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Thursday, July 31, 2014

How Safe Are Unallocated Bullion Accounts?

Imagine you owned a small business. It’s a retail store and you sell a physical product which lines the shelves. You need to keep a variety of different products to ensure that customers who enter your store have plenty of choice. Not only do you have to stock a range of goods, but you have to keep a lot of each on hand as customers often purchase in bulk, due to fluctuating prices (they may buy large quantities when they believe it is well priced). As the store owner you have to hedge your exposure to the fluctuating price of the product you keep on hand to reduce the chance of getting caught on the wrong side of a price swing, this adds further complexity to managing your inventory.

The products you sell are expensive, this is no $2 store where your entire inventory only totals a few thousand dollars, almost all of your products cost over $20 each and up to $44,000 or more, remembering that you have to keep multiple of each in stock for those customers who want to purchase in bulk. The worst of it is you can only charge a small mark-up on the products (over cost price), otherwise your customers will go elsewhere. Obviously the capital you need for running this store will be substantial. Likely to be in the millions of dollars.

Now imagine there was a way to offer such a wide selection of expensive products, but have your customers fund the capital costs to do so… sounds too good to be true?! They will essentially pre-purchase your stock (allowing them to lock in the price they want), which provides substantial capital for putting product on your shelves. The customer can come in and use their store credit to make a purchase from your product range and take delivery at a time of their choosing. All you have to do as the store owner is promise your customers that you won’t take more funds from them than you have product on your shelves.

…you’ve probably worked out by now that I’m talking about the challenges faced by a bullion dealer. I have a lot of respect for those in the industry, it’s a cut-throat business with small margins and high volumes, lots of regulations to abide by and is littered with risks. However, as a consumer of their services, I have to think about the safety of my own capital first.

The solution I talk about above, where the customer can provide capital for stocking a larger product range, is unallocated bullion accounts. Unallocated accounts have become a popular offering from bullion dealers in Australia over the last few years, I suspect this is partially a result of an increase in the number of bullion dealers trading and also boosted by the closure of new funds to Perth Mint’s Unallocated Silver Accounts (as of March 2011, Unallocated Gold remains open at this time). The advance in functionality of bullion dealers online stores means the process to buy unallocated metal today is very easy, sign up an account, hit the buy button and transfer the money to the dealers bank account.

There are some benefits for a customer purchasing unallocated metal (as opposed to taking delivery of physical). There’s generally no cost charged for storage, the premium (over spot) charged will be lower allowing exposure to a larger number of ounces (e.g. $5000 buys 192 1 ounce silver coins at $26/oz, but buys 208 ounces of unallocated Silver at $24/oz), you don’t have to pay for delivery and it’s easier to trade (for example a dealer may offer Gold:Silver Ratio swaps or to buy it back at the click of a button). I have used unallocated accounts from two Australian bullion dealers in the past and may do so in the future, but I manage the risk by limiting my exposure to an amount I'd feel comfortable losing (the same amount that I'd risk placing any single order with a dealer).

This brings me to the problem I have with unallocated accounts. One of the reasons I own precious metals is that they have a lower level of counter-party risk compared with traditional assets such as shares. Buying precious metals in unallocated form potentially exposes the client to the solvency of the company offering the service, which is counterproductive to the reasons I hold precious metals.

The ownership (title) of the bullion in an unallocated account is a grey area and will likely differ depending on the specific setup for each dealer. I've had it explained that some bullion dealers in Australia have structured their unallocated products so that the client retains ownership of the metal in the event of bankruptcy, but I'm not an accountant or lawyer, so even if I was shown 'proof' of these claims I'd not trust myself to be confident that was definitely the case. I haven't seen any bullion dealer with a Product Disclosure Statement on their website outlining the offer, ownership structure, how the metal is treated and risks, most of them provide little more than a few sentences describing their unallocated products.

After reading the above you may be wondering how likely is the collapse of a well established bullion dealer offering an unallocated product?

It's not something that has occurred very often, the last recorded instance that I've been made aware of was back in 1996 with the collapse of "Perth Bullion Exchange" (of Sydney, not to be confused with any current trading entities with similar names). This particular case was highlighted in a Sunday Mail article where a couple had written to "The Fixer". They had purchased 20 bars of silver bullion totaling $12,900 (in 1993-1994) for which they had certificates showing ownership and when they went to redeem their metal in 1998 the business had vanished. The Fixer managed to track down the bankruptcy proceedings and the couple supposedly got around half their money back following the sale of the companies assets:

Perth Bullion Exchange had been trading for some 18 years at the time of their bankruptcy (via records of the bankruptcy proceedings). Over those years they had offered various services that would be comparable to some unallocated accounts today (keeping in mind that all dealers do things a little differently). Early on their certificates of ownership stated that "THE ABOVE INGOT IS BEING STORED BY THIS EXCHANGE - FULLY COVERED BY INSURANCE AND FREE OF STORAGE CHARGE UNTIL REQUIRED", other customers had received notification that "The Perth Bullion Exchange agrees to store these ingots free of charge under the best security available on the condition that we may use the physical bullion in the normal course of our business". As prices for bullion fell and the bankrupt's business deteriorated, the owner progressively sold all his stock of bullion. At the date of the sequestration order, the bankrupt was in possession of various giftware, jewellery, fixtures and fittings (but no bullion).

There was little warning of Perth Bullion Exchange's demise, in fact just several months prior the Sydney Morning Herald ran a positive article
(read in full here) on the company describing a proprietor who was interested in floating the company publicly:

Another example, this time in New Zealand, was that of Goldcorp Exchange Ltd, Wikipedia summarises:
Goldcorp Exchange Ltd had a business of holding gold reserves in coins and ingots for customers wishing to invest in gold. Some gold was held for customers, but the levels varied from time to time. The company's employees also told customers that the company would maintain a separate and sufficient stock of each type of bullion to meet their demands, but in fact it did not. The Bank of New Zealand on 11 July 1988, being owed money by Goldcorp Exchange Ltd, petitioned for the business to be wound up. It transpired that Goldcorp had not held anywhere near enough money for the members of the public, around 1000 people, who had supposedly bought gold with it, even though in their contracts they were entitled to delivery of the gold (in 7 days, for a fee) if they wished. The company also lacked enough assets to satisfy the debts to the bank. The members of the public alleged that the gold that remained in stock was entrusted to them. The bank argued that because the gold stocks had never been isolated, it did not, that all the gold customers were unsecured creditors and that its security interest (a floating charge) took priority.
In this case, there was Gold remaining in stock at the time of their bankruptcy but the title of the metal hadn't been structured to verify ownership by the clients holding unallocated accounts. An early brochure read "Basically you agree to buy metal at the prevailing market rate and a paper transaction takes place. [The company] is responsible for storing and insuring your metal free of charge and you are given a 'Non-Allocated invoice' which verifies your ownership of the metal. In the case of gold or silver, physical delivery can be taken upon seven days notice and payment of nominal delivery charges." (via records of the bankruptcy proceeding), but the judgement was made:
The Privy Council advised that the customers had no property interest in the gold, and therefore the bank could use it to satisfy its debts. The customers' purchase contracts did not transfer title, because which gold specifically was to be sold was not yet certain. Although Goldcorp's brochures had promised title, a trust did not arise because there was no declaration of it. It was contrary to policy to imply a fiduciary duty simply because there was a breach of contract. It was also rejected that equity required any restitution of the purchase money.
Both of these examples are very dated. One might look at these precedents and think that recurrence is unlikely today. However, my current concern lies with the recent revelation of missing Gold and suspected tax fraud occurring as previously covered on this site in my article 'ATO & AFP Investigate Australian Gold Industry Fraud'.

I don't know what will come of this investigation and those companies named in the exposé by Chris Vedelago, but the potential for some of them to suffer losses (or potentially worse) as a result of these events seems worthy of consideration. As far as I know ATO garnishee notices take priority over other creditors, so unlike the New Zealand case detailed above, you'd want to be sure that the customer ownership of any metal in unallocated accounts was air tight if you have a substantial holding in this form.

This article was not written with the intent to panic those investors with unallocated accounts, but simply to draw attention to the risks associated with having another party store your precious metals. In the case of outright theft of customer metal, which seems to be what occurred in the case of Perth Bullion Exchange, allocated accounts aren't completely safe either. However, even if bullion dealers offering unallocated accounts do everything by the book and are a reputable long-standing business, they may inadvertently expose themselves to external risks that put their company and the unallocated accounts of their clients at risk.

I said in another recent article '7 Ways To Keep Your Gold And Silver Safe' that "there is no completely risk free way to own precious metals, as is the case with any other investment", it's just a matter of assessing the risks of the various options available and judging for yourself which you think is safest.

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Monday, July 28, 2014

House Prices in Gold / Silver Ounces (2014 Update)

I last updated these charts in August last year. With 12 months having passed and Residex posting on their blog today with the latest property data (taking us through to June 2014), I thought it an opportune time to publish new charts. The Gold & Silver price used was AUD 'bid average' from Perth Mint.

Key Figures:

Sydney (Ounces to buy a house)
Precious Metals Peak (January 1980): 103oz Gold, 1811oz Silver
Housing Peak (February 2004): 1100oz Gold, 69,143oz Silver
Latest Figures (June 2014): 607oz Gold, 39,611oz Silver
Based on Current Spot Price: 592oz Gold, 37,523oz Silver

Melbourne (Ounces to buy a house)
Precious Metals Peak (January 1980): 67oz Gold, 1181oz Silver
Housing Peak (February 2004): 661oz Gold, 41,538oz Silver
Latest Figures (June 2014): 464oz Gold, 30,278oz Silver
Based on Current Spot Price: 452oz Gold, 28,682oz Silver
Brisbane (Ounces to buy a house)
Precious Metals Peak (January 1980): 62oz Gold, 1091oz Silver
Housing Peak (February 2004): 600oz Gold, 37,696oz Silver
Latest Figures (June 2014): 344oz Gold, 22,433oz Silver
Based on Current Spot Price: 335oz Gold, 21,250oz Silver

(Spot Price ratio calculated on A$22 & A$1395 & June house prices)

The chart tells the story as Gold and Silver continued to be outperformed by property over the 2013-2014 financial year. This has been a result of stagnant to slightly lower precious metal prices and further exacerbated by strong house price growth (at least in the eastern capitals covered by the charts).

Interesting observations on Sydney:

Sydney houses peaked against Silver in November 2003 (Gold in February 2004) at 79,385 ounces, they fell to less than 25% of that by April 2011 when priced at 16,864 ounces. The fall in Silver price from it's peak over 3 years ago and recent strong growth in Sydney property prices has seen houses bounce to 40,230 ounces of Silver (only half the peak, but well over double the 2011 lows). Anyone stacking Silver ounces with the intent to purchase Sydney property over the last few years has seen a large setback.

Another way to show just how ridiculous Sydney house prices have risen... in January 2011 the price of Adelaide house prices was $410,000 and Sydney was $671,500, a ratio of 1.63 (Sydney divided by Adelaide house prices). In June 2014 the price of Adelaide house prices is $408,500 and Sydney house prices are $825,500, a ratio of 2.02. Though most capitals (all except Darwin as measured by Residex) have seen some growth over the last 12 months, Sydney's has been absolutely phenomenal and is reaching price and speculation levels that rival the last major price peak seen 10 years ago (see charts at 'Sell Sydney Property' on Macro Business). 

Following the last major peak in Sydney prices (January 2004, $573,456) they didn't increase nominally for a 5 year period (May 2009, $573,507). I expect we'll see similar from the next cyclical peak in Sydney property (5 years stagnation in nominal prices) which I think will come later this year or early next. Over the same period (next 3-5 years) I expect rising precious metal prices and a lower Australian Dollar, so do think investors stacking ounces for the eventual purchase of a house will be rewarded (even those in Sydney). Only time will tell if I'm right.

Here are the charts (click any to enlarge).

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Wednesday, July 23, 2014

Limited Edition 2014 Kangaroo 1 Gram Silver Cards

The sale of some Bullion Baron 2014 Kangaroo 1 Gram Silver Cards through the Free Silver Card website and an auction on Silver Stackers has raised $39.50 for Ronald McDonald House Charities. I’ve rounded the donation up to $50 and forwarded through the payment this evening.

My previous post on the cards only showed a computer rendered image, but having now received some I can report that the cards look great in real life.

They are slightly larger than a credit card in size, so don’t quite fit the card pockets in a wallet, but fit snugly in the section for notes (in my wallet at least).

At the time of this post there are only 148 of the cards remaining on the Free Silver Card website of a 250 card mintage. Would be great to see more sold in order to raise further funds for the cause (any profits I make from sale of the cards are going to RMHC).

If you’re looking for a unique precious metal product to add to your stack or gift to your friends and family then please consider buying a handful of these Silver cards to hoard or distribute!

Click here for more information about the cards or to make a purchase from the Free Silver Card store, click here.

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Monday, July 21, 2014

7 Ways To Keep Your Gold And Silver Safe

In the spirit of these lists that have flooded some of the most popular media and news sites (Business Insider I'm looking at you), I thought I'd do a series for precious metals, starting with 7 ways you can keep your Gold and Silver safe (keeping in mind there is no completely risk free way to own precious metals, as is the case with any other investment). 

Some suggestions are tongue in cheek (so don't take them all too seriously), but hopefully it gets your mind ticking about the safety of your stack. Here we go...

Keep Them On You

Keeping precious metals on your person may sound silly, but for the majority of the population that is exactly what they do. If you have Gold or Silver rings and other jewellery on your person, then someone breaking into your hotel, car or house is not going to be able to get their hands on them. It may be the safest place for them depending on your situation. If you have a more substantial investment in precious metals then some shabby looking sneakers (the smellier the better, less likely to be stolen) with trenches cut into the sole might fit some Gold bars (up to a kilo in each) snugly.

Hide Them Well

A recent thread on Silver Stackers highlighted the care you need to take if deciding to store your precious metals at home, where during a break-in thieves had emptied potted plants, pulled out electrical sockets, removed picture frames, moved furniture and more. You really can't be too careful here, but if you decide your home is a more secure place than any, then you might consider taking a look at this book for some ideas: How to Hide Anything - Michael Connor, keeping in mind that if you can read a book about where to hide something, then so can a thief. Be creative and don't share your ideas publicly.

Get a Safe Deposit Box

This is a personal favourite of mine. If there is anywhere that's likely to be safe for your Gold and Silver it's in a facility that is built for that very purpose. Just remember that not all safe deposit box facilities are created equally. Many large banks will offer safe deposit box services, make sure you shop around for the mix of safety and price that best fits your situation as in my experience both of these factors can vary substantially between providers. While I expect it's far less likely today than in times past, you should consider that keeping precious metals in a safe deposit box does make it an easy target for any government crackdown and confiscation should it occur.

Defend Them

Now this wouldn't be my first choice, putting my safety (or that of my loved ones) at risk, but if you are up to the challenge of defending your Gold and Silver at home, then you may not even need to hide them. You could take some martial arts classes or buy yourself some weapons (depending on what is legal where you live, knives or guns). Just be sure that you are familiar enough with local laws to know what constitutes 'self defense' should someone break in while you are there to take action. Another option to defend your precious metals at home might be to buy a guard dog, just be sure you are ready for that commitment.

Don't Tell Anyone You Own Them

If you do keep your stack at home perhaps one of the easiest ways to protect your stack is just to limit the number of people you tell. As they say 'Loose lips sink ships'. That also means being wary of giving out your address when buying or selling precious metals via post. Either get a post office box or get them shipped to work. Having your precious metals shipped to a home address is asking for trouble, even if you don't store them there permanently.

Bury Them

I would suggest the safest way to store your precious metals (if done right) is to seal them up into airtight containers and bury them somewhere on your own property (assuming you have one that is large enough to do so discreetly). That said this method should also be used in conjunction with the tip above about keeping quiet about your stack as burying your metals is far from infallible if someone knows to search your property with a metal detector. One woman lost over a quarter million dollars worth of Gold Krugerrands using this method after burying a safe full of them. If you do use this method, make sure you have a surefire way of finding them again and that at least a trusted loved one knows where they are in case something happens to you.

Don't Own Any

One way to avoid the loss of something is to never own it in the first place. If you don't have any precious metals then you have none to lose. However the way I see it, those who don't hold any precious metals also have a lot to lose. This is one of those cases where you can be damned if you do, damned if you don't.

Just remember, not all of these methods are practical for everyone. You should take into consideration your location and personal situation before making a decision on how to best keep your precious metals protected. Safe stacking!

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Thursday, July 17, 2014

The Truth About "Gold Backed" Cryptocurrencies

Another day, another salesman tries to sell us the story that they are launching the first Gold backed cryptocurrency. On this occasion it's Anthem Vault (founded by Anthem Blanchard, son of well known Gold advocate Jim Blanchard):
Newnote Financial Corp. is pleased to announce the successful development and launch of the first open-source gold-backed alternative crypto-currency, commissioned by Anthem Vault Inc. Business Wire
So are they really the first? They certainly aren't the first to launch a "Gold backed" cryptocurrency. The first I recall reading about was NoFiatCoin (XNF) which trades on the Ripple Network and was launched earlier this year:

Click Chart To Enlarge
Despite this cryptocurrencies favourable return for early adopters, the claim that it's backed by Gold (bullion) is dubious. The company simply allows those holding the cryptocurrency to exchange it for precious metals they have in stock. As Michael Suede wrote shortly after the announcement of XNF:
NoFiatCoin says that only a 1/3rd of XNFs are backed by bullion and that the market will determine the price for an XNF.  To me, this doesn’t make much sense.  This means an XNF does not represent a fixed weight of gold.  Further, NoFiatCoin says redemption of XNFs for bullion requires a minimum of $3000 worth of XNFs at current market prices.

If XNFs were actually a “gold backed” currency, each XNF would have to represent a fixed unit of weight.  For example, they could set an XNF to be worth .001 ounces of gold, and if you saved up 1000 XNFs, then you could always exchange them with NoFiatCoin for an ounce of bullion.  Of course, under this system, it would be impossible to have a fixed limit of currency creation, and there would have to be a way to take XNFs out of circulation once they were redeemed for physical specie.
Without convertibility at a fixed ratio with the coins, how is this Gold backed?

Other cryptocurrencies purporting to be Gold backed include Gold Backed Coin (GBC) which also trades on the Ripple Network, they suggest that each of these coins is backed by 1/10oz of Gold. But what do we really know about this company and how or where they are storing the Gold that is supposedly backing all these coins? The domain for the website was registered only a few months ago.

Then there is Ripple Singapore which claim to be able to load your Ripple wallet with XAU (Gold), XAG (Silver) and XPT (Platinum) with the bullion backing these positions stored in Singapore by Silver Bullion Pte Ltd. Though take up doesn't appear strong, they published these audit figures on their website:

What is the benefit of storing these in your Ripple wallet? There's not much liquidity given the published reserves, why not just setup a regular unallocated account with the dealer? Not that I would recommend storing your precious metal that way either.

Further to those already mentioned there is also G8Coin, MinaCoin, XGOLD (a work in progress) and probably others that I've missed. None of these currencies really offer anything that hasn't been seen before in one form or another, for example E-gold was founded in 1996 and topped 5 million users before the Gold was eventually seized and company placed into receivership. Also, there are already online exchanges where one can buy precious metals electronically or trade peer to peer with other account holders, some of which are well established and trusted, such as BullionVault and Gold Money.

So... Anthem Vault's new offering may be the first open source currency in this space (although some of those mentioned do trade on Ripple, which is an open source platform), but it's far from something new and exciting. Let's hear more about it though...
The virtual currency was secretly launched on the 4th of July 2014 by Anthem Vault’s technology team, in conjunction with Newnote Financial Corp. Dubbed the 4th of July Coin, this first Anthem Vault alt-coin is commonly referred to as MGC (Micro Gold Coin).

The MGC is an open source crypto-currency which means any person can download and look at the source code behind the coin, which is similar to Bitcoin. However, the coin has some unique attributes which sets it apart from Bitcoin. For example, there will only be a total of 10 million MGC’s in this series. All coins will be fully mined within one year, meaning all 10 million MGC’s will be in circulation and/or ownership by July of 2015. The entire series of MGC’s are backed by 100 grams of Gold stored at Anthem Vault, providing a base value to all MGC’s from the first moment the coins are “mined”. Business Wire
So the whole currency is "backed" by only 100 grams of Gold (spot value currently US$4192)? Based on 10 million coins, that means each coin will be worth 0.00001 gram of Gold. Talk about an anticlimax, this is nothing more than a marketing stunt designed to attract new customers to the brand or to have people write about it (game, set, match, they got me). Though according to the company founder this was only a taste of what's to come:
Blanchard said Wednesday's launch was a promotional offering, and the company has plans to offer a full suite of virtual currencies backed by a larger amount of gold as well as other precious metals at the end of September. Reuters
Let's face it though. Most of these "Gold backed" cryptocurrencies are a complete farce.

Those that aren't linked to a fixed amount of Gold, 100% backed and redeemable (by physical delivery of your Gold portion) I wouldn't consider to be Gold backed. Otherwise one could make the argument that any fiat currency is Gold backed (where the issuing country has official reserves), which is preposterous.

Those that are linked to a fixed amount of Gold, 100% backed and redeemable by physical delivery are illiquid or have been launched by unknown entities, not a system you want to be relying on for your exposure to Gold.

The reality is that combining cryptocurrencies with Gold doesn't make a lot of sense. The whole idea behind most cryptocurrencies is having a distributed electronic method of transferring value without the need to be tied to a physical location. Adding Gold to the mix literally destroys the advantages of a cryptocurrency because the asset it's tied to is stored centrally, leaving it vulnerable to the negative effects of government regulation.

If you want exposure to cryptocurrencies, then do some research, find one that fits your risk profile and take a punt.

If you want exposure to Gold, then buy it physically from a trusted source.

There's absolutely no reason at this point in time to try and combine these two very different assets.

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