It's Time To Grab Your Gold
By James Turk, editor
Freemarket Gold & Money Report
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 expenses burden would prod him to 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 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 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 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 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 than 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 metals.
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 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 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'.
Editor's Note: James Turk is editor of Freemarket Gold &
Money Report, P.O. Box 5002, North Conway, NH 03860. 1 year,
20 issues plus Interim Bulletins, $260. Turk provides a monthly
commentary on precious metals and monetary matters. www.fgmr.com.
