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Theodore Butler
explains how most silver certificates aren’t backed by the metal.
(emphasis mine) [my
comment]
[Everything
Theodore says about silver applies to gold as well. (he seems slightly too
obsessed with silver)]
One reason why we have much more silver promised on paper than exists is, as
shown above, because silver needs to be stored, when dealing in large
amounts.
The second reason is because bankers will be bankers. That is, it is a
normal and acceptable practice for bankers of all stripes to promise to pay
all depositors on demand, because we all know that all depositors won't
demand to withdraw all their assets at once [except in runs on the bank].
Please understand that this is not an indictment on the banking system. I
know full well how the fractional reserve system operates, and I am not
condemning it. It is the way of the modern world, for better or worse. In
the event of a bank run by depositors, at least in the US, safeguards have
been built into the system, by the FDIC and Federal Reserve to contain and
isolate such rare occurrences.
My point is different. It is this established and, generally, smooth-working
system that we have all grown used to, including the bankers. But this system
has been designed around paper currency (including checks and loans) and
electronic money. The system has not been designed for physical silver metal.
The problem is that the bankers have behaved as if the system can apply to
a metal, just as it applies to currency. It can't. There is no Federal
Reserve, nor FDIC that can be called upon to deliver truckloads of silver
metal, like can be called upon to deliver paper currency in a bank run. There
is no silver guarantor of last resort, as silver is no one else's liability.
Either the silver is there, or it's not there. Believe me, in most
cases, it's not there. But the foreign bankers don't realize that. They
think a silver certificate is the same as a currency-denominated certificate
of deposit. They look at it through bankers' eyes. I look at it through a
silver analyst's eyes. I see it differently than they do.
It's not just that the foreign bankers see it differently. What they have
been doing, issuing and letting their silver certificates remain unbacked by
real silver, is an immensely profitable business. For twenty years, or more,
by not having to go out and buy and store real silver whenever a customer
buys a silver certificate, the foreign bankers have been printing profits for
themselves. Their customers give them cash upfront, and not only do these
banks have full use of that cash, they do not have to pay any interest on
that cash, and get this - they charge storage fees, for silver that doesn't
exist. It's better than stealing, because if you just stole the money
from someone, you wouldn't get to charge additional storage fees. It's a
racket.
[…]
There are two things that should come to every silver investor's mind. One,
is there silver behind my certificate? There most likely is, if you have a
certificate that spells out the serial numbers on the bars, or a specific
description of the silver held (bags of coins for instance). There probably
is, if the storage function is separate and distinct from the dealer selling
you the silver. There probably is, if it's registered in your name and
not the name of your dealer. If you have all three, no sweat. But, if
you hold a certificate where the silver is not described specifically, or is
unallocated form, or is in a pool account, or there are no storage charges,
you would be wise to assume the silver doesn't exist. That doesn't
mean you will automatically lose, when silver takes off, but it becomes a
question then of the credit quality of the entity you are doing business
with, which is a very different analysis than the merits of silver. You
would then be betting upon the financial viability of a dealer whose books
you have not analyzed. Appearances can be deceptive. Remember, a few
years ago, the then largest silver refiner in the world, Handy and Harman
Refining, suddenly went bankrupt and all silver pool owners and depositors
were left in the cold. Also, there may be small print wording in these
unbacked silver certificates that may prevent you from getting your silver in
physical form, or that deny you the true world price at the time you may wish
to sell.
Theodore Butler
reports that two kinds of silver.
[Everything
Theodore says about silver applies to gold as well.]
there are maybe billions of ounces of silver represented in bank certificate
form that have no real metal backing, and how bad things may happen to the
owners and issuers of those unbacked silver certificates when the price of
silver explodes. I mentioned that banks all over the world, but particularly
European banks, and especially large Swiss banks, had issued many of these
silver certificates. My conclusion was that you should, if
you owned silver in any questionable paper form, switch to an unquestioned
form.
Last week, I received a communication from an employee of a very large and
well-known Swiss bank which confirmed my basic premise. Out of respect and
concern for his privacy, I don't want to reveal his identity, and I will tell
you what he said in my words, but it would be easy to verify his basic story.
What he told me is that there are two different types of silver you can
buy from any Swiss bank, each priced differently. If you want the cheapest
form of silver, you would buy silver in a metal account. He explained
that there were no charges (fees or storage) in a metal account, just cash
payment for the agreed upon price at time of purchase. There was also no real
metal backing whatsoever, just a private agreement between the bank and the
client. The other form of silver certificate would be a deposit account,
where by Swiss banking law, the metal had to be physically stored by the
bank, on an ounce for ounce basis. Silver owned in a deposit account incurred
a fee of 20% ( plus, I assume, storage fees, although he didn't spell that
out. I also think a good portion of the fee is due to the VAT, although this
was not spelled out). He indicated that the banks would, obviously, prefer
that clients deal in the all-paper form of silver, and would steer clients to
that form, the metal account. While it wasn't indicated in his
message, another advantage to the all-paper metal account, was to ability to
borrow on margin (for an interest charge, to be sure) and increase the
leverage of the account. I can see why these all-paper accounts,
ironically called metal accounts, would be so attractive to silver investors.
That's too bad, as I think that apparent attractiveness could prove very costly
in the long run.
Theodore Butler
reports that swiss bank stop trading silver-gold certificates.
The
Sensible Swiss
This week I received an e-mail from a Swiss money manager, a friend and trusted
source. He informed me that a very large and conservative Swiss bank had
informed a number of their clients that they would no longer be offered paper
gold or silver certificates in the bank’s name. It seems the bank had
previously granted the accounts because it was able to protect itself against
an upside move with a derivatives contract with another financial
institution. Due to the financial turmoil, the bank was no longer comfortable
with the counterparty risk from the other financial institution. Instead, the
Swiss bank informed its clients, all paper transactions had to be converted
to physical or physical ETF positions (There are Swiss ETFs for gold and
silver). My friend informed me that other Swiss banks were likely to follow
this bank’s lead.
My reaction:
Unallocated gold certificates aren't safe.
1) Today’s monetary system has been designed around paper currency
(including checks and loans) and electronic money. In this system, banks
promise to pay depositors on demand, because we all know that all depositors
won't demand to withdraw all their assets at once.
2) In the rare occurrences that all depositors demand to withdraw all their
assets at once, safeguards have been built into this system, by the FDIC and
Federal Reserve, to contain and isolate such rare occurrences.
3) Bankers have behaved as if the system can apply to a metal. That is to say
they have sold gold/silver certificates without having gold/silver on hand.
4) If all gold/silver certificates holders demand their metals at once, there
is no Federal Reserve or FDIC that can be called upon to deliver truckloads
of gold/silver.
5) Most bankers don't realize this and think a gold/silver certificate is the
same as a currency-denominated certificate of deposit, but it is. Their customers
give them cash upfront, and not only do these banks have full use of that
cash, they do not have to pay any interest on that cash, and get this - they
charge storage fees, for silver that doesn't exist.
6) Issuing and letting their gold/silver certificates remain unbacked by real
metal has been an immensely profitable business for banks.
7) There is probably gold/silver behind a certificate if:
A) It spells out the serial numbers on the bars, or a specific description of
the silver held (bags of coins for instance).
B) The storage function is separate and distinct from the dealer selling you
the silver.
C) It's registered in your name and not the name of your dealer.
8) if you hold a certificate where the gold/silver is not described
specifically, or is unallocated form, or is in a pool account, or there are
no storage charges, you would be wise to assume the gold/silver doesn't
exist.
9) If you own certificates unbacked by physical metal, you are betting upon
the financial viability of a dealer at a time when most of the world’s
financial system is insolvent.
10) Illustrating the dangers of unallocated metal certificates, in 2000, the
then largest silver refiner in the world, Handy and Harman Refining, suddenly
went bankrupt and all silver pool owners and depositors were left in the
cold.
11) Bad things are going to happen to the owners and issuers of unbacked
gold/silver certificates as the price of precious metals explodes.
12) There are two different types of silver you can buy from any Swiss bank,
each priced differently:
A) The first form of silver/gold certificate would be a metal account, the
cheapest form of silver. There were no charges (fees or storage) in a metal
account, just cash payment for the agreed upon price at time of purchase. There
was also no real metal backing whatsoever, just a private agreement between
the bank and the client.
B) The other form of silver/gold certificate would be a deposit account,
where by Swiss banking law, the metal has to be physically stored by the
bank, on an ounce for ounce basis.
13) In September 2008, a very large and conservative Swiss bank informed a
number of their clients that they would no longer be offering paper gold or
silver certificates in the bank's name.
14) The bank had been buying derivatives contracts (ie: gold futures) to
hedge itself against unallocated gold owed to clients. However, due to the
financial turmoil, the bank was no longer comfortable with the counterparty
risk of these derivatives contract.
15) the Swiss bank informed its clients, all paper transactions had to be
converted to physical or physical ETF positions
16) Other Swiss banks have likely followed this bank's lead.
Conclusions:
1) If it was the practice of conservative Swiss banks to sell gold
certificates offset by gold derivatives (futures), then it can be assumed to
also be the practice for most the world’s banks.
2) Although Swiss banks have stopped selling unallocated gold/silver, most
other banks haven’t.
3) To shift their clients out of paper gold/silver and into physical metals,
Swiss banks have been selling COMEX gold/silver futures and buying the
physical metal instead.
4) As other banks follow the Swiss’s lead, the risks of default at the
COMEX increases.
Unallocated gold/certificates are basically uninsured gold deposits, and
owning uninsured gold deposits at a time where the global financial system is
insolvent is not a good bet.
Eric
de Carbonnel
Market Skeptics
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