It’s no surprise that Stephan Bogner, analyst with Rockstone Research Ltd. and CEO of Elementum International — a precious metals trading and storage firm — advises investors to hold physical metals outside the banking system, but he also advocates mining companies keeping gold on their balance sheets and forming a cartel.

Gold

In this interview with The Gold Report, Bogner discusses which exploration and development companies will be ready to produce when metals prices rise and shares his interest in the diamond, potash and uranium space.

The Gold Report: Stephan, two years ago, Europe was awash in fears of debt defaults and countries exiting the Eurozone. On a scale of 1 to 10, where are we today on Europe’s “fear meter?”

Stephan Bogner: I think we are between 3 and 5. Inflation in the Eurozone fell to 0.7% in October, its lowest level since January 2010. Deflationary risks, a stronger euro and economic weakness have motivated the European Central Bank (ECB) to cut rates to a record low of 0.25%. However, these unprecedented low interest rates substantially devalue savings in the Eurozone and increase the danger of bubbles. I believe the downward pressure will get worse and companies will suffer. Once the companies start demanding loans, the ECB will pump liquidity into the real economy, and inflation will pick up. The ECB seems to want inflation, but to justify that, it first must strangle the economy so people indirectly demand inflation. They then become the scapegoats during the upcoming inflationary times.

TGR: Are European investors embracing gold as a hedge against these weaknesses?

SB: Along with some central banks, only the smart money is moving into gold and silver at the moment. People should buy when prices are declining and low, but they are not. The masses buy when prices are rising and high. I anticipate negative real interest rates ahead. Once that happens, people will take their money out of the banking system and look for safe vehicles like gold and silver. It only takes 5% or 10% of depositors withdrawing their deposits to push a bank into bankruptcy. Hence, I anticipate new laws to prohibit cash holdings and to prevent bank runs, especially if nominal interest rates go below zero. People are increasingly looking for alternatives to banks. Independent vaults offer exactly that. Instead of holding your cash in a bank account, you can buy gold and silver and store it in an independent vault outside the banking system. My firm, Elementum International, stores precious metals in a high-security facility inside a mountain in central Switzerland. Our clients can sell the metals to us at any time if they need cash. That is banking backed by real values.

TGR: Should volatility of the gold price concern investors?

SB: Volatility is seen as something negative and the media is propagandizing that gold is not a safe investment anymore because it is so volatile. However, I somewhat like it being volatile because it shows that the market is alive and that the market forces are fighting a dead-serious war. I would be more concerned if the price moves sideways on low volumes. Volatility means action and investors want to be where the action is. People should not ask who is selling but who is buying.

TGR: How do you see paper versus physical gold?

SB: I see paper as an instrument to drive people out of holding bullion and to get their hands on that gold. Gold prices are beaten down to achieve one thing: redistribution of real values. If investors believe that inflation will come, they should want to hold gold and silver now. However, there are very few physical gold and silver sources from which to purchase substantial quantities, so investors must be smart on how to accumulate. They can accumulate most when buying into a declining price after it has been high. A lot of speculative money has left the precious metals markets. Someone bought into all that. China is importing huge amounts of gold, and India now imports massive amounts of silver. I think China will back its currency with gold or somehow utilize gold as a monetary asset once gold prices have started to rise toward $2,000/ounce ($2,000/oz) and/or once there is nothing left to purchase from a dried-up physical market. Russia may very well do so, too. There is no other solution to the growing financial excesses but inflation, so investors have got to go for gold. Follow the smart/quiet money and not the dumb/noisy money.

TGR: Is China purposely trying to suppress the gold price, and, if so, how?

SB: Yes, I think it is. Why shouldn’t it do so? China is a large buyer in a small market, so it has to play smart to get its hands on physical bullion. It may do so with paper money and by playing the futures markets and putting pressure on the markets. However, as soon as the price picks up again and the physical market has dried up, China will no longer manipulate the price to the downside but to the upside. China doesn’t mind price declines in the short term because it is buying for the long term and has an ever increasing interest to appreciate these assets relative to its dollar reserves.

TGR: You have advised gold and silver producers to hold onto their production in an effort to sell at higher prices. In a cash-hungry business like mining, is that feasible?

SB: It is sad that mines are coming into production or increasing output at these low prices. Deposits should be exploited during high prices not low, when companies can only make losses or marginal profits. If I owned a gold mine, I would stop all operations and wait for better times. I know this is not easy or feasible, especially for public companies, but this is the time for innovation.

TGR: It’s one thing if you own the company, but a CEO needs to have the company perform to keep his job. How does management balance those two priorities?

SB: As soon as a company mines gold or silver, it sells it into the market and trades it for dollars. Instead, the company should use gold and silver as the functional currency for the industry. I’m certain that most companies would participate if such a system was in place. Companies should look for ways to bank their gold as cash assets or take out gold loans, not dollar loans. They should buy physical gold and silver and store it outside the banking system. When they require cash, they can sell part of their holdings. Many exploration, development and producing companies have millions of dollars of cash in the bank. If they all bought bullion and stored it in an independent vault facility outside the banking system, that would put upward pressure on the price, which would benefit the companies. Such a system is already in place and it is only a matter of time until mining companies will hold their cash in gold and silver. Shareholders will appreciate such prudent companies that know how to play a depressed market for the benefit of the shareholders. This also would bring a lot of credibility and investor confidence back into this dried-up market. There are oil and potash cartels; the gold industry should come up with

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