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How BullionVault Got Started

Paul Tustain, CEO of the world's #1 gold and silver provider online, explains why and how it began...

PAUL TUSTAIN is CEO and founder of BullionVault. Here, in this interview republished with kind permission of Hard Assets Investor, he describes how and why he began what is now the world's largest provider of physical bullion ownership online.

You can watch Mike Norman's full interview with Paul Tustain here...

Hard Assets Investor: Paul, you have an interesting story about how you got started with your company. Back at some point, as an individual, private investor, you weren't involved in the gold market. You wanted to buy some gold. And you went out there trying to get some and you found it was very, very difficult. And I guess a light bulb went off in your head and you decided it shouldn't be that hard to buy some gold, right?

Paul Tustain, CEO & founder, Bullion Vault: That's exactly what it was. I bought some gold. It turned out that I bought a strange contract. I didn't own physical gold, I overpaid for it. It was very difficult to actually...

HAI: Was it like a futures contract?

Paul Tustain: It wasn't a futures contract. It was what's called unallocated gold. So this is gold which exists on the bookkeeping of a bank. So I was a bank's creditor. All I wanted was to own some of the big bars. I'd just sold a business. The Chancellor of the Exchequer in London who ran the economy was selling British gold.

HAI: When was this?

Paul Tustain: About 2000, 2001.

HAI: So it wasn't really that long ago; we're not talking like the 1980s or the 1990s.

Paul Tustain: No, I was very lucky. I got in at the point where gold was bottoming out. I bought my gold at $260...$270 an ounce. It was a nice price; nice way to get in. But I then found out after I'd bought it, the bank who sold me this product had said, "We are only a custody bank. That's all we do." And it turned out that they were only a custody bank; in other words, looking after my property in respect of all things except gold. And when it was gold, it went on to their balance sheet. So I was exposed to their default. And that was precisely what I'd asked them to avoid on my behalf.

So I thought, this is a transaction which I think more and more people are going to want to do. My skill is I.T., specifically in post-trade processing. That means organizing the equities and bond trades, which I'd been doing in my previous business for 15 years. I could build this software so that people could interact with real physical gold at the most efficient level across the internet. And that's how Bullion Vault started.

HAI: And as a result, you've been able to provide your clients, your customers, with access to the gold market, physical gold market, at a price I guess that's cheaper in terms of all-in cost than what had been the case prior to a company like Bullion Vault?

Paul Tustain: Yes, it's quite significantly cheaper. The key to making gold efficient is to trade good delivery gold. This is what I found out 12 years ago. Good delivery gold is a gold that's traded by the professionals. The international spot market, which trades large bar gold, usually settles loco London. It's trading these bars which have never been through private hands. They're made by accredited refiners, they're stored in accredited vaults...

HAI: What are we talking about in terms of the weight of these bars?

Paul Tustain: Well, this is one of the problems, because they're 400 ounce bars. So they weigh 12.5 kilos each.

HAI: So it's out of the reach ordinarily for most individuals...

Paul Tustain: Yes. And because they have to stay in the vaults, the private customer can't get access to those vaults. So you're dis-intermediated from where the official gold is. So what we had to create was a way for people to share ownership of these bars. You can take delivery. But if you take possession of these bars, then you're not going to be able to sell them back into the market, because they've no longer got the integrity of having been kept in a secure audited part of storage vaults.

So that's what we had to do. We had to arrange for the bullion to stay within the professional market. So when Bullion Vault is facing that way, looking at the market, we're just another professional bullion institution trading 400 ounce bars. When we turn around and face this way, we're an internet marketing organization, which runs an exchange in privately owned, good delivery bullion across the internet.

So my customers deal directly with each other. They are, if you like, market makers in bullion themselves. So if you're a seller of gold, you will offer it at a price that you would accept. If I'm a buyer, then I can pay that price. So that means people are cutting out the middleman, dealing directly with each other. And my only interest in this trade is a commission.

So the commission starts at half a percent. The storage costs are down at 12 basis points per annum. So that's less than a third of the cost of the typically ...

HAI: Right, very small. So you're really on the front line, so to speak, of the individual small investor and their involvement in gold. Characterize how you see that market. We all know that gold investment has gone up – individuals' desire to own gold. We've seen the advent of exchange-traded gold funds like the GLD, which have brought a lot of individual investors into gold. From your angle, how do you see the market? Is the interest still there? Is it growing? Has it come off a little bit?

Paul Tustain: It's certainly cooled down a little bit. All over the world, gold is formally priced in US Dollars. The US Dollar is the strongest of the world currencies. Whether or not that's permanent, we don't really know. But at the moment, because the US Dollar is so strong, it makes it look as though the gold price is weak. But of course in Japanese Yen terms, gold is making all-time highs, more or less, as we speak.

In the Euro, again, gold has been very, very firm, and its top is not very long ago. In Sterling, its peak was back in September 2011 with the Dollar, but it hasn't come off like it has. So elsewhere in the world, people still look at it as a commodity that's priced in Dollars, but they're not being affected in the same way as the US investor.

One of the things that's always been characteristic of the gold buyer is, around the world, except in the United States, they buy a falling market. So it's very different. And I think it's indicative of the difference between gold investors and typical retail investors.

So you're saying investors outside the US, foreign investors, they're more savvy; they buy when the price is going down. We buy when the price is going up, kind of like the way we invest in stocks.

Paul Tustain: It is a little bit like that. We do about 25% of our business in the United States from American customers. And that's what I see: I see that our volumes go up every time the price drops off the top. When the price is rising, we tend to see people selling. So it's almost the inverse of what you would expect from retail investors.

Now, I don't know if I'm right about this, but my expectation is that still the retail investor in gold is probably more sophisticated in terms of buying low and selling high – which is the general idea – than the retail investor in, perhaps, equities. The equity market in the US is very, very strong right now. That's obviously having an enormous impact. If you're a hedge fund manager, you've pretty much got to unload some of your gold in an ETF.

HAI: We've seen this recently, actually. George Soros, I think, is selling out some of his position in gold. I think John Paulson is still holding on. But some of the other larger hedge funds are starting to liquidate their position. How does this period differ, if it does, from past periods in gold where we saw big bull markets, like in the late '70s, for example? Does it differ?

Paul Tustain: I think they're all different, subtly different. What we've not seen before is a monetary environment anything like the one we currently have. I've seen you talk many times about quantitative easing. I don't think necessarily in the States people understand just how influential that's been elsewhere in the world.

So, for example, Britain has undertaken more per capita quantitative easing than has been done here in the United States. And it's far more likely to unwind in a bad way in Britain than it is to unwind in a bad way over here. I don't think the US will suffer in the same way, but I think what will happen is that when the policy itself is seen to fail in weaker economies, when you see Britain, or Japan, which is going through it in a big way now...

HAI: But Japan's been doing it for 20 years, basically.

Paul Tustain: But they're now starting from 250% debt as a percentage of GDP, and they're cranking up their QE from that level. It's all politics. It's all about trying to get the economy moving again. But these places are simply not as strong as the US.

This is where you're going to get a counterargument from me at least, because quantitative easing really doesn't do anything. All it does is change the composition of the assets that the public holds. They'll hold fewer bonds and more reserves in the banking system. So net/net, nothing really has changed. And governments are all doing austerity. So the monetary's not inflationary.

Paul Tustain: It's a very curious form of austerity. The current numbers – I could talk to you about trillions, I could talk to you about the size of the US economy, $15 trillion or whatever, the size of the budget deficit – it's actually much more visible when you talk about what's happening per worker. So in the current situation, the US government is printing not cash, I agree with you; it's not printing cash every day, it's printing $25 of sovereign bonds every day for every single one of 118 million workers in the United States.

Now, this is not a sustainable policy long term. That money goes into the economy by the public sector. It gets spent. It stimulates economic activity here for a short while. And then it accumulates after eight or 10 weeks in the bank accounts of savers and of corporations, many of whom continue to buy those debts.

Now, I think that what we're looking at here is a bond glut. And bonds by their very nature run down the clock to redemption. If, because of actions elsewhere in the world, we start to see people not trusting the monetary policy which is based on this sort of direction, if bond investors here lose faith in the bond market because of what they've seen happen in a place like Britain or Japan, then all bets are off when you start seeing bond yields extend upwards.

HAI: After 20 years of quantitative easing in Japan, you still have a 10-year Japanese government bond below 1%.

But if you're an investor and you want to own physical gold, BullionVault is a place to check out.

Paul Tustain: It is. We've got 40,000 customers; they've got $50,000 on average each. We've got a stock of gold now distributed around London, Zurich, New York, Singapore – one of the biggest stocks in the world, bigger than most of the world's central banks. And the cost of carry in BullionVault is down at 12 basis points per annum. So it's a tiny fraction of the cost of an exchange-traded trust fund.

HAI: Great deal. Paul, thanks very much for coming on the show. is a research-oriented website devoted to sharing ideas about investing in the natural resources sector. Published by Van Eck Associates Corporation, the site offers an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures, and gold – the three major components of the hard assets marketplace.

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