May 26, 2003 – I continue to hear the horror stories. A subscriber tells me that the bank where he stores his silver announced a three-fold increase in fees. His bank therefore recommended that he sell his silver “because it is expensive to store and has been a poor investment.” When he gave his bank notice that he intended to move his silver to another location, the bank backed down and said that his storage fee would not change.
I advised him to move the silver anyway. My reason? It appeared to me that his bank was too eager to get him to liquidate his silver. Maybe their trading desk is short physical silver and is looking to get its hands on any silver it can. If that is the case, who knows how safe his silver really is?
Another subscriber tells me that his bank raised his storage fees for silver to 2% per annum, apparently thinking that additional expense burden would prod him into selling. Again, his bank told him that silver has been a poor investment and should therefore be sold. My response was why has his bank suddenly taken this great concern for the customer’s well being after having ignored him and his silver for years?
And the horror stories are not just for silver. I have been told things about gold too that make one wonder about the factors that are driving some banks to act as they are with regard to metal placed with them for safekeeping. The result of their actions has directly impacted their treatment of customers who store precious metals with them. It appears that these banks are eyeing up the metal stored in safekeeping for a purpose. And it is all but certain that the banks taking these steps are not doing it for their customers’ best interests.
The sad fact is that most people do not completely understand the intricacies of storing precious metals. As a result, many people do not fully appreciate the risks that they are taking with their gold and silver, which ironically has been bought by many people in order to provide a risk-free way to hold some of their wealth. Consequently, I have prepared this primer in order to provide you with three storage basics to help you avoid needless risks with your gold and silver.
1) Unallocated vs. allocated – These are the two most basic methods of storage. When you store on an allocated basis, you continue to own the gold. There is no transfer of title. With allocated gold, you deliver gold bars to the vault under a contractual agreement that the exact same bars will be redelivered back to you upon request.
With unallocated gold, however, you become an unsecured creditor of the bullion bank, and thus, in an unallocated account you are at risk of the bullion bank’s insolvency. Thus, it is clear that when you store gold, it should be allocated.
2) Pool accounts – This term is used to mean that your gold is commingled with the gold of other people, which is easy to do because gold is a fungible commodity. There are advantages to pooled gold, generally relating to economies of scale and the resulting reduced fees that are charged when the gold of many people is pooled.
Pooled gold can be allocated and unallocated. For example, in GoldMoney all gold is allocated, and each user owns his/her respective portion of the pool of allocated gold, which again is the way that all gold should be stored.
In contrast to the storage arrangements of GoldMoney, however, the pooled gold of some firms is unallocated. Thus, customers of these firms own unallocated gold, which means that you are a general creditor of the firm and at risk of the firm’s insolvency.
Thus, pool accounts are advantageous to use, and I do recommend them – but only when the pool holds allocated gold. Avoid all other pool accounts.
3) ‘Gold’ certificates – These certificates are common, and are perhaps the most misunderstood type of storage because they are not storage at all. The name is a misnomer because you really don’t own gold. All you own is someone’s promise to pay gold to you, which is the basic nature of any ‘certificate’.
For example, let’s say you have some dollars, and you go to your bank to make a deposit. As evidence of the transaction, the bank gives you a “certificate of deposit”. You no longer own the money, and you now become an unsecured general creditor of the bank.
This same principle describes how the so-called “gold certificates” work. You don’t really own gold. Instead, you are an unsecured general creditor of the bank, trading firm or mint that issued you the certificate.
In summary, everyone who owns gold has to distinguish between paper and physical gold, which are very different things. I recommend that everyone own physical gold, and there are two ways to accomplish this objective – either you take possession of the gold yourself or place your gold in allocated storage. There are no other alternatives.
If you take possession of the gold, you must then be willing to manage the responsibilities of holding physical metal, and to take those required steps to make sure that it is safely stored and insured. You also have to be certain that you are purchasing gold from a reliable dealer so that you are not receiving gold-plated bars of lead or other base metal.
If you place your gold with others for storage, I recommend that your gold be allocated. Do not place your gold at risk in any way, and do not hold gold certificates.
Gold certificates are not gold, despite what banks, firms or mints may tell you. These companies will usually offer you all kinds of inducements to take their certificates – free ‘storage’ being the most common. But there is no such thing as a free lunch. If a bank or mint is storing gold for you for free it’s because you are a general creditor of that bank or mint, which is now using your gold to generate income.
Unallocated gold and certificates are not gold. It is just someone’s promise to pay you gold, and in a crisis – which is precisely the time that you need that gold – it is likely that there will be a default on their payment of gold to you.
The bottom line here is quite simple – make sure your gold is allocated. Do not take the risk of ‘gold certificates’.