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What the Swiss banks' move away from unallocated accounts says about
gold, and about banking...
IMAGINE
you could sell someone something, but keep ownership of it, and then use it
yourself, writes Adrian Ash
at BullionVault.
You could lend it out for interest, say, or raise loans of your own by
pledging it as collateral. Or even sell it to raise cash when things get
tight. And if your business fails entirely, the "owner" will just
have to cue up with all of your other creditors, and be thankful with
whatever small change is paid out by the courts.
This is pretty much what big banks get away with in gold or
they did. Now Swiss banking giants UBS and Credit Suisse are changing their
gold-account fees for big, institutional clients. The aim is to discourage
other institutions from keeping gold with them like this
so-called "unallocated gold". It looks a lot like putting cash on
deposit. The bank gets to own it, and so it gets to go banking with the value
as well. But now the business of selling gold but without
selling anything no longer pays.
And if you can't make a return from that, what hope is there for big banking
bonuses in 2013 or beyond?
You might wonder, as I did, if this news has something to do with the
collapse of gold interest rates...
...but as you can see, there hasn't been much money to make in lending out
gold whether it belongs to you or not for
nearly a decade now. Yes, the collapse in cash interest rates played a part in
that switch. (The returns above are what a gold lender makes after paying a
borrower to take it away, receiving the gold's cash value in return, and then
lending out that money instead. Just another oddity of the gold market.) But
the slump in lease rates came as gold miners stopped borrowing gold, selling
it for fear of further price falls, and instead began expecting higher prices
for their future output. And lending was never really the point of
unallocated gold accounts at the big banks anyway.
Instead, from what our friends in gold banking and Swiss bullion storage tell
us, the big banks were keen to get big piles of shiny metal which they could
then show to regulators. "Look, all this belongs to us, and not to
clients," they could say, before going out and banking with it
investing, borrowing and lending with that weight of highly liquid, instantly
priced bullion behind them. Or at least, banking with a hefty part of its
value.
Most especially in Switzerland, the big banks gathered such unallocated gold
from their smaller competitors those private Swiss banks caring
for very wealthy customers, but lacking the secure, underground gold vaults
which such well-heeled clients might expect. Perhaps the big banks could
help? Sure they could. But only if a chunk of the client's gold wound up on
the big bank's balance sheet too.
Whatever the proportion of allocated to unallocated gold, this meant
confusion for any private-bank customer wanting to own his or her metal
outright. Because the bullion was now split between the big bank's balancesheet and the private bank's own account in
the vault. So the actual client was a long way from fully allocated. Come a
banking crisis not that such things ever happen of course, until
they do he or she would most likely find themselves exposed
to not one but two Swiss institutions.
Now, if this unallocated gold trail hadn't existed, neither would
BullionVault today. Paul Tustain founded it in 2003 precisely because of the
confusion and risks he encountered when trying to
buy gold for himself a
year earlier. The Financial Times,
which broke the new move last week, explains the background:
"Under the more common 'unallocated' gold accounts, depositors'
gold appears on banks' balance sheets. [But as regulations change, that is]
forcing them to increase their capital reserves."
Just as with any loan the bank takes in including
household and business deposits it has to match at least some of
that debt with ready cash. Or rather, with reserves held at the central bank.
This was always the way, but 2013 sees new regulations aka
Basel III raise the requirements to try and avoid a repeat of
2007 and all that. Before now, offering unallocated gold at least put bullion
onto the bank's balancesheet. But with these new regulatory hassles and thus
costs (money unlent is dead money to banks, remember) unallocated gold has
suddenly become lose-lose to the banks.
This marks a big shift in the banks' provision of gold, and there is more on
this to come no doubt. Such as how the Swiss giants who
provide a lot of gold-vaulting to the smaller Swiss private banks are
actually raising their unallocated fees by 20%, as the press report.
Unallocated gold shouldn't cost you an ongoing fee, because why would you pay
to store something which isn't yours? On the other side, according to Dow Jones'
report, they are actively cutting their allocated storage
fees too. Suggesting perhaps that either they'd like to get the
private-banks' clients directly. Or they've got a lot more spare capacity in
Swiss vaulting than earlier press reports would suggest.
Either way, private savers trying to hide out in gold aren't likely to see
vaulting fees drop. Swiss private banks charge 1% and more per year to their
clients, and a 1/100th of a per cent drop in their costs is
unlikely to show up in their "retail" pricing. (BullionVault is
best-value worldwide, by the way, at 0.12% per year for specialist non-bank,
fully allocated storage in your choice of Zurich, New York or London.)
So for now, this change simply marks another key stage for gold and for
banking. One is making a long return as a core asset to be owned outright.
The other is struggling to cream off the kind of fat margins which once paid
so well.
Adrian Ash
Adrian Ash is head of research at
BullionVault the secure, low-cost gold and silver market for
private investors online, where you can buy gold and silver vaulted in Zurich
on just 0.5% dealing fees.
(c) BullionVault 2013
Please Note: This article is to inform your thinking, not lead
it. Only you can decide the best place for your money, and any decision you make
will put your money at risk. Information or data included here may have
already been overtaken by events and must be verified elsewhere
should you choose to act on it.
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