BH: To your knowledge, what has happened to Elemetal Refining and its subsidiaries to-date?
PT: So far, as of March 31, 2017, their registrations have been de-listed from the “Good Delivery” list on both the London and Chicago/New York exchanges, immediately stopping their ability to deliver their physical gold on the open market – a very small list of preferred providers worldwide. Additionally, they have been suspended from “warranting” (registration as an entity) by the CME Group, which ends their ability to participate in the Exchange-approved processes in their futures markets. Once a warrant has been cancelled, that material for physical delivery (their 100-troy ounce and kilo Gold bars) cannot be bought or sold until further notice. The exchange thereby puts the company under an active review, and passes the action along to the CFTC, their enforcement arm.
BH: So NTR (the initial named entity in the story) and Elemetal are out of the fine gold refinement and delivery business for the time being. A third Bloomberg article on a “Florida Boutique Tied by US to Alleged Gold Laundering Plot” from April 7, revealed that NTR operated as a clearing house for at least $3.6 billion in revenue for gold from 2012 to 2015 – the claim being that much of this was illegally mined. What is the dollar amount you are referencing as the bottom-line issue?
PT: If Bloomberg’s estimates are correct, and you add 2016 revenue of hundreds of millions and we’re looking at somewhere in the $4 billion ballpark – a sizeable portion of the annual global marketplace if enforcement action was to be taken by the Department of Justice against the perpetrators. The world moves somewhere between $115-120 billion per year in total gold, so we’re talking about somewhere between 3% - 4% of the marketplace subject to some immediate legal remedy. Perhaps what …. Confiscation?
BH: That gets us right to the heart of the matter, right? You seem to be implying that since this is a US problem in large part, prosecuting the participants in this illegal scheme becomes an issue for one or more enforcement agencies. What do you see as the legal ramifications in this specific case?
PT: In a word: HUGE. This seems to me to be, at the proverbial end of the day, a straight up law enforcement issue. The federal government has a long history of interdicting material items from those involved in perpetrating federal crimes – particularly when the offenses involve drug smuggling or human trafficking. Keeping it at its simplest level, if the Feds indict a refiner’s employees and they were determined to be acting in the interests of their employer, then the ultimate product of their crimes – their profits – would be subject to confiscation. This would obviously mean that every gold bullion product produced by NTR or Elemetal (ELEM) would need to be turned over to the Department of the Treasury.
BH: Well, that is enormous. Let’s discuss your personal role in all of this. I know you are occasionally called the Father of Cross-Collateralization in the industry – an industry that covers the precious metals as well as base metals used in many different industries. Please explain that role.
PT: The niche I created was to offer a technology that allowed companies and even nations to buy gold and hedge it to accomplish a couple of important cost-savings purposes. First – we perfectly hedge their exposure in physical gold so that they have a fixed price (delta-neutral exposure) throughout the life of the storage and delivery cycle of their product. Additionally, we neutralize their currency risk, and allow for them to make payments in their native currencies – many of which are not traded on the major exchanges. It’s a facilities management operation at its core.
BH: OK, and how does this effect you personally, given your role in the PM “lifetime” process from defining the client need to actual delivery. Do you physically handle the product?
PT: We sure do. As one of the very few with a federally licensed mandate to conduct these operations, I’m responsible for the ordering, purchasing, assaying, storage and delivery of the physical gold in addition to hedging the currency, conversion of and moving the cash. These duties put me squarely in the sights of any of the enforcement arms investigating these crimes and determining the culpabilities of whomever is on the profit trail. The Feds will look to see if I handled or used the gold bars in question, and they will review our sales paperwork trail (which we keep, religiously) from NTR to us. Forunately, I’ve never bought metal from them, but others in the biz may not be so fortunate.
BH: On background for our readers, the government has only been in the gold confiscation business once before, when FDR wrote an Executive Order “forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates within the continental United States” - which criminalized the possession of monetary gold “by any individual, partnership, association or corporation” (thanks to Zerohedge!) on April 5, 1933. This was arguably an unconstitutional overreach by our government, but ostensibly was done for the “right” reasons – that is a bailout of our Federal Reserve bank which was saddled by the backing of our currency by a commodity that was “finite” in nature. After the Great Depression, this seemed like a necessary step to take, and in fact, Congress essentially ratified the order by writing and passing the Gold Reserve Act of 1934.
We are going to theorize on this juicy conspiracy topic in a later blog, but for now I need to ask you …. Are you implying that the government might confiscate product produced by the refiners under this investigation and potential indictment?
PT: Absolutely. I’ll refer your readers to a March 31 article from Kitco News titled “Chile’s Crackdown on Gold Smuggling Hurting Legit Dealers” in which the importing of pure gold coins for consumption has gone from, citing just one example, the importing of 15,500 ounces of Gold Maple (the 24-carat highest purity unit) to exactly ZERO since December 21, 2016, when their tougher rules were introduced. This is the kind of thing that kills honest dealers trying to make a living on the truly thin profit margins that exist in the world of high-end gold sales. It’s a tough, very competitive marketplace.
BH: Wait one second – this sounds like the shallow end of the pool. Are there larger implications as it relates to your deeper end of the industry?
PT: There sure is. I was hardly finished. That article covered only a localized region, and retail sales of gold. On my “institutional” level, I can say with a high rate of certainty, that this enforcement action is likely to lead to indictments of the “deeper pockets” on the paper trail – which means that ultimately Elemetal itself is likely to be defending itself as the ultimate beneficiary of a trail of money laundering via the production of “pure” and deliverable gold bars containing Illegal conflict gold.
BH: What does that mean?
PT: Every single gold product delivered by the legitimate delivery mechanism around the world will be subject to examination and the possibility of confiscation exists, with zero compensation for the aggrieved parties, whomever and wherever they are.
BH: Who are YOU to make such a claim, Pete?
PT: You’ve got to understand, Bill. As one of the few US-based licensed professionals who can operated under the kind of mandate the Feds require to offer expert opinions on the providence of precious metals, I am frequently called on in legal matters in various courts to offer expert testimony. I’ve been on the federal payroll many times, making exactly the kinds of identifications that will surely be necessary, in the event ELEM Gold requires identification for whatever purpose. Our Federal Reserve Bank, and Fort Knox I presume as its holding company for metals, will need to find every single bar of ELEM Gold in circulation – irrespective of where it is or who “owns” it. It is the fruit of the poisoned tree that was created when Elemetal and NTR decided to utilize illegal gold in the production of legitimate, deliverable bullion.
BH: It sounds like the government is going to need an army of assayers basically raiding any, and all, of the production output, wherever it winds up, right?
PT: Yep. There will not only be monster manpower delays getting things underway, making valuations, counting product and so forth – but how will they be obtaining access to the thousands of vaults around the world that is housing ELEM gold? If court orders must be issued separately, how long might this go on? Sovereign countries will be giving up, potentially, billions of dollars in value. We’ll have cross-border transportation to deal with, armed enforcement officers potentially facilitating the physical confiscation, and experts trained in the identification of the product – of which I am, as indicated earlier, one of the FEW US agents qualified to do so.
BH: So, this will require the DOJ to come to decide as to the “legality” of the gold?
PT: Yes sir. Remember that all the major exchanges were “duped” and received the product under what they assumed to be the same stringent guidelines that have been in place for years.
BH: I assume, then, that you are talking about potentially thousands of legal claims against Elemetal and their companies. I’ve read recently in “about.Ag” that there liens already being placed against stored and leased metal by a myriad of corporate entities for product that they are involved in the delivery of.
PT: Right again. This is a brand-new scandal just breaking. It’s why we are talking right now. This is tomorrow’s headline and we want it out there for all to see. You may be a small retail user or reseller of gold products, one of my bullion dealers – or you might be a small mining concern that has dealt with me in good faith. These folks deserve their place in line, and we simply cannot predict what nightmares are coming down the pike. I have a duty to let folks know that their gold – their personal property rights might be effected. Hear this, people: it is possible your gold might be gone!
BH: This sounds like a potential nightmare. What countries are going to be most affected?
PT: Well, this is where it gets a bit more conspiratorial. The demand for gold is disproportionately high nowadays in India, China and the Mideast (Dubai, Saudi Arabia and Iran). It’s difficult to imagine confiscation of gold from most of these countries, although their product would be subject to interdiction should it come back onto the world markets again as the subject of new regulations, and if the product bore the NTR/ELEM stamp (as every “good delivery” bar must). Just that fact alone would render it basically useless for monetary value, unless it was further refined, illegally, by those country’s networks of smelters. This is going to be a very sticky issue – because we’re talking about some 1600 metric tons of gold! It is likely to be, literally, everywhere.
BH: I know you’ve had to be very careful when discussing this subject with your industry counterparties as you don’t want to let that kind of verbal intervention get around – impacting price potentially, as well as covering your own exposure by naming names and making implications that are still outside of the scope of the investigations. What impact has this had on you personally?
PT: Not much, to-date, honestly, as I personally deal with mostly Swiss products, so I should be alright (knocks wood). But the tide is coming. I am very careful to cite only the sources that are already in the industry news, and am not speculating on any one particularly, because most of the players in this fiasco have not yet been arrested. Investigations continue by multiple agencies now, and I can assure you that the ramifications of this conspiracy run deep and worldwide. It is going to be a very complicated ball of yarn to unwind. This is exactly why we are going “mainstream” with this now.
BH: What do you see as ramifications on gold prices if any?
PT: The obvious thing is the loss of some 3% to 4% of the annual production of global investment-grade gold. Remember, this will be in a single, fell swoop, and will NOT be subject to compensation, if tied up in criminal prosecutions just as all confiscated property is when similarly taken as ill-gotten gains. If might be a different story when dealing with sovereign countries. There may have to be some sort of re-compensation made by the confiscatory entity, and perhaps some kind of monitored on-site storage facility inside the countries involved.
We simply do not know enough at this point to even speculate, but certainly a great deal of gold is going to be taken out of circulation for at least a decade, if not longer. I’m speculating somewhere between a 7% - 14% one-time increase in spot on this action alone when the enforcement action is announced.