-- Posted Tuesday, 4 September 2007 | Digg This Article
By
Michael B. Clark
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 once-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 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 is a consultant to Gold and Silver Investments Limited, www.goldandsilverinvestments.com , 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.
-- Posted Tuesday, 4 September 2007 | Digg This Article
