Interview with Paul Tustain Founder & Director of BullionVault.com Pt. 1

This is an interview with Paul Tustain of BullionVault.com His company is one of the Internet´s premiere web sites for buying, storing, and selling gold online. Its popular with both experienced traders, new buyers and long term investors. The fees are extremely reasonable and the services they offer are second to none. BullionVault, which is based in London, offers an extraordinary product for the online purchase and direct ownership of gold bullion. Accounts range in size from $2000 to $10 million and you can tell from this interview that Paul created his business to satisfy all customers both large and small.

We have found BullionVault to be a very easy and safe way to participate in the direct ownership of gold bullion without the expense or worry of shipping or storage. Using BullionVault.com account holders can take full advantage of their online trading options including bid and ask pricing which are some of the most competitive anywhere in the world. Paul Tustain trained in computers and worked for six years as an equity analyst in London. Four of those years were spent working in systems for financial risk measurement, regulation, and settlement.

In 1990 he founded a software business which developed systems for administering electronic equity and bond trading. The company´s main product was widely used in Europe to communicate with and instruct CREST, which is the biggest of Europe´s central depositories for equities, similar to America´s DTC. Today in 2008, Paul still retains about 20% of that business, but these days has little day-to-day involvement. Want to learn more about gold and money? Paul is also editor and contributor on the www.GalMarley.com web site. I highly recommend you spend some time there, its loaded with clear, easy to understand information.

(Q) What is your position with BullionVault and how long have you been with them?

I´m BullionVault´s founder and Director. The business was incorporated in 2003 although prior to that I had been planning it for about 2 years.

(Q) Who do you consider to be your target market?

Gold investors from anywhere in the world seeking between $2,000 and $10,000,000 in gold.

(Q) How many account holders do you currently have?

About 36,000

(Q) When I am using BullionVault to buy gold online, will I get the actual delivery of what I buy?

Yes. All BullionVault gold is delivered. But this word ´delivery´ is not synonymous with ´possession´ and the subtle difference is very important - especially for gold. With BullionVault you take delivery at the instant of trade. From that point the gold is your property, even though it continues to be looked after by your professional bullion custodian.

The huge majority of gold transactions in the world are undelivered. This includes unallocated gold, i.e. most pool accounts, most of the popular certificate schemes, and almost all gold bought through banks. Undelivered gold exposes buyers to default because the gold is not theirs in law. So BullionVault is exceptional in that every trade is delivered at the instant of trade. BullionVault gold includes the right to take possession. But on BullionVault you choose not to take immediate possession: you leave that decision pending some future crisis, because postponing possession will almost certainly save you a lot of money and inconvenience.

You´ll have noticed the professional markets trade bullion on very competitive prices not usually available to private individuals. The settlement condition for a professional market bullion trade is that the seller makes available a Good Delivery Bar at the door of an accredited bullion vault.

The Good Delivery Bar usually weighs 400 oz (this varies across markets) and has been continually stored in these accredited vaults since it was manufactured by an accredited refiner. Unlisted manufacturers, under-sized bars, and also previous private possession of full size bars deny the gold ´good delivery´ status. This prevents professional buyers accepting them when you sell because of the integrity rules of the bullion market. The result is that for gold in private possession - typically small bars - when you sell you will only get a discounted price from a trader outside the main bullion market, the prices are much less competitive and you will lose probably 4-6% of your gold´s value the instant you take possession.

There are other problems with taking immediate possession. In most instances where people think possession would be useful it turns out to be both expensive and inconvenient. In a real crisis bullion gold in your hand is surprisingly difficult to make use of.

Firstly, should you try to sell it people will doubt its integrity and you´ll usually have to accept a poor price.

Secondly it´s difficult to acquire things directly with fairly priced bullion because people are unfamiliar with it.

Thirdly it is likely to be very difficult to transport out of your country, as you might wish if - for example - exchange controls were re-introduced.

Fourthly insurance is very expensive. These problems are easily avoided if you store your gold in an offshore location where it continues to be legal, and - still in its high integrity form - easy to sell.

I think these are good reasons for delaying possession until no other good alternatives exist. On BullionVault all our users have the right to take possession subject to a modest fee, but generally users have found it more attractive to use BullionVault to sell their gold, rather than destroy its Good Delivery status and damage its marketability through taking possession.

(Q) What is the number one advantage of buying gold through BullionVault?

It varies for different people. Some say price - because we are consistently the cheapest source of gold for the private investor. Some say it´s our multiple choices of storage jurisdiction - especially as it includes Switzerland. Some like the transparency of our Daily Audit, which most people agree provides watertight proof that our business is properly segregating all owners´ gold in professional vaults.

(Q) Do you offer the option to users of storing their gold in multiple jurisdictions?

Yes - London, Zurich and New York.

(Q) At today´s gold price, which is hovering at about $900 per ounce, what price would you value your total gold company holdings?

Approximately $195 million. The rate of increase is now very rapid. We have more than doubled in size in the last 6 months.

(Q) Should we consider BullionVault to be a digital gold currency like e-gold or GoldMoney?

Not really. The founders of DGCs tend to believe in gold as both a store of value and a medium of exchange. I agree with them wholeheartedly that gold is peerless as a store of value, but I think the evidence is that gold is at best a temporary medium of exchange. It gets beaten back by Gresham´s law :- "Bad money drives good money out of circulation".

There are currently no freely circulating gold currencies in the world; so, right or wrong, as a medium of exchange it is clearly prone to failure. Why? Because it is so good at storing value that presented with a choice of spending pesos or gold people repeatedly spend pesos and save gold - which means the gold gravitates to savers, not spenders, and stops circulating as currency.

DGCs are designed to enable you to spend gold. I want it to act as a store of your wealth, so at BullionVault, instead of encouraging merchants to accept gold, we eliminate them from the equation altogether, which gives us a safety feature which DGCs can´t offer. In complete contrast to a DGC your BullionVault gold can only return to you, which is, I think, why the average holding of gold in BullionVault is very much higher than the average holding of a DGC.

(Q) Can users leverage their purchases by paying less than the total purchase price? Are there any credit options like Futures trading?

None whatsoever. If you introduce credit in this way you introduce the prospect of default. There are plenty of alternate mechanisms for buying gold with leverage and credit, but in the interest of absolute financial safety we choose to be different.

(Q) When I compare the spot price of gold to the BullionVault price, sometimes BV is a bit higher than spot. Why is that?

BullionVault gold is fully allocated, and collected by our vault operators for separate storage exclusively for BullionVault clients before we offer it for sale. Normally for an allocated spot gold trade the buyer still has to pay for collection. With BullionVault your gold is already in the vault where you want it, so you don´t have that extra cost. The difference is fairly minimal, like about 20 cents an ounce, but it means BullionVault gold tends to hold a small premium over the spot price. I guess you can say BullionVault gold is spot gold inclusive of the cost of collection.

(Q) When I make a purchase online of gold bullion, am I actually buying from the BullionVault trading account or another user?

It might be either, whichever is offering you the cheaper gold. BullionVault lets all owners of gold offer it to new buyers on BullionVault´s public order board at the price of their choice, and you get the cheapest available - automatically. We are competing with 36,000 users to offer you gold at the best possible gold. So you might be buying from anyone, but whoever owns the gold they have never touched it. Only Good Delivery gold bought originally from professional dealers on the London market, and held permanently in accredited vaults, is allowed into BullionVault.

As well as participating on our own order board ourselves we allow free competition on it for all users. This ability for users to quote to each other means $0.20 spreads are not uncommon. Free competition on a public order board between all users is by far the best way of ensuring a healthy (i.e. narrow) spread, and deep liquidity. I´m fairly certain there are no other marketplaces in gold where 36,000 users are free to bid and offer high integrity gold bullion to each other.

To earn the spread you simply act like a market maker. Offering the cheapest gold - just, and bidding the highest to sellers - again just. If you manage to buy and sell and take the small spread, you´re making the market, just like the professionals although probably with smaller deal sizes. BullionVault is absolutely unique in offering this to the private investor, and don´t think for a moment that private buyers can´t cope. They love it.

(Q) When actively trading gold bullion at BV, what is the ´spread´ and how do customers have the option to ´earn the spread."

The spread is set by users according to market conditions.

We love it too. When one customer sells direct to another none of BullionVault´s working capital is tied up in the transaction, and since all our back-office processing on this trade is automated and instantaneous the (small) commission we make is all profit.

It´s a deal which is in everyone´s interest.

(Q) Do active traders who buy and sell often make up the bulk of your customers?

No. The huge majority of our customers buy gold to own it for the medium to long term, and choose BullionVault as the safest store of wealth they can find. Active traders are the minority who like watching for opportunities on the market.

(Q) Do you have any tax reporting requirements on a customers sale of gold....if tomorrow I sell a million dollars worth of BV gold, is that sale reported to the tax services?

No. Gold raises no taxable income which is what is ordinarily reportable at source. All users are responsible for reporting gains appropriately to their own tax authorities.

(Q) I understand that BullionVault is obliged by law to establish the identity of its customers. This is the standard for everybody in today´s world. What jurisdiction´s rules does BV adhere to, also do you have an active AML policy and who created that for you?

That´s a couple of questions rolled into one. First - money laundering. Yes - we must establish the identity of our customers. This is not too onerous for customers or for us. We take deposits only through the banking system direct from the customer´s bank - which should be trusted internationally (which includes just about every major Western bank). We require our users to submit scans of a photographic id (usually a passport or driving licence) and a scanned bank statement which we check to the source of funds. It´s that easy.

Remember we are not under pressure on money laundering. Because we always pay money back to an account in the same name as the money was deposited from (and almost always to the originating bank account) we are not a useful service for money launderers. In operational complexity this is a major advantage over DGCs.

Now jurisdiction...

We are a British Company so of course we are under British jurisdiction. Our customers own gold either in London, Zurich or New York, which places their property under one of those jurisdictions. The two are not the same thing. Once you have bought gold in Switzerland we are simply an agent for arranging the payment of your custody fee for your Swiss held property. That means a US customer with Swiss held gold is not exposed to British jurisdiction.

This is tangible property, and it is held directly by you, so it is not abstracted under some complex trust deed drawn up under British law (another advantage of the way we´re set up). So whatever a British government might wish to do to gold held by BullionVault customers in Zurich they cannot easily do much, any more than a British government could take possession of Swiss houses bought through a British real-estate agent.

In reality only domestically held gold places the owner´s gold under the power of the domestic government. That is why domestic gold ownership is widely considered more risky than - for example - Swiss gold ownership.

I don´t want to revisit the possession issue I talked about earlier, but arms length ownership has proven again and again the smarter route for private gold ownership. For example in America in 1933 it prevented its owners being fined and imprisoned. In Germany in 1932 it prevented its owners being incarcerated and eventually gassed. In Russia in 1917 it prevented its owners being shot. In France in 1720 and Argentina in 2001 it prevented the entrapment of gold behind exchange control barriers. These are just a few famous occasions. Wealthy people are usually relaxed about remote ownership in the right place provided they can see how ownership is structured, and we are exceptionally transparent.

(Q) When paying for a gold purchase, can I have a friend who owes me money send it directly to you from a third party European bank account?

No. We´ll send it back. It would break anti-money-laundering policies.

(Q) How secure do you consider BullionVault to be? Is it risk free ownership?

I never believe any investment is risk free. There is no such thing - and that includes bank notes, Treasury Bills, cash deposits, ´guaranteed´ capital bonds, and gold - in any form. But I do think the risks on BullionVault are exceptionally small and transparent - and I think offshore stored gold is, right now, very much safer than the benchmark of safety - the Treasury Bill - primarily because of inflation risks.

There is a small risk of loss to theft and damage - both incredibly rare in a vault. Both these risks are insured, so the owner´s real risk is if these events occur simultaneously with the bankruptcy of the insurer, and that is a very small risk indeed. There is also the risk of invasion, or nuclear war, both excluded under all bullion insurance policies.

But overall if anyone can find many savings mechanisms which are less risky I´ll be surprised. We´ve eliminated credit risk because there is no margining in BullionVault. We´ve eliminated counterparty default because we operate instantaneous settlement. We´ve eliminated shipment risk because the gold is already in the vault when it is bought. We´ve eliminated the risk of litigation arising from bad legal drafting of Trust documents, because this gold belongs to you, not a trust. We guarantee against faulty bars, and operate in the most secure professional bullion vaults in the world. And we´ve got three vaults in separate locations, so although we can´t eliminate geopolitical risk we´ve at least given our customers a uniquely broad choice, and - through instantaneous 24/7 settlement (which is unique to BullionVault) we´ve provided them with the ability to trade within minutes out of a deteriorating jurisdiction and into a different and safer one. This is very much easier and faster than trying to arrange a shipment in a time of crisis.

Customers also get peace of mind from the Burglar Alarm, which sounds your cell phone every time someone - including you - logs into your account. They also like the fact that we only allow money to be sent back to the original funder. Above all they like the transparency of our Daily Audit, which eliminates record-keeping risk. I think this is one of the most underestimated of all risks in modern securities markets.

To be continued.

DGC Magazine