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One of the cheapest ways to buy and store
physical gold and silver is with unallocated (or pool) storage. With
unallocated storage, a dealer holds metal that is owned by its customers, but
without identifying any particular piece of metal belonging to any particular
customer.
The advantages of this method are considerable: you avoid the risks inherent
in storing the metal yourself (transport loss, fire, and theft); you can buy
or sell just a few ounces of gold and silver at a time; you escape the big
bid-ask spreads associated with coins and small bars; and perhaps best of
all, storage is usually free.
To provide those benefits, a precious metals dealer buys and sells small
quantities of gold and silver to and from its customers throughout the
business day. When it needs more metal, it will buy it in the wholesale
market. Or when the dealer has more metal than it wants to carry for its own
account (because its customers have been net sellers), it will unload the
excess in the wholesale market.
Many dealers that offer unallocated storage will accommodate customers who
want to convert their metal into bars or coins and take delivery. The dealer
will charge a so-called "fabrication fee" for this service. The
dealer won't actually pick up a hammer and manufacture the bars or coins the
customer wants; instead, the fee represents the price difference between
buying 100-ounce or larger bars and buying small bars or coins.
Unallocated storage is an attractive option, which is why we have recommended
it to Casey subscribers for a portion of their gold and silver holdings. Of
course, there's no such thing as a free lunch, so we wouldn't want anyone to
rely too heavily on unallocated storage or on any one dealer that offers it.
Here are some of the things that might go wrong.
- Wholesale fraud.
A dealer might be a 100% hoax. It may not actually have the metal that
customers have paid for, in which case the customers would get hurt. The
proprietor would be committing a go-to-jail-forever crime, but it would
be easier to pull off, perhaps for many years, with unallocated storage
than with allocated storage. A customer who's
bought metal in allocated storage can visit his gold or silver and check
the serial numbers on the bars. A customer who's
bought metal in unallocated storage may be allowed a tour of the vault,
but all he's going to see is a whole lotta
gold and a whole lotta silver.
- Employee
embezzlement. An honest dealer might have a dishonest employee.
If the dealer's financial controls were lax, the employee could siphon
off metal for himself or a confederate. Or if the dealer's physical
controls were lax, the employee could swap bogus bars for real ones. If
the embezzlement exceeded the dealer's net worth plus its
insurance, customers would get hurt.
- Bad bookkeeping.
Gold and silver held in unallocated storage is legally the property of
the dealer's customers, not of the dealer itself. So if the dealer goes
bankrupt, the metal should not be available to the dealer's creditors.
Customers of a bankrupt dealer should be able to collect their metal and
walk away uninjured. That's how it should work. But if there are
problems with the dealer's bookkeeping, the metal that the dealer and
its customers thought was in unallocated storage could be up for grabs.
The customers would have to fight the dealer's creditors to protect
themselves – and they might lose.
- Fabrication delays.
When retail interest in gold heats up, much of the demand is for small
bars and coins. This can lead to a temporary shortage of small bars and
coins that makes it impossible for a dealer to accommodate customers who
want to convert their unallocated gold into small pieces and take
delivery. If such a thing happens when you want to convert and take
delivery, you'll have to wait. It would be a small problem compared with
losing part of your gold, but it would be a problem.
We offer these cautions not because unallocated storage is a bad choice, but
because you will be better off if you understand what might go wrong. It's
like the warning of possible side effects that is now standard with any
medicine. The warning isn't a reason not to use the medicine; it is a reason
to use the proper dose and to be alert to signs of trouble.
We can't say exactly how much metal in unallocated storage would be too much.
The proper dose is up to you. But here's a starting point. If you have more
than 20% of your gold or silver in unallocated storage with any one dealer,
consider moving some of it. It could go to another dealer, or you could
convert part of it to coins and take delivery.
This might be a chore, but we suggest that you go to the trouble even if the
dealer has come highly recommended, even if your experience with the dealer
has been entirely satisfactory, and even if you see no sign of trouble. There
is a difference between an event being highly unlikely and an event being
impossible. Sooner or later, an investor who neglects that difference gets
hurt.
[Check out our hot-off-the-press Annual Gold Forecast Survey edition in
BIG GOLD, where we interview 16 gold experts, fund managers, and authors,
along with Doug Casey, about what to expect for 2011 and how to invest. It’s available risk-free here.]
Jeff Clark
BIG GOLD
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