06 January 2015

Being aware of the true nature of unallocated accounts

For those new to precious metals, this guide put out by Global Precious Metals out of Singapore is straightforward and draws attention to a number of important things to consider when buying and storing precious metals, with little bias to their own offering. Plus you don't have to provide an email to access it, like many free guides require (h/t Bullion Baron for tweeting about it).
I've met Vincent and Nicolas (on an introduction from Grant Williams, who is a Non-Executive Director in the business) and these two guys know their business. You may be surprised why I'd mention/recommend a competitor, but at the Perth Mint we believe in diversification of your holdings and know many of our larger clients hold precious metals in multiple locations, so I don't think there is any point trying to "keep" all of a client's business to yourself, against their own interests. Vincent has a handy diagram to illustrate location diversification (although of course I'd add Perth as one of the stable safe jurisdictions).
I'd like to draw attention to Vincent's discussion about unallocated accounts. He says "that most investors holding an unallocated account are not aware of the true nature of such account" and I certainly think this is true. Vincent advises that "if the account documentation mentions insurance, chances are high that this is not an unallocated account". I would also suggest looking for very clear wording in storage agreements as to whether the metal is on or off balance sheet of the provider, what they are doing with the metal, how it is stored and so on. I have seen a number of unallocated accounts, usually offered by small coin dealers, that are completely vague on this and that is a warning sign. If the facility is not clear on exactly what they are doing, then stay away.
That is why you'll find the Perth Mint is very upfront about its unallocated and how it is different than the high risk fractional stuff offered by banks. Vincent notes that "those offered by reputed refineries are probably the safest option" as they are backed by the inventory of the company but he also says that such facilities are usually "only reserved for professional dealers (with the exception of the Perth Mint". In the case of the Perth Mint, this will not always be the case. Perth Mint stopped offering unallocated silver and gold will eventually close to new investors as well, as there is only so much metal we need for our operations (tip: you can tell something is not a Ponzi scheme if they close it to new inflows).
Regarding ETFs, one point I'd add to Vincent's concerns is to look at the diagram he has and note that the more people involved, the more fingers that can be pointed when something goes wrong, a point I made in this article.
One part I'd disagree with Vincent is on the London Bullion Market where he says that "a run on the London Bullion Market doesn't appear probable, but very likely", although I agree investors should stay away from this market if they are buying gold as insurance. I did a whole series of posts on the fractional bullion banking system, starting with this post, and whilst it is not easy going, it explains why this system has defied claims that its failure is imminent. That is not to say that it is safe and won't blow up, but the case for its instability is overplayed I think when you look at how it works (and can be backstopped by central banks, if they have the physical to do so) in detail.

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