Meanwhile... Down at the Gold Souk

Podcast Transcript

Ed Coyne: Hello and welcome to Sprott Radio. I'm your host, Ed Coyne, senior managing partner at Sprott Asset Management. I'm pleased today to welcome a new guest to Sprott Radio, Jeff Rhodes, Global Head of Operations at Goldstrom. Jeff, thank you for joining us at Sprott Radio.

Jeff Rhodes: Hi, Ed. It’s good to meet you and thank you for inviting me to Sprott Radio. It's fascinating for a Brit living in the Middle East for the last 30 years talking to colleagues in North America.

Ed Coyne: Let's start with where you're sitting and the current umbrella you sit under, which is Goldstrom. Talk about some of the work you're doing right now with Goldstrom and in the general markets. What's happening right now in your world? What are you looking at today from an opportunity standpoint?

Jeff Rhodes: From an opportunity standpoint, we look at the world of global physical precious metals. We are involved in every aspect, from the first step of either small, medium, or large-scale mining through to processing into doré, which is then shipped into LBMA good delivery refineries around the world. It ends up with kilo bars or other value-added bars, which we then sell to high-net-worth individuals, family offices, and the trade.

We extract value from the value chain with a little bit at every point in that value chain rather than trying to be one of the best sellers or best buyers. What we try to do as efficiently as possible is provide customer service to every part of the market and try to make a bit of money at each leg, and that aggregates into something we believe is significant.

Ed Coyne: I know you've spent the last couple of decades in the Middle East and Asia. What traditions have you witnessed there that impact gold from a value or price standpoint? What can you talk about that you're seeing in the East that a lot of our Western investors don't fully appreciate or recognize?

Jeff Rhodes: Certainly, there is a seasonality to the world of physical gold. Using my experience over the last 50 years in different parts of the world has different impacts. For example, in the former Soviet Union in the east, gold isn't really mined in the winter; it’s in Siberia and too cold. Then you find that gold comes onto the market in the summer.

Then you come to India, where there's lots of seasonality, and it is driven by monsoons in the summer, so when you get the monsoon season, physical demand goes away. It used to be that you would see the market's very soft and very quiet in the summer and quite strong in Q1 and Q4. In terms of seasonality, there were reasons for that.

As I said, in Asia, freezing conditions in the winter, no production, and then in the summer, that comes onto the market. India is either the number one or number two consumer in the world, whichever report you want to read, but they're certainly in the top two. That demand falls away in the summer because of the monsoon season. Then we get to the end of August or early September, and we start to approach what's known as the festival or wedding season in India, the peak of which is Diwali. There are a number of other Indian festivals that are celebrated, which culminate in Diwali.

Equally, there are times, Ed, when it's inauspicious, even during that period, to buy gold, and you will see on certain weekends during that period where it is good to buy or that you should stay away. Seasonality, the weather makes the difference seasonality, and the festival's big impact on gold. What tends to happen is that Indian families will decide to spend and have available to them to spend a certain amount of money. How much gold they purchase is determined by the price. They're going to spend the same money. There was a guy when I was young, his surname was Green, but he used to believe that the price of gold was determined by the combination of monsoons and the Indian and Arabian housewives, that when they decided to go down to the Souk and buy would be when gold goes up.

I think whereas we tend to look in the West at the financial markets and see gold as a financial asset, in the East, in Asia, it's always been seen as that physical safe haven store of value. Honestly, it goes back to India; thousands of years ago, there were more than hundreds of kingdoms, and the kingdoms would be constantly fighting each other. Even today, 40% of GDP is farming in India. The farmers would always keep their wealth in gold. They'd dig holes on their land, bury their gold, and run away. They'd come back and get their gold when the fighting was over.

It is a very simplistic way of describing it, but that belief in gold as the ultimate store of value when you need it the most is ingrained in Indian psychology—and not just India, right across the subcontinent and indeed the rest of Asia—because if it's not number two, number one is China. The Chinese have equally the same affinity as Indians, a little bit more if you were more willing to take a risk.

India's very careful with their money. They buy low and sell high, whereas we, I speculate, in the West tend to do the opposite, looking for a breakout. I have a huge amount of respect for the Indian markets, the Chinese markets, and the other parts of the subcontinent. Now, I haven't actually become a local, but I do love living here, and I enjoy the fact that, strangely enough, what's going on just down the road from where I'm sitting at the moment is probably one of the safest places in the world to live.

Ed Coyne: Interesting. You mentioned that about farmers. There is a great book that came out quite a while back called The Land Remembered, and it was really about the development of Florida. It's by Patrick Smith. It's a cool book, but it's interesting that they started with cattle. They got into citrus farming but always used gold as their currency. This is a hundred-plus years ago when Florida was developed to flee civil war and other things out there. It's a good book to read because it's about, more about the establishment of Florida, but the underpinning is really about gold and its value a hundred-plus years ago as well. It sounds to me like that's still happening in the East.

Jeff Rhodes: Honestly, it is. You had to think about the younger generation, Bitcoin, and so on. Yes, they are playing Bitcoin, but they are very involved in physical gold. My son Oliver, who is just, I think, six weeks ago, migrated to Vancouver. I haven’t had a meaningful conversation with him about what I do for a long time. He wasn’t interested in gold. Then over the weekend, out of the blue, I got this list of gold ETFs and silver ETFs that he is now thinking about investing in, that's in the West. This is not in the East.

I do believe that the younger generation in the West, as in the East, is really tuning in to gold. I've been doing this a long time here. Honestly, I don't think I've seen such a sustained period of strength in the gold price and in the underlying gold market as I've seen this year because John Reed in a piece for the World Gold Council, he referred to the fact there'd been 35 record highs in the gold price this year.

He may well have been referring to non-dollar-denominated records as well as dollar-denominated records, but over the last few weeks, we saw gold post eight consecutive record highs. You would've thought with that move that the 30-day RSI¹ would've been sky high, would've been 75, anything above 70 is a sell, 75, 80 it's been to this year. It never got above 65, and currently, it's sitting around 60, 62. There's something going on in the world of gold today, we're living an historic period for the gold industry. I think in the next couple of months we might be saying the same about silver.

Ed Coyne: Talk about other parts of the world then. We talk about what's going on in India and Asia. Dubai has certainly expanded. What they've done is nothing short of incredible over the last couple of decades in development. What are you seeing there as they become a modern economy? Is gold still showing the same importance there as well? Are we seeing this really across the board in Eastern culture?

Jeff Rhodes: Dubai, UAE is physically the center of the world. The Emirates Airlines with their business strategy caught on to that and became one of the global hubs for the airline industry. What that did at the same time, it connected all the major physical gold markets of the world, both on the supply side and on the demand side. It made it the logical place to become one of the world's physical gold hubs. In terms of what I would call gold redistribution, it's one of the biggest gold markets in the world because gold comes in and goes out. For example, what we did at  Standard Bank, we supplied India, and there are 36 different states in India, and if you like, 36 different sets of rules.

We hubbed physical gold holdings in Dubai, and we fed to our clients across the Indian subcontinent from Dubai. It was extremely efficient, and that efficiency and the ease of doing business here has just led to the UAE becoming one of the most important physical gold hubs in the world. Before you asked the question, and I'll bring it up anyway. One of the negatives over the last few years has been, if you like, the compliance question and AML and so on and so forth.

I can tell you that the authorities here really have focused on this over the last four or five years. I would argue quite strongly that this is the most highly regulated physical gold market in the world. I don't think there's anywhere else where, if you don't follow responsible supply chain, rules, regulations, and policies, here you can go to prison. You can be fined, and you can go to prison. It really is serious.

There's AML, there's CFT² and so on. Everyone in the market here, not just refineries, but everyone in the physical market, even in the financial market, you must follow rules strictly because they're not rules, they're laws. A transformation in the UAE has taken place over the last five years, which is extremely relevant when you're saying this is a major physical market. Obviously, physical markets lend themselves to bad stuff. There are strict rules and regulations that you must follow. If you don't, you have a problem.

Ed Coyne: You've made a lot of interesting points today that, hopefully, our listeners are taking to heart. We're not here to call a price. I don't know if you have a price in the back of your head that you see gold going. I've had people tell me that gold is expensive at 1,200, at 1,500, at 1,800, at 2,000. They miss the trade at 2,300. It continues to do its job over time. Having said that, do you have a vision as it relates to price over, say, the next one to three years? What do you see out there? Do you care to throw a price out there?

Jeff Rhodes: I do. Yes, I will. I'll tell you how I've lived my life since 1978. The chief bullion dealer at Samuel Montagu sat me down and said, "Keep a good diary," because we didn't have electronics in those days. Just write down all those factors you think is going to influence the gold price and then form a view. Because we were market makers, so you had to have a view.

Ever since 1978, every day of my life, the first thing I look at is the gold price and what might be affecting it. The last thing I look at at night after kissing the missus goodnight is where is the gold price and what's going on? There isn't a day where I don't have a view. Now that view can be one of three. It can be bullish, it can be bearish, or I don't have a clue-ish.

I do believe that we have made a fundamental shift in the price. If you went back five years, I would have thought a price above 2,000 would be brief and we'd never see it again and we'd go back down. I don't believe we'll ever see a price below 2,000 again. I'm skeptical that we'll see a price below 2,200 again. Over the next one to three years, I think $3,500 feels like a good number. Once we're above $2,685, the all-time high of a couple of weeks ago, once we're above that, we're in technical blue sky.

It's strange though. I don't know whether you've noticed yourself, Ed, over the last three or four weeks, gold has been quiet. If you look at the trading volumes, the trading volume yesterday on the COMEX was only 21,000 lots. Very light. That's been the case and it's been low volume for the last month. I tell you what I believe it is. I think so many people are thinking, "You know what? I really like gold, but it's a bit high to buy." A bit high to buy. There are people on the other side who already sold and are a bit nervous about selling anymore because they're already short. You've got this kind of standoff and eventually that standoff will go.

Ed Coyne: Our own analyst has talked about this sort of pause.

Jeff Rhodes: It's a ceasefire.

Ed Coyne: Yes, a ceasefire is a good way to say it. I would agree. Look, I think that people also have to recognize that all of that is done in the last year or year and a half in a strong interest rate environment, a relatively strong economy, depending on who you want to ask or talk to, and a relatively strong dollar. That's starting to all change, as we speak, but that really should have been the opposite for gold, and it's done well.

I think what you've said and what I've heard on this entire podcast is that there is a wind of change effectively happening, how people view gold, who's viewing gold. We applaud that, of course. We've been doing this for over four, close to five decades as well in one way, shape, or form. I really appreciate you taking the time today. Before we sign off, is there anything you want to say that I haven't asked that you think would be of interest to our listeners?

Jeff Rhodes: Yes, I think you should have mentioned a little bit more about silver.

Ed Coyne: Oh, yes, you did bring it up. Please do that.

Jeff Rhodes: I honestly can claim to have paid the highest price ever, me, Jeff Rhodes, ever. I think it's the 20th of January 1980. I think it might have been the 21st of January. Gold fixed that morning at $850. Now, I was running the silver book then and I was short going into that morning fixing. I didn't want to be short. I found someone who would sell me some silver and I paid $55 an ounce. Ed, I've still got that silver. It only went one way for the next 20-odd years. This is the year when I'll finally be in the money. I see a price north of $60 this year.

Ed Coyne: Wow, this year.

Jeff Rhodes: This year.

Ed Coyne: You know we're in the fourth quarter already, right?

Jeff Rhodes: I know. You look at the chart, above 35, the next resistance is 43. Above 43, it's 50. There are three chart points between here and the all-time high of 50. Because once silver starts to go, there aren't central banks standing in the way.

Ed Coyne: I just got invited to the Silver Institute dinner in New York in a couple of weeks. I am bringing to them the $60 call from Jeff Rhodes to that dinner.

Jeff Rhodes: Please give my best regards.

Ed Coyne: I will. Jeff, you must promise us you come back on the podcast, and we talk a little bit more about silver next time. How about that?

Jeff Rhodes: Love to. Of course. Yes, I'd love to.

Ed Coyne: If a listener wants to keep track of your world and what you're doing, how can they track you down or track down Goldstrom and just see what you guys are up to?

Jeff Rhodes: www.goldstromgroup.com and jeff@goldstromgroup.com. Delighted to receive any inquiries. Honestly, anyone who contacts us will get a reply.

Ed Coyne: I love it. That goes back to what you learned so many years ago. Regardless of the size of the client, treat them all with the same respect.

Jeff Rhodes: All big clients were once small clients.

Ed Coyne: That's right. Jeff, I can't thank you enough for taking the time today. This was a real treat to talk to you and get some insight on what's going on both in the Eastern world, but also the Western world. Thanks again for joining us today on Sprott Radio.

Jeff Rhodes: I love it. Thank you very much, indeed.

Ed Coyne: Thank you. Once again, I'm Ed Coyne, and thank you for listening to Sprott Radio.

1. The relative strength index (RSI) is a momentum indicator used in technical analysis. RSI measures the speed and magnitude of a security's recent price changes to detect overvalued or undervalued conditions in the price of that security. Source: Investopedia
2. Combating the Financing of Terrorism (CFT) is a set of government laws, regulations, and other practices that are intended to restrict access to funding and financial services for those whom the government designates as terrorists. By tracking down the source of the funds that support terrorist activities, law. Source: Investopedia