a little place.
Host: So you see the US heading down that same path, potentially?
Julian Phillips: It will start on that path. I see it as holding its position as one of
the three major power blocks, Eurozone, itself, and the Chinese power block. But as to its
hegemony, I think that will dissipate.
Host: Okay. Can we talk a little bit about what's going on with developing countries,
India and China? The average retail investor is buying gold. We see a lot of developing
countries, their central banks are buying gold, and have been buying gold strongly over
the last three years. Basically, what we're seeing is there's a huge ñ there's been a
huge increase in the demand for gold. What is underpinning that demand? What is driving
that demand, globally? Because we are seeing it globally, maybe for the first time ever.
Julian Phillips: I would put it ñ two words. New wealth. Emerging country, new wealth,
diverse fine reserves, new wealthy, out of poverty people, India, China. This is where
the bulk ñ this is the current of demand. It's always difficult to tell an American
audience about this, because they're so used to their derivative markets, their futures,
COMEX and so on, which is not physical in the main. COMEX, five percent of their turnover
is physical. The balance is paper.
But the current drive in the gold market comes from central banks, emerging in particular,
and from the newly wealthy, and that will persist, so long as that trend continues.
If we look at the Western demand, Western demand has the amazing position now. It's
that marginal amount that can push prices tremendously high or can pull them back. It's
the swing vote, as it were. And I think that they will continue to have that position,
because of the sophistication of the markets. Until Shanghai and Hong Kong come into the
picture strongly, the West holds sway over day to day prices. But they're ñ the West
is rather like the surf and the waves on the seashore. We measure going in and going out
and how high the surf is, but the current is something completely different.
Host: Now I want to move over and talk a little bit about the confiscation of gold, because
I know that you're involved in a project that has to do with that right now. First of all,
let's just talk about the idea of governments walking in and confiscating gold. Is that
really possible in today's day and age?
Julian Phillips: Yes. And people look back to the parallel in 1933, when America confiscated
gold from its citizens, leaving them with small amounts, and leaving them with rare
coins, but against penalties, huge penalties at the time, $10,000.00, which today, I mean,
what would that be, $1 million? They had to hand over their gold to the government. And
at that time, you saw America collect I think it turned out to be at the end of the day
26,000 tons, both from arbitrage, because the US dollar dropped, was devalued in '35
by 75 percent, but the exchange rate didn't show that reflection at the time. So a huge
amount of gold came into America on an arbitrage basis, and that's how America got 26,000 tons.
In 1935, as I said, they devalued the dollar. But it was done for money supply purposes,
and experts in the gold industry quite rightly say that that won't happen again, and I agree
with that 100 percent.
Host: Why not? Why not?
Julian Phillips: Because that was done for money supply purposes.
Host: That's why? Okay.
Julian Phillips: Today, it would be done, as I said earlier, for confidence purposes.
If the commercial banks come into the market wanting to use gold on their balance sheets,
they have to find the gold from somewhere. This will be supported by central banks, because
they appreciate the problem, the confidence problem. The gold in the international market
just isn't there. Four thousand tons with the present demand just won't cut it. So where
does it come from?
Because it's now integral to the confidence levels within the banking system, the only
way to get it is to confiscate it. But if it happens, it'll happen country by country.
But if a country like ñ well, let's ñ the Eurozone, if the Eurozone decides to say,
right, countries, go ahead and do it, then the others will follow quite quickly. Otherwise,
they'll be left out in the cold.
Host: Is there somebody that's right on the tipping point right now of that potentially
happening? A place like Greece?
Julian Phillips: If you look at ñ well, if you look at what's happening in Turkey, Turkey
is trying to get its gold owners to bring it into the banking system on a voluntary
basis, because of its usefulness at this time, and of course, the situation in Iran, getting
gold into Iran, so they can handle their problems. But that is an interesting feature of what
could happen.
But I would refer back to the gold swaps that the Bank of International Settlements undertook,
its use in that context. For instance, if we look at 2007, when Lehman Brothers went
down, at that point, any commercial bank that owned gold had to sell it, so that it could
have sufficient level I assets to improve their balance sheet position. Take that away
and leave gold there as a level I. There's no selling of gold.
Host: Right.
Julian Phillips: Therefore, gold in 2007 dropped back from $1,200.00 to $1,000.00, and then
proceeded to move up to $1,900.00, where the other markets stayed down, and have struggled
to get back on their feet. That's the function of gold in a confidence role.
So how close are we to that? The fiscal cliff, if that happens, then America does not look
very good, nor does the dollar. The Eurozone, we expect Greece to leave the Eurozone within
a year.
Host: Is that what you think?
Julian Phillips: That's what I think. Yes.
Host: You believe that will happen?
Julian Phillips: Yeah. They've got no money left. They can't pay back the loans. They've
got ñ at some point the Eurozone either has to accept them as a passenger or say, sorry,
got to stick to the rules.
Host: Does the Eurozone continue if Greece leaves?
Julian Phillips: Yes. And I think the euro gets stronger, simply because the weakness
has been cut away.
Host: Right.
Julian Phillips: But again, we come back to the confidence factor. That's going to be
the most telling point. We can't look at an example of, well, this country's going to
move to that at that point. It's a case of at what point does it become necessary to
preempt a collapse in confidence? We won't wait till confidence collapses.
Host: Sure.
Julian Phillips: It has to preempt it, to make sure there's a ongoing system. So ñ
Host: What will that actually look like?
Julian Phillips: Well, it will ñ it will be something like the fiscal cliff causing
the dollar to ñ dollar and the euro to fall, or fall ñ an internal situation where the
loss of confidence in the measure of value that the currency is supposed to supply just
becomes unreliable. So it's an intangible, because the dollar and the euro will fall
down together, as they've been doing, and the ñ if you look at the exchange rate, that'll
give you a false picture.
It's a point at which the banks say, we now have a similar crisis to 2007. We need gold.
We need to go public on gold being here. Which country first jumps into the fray with the
confiscation, impossible to say, but once it starts, it will be a domino effect, I believe.
Host: Okay. So let's just say it starts. I know that you have begun something to potentially
protect people along those lines.
Julian Phillips: Yes. We've set up a pair of structures which is designed to allow people
to continue to own their gold beneficially, to have the right to sell it at any time,
but not be vulnerable to attack at home. After all, let's be quite frank. If you own your
gold in Switzerland, and it's in your name, and you live in the States, it doesn't take
a great deal for your monetary authorities to knock on your door and say, bring it back,
please, and if you fail to do so, we'll levy the fine against you, which negates the whole
purpose of holding it overseas.
Host: Right.
Julian Phillips: You must have a structure where you can't repatriate it, and you can
ñ but you can say to the government, I'm doing my best to obey you. And they'll say,
well, what alternatives do we have? You can say, I can sell it, but they don't need money.
After all, they can print as much as they like. They want the gold. And that's why we
framed this structure to cope with that.
Host: So how does it work?
Julian Phillips: Well, you buy ñ you either transfer the gold you already own into the
company, or you buy gold through that company, and we then hold it on your behalf.
Host: This is a company based in the US?
Julian Phillips: No, there's a company based in London and there's a company based in Switzerland
which acts as the guardian of that gold. So the London company is not vulnerable to the
Bank of England attacking them, but they control ___ with the Swiss company. And as we all
know, Switzerland has been a haven for over 300 years.
I have to say, for ñ if Switzerland decides to confiscate everybody's gold, well, the
game's over for most people anyway.
Host: Right. Right.
Julian Phillips: But we believe this will provide that protection to investors that
is necessary to protect them against their own governments at home. And it's the at home
factor that's the important one. It's not where the gold's held. And hopefully we will
be able to provide a service that will make them ñ the investor feel safe, and continue
to own his own gold. And if there should be a spike, as there was in 1933, when it was
first confiscated, to 1935, when the dollar was devalued by 75 percent, then investors
will benefit. And it'll be their decision whether to sell or not, not the governments.
Host: So just so I'm clear, now, I just want to make sure I understand this. So the gold
physically is being held in Switzerland?
Julian Phillips: In a private vault, unleveraged, allocated. Yes.
Host: And so the United States' authorities, folks in the UK, no one can go in there and
try to get that, given the structures that you have put up around that?
Julian Phillips: Yes. Jurisdiction is dominant everywhere, and I've had experience with different
systems, whether it's the UK or African systems, South Africa in particular. Jurisdiction stops
at the border, and ñ
Host: I mean, you obviously know that ñ I mean, the US has been chasing, you know, the
Swiss ñ
Julian Phillips: UBS. Yes.
Host: ñ and they've been ñ yes, and they have got a long list of Americans with assets
in Swiss banks.
Julian Phillips: And they did it ñ
Host: And some of the banks seems to be playing ball with the Americans.
Julian Phillips: Absolutely. And they did it in the way that I would have expected them
to. They attacked the banks in America. So UBS was attacked in America, not in Switzerland.
And to save the Swiss banking license in America, UBS in Switzerland cooperated. That's why
we've put our structure outside the banking system, because the banks are reliant on governments
for their licenses.
Host: Right. Right.
Julian Phillips: So that's no place to keep your gold. In terms of effectiveness of jurisdiction,
UBS was asked for 45,000 names. They gave up 4,500, I believe it was. The balance were
not given up, and that's the soundness of Switzerland. But jurisdiction, and I emphasize
this, jurisdiction is dominant. Capital controls, exchange controls, can only work within those
borders. Outside the borders, they're not law. They cannot be enforced without the agreement
of some other jurisdiction, which is unlikely to happen.
Host: Okay. So the entity that you have in Switzerland, is it your own bank that you've
set up there?
Julian Phillips: No, it's not a bank. It's a structure. It's a Swiss company whose job
is to protect the beneficial owners' rights to continue to have that gold in that place.
And we put it there, it's called the Ultimate Gold Trust, we've put it there so that its
under Swiss jurisdiction with Swiss directors, and there's no outside influence that can
come and put pressure on. But the gold will be bought through the UK company, and that's
Stockbridge Management Alliance Limited, And they will hold the gold and do all the
admin and do all the advertising. The Swiss remains the quiet, solid rock of a company
that doesn't advertise, just has a role to play when push comes to shove.
Host: And clearly you think that push coming to shove could be a lot sooner than we think.
Julian Phillips: Well, they're talking about gold becoming a level I asset in Europe and
in America. We're just about there. I would hate to put a date on it, whether next year
or the year after, impossible to say. But one thing I can say, is when it happens, it'll
happen over the weekend, and it'll be too late to do anything about it.
Host: Okay. I want to end off this interview talking about the state of South Africa. I
know that's how we began the interview. We have particularly seen what has happened at
Marikana and the strife that's been going on with striking miners. There seems to be
real chaos, frankly, going on in South Africa in terms of what's going on in the mining
sector. And The Economist here just a few weeks ago published a front page article that
basically lamented the fact of the state of South Africa's economy, and that, you know,
literally said this country is in decline. You live here. You work here. Where is South
Africa at, you know, taking a holistic look at it from a mining point of view, but also
politically? Where is South Africa at?
Julian Phillips: The joy of South Africa is that it is so diverse, people, industries.
But it has always relied at the end of the day on its mining. Its wine is very good,
and it's a huge export, agricultural, but mining has been the thing that has driven
overseas people on South Africa.
Extraordinarily, the mining is sold in dollars. The mining product is sold in dollars, but
it has to be switched to rands before the miners themselves get hold of it, before the
mining companies get hold of it. And what's happened of late ñ there's been this arrangement
between the unions, the National Union of Mineworkers, COSATU, etcetera, which has become
very formalized. Some of the union officials drive company cars provided by the mines,
and therefore, the separation of workers' interests to local interests has taken place.
Host: They're blurred.
Julian Phillips: And ñ it has blurred, yes. And when we look at the Marikana incident,
it was a young, aggressive union that stepped into the fray, made outrageous demands, and
they went on the warpath. The violence started ñ unfortunately, it's something that's quite
common in South Africa. I'm afraid there are different standards to Europe and America
on that front. There were ñ two policemen were hacked to death by the striking miners.
So when they approached the police, the police expected that again, and they weren't properly
trained in riot control, etcetera, so they turned to guns a bit too early, perhaps. That's
not for me to judge. I don't have the details of that. But the resultant 45 deaths was quite
horrific, shocked the whole world.
But it was symptomatic of a change in power structure within the unions. The NUM, the
National Union of Mineworkers, tried to go down there and regroup. They only had 1,000
miners at the audience supporting them, which was really a very poor showing. And now you
find COSATU and the National Union of Mineworkers trying to regroup and take on these aggressive
and successful unions, but it's too late. Marikana gave awards to the stoke drillers.
Those are the drillers right at the face of the rock. And it achieved an enormous payout,
and therefore gained credibility. Young, aggressive unions, why bother with NUM and COSATU, who
are part of the institution now? And COSATU's very close to government.
So it's a power struggle more than it's anything else, and it will go on, so long as that story,
well, at Marikana this is what we got, it's going to persist, not just in the platinum
industry, but in the gold. Gold Fields has had tremendous battles trying to contain it,
and the result is that it's ongoing. It's a festering wound until it's resolved.
One of the solutions put forward by the government is that we should move away from migrant labor.
A tremendous number of miners come from Mozambique, Malawi, different parts of Africa, huge diaspora
coming down to South Africa from all of Africa. And to be a miner is thought of as the man's
But a lot of the problems come from that quarter, but the local people are not so keen to be
miners. It's a very difficult job. So there's a structural, cultural battle going on that
will last for a long time.
In terms of South African economy, well, I'm afraid the political nature of Africa, if
you look at it, and I don't wish to be too much of a cold bucket of water, but if you
look at the development of Africa, it has been inspired by the developed world, not
by Africa per se. As I said to you before this interview, what should be happening is
the city should be going to the village, but what is in fact happening is the village is
coming to the city, and therefore the decline takes place.
Host: So you're not ñ are you optimistic about South Africa?
Julian Phillips: Not really. No. It is moving back to the rest of Africa, slowly, but it
is the pathway into Africa. So the link between the developed world and Africa comes through
South Africa, and that will persist. And therefore, where the first world meets the third world,
you'll see it keep going, and South Africa will stay the wealthiest of the countries
in Africa. But I don't see huge growth. I don't see it being a star. Angola with its
oil will do better. Mozambique with its coal and its gas are doing extremely well. But
these are non-labor reliant, and that's where the problem is.
Host: Mm-hmm. Okay. Just lastly, I want to touch a little bit about mining companies
in general, gold miners, who are ñ obviously, we've seen this gold price spike up over the
last several years, and we have not necessarily seen the corresponding spike in the price
of gold miners themselves. In particular, junior mining companies. You've written a
lot about that relationship. What's going on there?
Julian Phillips: Right. The big miners, we look at somebody like Gold Fields, for instance,
which I personally favor, because it has about 57 million ounces of gold in reserves, but
they're at 3 kilometers below. So the shape of their mining has to mechanize, because
it's very dangerous to mine at that level. And your cost of cooling the mine is ñ
Host: Enormous.
Julian Phillips: ñ half your production costs or more. And it should be doing extremely
well, but if you look at the rising price of producing that gold against the price of
gold, gold miners are not benefiting as they should. I believe in South Africa we're talking
about a plus/minus 1,000 ounces costs. So an income of 1,700 very nice, but it's got
to keep going up, but the cost will keep rising with it. And that's the danger of any big
miner, that he can't keep his costs down. And that's I think one of the prime reasons
why gold miners have not done as well.
But I think, too, there's another major market feature, and that is when you invest in a
gold mine, you don't want to invest in a miner who just wants to dig holes. You're making
an investment. You want to see a return on your investment. Therefore, you want to see
dividends. If you don't see dividends ñ the days when you could just look at a rosy future
and say capital values will rise, they went in 2007. We're now talking about people earning
their keep. And miners have to realize, mining companies have to realize that they have to
pay out.
Now there are quite a few miners, both in the silver sector and in the gold sector,
where they have linked their profits to dividends, and they've made it rigid. Now that is a good
investment, because you can gauge your return on your investment, and it's that link between
return on investment and profits that are critical. That gives meaning to things like
costs. But the concept of just digging holes and extending life without rewarding shareholders,
I think those ñ that's the prime reason why share prices haven't risen. Where a miner
has linked his dividend to profits, those miners are performing very nicely indeed.
And any junior mine that decides to follow that route and reward shareholders, he'll
get investment, he'll get backing all the way through, even though he has to change
his shape.
Host: I'd like to wrap up with this question. We have talked about a lot of things over
the last number of minutes, and quite frankly, a lot of them are somewhat pessimistic in
terms of looking at what's going on with, you know, the gold prices rising, the US dollar
is dropping, is the Eurozone going to stay intact, what's ñ you know, we're living in
a world of seeming chaos. Is there something that you can tell me, some area that you are
optimistic in, that you feel good about, as we're moving forward?
Julian Phillips: Well, in terms ñ I think ñ you know, my focus is always on gold, and
gold has this remarkable quality of being able to reflect man's behavior. And it's not
really about gold per se. It's about man. I do see gold as providing a tremendous saving
ability to lots of systems that are looking sick. The very fact that it can shore up confidence,
the very fact that the price is rising, I believe gold miners will do well, if they
follow these basic rules of containing costs and paying out shareholders. They will perform
very well.
I'm very positive about that. I'm very positive about the gold price itself. I see that as
moving to a point where anybody who can retain it in his hands will have an investment that
has performed as well in the last 50 years as it will in the foreseeable future. So I'm
very optimistic about that.
It's ñ your question, it's a little bit like asking say in 1935, looking to the World War
coming, is there something good? I think we're going to see structural changes that are beyond
the ñ even the imagination of most people.
Host: Wow.
Julian Phillips: But I do believe staying with gold as an investor is going to see the
best performance of the performances out there. But it's not a good future, and it's ñ there
are solutions, but vested interest has to reform, and I don't think they're willing
Host: Julian, thank you so much for your time today. Really appreciate it.
Julian Phillips: No, it's been a pleasure, and any time. Please don't hesitate to get
in touch.
[End of Audio] Julian Phillips - Long Interview (audio only)
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