Paul Tustain’ message to investors – a bit gloomy :D

Dear BullionVault user,

The end of 2011 feels unusually dark. Things are getting worse. There is now maybe a 30 percent chance of a steep financial and commercial decline on a par with the Great Depression. Our governments are very weak financially and such protection as they can offer is not dependable.

The underlying problem of the 2008/9 financial crisis has never gone away, because fixing it is too painful. There is far too much debt, and eventually creditors will have to resign themselves to very significant losses, probably through money printing and devaluation, but possibly default, if the Germans hold their course. Many savings transactions involve being a creditor, and nearly all involve seeking a yield or interest payment. Such ‘rent seeking’ is becoming increasingly risky to capital, even for traditionally safe investments. With bank deposits – for example – we must now consider the issue of bank failure. Other rent-seeking transactions are even more problematic:

1. Commercial properties are increasingly empty, and costing a fortune where business taxes now continue on empty buildings. Values could fall to zero or negative. Imagine what that does to the banks!

2. Increasing numbers of corporate bonds will go into default if the financial tide goes out much further.

3. Buy-to-let residential property could easily suffer rent protection to help low-paid tenants. Few landlords realise just how frequently this happens in a harsh economic downturn.

4. Retirement savings look like they will be forcibly re-directed into government bonds, while the government carries on printing money. Their value will drain away in inflation.

5. Pension annuities already assume almost no investment income because rent-seeking at decent rates is so risky. They are now largely capital repayment programs and pay less and less.

6. On top of all the other risks, money lent in the wrong country could easily be trapped by exchange controls.

This is all typical of environments where debtors simply cannot pay. Even governments cannot pay; in fact they are top of the list of distressed borrowers. Only the creditors can pay. Eventually it is always the creditors who pay, and this is why banks are hauling back credit extended all over the world through the credit boom. They don’t want to be creditors any more. Nor does anyone who chooses to use BullionVault. In the words of Robert Smitley, who lived through this sort of event in the 1930s, “The complexity of this era of credit liquidation is too great for the mind to grasp.” None of us can see the whole picture when $100 trillion worth of exotic financial assets are trying to convert into reliable money. BullionVault’s role is to help people use physical gold to remove themselves from the web of debtor/creditor relationships which are steadily unwinding in this extended and deepening credit crunch. I stress (I spend a lot of time stressing this) that we are not at all like a bank. You are your bank’s creditor. The bank owns what was your money, and owes it back to you. That is the deal with banking and it means the bank might not be able to pay. But it is not the deal with BullionVault, where you own your gold. We are not lending your gold. We have acted as your agent in organising professional and insured custody of your gold – as your property – so it is not subject to default risk. The point is that through BullionVault you have extricated yourself from the creditor/debtor nature of rent seeking, and it is for this reason that I believe I am justified in saying that BullionVault is a particularly safe way to store wealth right now. I keep my own savings in BullionVault to avoid worrying about banks. Okay, I get no interest, and I am exposed to gold price falls (and rises). I accept this because I am trying to avoid rent-seeking risks and money-printing risks at the same time. BullionVault does it the way I want it. Which brings me to bank balances. When BullionVault users have deposited funds, but have not yet invested that money in gold or silver, their money is in a Trust Bank Account. As with all deposits, the bank owns this money and owes it to BullionVault users collectively. You are safe while the bank is solvent and liquid, but that is not guaranteed in these difficult times. So is your un-invested money safe in the Trust Account? I think so, but I cannot be sure, because I cannot be sure about banks. I believe we are using one of the safer banks in the world, on the strength of reputation, and stress tests, and because of the credit of the British government, which I believe would print money to rescue Lloyds Bank depositors if that were necessary. But BullionVault cannot and does not guarantee your cash held at Lloyds in the Trust Account, so until you own bullion in one of our vaults, your uninvested money is subject to default risk. If this worries you, you should either buy gold or silver, or withdraw your money to your own bank. What about 2012? Will gold and silver go up from here? Notwithstanding sharp reverses it is easy to show that the direction of the gold price has been resolutely upwards for the last 7 years. It is much harder to predict the future direction of the gold price, and harder still to predict the price of silver, which is more volatile. Clearly gold’s higher price is reflecting deep concerns about the credibility of political action to find a way out of crisis, so if someone finds a credible solution which does not involve printing a huge amount of money then I expect gold will fall. But that looks too difficult a problem to me. That’s why I am still buying both gold and silver. I remain mindful that both will probably go down when, eventually, the financial crisis eases, and I hope you will be mindful too. But I think this will not happen until the creditors have paid through defaults or inflation, and so far they have not. Christmas and the New Year can crystallize a crisis, and there is a bigger than usual risk of some financial fireworks over the holidays. It probably won’t happen, but we wish to be as prepared as we can be. Special plans have been made here at BullionVault which I want you to know about. Some of you may remember that last year we could not get our hands on physical silver over the New Year period. Some people thought it showed the market was ‘out of silver’. Well, it wasn’t. It was simply that there were so many staff on holiday from the secure transportation companies, and at a time of unusually high physical demand from India, that a shortage of transport capacity left us waiting 10 days for a shipment. That was why we had no silver to meet our users’ demand. So this year, just in case of holidays and extraordinary events, I have opened temporary allocated storage facilities at one of the major London bullion banks. If delivery gets tight we will aggregate physical metal over the holiday period at this site, and collect the bullion for transfer – to our normal vaults – once the holidays are over. This should protect our ability to respond to unusual events over the holidays, if they happen. You may notice an additional bar list on our Daily Audit. That is the reason. Finally, a quick review of BullionVault’s steady progress. Since I founded BullionVault in 2003 we have grown to look after $2 billion on behalf of 35,000 private investors from all over the world. We are widely regarded as the fairest and most transparent bullion acquisition service in the world. We are recommended by the World Gold Council (, we won the Queen’s Award for Enterprise Innovation, and this year we entered the Sunday Times TopTrack 250 of the UK’s largest privately-owned businesses. So we are a substantial company and, I am pleased to say, a financially conservative and unleveraged one. I value solidity more than profits growth. We made solid if unspectacular profits of £3.7m ($5.8m) in 2010 and £5.6m ($8.8m) in 2011. Apart from a small dividend of £150,000 ($232,000) paid to shareholders, who made BullionVault possible, we retain that money to build an ever stronger financial base. As a result our net assets, which are all cash and bullion, are now £19m ($29m) – sufficient to run our company for 8 years in its present form, without a penny of revenue. Few organisations are better prepared for lean times, and certainly no banks on the High or Main Street. I’m fortunate to have shareholders and a board of directors who support a cautious policy. Solid security is tough to find out there in the financial world, and I shall be happy if people see we are doing everything we can to help those of you who are looking for it. The outlook may still be dark but it’s no excuse for not having a good time at the right time. I hope you have a happy, peaceful and prosperous Christmas and New Year.

Paul Tustain Founder and CEO BullionVault


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