Gold Research Videos

James Turk: This is James Turk. I'm a director of the Gold Money Foundation. And it's my pleasure to be here this morning with Bruno Bandulet, who for many years has been an influential voice in the precious metals market. Bruno, I've never said this to you before, but back when I was in Abu Dhabi in the 1980s, I used to speak to the Swiss banks. And more often than not, they would always start by telling me what you were thinking and what was going on in the gold market.

I'd like to talk to you today a about the gold market. A lot has happened since we met each other in Spain a couple of years ago. The price of gold has gone up. The problems with the euro have become more apparent, the sovereign debt crisis. Let's start with the euro and the sovereign debt crisis. What are your thoughts?

Bruno Bandulet: Well, I was against the euro from the beginning. I thought it was a terrible mistake. And it has turned out to be a fatal mistake. And now they are in a trap. The governments are in a trap. Whatever they do has very bad consequences. And nobody knows how long it will drag on. And all big currencies, including the dollar and the euro, are in a kind of competition of ugliness. But presently, the euro is worse off, than the dollar.

James: Yeah. You know, the promise to the German people was that the ECB would be managed like the Bundesbank. And the euro would be managed like Deutsche mark, but it's not working out that way. It seems like the euro is under political control, which is why they're buying government bonds. Would you agree with that?

Bruno: Yeah. It's completely about politics. And the euro, as it was planned and agreed upon in the Maastricht Treaty and as it was promised to the German public, doesn't exist anymore. It's a completely different currency. You could say that the euro, which was founded in 1999, started as a substitute for the Deutsche mark. Then since 2010, it became a French currency, a French euro. And then, the next thing will be that it becomes an Italian currency with an Italian president of the European Central Bank. So, it developed from a fairly stable currency into a weak currency.

James: But it seems that the German people are speaking, in a sense that the local elections have been against the government. It's an indication of discontent about the euro. Would you say that's a true statement?

Bruno: Yes and no. People don't trust the euro any more and they are really no longer in favor of what the government does. But, the problem in Germany is practically all the parties, which sit in Parliament, are in favor of this euro policy. In contrast to other countries like Denmark, France, and Austria, there's no political party in Germany, which speaks out against the whole euro concept.

James: In Finland, for example, the True Finn party...

Bruno: Yeah! That's another example.

James: Which got 20 per cent or 19 per cent of the vote in the recent election. There's no powerful voice like that here in Germany?

Bruno: No.

James: Is there one likely to emerge? Or are all of the politicians in favor of continuing the euro?

Bruno: Yes, momentarily, yes. In the end, I think such a new force could come out into the open, but not now. The German public is fairly apolitical. They like to suffer. They, more and more don't vote. But the political establishment is very stubborn. They have their concept, and its European ideology. It's integration. It's unification. And the whole thing is a political decision just to keep the euro afloat.

And, I suspect, they will go on and go on like this for as long as they can. But, at some point, we are still a democracy. And at some point, it's enough. And then the whole thing breaks apart probably.

James: Yes. You say that less and less Germans are voting. Is that apathy because of lack of interest? Or is it just content because the German economy is doing very well compared to other economies in Europe?

Bruno: It's not really lack of interest, but it's a lack of alternatives whom to vote for.

James: I see.

Bruno: But all leading parties are in the same boat. You have no alternative.

James: But here we have the gold price up almost again, near record highs in terms of the euro. And we've seen, in GoldMoney for example, a huge interest in Northern Europe, not just Germany, but Northern Europe in gold and silver as alternatives to the euro. Is that likely to continue with the problems with the euro, at the moment?

Bruno: Yes, I think so. I mean, looking at the world market for gold, Germany is not really decisive. It's not the biggest market. It's more or less an Asian market, but instead of voting for a non existing anti euro party, investors buy gold. That's true, but it's still a fairly small minority. It's not yet a mass movement.

I remember in the '70s and up to 1980 there was much more gold buying in Germany. You could buy a Krugerrand at all these bank counters. It was no problem. Today, it's not easy to buy gold in Germany. Most banks don't have anything. You have to order. They want your address. And it takes days until you get your money.

But the interest is there. I've been in Switzerland recently, and it was a very interesting development. In Switzerland, the biggest party now is the Schweizerische Volkspartei, Swiss People's Party. And they have started organizing a referendum about the introduction of a gold franken as legal tender.

And this will come before the Parliamentary Committee this summer. And so, it happens. But gold Franken will be an additional legal currency. So, if somebody wants to save in gold franken, rather than in the...

James: Swiss franc?

Bruno: The other Swiss, the Swiss franc, as it is now, which is not covered really by gold like in the old days. You can buy gold franken. And my idea is that we should do the same in Germany. And as long as the authorities don't do it, people can buy gold on their own. And so, they have their private currency.

James: The gold franken would circulate parallel to the Swiss franc then?

Bruno: Yes.

James: But that is at a varying exchange rate because the gold Franken would be based on gold and the Swiss franc is not based on anything other than, the central bank.

Bruno: It's a very interesting idea, which is far more important than what happened in Utah, because it's now on a national level. And the national parliament has to decide upon it.

James: When will that referendum be held?

Bruno: I spoke to them, and they said at the earliest next year.

James: I know here in Germany there are a lot of community currencies or local currencies, but there have been no movements toward reestablishing a gold mark?

Bruno: Not yet. Actually, I'm the first one advocate it. I just wrote an article about it. No. It's not yet discussed.

James: I'll be the second person to advocate it even though I'm not German, but it sounds like something that make sense. Because it provides an alternative for people concerned about the euro. OK. You don't have the stability that the Deutsche mark used to have.

Bruno: Yeah, I think we mustn't forget, it's not a French party, it's the biggest party in Switzerland. And one very important argument is the following. They say the gold Franken helps to reduce upward pressure on the Swiss franc, which could be a problem for the export industry. As it is now, especially foreigners who want to be on the safe side, buy the Swiss franc. And so, the Swiss franc really is overvalued, which can be problematic for the export industry. But if you have two currencies, and it's not just about buying gold coins.

The Swiss banks, which have gold accounts. These many foreigners who have their accounts in Zurich or Geneva, they can choose between the paper Swiss franc and the gold franken. I think this makes sense. And the more choice you have, the better. This was really the biggest mission with the euro.

They could have introduced the euro as a parallel currency to existing national currencies. And we still should do it. And then the market decides which currency they prefer for what purpose. For instance, Greece could conduct their tourism business in euros so people don't have to exchange the money.

But they could export in a new drachma again. So, the market decides which money is accepted. I think that's much better. And the whole system becomes more flexible.

James: I agree with you completely on that. You know, competing currency is, I think, the way to go. Competition is a good thing as the market then chooses which one has the best product and that's what you want. You want the best product the most efficient. So competing currencies, the logic is exactly the same.

Bruno: I think that was the original idea of the euro was about, eliminating competition between currencies, because you had competition between the Deutsche Mark, the French franc, peseta, and lira. So, people who didn't like the French franc, could buy the Deutsche Mark. But this is something they didn't like. They hated it. And so, they abolished the competition.

James: Yeah. My vision is to go back to the world's international money, which is gold, so that every country could have its own currency. But if you want to transact internationally, you transact in terms of gold. Which is the way historically it always has been. But politicians seem to be against gold because of the constraints and discipline it imposes on government spending.

Bruno: Yes, of course they are. It's a question of their power, because their power rests on being able to incur debt and to buy voters and to spend money. On the other hand, if it is really true that they don't need gold anymore, they could have sold it long ago. Why not sell it? The United States has more than 8,000 tons. Germany is second in terms of nations, and they have some 3,400 tons. They could sell it.

James: Yes, it's very ironic. They talk against it, yet they still have it. I think they truly recognise that gold is international money. And it really is a reserve, and they want to keep it just in case.

Bruno: I remember talking to the Deutsche Bundesbank. I must tell this story because it's very interesting. Before 1999, before the Euro was introduced, it started as book money, not yet in a physical form. Before 1999, the forerunner of the European Central Bank, which already existed in Frankfurt, conducted a study on the possibility of a gold euro. Of a euro which was covered by gold to the extent of 50 per cent or anything between 30 per cent and 50 per cent, which was also the case before the First World War in Germany. The gold mark wasn't covered 100 per cent in gold.

James: Nor was the British pound.

Bruno: Yeah, and that was enough. This fluctuated before 1914. It could be 30 per cent, it could be per cent, but there was no problem. So, there was a committee in Frankfurt, including one or two of the big Frankfurt banks. Deutsche Bank took part as far as I remember. I'm sure they took part. And funny enough, Deutsche Bank was in favor of a gold covered euro, and they looked at the future money supply, money aggregates. And so, they found out there was enough gold to introduce a gold euro.

Well in the end, it was decided not to do it. But then, I remember, that's what I wanted to mention. I asked the Bundesbank, 'Why do you keep your gold then once it was decided not to cover the euro?'

And they said, 'Well if some time it goes wrong with the experiment, and we have to go back to the Deutsche mark, we need something we can build upon.' And that's the case also with other big central banks, even the Federal Reserve.

If this whole paper currency system goes down the drain, which really can happen, even if it takes five more years or 10 more years, they need something people trust. And that's why they keep their gold.

James: I'm not sure the dollar's going to take five more years before it goes down the drain, given the way politicians are spending money. And given the way the debt had accumulated. What's happening is there's so much debt. I was just looking at the statistics, for every $100 that the US government spends, 40 per cent comes from debt and only 60 per cent comes from revenue.

And historically, when you're at that ratio, it's an indication that you're very close to hyperinflation. And I really think that's where the US government is headed. And I'm concerned that if the US government pursues this, given that it is the world's reserve currency, this is obviously going to have an impact worldwide, including the euro.

Bruno: Yes, just look at the balance sheets of other central banks and how many dollars are accumulated there. This is something, which concerns the whole world. Of course, it would be a terrible problem for China. And one sign of an approaching crisis would be a collapse of the bond market, which has not yet happened. This is something we have to watch. On the other hand, theoretically, if politicians in Washington get their act together, they could hike taxes. That would be bad for the economy. But a combination of higher taxes and spending cuts could, theoretically, really help the dollar and prolong the whole game. But I don't know if it's going to happen. That's a different question.

James: I was just in the states speaking at a monetary conference there. I always like to try to be optimistic, but I just don't see anything happening. Right now, they're trying to figure out if they can increase the debt limit. And trying to get political consensus to increase the debt limit, because it has to be increased by August 2. And what they're thinking now is to increase it by $2 trillion, which will take it from August two until November 2012, the next election. Which basically shows that they don't have the political will today.

Whereas, they're starting to say in the United States, 'They're kicking the can down the road.' Let somebody else solve the problem. And I think that's probably an indication that the political will isn't there now. And it won't be there in 2012. And I think that's a very bad indication for the future of the dollar, and obviously, very positive for gold and silver.

Bruno: No, something is going to happen. You are perfectly right. The political will is not there in Washington. On the other hand, looking at it from a European perspective, there's still an enormous amount of wealth and capital accumulated in the United States. Just look at New York and the enormous funds, which circulate there. So I think they still have possibilities. In Europe, not just in Germany, but also in other countries like Belgium after the Second World War, we had what is called in German 'Wolugensaga,' which means every person or every institution, which is still more or less rich, gets 10 per cent or 20 per cent or 30 per cent taken away.

That's different from the traditional debt cut, which means government debt. But they can take away a portion of your personal wealth. That's something I think has never happened before in the United States, has it?

James: They take it away a thousand cuts at a time through various taxes, but nothing quite like that. That doesn't mean it won't happen in the future.

Bruno: But this is really the big hammer. So with one stroke, the government is richer and individuals are poorer.

James: Yeah. I guess the US did it, in a sense, in the 1930s, when they confiscated gold. They confiscated the gold at $20.67, then they devalued the dollar, so that an ounce then became worth $35. So in that sense, I guess they did it too.

Bruno: Yes, that's comparable.

James: And recently, we've seen examples in Argentina. And more recently, in Ireland, where governments have actually taken pension plans in effect, to bail out banks and to help solve their spending problems. Which means that governments basically go wherever the wealth is and try to grab that wealth to keep their schemes going, rather than imposing discipline on their spending, which is what's really required.

Let's me ask you, I spoken to a number of German people, particularly, over the past several months. And several of them indicated to me that it would be their preference, and they almost see it as a solution.

Rather than letting Greece drop out of the eurozone, have Germany pull itself out of the eurozone and reestablish the Deutsche mark once again. It's similar to what you were talking about before about parallel currencies. Let the euro exist for European transactions, but have a domestic Deutsche mark. You think something like that is possible?

Bruno: Yes. Actually this is an idea I have been propagating for some time now. I remember in the '90s, when we still had the European currency system as a predecessor of the euro, we had similar problems. The French franc was overvalued. They had a lot of monetary and economic problems. So, everybody in the market expected the French to devalue, which they didn't want, because it went against their pride. They didn't like to devalue. And before that, we had a lot currency alignments in Europe, in the European monetary system. And then, suddenly the French came out with the idea. Not publicly, but talking with the German government, if Germany leaves the European monetary system then the still existing Deutsch mark goes up. And we get our devaluation without having to devalue, which would have been a very elegant way to solve the whole problem.

Now jumping to the present situation, if Germany left the system of the euro, and went back to the German mark, the German mark would become stronger. And the others would have their devaluation. I think it would be a very elegant solution to the whole problem. You don't have to change very much. At least the others don't have to do anything. Yeah?

James: Right.

Bruno: They get what they need. But they need a cheaper currency. This holds true practically for most of them. Not just for Greece, also for Spain, Portugal, Italy even France. Because things are slowly, slowly drifting apart between Germany and France also. The next bigger problem still can take years, but France and Germany really are the core of the whole thing. If France gets into trouble, which will happen if present trends continue, then it's terrible.

James: Yeah, the French economy is not as strong as the German economy.

Bruno: By far.

James: I think there's probably more discontent in France in terms of the economic situation because the economy is a little bit weak there.

Bruno: They go on strike much easier. It's completely different from Germany.

James: Yes. Completely. Any thoughts here on the price of gold going forward over the next few months. Do you see it continue to go higher?

Bruno: You know my feeling is the Greek situation could be over by the beginning of June. They have to do something.

James: It's clearly unsustainable.

Bruno: Yeah.

James: Twenty per cent interest under two year bonds. The debt is not being solved. It has to be restructured. Somebody has to take some losses.

Bruno: I mean they don't have to pay these kinds of interest because they're not in the market anymore. They get money from the European Union, and Germany.

James: The financial stability fund.

Bruno: Now they need more money and so on. The main problem presently is the Greek economy has broken down. It doesn't work anymore. People they has impending bankrupt in Greece, so it has broken down. Otherwise they could drag on for another one or two years if they get enough money from Germany and other countries. It looks like it happens this year I would say.

James: Could that bring about a European banking crisis because the paper that the Greek, the Greek paper that the banks has?

Bruno: At least it's very dangerous for the banks. On the whole, the situation of the European banks is worse than that of the American banks. They haven't cleared up their mess in Europe. It's very fragile. It's very dangerous. This is why the European Central Bank and the German government, French government don't want the Greeks to cut their debt. The Greeks are forced by the others to carry on. They've lost their sovereignty. They're completely under control. But I think it will happen this year.

Now this can give another push to the gold price especially if a banking crisis follows, which to some extent will happen. But it could be containable because Greece is not as big as Spain was. But apart from that, if nothing sensational happens this year, the gold price should go down for a few months.

My original actual price target at the beginning of the year was around 1,500.

James: Dollars.

Bruno: Dollars, yes. It went above $1,500. Anything around $1,600 is also possible. I was a bit surprised that demand from India and China held up so well. Because in former years, they waited for larger price dips before buying. But now they came back very quickly.

James: This is something I've been watching as well. Ever since we went above a thousand dollars an ounce, instead of waiting for that 30 per cent or 35 per cent pullback. 10 per cent, 15 per cent, 20 per cent at most, they're right in there buying again in that physical market. That's what really driving the price so much higher. Here again, the demand from India and Asian generally, at $1,500 dollars has been very strong.

Bruno: It came back. It wasn't even 10 per cent I think.

James: Yeah.

Bruno: Yeah. But we have to mention something else. My feeling is that the whole commodity boom is overextended for the time being, including oil. What is always interesting is the situation when the price swings become bigger and the market gets more nervous. This is what happened with oil and with silver. I think silver and oil especially is a curse to ask that the commodity boom could be over, at least for this year or at least over the summer month. If this is the case, gold would suffer a little bit, but much less in any case.

James: Yeah.

Bruno: Especially in dollars.

James: Yeah. The accumulators will continue to accumulate gold on any pullback. I guess the silver and the crude oil market had been hit by the margin increases so it's really the paper market here driving prices lower. Would you agree with that, rather than fundamentals of underlying demand?

Bruno: Yes you're perfectly right. It would have happened anyways even without higher margin requirements. These markets just have been overextended. If you look at the commitment of traders in oil, it was higher than 2007, 2008. Even gold investors must know there are two sides to these markets. Even to the gold market. You have the investment market. You have serious buyers, serious investors who just want to have something in their portfolio which can't go bankrupt.

James: Physical metal.

Bruno: Yeah. As an alternative currency, which really it is is an alternative currency. But then you have these people who play games. Like hedge funds and other operators who don't buy gold in order to keep it. They buy it in other to sell it at half prices. This creates a foam layer above the market and periodically the foam has to be taken away, at least partially. This is what makes the market cyclical. Then you get a new buying opportunity.

Summing it up, the whole gold story is not near its end. When I started in the gold business and writing about gold, that was the second half of the 70's. I lived through this whole gold bull market then which really ended in January 1980.

Actually it sounds preposterous but I mention it nevertheless. I sold everything I had exactly on the day after the gold high, 850. Not because I was particularly very clever, but because the newspapers were so exuberant.

I remember one newspaper really was decisive for my selling. They wrote, it was a big German weekly and Gazette, 'From Now On.' That was when gold was 850, they wrote, 'The gold price will keep rising by leaps of 700 dollars.' Not rise by 700 dollars but my leaps of 700 dollars. So, I sold everything.

Looking at what happened at the banks and everywhere, we're not in that situation now.

James: We still have a few years ago would you suggest, or three to five years before this bull market ends or perhaps...

Bruno: Yes. It's hard to say. What can happen? I don't know of course. But what can happen if we get for a certain buying a stronger dollar, because euro is even worse off and the yen and all of them. So, the dollar price of gold could go down somewhat. Normally it would go up again in August or September this year. But what can also happen is that it takes a nine-month or even a bit longer. During the gold bull market in the 70's we had suddenly from the beginning of 1975 till August 1976, it went down nearly to 103 dollars in August '76.

James: That's right.

Bruno: But after that, the fun really started.

James: Yeah. It just kept going.

Bruno: But in the summer of 1976, many people were out and didn't reenter the market until much later. Normally you have these kinds of pause or interruption, which we haven't had. What is really I find sensational that since 2001 we haven't had one year with falling gold prices. Every year was in plus. But this is exceptional.

James: It truly is. That's why it's always useful to make comparisons back to the 1970's. I myself do that quite a bit. But I also say that this time it's different from the 1970's like you say.

Bruno: It's worse.

James: It is. The currencies are worse. The debt loads is worse. We have this mountain of derivatives out there. While bull markets end with a lot of enthusiasm normally. My thinking has been this time around this bull market is going to end differently in the sense that when it comes to an end, you're not going to be selling your gold. You're going to be spending your gold. In other words, I think gold is once again going to return as currency, rather than actually wanting to sell your gold and dealing with the national currency instead.

Bruno: It is possible. Yes it is possible.

James: It should be interesting the next few years.

Bruno: At least it's not yet in a real bubble.

James: No, that's definitely for certain. Bruno, it's been a real pleasure to speak with you. Dr. Bruno Bandulet. Thank you very much for spending some time with me this morning.

Bruno: Not at all.

James: Thank you.