Last week's Bullion
Buzz article, Cyprus
and Gold: Lighting a Candle in a Dark Room, seems to have touched a nerve
with many investors, and my inbox has been inundated with concerns about an
event like this occurring in Canada. Most expressed concern over whether such
a "bail-in" could occur with gold. We have found gold investors and
the gold community in general to be better-informed about the dangers of
central bank intervention than those who have no interest in gold, but when
it comes to the opaque machinations of central bankers, the best any of us
can offer is little more than an educated opinion. Where we at BMG do have
unique expertise is in the field of wealth protection through uncompromised bullion
ownership and allocated
bullion storage. It is from this position that I would like to respond to
the concerns that the threat of bank expropriation of funds has caused.
The issue has been exacerbated further by a flood of blog posts based on
the most recent 2013 Canadian Budget, and pages 144 and 145 of the Canadian Economic Action Plan
2013 in particular. This document makes it clear that such a
Cypriot-style bail-in, a euphemism for outright expropriation of depositors'
funds, is being considered for uninsured deposits over CDN$100,000. In fact,
a similar program is already in place in the United States for uninsured
deposits, and will likely be implemented in most of the southern EU countries
that have major banking problems.
Events in Cyprus have led to the realization that people who have worked
hard and put their savings into a bank are technically lenders to the bank.
In the case of insolvency they are "unsecured creditors," and not
automatically entitled to their own funds. Understandably, this has caused a
great deal of concern amongst depositors and investors alike, especially to
someone who has viewed economic activity from the standpoint of gold, as I
have, for the past fifteen years.
As mentioned last week, a significant crisis in confidence is beginning to
develop thanks to the light shined on the dark underbelly of central banking
by the Cyprus fiasco. Central bankers know that the only thing keeping their
Ponzi scheme, our modern fiat currency economic model, alive is confidence.
The most important tools central bankers have in their arsenal are the right
to create unbacked fiat currency, fractional reserve banking and the
perception management resources they use to prevent mass withdrawal of funds.
The right to create unbacked currency is the crown jewel privately owned
central banks have fought to possess for hundreds of years .This privilege
has come under more scrutiny over the past few years, thanks in large part to
the Internet and to former Texas congressman Dr. Ron Paul, who educated an
entire generation about the true nature of the Federal Reserve and its
private ownership. Fractional reserve banking, which allows banks to lend out
nine dollars for every dollar invested, works until there is a loss of
confidence and people rush to remove their currency from banks since, at
best, the banks have only a fraction of the funds lent out on reserve.
Finally, the vast resources the banks and financial services industry have
amassed over the past three hundred years allow them to control all sides of
almost any financial discussion, and to manage perception quite effectively.
This effectiveness is clearly reflected by the success of their campaign
against fiat currency's number one alternative--gold. After a decade of solid
gains against all currencies and after holding purchasing power better than
any other fiat currency in existence from as far back as biblical times, gold
is still considered a risky and "barbarous" investment by
mainstream investors.
This entire matrix is in jeopardy now due to events in Cyprus. The threat
of such drastic action as expropriation of investor savings tells us that
something quite serious is occurring behind the scenes.
Gold has a target on its back because when it is pegged to currency, it
restricts the amount of currency that can be created. President Nixon removed
this peg in 1971, and central bankers went one step further by attempting to
apply the fractional reserve banking model that worked so beneficially for
them with paper currency to gold.
As a result of this attempt we have a world flooded with complex paper
gold instruments that are essentially derivatives or proxies for gold. Many
who have purchased these products, which include gold certificates, gold
accounts, pooled gold, futures contracts, options, mining shares and ETF
shares, believe they are invested in gold and are therefore hedged against
financial calamity. Investors have been attracted to these paper gold
investments because of convenience and low fees. In order to own
uncompromised gold, investors need to do their homework; it is more
complicated than a quick Internet search and the click of a mouse, and he or
she will have to pay higher fees for allocated storage with a credible
custodian.
Therefore the short answer to the question of whether such a
"bail-in" could occur with gold is yes and no. It could easily
occur with what we call compromised gold ownership, but highly unlikely with
uncompromised gold. Knowing the difference between these two could mean the
difference between financial devastation or financial survival and
prosperity.
Compromised Gold
Compromised gold, by our definition, is any gold that is not owned
outright and held in hand, or owned outright and held in allocated storage.
There are no exceptions to this rule, even though many people believe that
the form of gold they own is an exception.
This is a complex subject that BMG is qualified to discuss, having spent
significant sums on legal advice. To make the issue simple, we can say that
the reason most forms of gold ownership are compromised is because in the
event of a crisis, gold owners may find that they are simply unsecured
creditors similar to bank depositors. At best, they will receive a cash
settlement, but this will likely come after years of legal battles with other
third-party claimants; if and when it does come, gold will most certainly be
trading at a much higher price.
Uncompromised Gold
Gold to which a person holds clear title and stores in a vault as
"allocated" bullion cannot be legally dealt with by anyone but the
owner. However, ensuring that gold is uncompromised is costly, and true
allocated storage is more expensive than simply holding gold in a bank safety
deposit box or in one's home. Both forms of gold ownership involve risk, as
bank safety deposit boxes can be raided in the name of national security.
This occurred in Britain in 2011, when police raided 7,000 safety deposit boxes;
many people claimed the gold they held in those boxes, with no proof of
ownership, went missing. Holding significant amounts of gold directly not
only creates the risk of losing the gold to theft, but also may put your entire family at risk.
Most insurance companies will not insure gold stored at home, nor gold stored
in a safety deposit box.
Uncompromised gold bullion is gold to which we hold a title document
stating the refiner, serial number of the bar, the weight, the fineness or
purity and the name of the owner.
Allocated and Unallocated Storage
Owning and storing gold in secured allocated storage is a two-step
process. First we buy the gold and receive title documentation, and then we
store it in a vault under a custodial agreement on an allocated basis.
Vaults can also be compromised, which is why bullion owners should not
look for the cheapest storage available. Guaranteeing that a vault is not
subject to third-party claims from landlords and lenders requires extensive
legal work. Otherwise, we may find the contents of the vault tied up in court
as collateral against the debts of the failed storage facility.
Ultimately, the most secure storage at this time is within the London
Bullion Market Association's (LBMA) "chain of
integrity" defined as:
"A locally recognized chain of custody among trusted trading partners
where bullion bars are accepted at face value without an assay test. COMEX
rules specify an official "chain of integrity" for COMEX GOLD
contracts. The London Bullion Market Association maintains a "Good
Delivery List" of member refineries that meet certain membership
requirements and have passed assay tests. Bullion products from these
refineries will generally be accepted by other members of the LBMA on face
value without further assay testing. However, the LBMA's chain of integrity
is purely informal. When purchasing bullion products the face value can
generally be accepted if the product can be shown to have remained in the
custody of a certified bullion repository since its manufacture at an acceptable
refinery."
It is possible to hold pooled gold in allocated storage as BMG mutual
funds do. However, not all bullion funds store their gold on an allocated
basis.
The following chart compares the two:
Conclusion
One would have to be quite uninformed in order to be complacent about the
events in Cyprus, because they reflect a state of desperation on the part of
central bankers that is alarming. Something must be near the boiling point to
cause these established institutions to make such a desperate move that in
truth disarms one of their most powerful weapons--investor confidence. Jim
Sinclair, quoted in our previous
article, feels it may be the "quadrillion dollars" in
derivatives that could explode any day.
Perhaps it is one of the six major trends discussed in $10,000 Gold, the movement away
from the U.S. dollar, that is at the root of their concern. This past week
saw a $30-billion trade agreement between China and Brazil, and
following that a trade agreement between China and Australia. Both
agreements will bypass the U.S. dollar completely. The U.S. dollar, the
world's de facto reserve currency since the Bretton Woods agreement in 1944,
is more directly threatened by gold than any other currency. Much of the
downward pressure on gold and the ramped-up negative publicity campaign
against gold is likely a direct result of this competition.
Therefore, it our conclusion now, as it was when we started our first fund
in 2002, that the most effective way to protect oneself from the potential
for wealth confiscation through bail-ins is through gold, owned outright and
stored in secure allocated storage.
In my new book, $10,000
Gold: Why Gold's Inevitable Rise is the Investor's Safe Haven,
published by John Wiley and Sons and to be released in May, I discuss the
long-term and irreversible trends that will lead to $10,000 gold. The book
looks more deeply at the issues discussed above. It also describes how
investors can protect their wealth through precious metals ownership, just as
many in the developing nations have been doing methodically for the past
decade.
Each week BMG presents a free newsletter called the BullionBuzz
that is a compilation of articles, charts and videos that follow the
developing trends that will lead to $10,000 gold.
