To establish a physical bullion portfolio foundation with metals that are stored on an allocated and insured basis, one that will protect against what could be called ethical mayhem in today’s financial sector, investors must, as Governor Dodge advised, make a concerted effort to understand what they are buying. While reading legal documents and prospectuses is tedious, the truth is in the fine print and investors must do their own due diligence, and beware of complex investment structures.
Demand documentation that transfers title directly to the purchaser
For a bullion product, be it a fund or actual bullion bars, to earn its place as the foundation of a portfolio, the bullion purchaser must demand documentation that legally transfers title of specific, physical bars directly to them. Do not accept IOUs, paper proxies or derivatives. It is important to read the purchase documents carefully to ensure they convey legal title. Only after the purchaser has legal title can they enter into a binding custody agreement for bullion storage on an allocated, insured basis. In that agreement, the purchaser must be able to identify all terms and rights concerning insurance and secure, allocated storage.
Proper insurance and allocated storage in a credible, guarded vault costs money, so steer clear of bullion products promising low fees. If the deal appears too good to be true, the physical bullion may not exist. What the investor may have is paper bullion that will not offer protection when it is most needed; they may simply be an unsecured creditor of the dealer. It is hardly prudent to be tempted by low storage fees that will save a fraction of a percentage point while risking an entire bullion holding. Short cuts and penny pinching are inadvisable strategies for any asset intended as an ultimate safe haven of wealth protection.
Home storage not worth the risk of invasion or physical assault
Many people think that storing their bullion at home is a good way to economize on physical bullion storage fees, but be aware that any sizable amount of home-stored bullion will not be covered by a household insurance policy.
Keeping a modest—and secret—stash of small-denomination gold or silver for barter purposes is recommended in the event that ATM machines aren’t working, or a ‘bank holiday’ is announced. This may seem like an excess of caution until you consider that, earlier this year, the Bank of Italy authorized the suspension of payments by Bank Network Investments Spa (BNI) without first advising depositors .
Unless absolute secrecy is maintained, home storage means putting yourself and your family at risk of a home invasion. There has been an increase of home invasions in England during Asian wedding season, when gold gifts are stored in homes, and street gangs and professional thieves are only too happy to relieve people of their precious metals .
Even in peace-loving Canada, a British Columbia man lost his life savings of $750,000 in silver bars to knife-and-gun wielding thugs who arrived at his door disguised as police officers. When he let them in, the ‘officers’ forced him to open his vault and stole the silver . For any sizable amount of bullion, home storage is clearly not worth the risk.
Many precious metals dealers do not trust banks for storage, and prefer private vault facilities. They may rethink this approach on reviewing a British case where authorities raided three private safe deposit box centres, and opened 6,717 private boxes . The owners of the boxes were required to provide proof of the contents of their box before their possessions were returned. Most could not do so, and much of the cash involved went missing while other items are in dispute. The ensuing litigation will likely last for decades; in the meantime, those who stored bullion in their boxes have been relieved of their metal, and may only receive compensation in the amount of the value of the bullion at the time of the raid.
Another consideration is that safe deposit box contents cannot be insured, and there is no proof that anything is actually in the box. Investors who are still interested in private vaults or safe deposit box centres should perform due diligence on the financial condition of the operator and the owner of the vault, since stored assets may be at risk in the case of a private vault’s insolvency.
Storing bullion at home, in a safe deposit box or in a private vault is another form of false economy, wherein investors put their safe haven asset at risk to save a small amount in storage fees.
LBMA bullion in LBMA member vaults
Another important aspect of due diligence for a proper foundation of wealth preservation is the assurance that your bullion is in the form of Good Delivery bars, and stored in the vault of a London Bullion Market Association (LBMA) member.
The LBMA is a wholesale, over-the-counter market for trading gold and silver. Its members include the majority of the bullion banks that hold gold, plus producers, refiners, fabricators and other traders throughout the world.
The reason for insisting on LBMA bullion is that it assures the purchaser of the quality and fineness of the bars. Once gold is outside a chain of integrity such as that of the LBMA, it may need to be re-assayed before it can be sold. This prevents gold-plated Tungsten bars from entering the chain of integrity. Re-assaying is time consuming, engenders extra cost and once again defeats the purpose of a safe haven store of wealth that offers efficient liquidity.
We constantly hear stories of discount bullion, or bullion sold at no premium to the spot price. The likelihood that this is pure bullion from an ethical source is slight to none.
In case of fire, you need an extinguisher, not a picture of one
Bullion demand is clearly growing as both sovereign nations and the world’s largest financial institutions buckle under the burden of unserviceable debt, leaving helicopter-loads of new money printing and associated currency devaluation as the only way out.
Investors can protect their portfolios by purchasing physical bullion. Just as with any large asset purchase, demand documentation that confers legal title to the bullion you are purchasing, review a written custodial agreement that specifies insured, allocated storage without giving the custodian the right to deal with the bullion in any way, and insist on Good Delivery bars.
When the next financial firestorm erupts, you need real, physical bullion and not a paper proxy; just as in a fire you need a real fire extinguisher, not a picture of one.