This week, more rumors and confusion surfaced about gold ownership,
despite gold's strong technical performance as it rebounded from a low of
$1,395.50 on April 12 to $1,467.50 on April 29. Much of the confusion stems
from a misunderstanding of the terms 'allocated storage' and 'unallocated
storage.' Because Bullion Management Group Inc. ("BMG") specializes
in uncompromised bullion held in secure allocated storage, this is an issue
we find ourselves constantly addressing with clients. It's a black or white
area: Either you own uncompromised bullion bars for which you have title
documentation that are stored in secure allocated storage, or you have an unallocated
account that can be settled in cash at the issuer's discretion. There is
nothing illegal or conspiratorial about this. The fine print on your precious
metals account or bank certificate should make it clear. Yet many investors
with unallocated accounts are shocked when they attempt to take delivery of
the gold.
Allocated and Unallocated Storage
Many of the myths about allocated and unallocated gold storage are based
on partial truth and anecdotal evidence. These embers, fanned by fear and
ignorance, lead to irrational investment decisions. Experienced investors
know that facts, not emotion, lead to wise long-term decisions. The discovery
of facts, often hidden in the fine print, requires an intense intellectual
effort.
When we first started the BMG BullionBars program in 2008 we, along with
several investors, discovered that many bullion sellers and storage
facilities were not being entirely honest with their customers. One longtime
customer initially balked at our storage fee. He told us he purchased gold at
the spot price without any premium, and that it was held in allocated storage
in Switzerland at a fraction of one percent - much less than typical
allocated storage costs. Having spent a great deal of time and money finding
the most cost-effective way to buy and store precious metals bullion on a
large scale, I knew something was wrong. I asked him what kind of
documentation he was given, and was told he received an account statement
showing the number of ounces he held. I then suggested that he ask his dealer
to provide him with the refiner and the serial numbers of the bars he owned.
He called a few days later to report that the company would not provide this
information. I then asked him if the company would provide the total number
of bars being held on behalf of clients. Again, the answer was no.
The reality was that he didn't own any bullion at all, and it could not
therefore be held in allocated storage for him. He simply had a bullion
account that, just like a cash account, was an unsecured, uninsured liability
of the dealer. Once he understood that he didn't really own any bullion, he
liquidated the account, purchased bullion from BMG, and put it into true
allocated storage. He received a Bullion Deed for each bar, together with a
confirmation of trade detailing the refiner, serial number, exact weight and
purity of each bar he purchased. He then entered into a custodial agreement
for allocated storage.
During a recent visit to Geneva, Switzerland, BMG's Executive
Vice-President, Paul de Sousa, decided to check on these cheap
"allocated" storage services offered by Swiss banks. Many investors
associate Switzerland with secure wealth preservation and assume that because
the account is Swiss, it is allocated. This turned out to be far from the truth.
None of the banks questioned offered true allocated storage. In fact, they
strongly resisted the "allocated" program, saying it wasn't worth
the extra cost; they did not produce nearly enough documentation to give the
investor any form of comfort that he or she actually owned any gold.
We have heard several similar reports over the years of investors being
lulled into believing that the bullion they thought they held in their
precious metals accounts, or even through bank certificates, was the same as bullion
in allocated storage to which they had a direct claim. Much of this confusion
can be placed squarely on the shoulders of the salespeople who themselves may
not have fully grasped the difference. However, most of the responsibility
lies with the investor who didn't read the fine print, and was attracted by
artificially low costs.
When you store hundreds of thousands or millions of dollars' worth of
precious metals, low-cost storage should not be your major criterion. Direct
ownership of the bullion should be your first concern; no one else should be
able to deal with it in any way without your permission.
Step One: Ownership
The first step in the two-step process is purchasing the bullion and
having documentation that legally transfers title to specific bars to you.
From a legal perspective, this is fundamentally the same as purchasing any
other tangible asset such as a house, a car or a boat. The asset needs to be
described in detail, and appropriate representations made by the seller. The
same applies for gold. Once payment is made, documentation transferring
ownership to the purchaser must include the name of the refiner, the serial
number, the weight and purity to three decimal places. While client
identification for money laundering and anti-terrorism compliance must be
kept by the seller, the seller should provide a written confidentiality
agreement to maintain the privacy of the client.
Step Two: Storage
The second step - finding and maintaining secure allocated storage - is
just as important as the first step. To insure instant liquidity, the vault
must be a London Bullion Market Association (LBMA) member vault. The LBMA
sets out the criteria for the "chain of integrity" from the mine,
through refining, delivery and vault storage. As long as the bullion is held
this way, it is instantly liquid without the need for re-assaying. The
allocated storage agreement needs to be carefully reviewed to ensure that the
custodian cannot deal with your bullion in any way. It is just as important
to determine whether you have an actual custodial agreement, or if you are
simply renting storage space in a secure facility. The obligations of a
custodian are entirely different to those of a rental facility simply
providing storage space. A custodian has much higher levels of obligations,
and a written Custodial Agreement sets out what the custodian can and cannot
do without the owner's permission, and details the insurance coverage.
Securing allocated storage also involves assessing the audited financial
statements of the storage facility to determine if the facility is owned
outright, or if it has any third-party liabilities. Depending on the
jurisdiction involved, third-party landlords or lenders may have a priority
claim on your bullion if the storage facility defaults on its obligations to
them.
Since starting the BMG BullionBars program, we have attended the vaults
frequently to confirm the detailed reports from the custodian. Together with
our auditors, BMG's management has matched names and serial numbers to those
of our clients who own the bullion. We can facilitate multimillion-dollar
transactions within a day, and we have never experienced any delay when a
client wishes to take delivery or sell his or her bullion bars.
Today, there is a lot of Internet chatter that says taking physical
possession of your bullion is the only secure alternative. While this may be
practical for small holdings, it is simply not wise for large amounts of
bullion. Unless you plan to swear your entire family to a vow of silence and secure
your home as a fortress, it is not prudent to risk a home invasion in order
to save on storage fees. Private insurance on bullion stored at home, if you
can even get it, will be far more expensive than allocated insured storage
fees. I am unaware of any home insurance policy that covers gold bullion
ownership. Selling your bullion, once it has been removed from the LBMA chain
of integrity will require the added expense and delays of having the bullion
re-assayed.
The two-step process of buying uncompromised bullion with clear title and
then storing it in allocated storage was covered in my articles Can a Cyprus Style
"Bail-in" Occur with Gold and Unallocated Gold Storage Or
Accounts: Avoid This Risk When Buying Gold. It was also covered last year
in Paul de Sousa's article Real
Gold vs. A Promise of Gold. Rather than repeat the points made in those
articles, we decided to create a checklist that anyone buying and storing
precious metals bullion can use to verify that the bullion they are buying is
authentic and uncompromised, and that the storage is truly allocated. Unless
these questions are answered in the affirmative, you may find yourself
involved in a long legal battle, you may lose ownership of your bullion, or
you may receive a cash settlement for a fraction of its value at the time of
default.
This table compares allocated with unallocated storage:
Bullion Ownership Checklist
The following checklist should be used by all bullion investors. If your
dealer, broker or storage supplier cannot answer the questions on this list
in the affirmative, then there is cause for concern.
The printer-friendly version of this checklist
is available on our website.
Based on the above checklist, we believe that the BMG BullionBars program
provides the most secure, cost-effective and transparent way to purchase and
store investment-grade Good Delivery gold, silver and platinum bullion.
Clients may take delivery at their discretion or request the BMG storage
option. BMG's custodial storage agreement with The Bank of Nova Scotia
provides for bullion storage on an allocated and insured basis in Toronto,
New York and Hong Kong. Gold is available in 400-ounce, 100-ounce and 1-kilogram
bars. Silver is available in 1,000-ounce bars. Platinum is available in
50-ounce bars.
Of course, this type of security comes at a price. The legal fees involved
in setting up such a service, guaranteeing the clear title to each bar,
triple checking the security of the vault and maintaining the proprietary
software that allows us to provide monthly reporting while protecting our
customers' identities are significant. The cost of true allocated storage in
an LBMA-member vault is also more expensive than storing one's bullion at
home or of renting space in a private storage unit.
Yet what does that extra percentage point each year matter if it makes the
difference of being able to take delivery of or sell one's gold bar no matter
what the state of market or the price of bullion? This is why we hold
precious metals bullion in the first place--as insurance against financial
calamity. It is at such times that we will need our gold most.
I hope my book, $10,000
Gold: Why Gold's Inevitable Rise is the Investor's Safe Haven, helps
as many people as possible to grasp the issues surrounding gold, and to gain
the confidence that can only come with knowledge. Through bullion ownership,
I hope readers choose to become their own central bank so they may be each
become a truly sovereign individual. The wealthy have used this strategy for
centuries. They have also enjoyed the privilege of access to the underlying
truth about money, which is now, thanks to the Internet and to open-minded
publishers like John Wiley and Sons, available to most of the world's
population.
Please study these issues carefully. Make the intellectual effort to
distinguish facts from emotion. Your wealth, and the wealth of your children
and grandchildren, depends on it.
