Gold, QE and Buying Physical Bullion

BullionVault's Miguel Perez-Santalla talks to Mike Norman of Hard Assets Investor...

Mike Norman, Hard Assets Investor: My guest today is Miguel Perez-Santalla, vice president of Bullion Vault. Miguel, thanks for coming back on the show.

Miguel Perez-Santalla, vice president of Bullion Vault: Thank you for having me.

As you saw, gold recently tanked and took a tremendous hit, going to $1,554, almost breaking that level.

Mike Norman: Is that a very important support level?

Perez-Santalla: Yes. And the fact that it held keeps me bullish at the moment. And I think what people are seeing, and what the general public is seeing, because their money is holding and sticking in the gold, even though we saw liquidation in our marketplace and …

Mike Norman: What do you mean, "their money is holding and sticking?" The price is going down. Somebody's selling it. And by the way, why is it going down?

Perez-Santalla: Well, it was originally going down because they think the economy is improving; everything's stabilizing. And principally, though, the big key is Bernanke. They think the Fed is going to stop the easing sooner than later, so they're all preparing for it. They're preparing for higher interest rates so they started to get out.

Then yesterday [Feb. 27, 2013] in the Humphrey-Hawkins testimony, Bernanke confirmed they will be continuing ...

Mike Norman: But here's the thing with this whole quantitative easing; we've seen it: a major expansion in the Fed's balance sheet—I think two separate instances, last year alone—and gold still kind of drifting down. Is that whole quantitative easing idea really enough to boost up the gold market? It's not working.

Perez-Santalla: It's not just the quantitative easing; we have a lot of factors. The fundamentals of gold, the cost of mining gold have also risen tremendously because of a lot of reasons, not just the hardware. Health insurance and things like—all these costs are going up …

Mike Norman: So that's going to impact the total output of gold?

Perez-Santalla: Yes.

Mike Norman: Some firms are going to have to cut back on production, shut down?

Perez-Santalla: Yes; when it goes below $1,600, they are losing money. So there are some firms that can't make money at that level, that are looking for higher gold. So we have that cutback of production. It's a possibility. We also have the fact that that price is fundamental, so people are looking for higher prices than that.

They're saying that the cost overall might be in the $1,300s on gold. So if it's $1,300 on gold to produce, the profitability as a product for these miners, they need to make some money.

Mike Norman: Let's flip that around: When gold was up near $2,000 or $1,900, that was a huge profit margin for most firms. And that price level persisted for a level of time—maybe not $1,900, but $1,700, $1,800. So couldn't the same thing happen on the downside, where, let's say, $1,300 … or here's an example: Remember when it was $250 in the '90s? And a lot of firms had to shut down because it was below the cost of … but that persisted for a long period of time. Why can't you have the same scenario?

Perez-Santalla: Well, I don't think the economy's going to recover that strong. And at that time, remember, the stock market was "the all," and so was real estate. So everybody was saying, "Gold, what's gold? I need to be in real estate. It's going through the roof; I need to be in it"—and then obviously a few years later we see the whole real estate market was done with mirrors. And that's where we had the collapse. So that's why I think gold still has a few years to run.

Mike Norman: But real estate is coming back, right? We see prices …

Perez-Santalla: It's coming back, but …

Mike Norman: … inventory is way down.

Perez-Santalla: ... one of the Fed governors from California commented on Feb. 21 that they believe the central banks are integral in manipulating the price in the stock market, which of course then makes people feel like they have more money, and then they spend more. So where's the truth? I think there is some truth: Things are getting better. But I think people still need to hold some gold to protect themselves. I never say that you should be all in in gold. But I myself personally buy gold.

Mike Norman: And these levels are obviously a lot more attractive than at $1,700, $1,800, $1,900.

Perez-Santalla: Absolutely.

Mike Norman: And if what you're saying is true—and I believe it is—$1,500, that's a really attractive price, $1,400, $1,300. If it does happen to get down there, people with a long-term perspective should be jumping in.

Perez-Santalla: Exactly. And that's what we saw. We saw liquidations last week in our marketplace, in the Bullion Vault market. But then as of Friday, they saw it as a bargain and they started coming in. So our customers were net buyers the last few days.

Mike Norman: Now, what's the best way to go about this? Do you think people should buy physical gold coins or ETFs? Should they go with GLD, for example?

Perez-Santalla: Well, I've got to be clear on this. I believe Bullion Vault's main competitor is the ETF market. But we offer a solution for owning physical, which is the cheapest, and competitive to the ETF market. Gold coins have their proper place. In other words, just like you want to have cash in your pocket, you want to have cash in the bank. So they all have their proper place and proper uses.

ETFs I think are the fast money. That's not the sticky money. That's where you want huge liquidity and to be able to get in and out instantly. But if you're going to buy and hold over a long period, I think there are other solutions.

Mike Norman: And let's face it: A lot of people like that idea of being able to touch their gold and own it. Is there like a minimum investment to be able to own some gold bullion?

Perez-Santalla: Well, to own it physically on your person, you could actually buy it pretty much anywhere. Except that in different parts of the country, there are taxes if you're buying below $1,000. But over $1,000 is typically considered an investment. So they don't tax you. But personally, in terms of the physical gold, I prefer to see my wife wearing the gold jewelry.

Mike Norman: It does look very nice. Let's talk a little bit about silver. What's your outlook there? It has also pulled back with the gold market.

Perez-Santalla: Well, silver's a different animal. A lot of people are talking about differentiation between gold and silver, and that silver has a greater capacity to go higher. Unfortunately, I believe there's plenty of silver supply—silver supply continues to increase.

Mike Norman: Isn't there like a shortage of silver?

Perez-Santalla: No, there wasn't a shortage of silver. The big story started a couple of years ago when there was a big run on physical silver. So to meet that production demand that came in suddenly out of the market, it made this appearance that there was no physical available. But really it was just a bottleneck in production. And once that bottleneck was clear, then all the premiums dropped.

Mike Norman: But silver is also an industrial metal, as you've just pointed out. So it has an economic sensitivity to it. If you're bullish on the economic outlook—I don't know if you are, but let's say the economy improves—wouldn't that be a bullish case for silver?

Perez-Santalla: Well, the thing is, obviously that's a factor, but the point is that there's plenty of silver supply. So it's bullish in terms of that people will always want silver, and people will always demand silver. But there's plenty of supply always increasing as mining increases. And silver's primarily a byproduct.

So even though the cost for the primary silver miners is around $28 an ounce, the rest of the market is cheaper. So it's like 25 percent of the market has that cost. But the rest of the producers, it's cheaper. So if they disappeared, maybe it'll drive the price higher.

Mike Norman: And on the downside, where can it go? You talked about gold cost of production anywhere from $1,300 to $1,550, $1,600. What about silver?

Perez-Santalla: Silver, they're talking that the production for the primary producers is around $28-29.

Mike Norman: So we're right there, basically.

Perez-Santalla: Yes. So we're right there for the primary producers. But for the people who produce the byproduct, their costs are way lower, because they're producing either copper or zinc. And this is the byproduct. For everyone, it's different, what their actual cost factors are. It could be as low as $10, it could be $20.

Mike Norman: I heard around $14.

Perez-Santalla: Yes, there are people that were throwing around $14, but you'd have to do a study on every mining company to see what their costs are, and try to extrapolate it. And it's a very difficult number to come …

Mike Norman: Interesting. All right, so gold down a little bit lower from here starts to look pretty good.

Perez-Santalla: I think it's looking good here, because why wait? I would buy...

Mike Norman: And you were one of the original bears when it was way up there, I remember. Miguel, thanks very much. 

This interview was originally published at Hard Assets Investor. For the safest gold and silver at the lowest possible price go to BullionVault today...