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Lately I have received many inquiries about whether the
physical gold or silver people think they own and have stored with third
parties is safe. Many have asked me to comb through various
prospectuses or user agreements and give my opinion.
Because of reader inquiry I have thoroughly
researched the GLD ETF and GoldMoney. However, due to time constraints I
have not thoroughly researched other options like the Perth Mint, Kitco pooled accounts, CEF, GTU, other ETFs, Royal
Canadian Mint, or plenty of other options.
ROYAL CANADIAN MINT ISSUES
On 12 June 2009 the Ottawa Citizen reported:
To halt a possible “run” on the gold it
safeguards for private businesses, the Royal Canadian Mint is reassuring
customers their deposits are fully accounted for and in secure vaults as the
investigation continues into as much as $20 million in lost precious metals.
There have been widespread issues concerning the
gold held by the Royal Canadian Mint. Supposedly some of the gold was
lost, stolen or otherwise has disappeared through some type of accounting
discrepancy.
PAPER GOLD VERSUS PHYSICAL GOLD
On 8 September 2008 I was featured on Adam Curry’s Daily Source Code 788 (mp3) where I mentioned in passing that there are
approximately 140 ounces of paper gold for every one ounce of physical gold.
The ratios may be even higher for paper silver and physical silver.
As usual GATA hits on the real issue:
Yes, there well may be plenty of gold left at the
Royal Canadian Mint, as was insisted upon, with great agitation and anxiety,
by the paper gold marketer quoted in today’s Ottawa Citizen story,
dispatched to you a little while ago — just as there may be plenty of
gold left at Fort Knox. But those are not the most compelling questions. No,
the most compelling questions are: Who
really owns that gold? And how many people have claims to it?
Gold is one of the most transparent of assets.
Au, or gold, has the periodic number of 79, a boiling point of
2,856?°C or 5,173?°F, a standard atomic weight of
196.966569(4) g·mol?1 and is metallic yellow in appearance.
On the other hand, the gold market is extremely murky with many shadowy
characters lurking in the unsavory places attempting to places risky barriers
between owners and their gold.
UNSAVORY GOLD MARKET CHARACTERS
There are many untrustworthy agents which purport to
help you answer the questions of how to buy gold or silver but really
attempt to sell you paper silver and paper gold which, in many cases, is merely
a form of fool’s silver or fool’s gold.
I have thoroughly reviewed the prospectus and
found problems with the GLD and SLV
ETFs and later found another problem with the GLD ETF where the 10-K precludes
the right to audit physical gold inventories.
There are other third-party storage services such as
E-gold or the Perth Mint in Australia. But in July 2008 E-Gold pleaded
guilty to money laundering charges in US federal court. As mentioned
earlier, the nation of Canada’s Royal Canadian Mint withheld employee
bonuses and sent in external auditors to determine the cause of a
multi-million dollar ‘unreconciled difference’
between the financial accounting and the physical bullion.
I recommend staying away
from unnecessarily complex instruments even if issued through
perceived reputable firms. For example, in June 2007 Morgan Stanley & Co. settled a class
action lawsuit for $4.4 million where the complaint alleged
that Morgan Stanley told clients it was selling them
precious metals that they would own in full and that the company would store.
But Morgan Stanley either made no investment specifically on behalf of
those clients, or it made entirely different investments of lesser value and
security.
While the efficacy of the claim may still be at
issue the Better Business Bureau-like complaint from unsatisfied customers
who initiated litigation does not inspire confidence for those seeking to
reduce risk. Most people, probably including you, neither want to get
involved with an asset that you do not understand nor do you want to get
taken in a scam, Ponzi scheme or other type of
fraud or theft.
JOHN NADLER’S ADVICE
John Nadler is the Senior Metals Market Analyst for
Kitco.com which receives about 5 million hits per week. His daily
commentary is widely available to the gold community. On 12 June 2009
in Good News/Bad News/ No (Inflation) News
Mr. Nadler wrote:
A brief Friday footnote. A lot of ill-informed noise
has been generated by the Royal Canadian Mint’s gold reconciliation
story, seen in the Canadian press of late. Some ‘market advisors’
found an opportunity in this story, to try to instigate some kind of a
“run” of the custodial accounts of that, and other mints around
the world. How pathetic. We need very few words to emphatically tell you that
Kitco reaffirms its 100% degree of confidence in
the RCMs ability to keep the customers’ metals free of any material
losses, no matter what the ultimate tally will turn out to be.
The RCM has issued a letter on the subject matter,
and it has assured everyone that customer metal accounts are unaffected by
the reconciliation problem. We expect a complete report on the findings of an
on-going investigation and continue to remain at ease with the status of both
our own as well as our customers’ balances at the Mint. As well as
those at any other mints around the world. Some over-zealous alarmists need
to get a grip
and learn how vaults, insurance policies, and such operate in the real world.
Until then, we can only call them saboteurs. And anyone who listens to them,
sadly misinformed.
SCALPEL PLEASE
The primary reason people own gold or silver is to
reduce risk; counter-party, payment, performance, currency crisis, etc.
At all times and in all circumstances gold and silver remains money.
Gold and silver are insurance for when everything else fails.
The intent behind demanding physical gold or silver
for immediate possession is irrelevant. In this case, Mr. Nadler
remarks that market advisors attempting to instigate a run on custodial
accounts is pathetic. This is followed up by a reaffirmation of the
100% degree of confidence in the Royal Canadian Mint’s ‘ability
to keep the customers’ metals free of any material loss. It
appears that this reaffirmation of confidence is revealing that one of the
primary reasons individuals own gold, to reduce risk, is not being met.
Additionally, the Royal Canadian Mint has issued a
letter attempting to assure people that their metal is there. The
letter is or should be irrelevant. Very simply, the metal is either
there and available for physical delivery or it is not. Additionally,
Mr. Nadler seems to be encouraging people to wait for ‘a complete
report’ about whether their gold is still there or not.
Ad hominem arguments, those arising from or
appealing to emotions and not reason or logic, are present in Mr.
Nadler’s analysis. I find particularly humorous the ad hominem
attack on ‘over-zealous alarmists’ that do not understand how
vaults, insurance policies and the gold market operates ‘in the real
world’. I would like to know which real world Mr. Nadler is
referring to; the physical world where gold is an element with a standard
atomic weight or the derivative illusion where ‘gold’ is an
apparitional derivative of an element with a standard atomic weight.
What exactly should these ’saboteurs’
and those sadly misinformed souls who listen to them ‘get a grip’
on? I think some physical gold would be a good idea.
After all, none of these issues matter until they are the only things
that matter. Demanding physical delivery of physical gold or silver
bullion is always a good exercise. It keeps the third parties and
vaults busy, provides jobs and allows the owner of the bullion to have a cute
piece of metal to pet.
WHAT TO LOOK FOR
When combing through a prospectus or user agreement
the language to find should be extremely simple and clear. Here is an
example from the GoldMoney User Agreement under
VIII. Section E:
A User may, by providing GoldMoney with delivery instructions, which
instructions must be in the form prescribed from time to time by GoldMoney and the Vault, at any time request GoldMoney to change the goldgrams
and silver ounces in his Holding into grams of gold or ounces of silver
that are available
for physical delivery to the User, provided that there
are sufficient goldgrams and silver ounces to take
delivery of a London Good Delivery bar of gold, which bar weighs
approximately twelve thousand five hundred (12,500) grams, or bar of
silver, which bar weighs approximately one thousand (1,000) ounces. GoldMoney will not charge a fee for its service, but
fees may be charged by the Vault for acting on the delivery
instructions.”
On 7 May 2009 they announced that “In
conjunction with Baird & Co. customers can now redeem and take physical
delivery of their gold in convenient units of 100 gram or one kilo (1,000
gram) gold bars.”
When I experimented with this option I received this
message:
Only Holdings with verified owners that are resident
in the following countries can currently redeem bars: United Kingdom,
Guernsey, Isle of Man, Jersey. We expect to make these bars available to all
of our customers in June 2009 after the initial trial launch has been
completed.
I am excited to see the ability to take physical
possession at any time of gold in smaller amounts than 400 ounce LBMA bars.
This is an example of what to look for in the language of the legal
documents of the third-party service you use to store your physical gold or
silver bullion. Do not use safety deposit boxes or your
precious metals may end up on Ebay.
CONCLUSION
Gold is the risk-free asset and along with silver
will always be worth something. There are many shady characters in the
bullion market that want to erect barriers between the owners and their cold
hard gold or silver bullion.
The prospectus, user agreement, etc. should
therefore be pretty simple. The owner of the gold or silver should be
able to demand
physical delivery at any time. There are options for
third-party storage of gold or silver bullion, like GoldMoney
which is recommended
by Michael Maloney, Doug Casey, Peter Schiff and others, that allow for
physical delivery at any time.
But sometimes even that highest guarantee is not
sufficient for Chicken Little’s gold standard. In those cases, I
think Chicken Little should get
a grip; on their physical gold or silver bullion by demanding
immediate physical possession. Why? Just because Chicken Little
can.
If you determine that to satisfy your own gold
standard that you will follow Chicken Little’s example and demand
physical delivery and are denied I would like to know. Please leave
your comments if you have had or do have any problems with any institutions
failing to deliver.
Disclosures:
Long physical gold and silver with no position in GLD or SLV.
Trace Mayer
RuntoGold.com
Trace Mayer, J.D., holds a degree in Accounting from
Brigham Young University, a law degree from California Western School of Law
and studies the Austrian school of economics. He works as an entrepreneur,
investor, journalist and monetary scientist. He is a strong advocate of the
freedom of speech, a member of the Society of Professional Journalists and
the San Diego County Bar Association. He has appeared on ABC, NBC, BNN, many
radio shows and presented at many investment conferences throughout the
world.
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