Editor, The Bauman Letter
What does it mean to “own” something? It’s a question you should be asking
… especially if that something is gold.
The Oxford English Dictionary defines ownership as “the act,
state, or right of possessing something.” That sounds about right. But what
does it mean to “possess” something?
Gold Investment Pyramid – GoldCore
After all, you can own something that’s in someone else’s legal
possession. For example, I own a house in Cape Town. My tenants have formal
right of possession under a lease. I sleep at night because the sheriff of
the Simon’s Town Magistrates’ Court will enforce my superior right of
possession under South African law if needed — say, if they stop paying rent.
In other words, the “state or right of possessing something” that isn’t
under your physical control depends on contracts and on law.
That in turn depends on the ability and willingness of those who honor contracts
— and enforce laws — to do so.
If you “own” precious metals under certain types of arrangements, you may
be shocked to find that you’re in a legal limbo where ownership and
possession are hazy at best.
It’s not a place you want to be.
Deutsche Bank Unter Alles
German mega bank Deutsche Bank is in serious trouble. The
International Monetary Fund (IMF) has publicly called it one of the greatest
threats to the global financial system. The Russian government (no doubt
crying crocodile tears) is investigating its role in rampant money
laundering. And the U.S. government has just announced a fine related to its
behavior before the 2008 crisis that is more than the bank’s current market
valuation.
Over the last few years, Deutsche Bank has been the principal banker and
repository for a popular exchange-traded commodity fund (ETC) called
Xetra-Gold. As you know, we here at the Sovereign Investor Daily
don’t like metals ETFs and ETCs because you don’t really own any gold — just
a claim on gold.
Xetra-Gold, however, differentiates itself from other ETCs by stating in
its investor contract that “every gram of gold purchased electronically is
backed by the same amount of physical gold” stored in the Frankfurt vaults of
Clearstream Banking AG, a wholly-owned subsidiary of Deutsche Börse AG, one
of Deutsche Bank’s subsidiaries.
Xetra explicitly says that every time an investor buys shares, a
corresponding amount of gold is purchased and put into the vault, so that
“investors always have the possibility of demanding delivery of the
securitized amount of gold per bearer note.” Because of this promise, Xetra
is extremely popular. During the first seven months of this year, order book
turnover on Xetra stood at approximately €1.5 billion. The assets managed by
Xetra currently amount to €3.5 billion.
But recently, an Xetra investor encountered a big surprise. When he went
to arrange for delivery of physical gold, a Deutsche Bank account executive
informed him that physical delivery “is no longer offered for reasons of
business policy.”
Oops.
Dude, Where’s my Gold?
People piled into Xetra because it promised the small spreads and low fees
of an ETC and the promise of quick physical delivery of gold on
demand. Usually you get one or the other, but not both. It seemed too good to
be true. It was.
As things stand, Xetra is a paper-only ETC. If you want to turn your
shares into gold, you have to sell them to a willing buyer and use the
proceeds to buy gold somewhere else. That’s not what Xetra promised at all.
What about those promises of full gold backing? Nobody is quite sure how
Xetra and Deutsche Bank are justifying their failure to deliver gold, but the
likely culprit is a clause in investor contracts that allows Xetra to modify
its terms as the need arises. Many contracts include such boilerplate, and
many people ignore it precisely because it is boilerplate.
The problem is that any contract that allows one party to alter the terms
at will means that the other party has no real rights of ownership. In this
case, Xetra investors don’t have gold in their possession, but neither do
they have an enforceable right to convert their shares into the metal.
Possession Is 9/10 of the Law
The speculation about Xetra is predictable. Deutsche Bank has probably
raided its gold holdings in its scramble to remain solvent. And there’s
nothing any Xetra investor can do about it, since they never really owned any
gold in the first place — just a piece of paper.
If you want the protection that ownership of real gold bullion provides,
you need to own it yourself and store it in your own name. You may pay a bit
more in spreads and fees, but if you’re owning gold as a hedge against
financial calamity, that shouldn’t matter.
The upside of avoiding massive loss far outweighs the extra cost of being
a real owner of gold … not of a worthless piece of paper.
Full article here
Gold Prices (LBMA AM)
27 Sep: USD 1,335.85, GBP 1,031.01 & EUR 1,187.84 per ounce
26 Sep: USD 1,336.30, GBP 1,033.23 & EUR 1,188.91 per ounce
23 Sep: USD 1,335.90, GBP 1,027.17 & EUR 1,192.16 per ounce
22 Sep: USD 1,332.45, GBP 1,019.59 & EUR 1,186.68 per ounce
21 Sep: USD 1,319.60, GBP 1,015.96 & EUR 1,183.81 per ounce
20 Sep: USD 1,315.40, GBP 1,011.02 & EUR 1,175.84 per ounce
19 Sep: USD 1,315.05, GBP 1,007.99 & EUR 1,177.36 per ounce
Silver Prices (LBMA)
27 Sep: USD 19.42, GBP 14.99 & EUR 17.26 per ounce
26 Sep: USD 19.44, GBP 15.04 & EUR 17.29 per ounce
23 Sep: USD 19.82, GBP 15.28 & EUR 17.66 per ounce
22 Sep: USD 19.88, GBP 15.22 & EUR 17.69 per ounce
21 Sep: USD 19.43, GBP 14.95 & EUR 17.43 per ounce
20 Sep: USD 19.17, GBP 14.78 & EUR 17.15 per ounce
19 Sep: USD 19.12, GBP 14.65 & EUR 17.13 per ounce
