 Physical Bullion
Investments
Are Your Precious Metals Held By A Third Party?
Michael B. Clark
Sep 10, 2007
When having precious metals
investments held by the selling dealer or another custody company,
how can investors know their precious metals really exist and
that they are, in fact, being securely stored for their benefit?
When buying precious metals,
or any investment for that matter, most investors today take
precautions to ensure they are dealing with a reputable seller,
so they can be confident their transactions will be completed
properly and delivery of the investment products they purchase
will actually be made. These investors may ask for, and check
the dealer's references or investigate the dealer's history of
service and performance by some other means, before they proceed
to transact business with that dealer.
However, it is now common for
investors to acquire precious metal bullion bars or coins from
a dealer and, for convenience and security reasons, leave them
in "safekeeping" with that dealer, or with the dealer's
recommended storage company.
But if these investors do not
take direct possession of their precious metals, and actually
see the bullion or coins they purchased, how can they be certain
the products were really purchased by the dealer, or that they
actually exist and are being physically stored in a secured manner
for their benefit?
To be sure, there are many
reputable precious metals dealers and reliable custody arrangements
available to precious metals investors today. But, in instances
where their investments are held by someone other than themselves,
it is of utmost importance for investors to consider several
not-so-obvious, yet vitally critical factors in order to ensure
they are fully protected. In such cases, investors must understand
certain concepts and ask several key questions in order to know
the true status of their investment.
Balance Sheet Considerations
First and foremost, investors
must know whether the company "storing" their precious
metals is holding them on or off that company's balance sheet.
If their precious metals are being held "on" the company's
balance sheet, they should understand that their investments
are co-mingled with the assets of the holding company, and they
will become general creditors in the case of the bankruptcy or
failure of that company. In such a circumstance, investors will
receive whatever portion of the company's total assets the bankruptcy
court or "receiver" may determine, which may very well
be only a fraction of what the actual market value of their precious
metals. If held "off" the company's balance sheet,
investor assets are held separate and apart from those of the
company, and thus, they will not get tied-up in bankruptcy proceedings
should the company fail. So investors should always ask, "Is
my precious metal investment being held on or off of the holding
company's balance sheet?"
Account Type
Next, investors should know
whether their investments are being held in an unallocated
or allocated account. Typically, Unallocated Accounts
report balances denominated as ounces of a given metal type (e.g.,
50 ounces platinum), whereas Allocated Accounts generally report
holdings as specific quantities of defined physical products
(e.g., 25 one-ounce Silver Canadian Maple Leaf Coins).
Unallocated precious metal is an accounting on a holding company's
books listing the total number of "generic ounces"
of gold (or silver, platinum, etc.) that it holds and owes to
its individual precious metals customers, in the same way a bank
might account for the deposits of its banking customers. This
account often comprises a "pool" of precious metals
assets (held "on balance sheet") that may include products
other than physical precious metals, such as options contracts
and the company's precious metals receivables, or it may simply
be backed by the company's general credit worthiness. Thus, in
this instance, the investors' precious metals may, or may not
physically exist. (To be sure, the company remains liable for
paying investors when they sell their positions, and for delivering
the actual metal investors originally purchased should delivery
be requested, but until either event occurs, the company may
use investors' funds for purposes other than buying and holding
precious metals.) An investor owning, say, 250 ounces of platinum
in such a "storage" program would simply see an entry
like "250 ounces - platinum" on his/her holdings statement,
which represents the liability of the holding company to that
investor.
Allocated precious metal, on the other hand, refers to the
company's accounting assignment of specific quantities of particular
physical products to its individual investors' accounts. (These
products may be held either on or off the holding company's balance
sheet.) For example, a custody company may have a total of 515
onc-ounce Johnson Matthey gold bars in storage, which
it is holding for 16 different investors. It "allocates"
and reports, say, 20 such bars for Investor A's account, 36 bars
for Investor B's account, and so on, until all 515 bars are properly
"allocated" and reported to reflect the appropriate
ownership of those bars by all 16 customers. Thus, Investor B
in this storage arrangement would see something like "36
One-Ounce JM Bars - Gold" as an entry on the holding statement
he/she receives from the company holding his/her gold investment.
[Note: Allocation
is often confused with the concepts of fungibility and
segregation. "Allocation" is an accounting principle,
whereas fungibility refers to the innate qualities of
an item that permits it to be substituted for a like item with
no affect on the end result (e.g., exchanging a one-ounce American
Gold Eagle for another). Segregation and its opposite, commingling,
on the other hand, refer to the physical arrangement of precious
metals when stored.]
Insurance and Account Title Considerations
Next, investors should always
know whether their holdings are insured, and if so, by what type
of policy. Are their precious metals simply covered by a general
liability policy of the company holding them, or is there a specific
"all-risk" custody policy in place, underwritten by
a reputable insurer (like Lloyds of London), that specifically
protects the precious metal of its customers?
Finally, investors should be
certain the company is holding their precious metal investments
in an account (or sub-account) titled in their individual names.
This way, the company's records will reflect exactly what precious
metal belongs to which investors in the event the company fails.
Conclusion
When leaving their precious
metals investments "on deposit" with the seller, or
when having the seller store the investment with a third party,
investors should be sure to understand the exact status of their
investment. Does it exist physically? If so, where is it being
stored? Or, does it exist simply as an accounting liability of
the selling company? Is in Insured? If so, by what insurer and
by what type of policy? Is it held in my name?
If investors are satisfied
with the financial strength, business reputation and credit worthiness
of the company "holding" their precious metals, then
the actual status of the investment may not matter and these
investors should be able to sleep soundly at night. If not, then
investors should always ensure:
(1) his/her precious metals
are held with a reliable company
(2) they know whether the [they] are being held "on" or "off"
the company's balance sheet
(3) whether they are in an
allocated account and titled in his/her name; and
(4) whether they are insured
by a special "all risk" policy underwritten by a reputable
and credit-worthy insurance provider.
In other words, be sure you
know the true status of your investment when held by a third
party.
Consult your trusted precious
metals dealer for more details.
Michael B. Clark
email: info@gold.ie
Michael B.
Clark is a consultant to Gold and Silver
Investments
Limited, Ireland's Asset Diversification and Wealth Preservation
Specialist. He is the President of Solidus Associates, LLC
of Wilmington, Delaware, and has served in the precious metals
industry for 25 years. He oversaw Deak-Perera's Precious Metals
Certificate Program, America's largest precious metals investment
program, in the early 1980s. Later he became Vice President of
Precious Metals at Wilmington Trust Company, and President of
both Delaware Depository Service Company and First State Depository
Company. He obtained licenses for Wilmington Trust and DDSC to
operate as Nymex and Comex depositories.
321gold Ltd
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