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  • Physical Gold - Why?

    Physical Gold - Why?

    by Paul Tustain (BullionVault)

    April 15, 2007


    Note: I learned about BullionVault (BV) about a year ago from a friend who is a partner in a Boston Venture Capital firm. He asked me to call Managing Director (the UK equivalent of a CEO) Paul Tustain, to assist my Boston friend to see if I can help get him into a round of funding that Paul was raising for BV, and to assist with due diligence. Turns out that before founding BullionVault in 2002 Paul, like me, ran a couple VC-backed high tech companies, plus we both know our gold history, so we hit it off right away. In several conversations I've had with Paul, and I will interview him in the coming weeks, I have concluded that he is the smartest guy in the gold business. His company uniquely provides a service that offers all the advantages of owning physical gold but without the disadvantages of keeping it in your home or in a safe deposit box, and even protects it from political events which may some day limit US citizens' access to the physical gold they own and hold in the US. Because the BV service is a unique way to own gold, it is also more difficult to comprehend than more familiar methods, such as stocks, coins, and ETFs. To address this we plan to run, with Paul's permission, a few of his notes on BV here. -Eric Janszen

    Why does BullionVault make sure you get outright physical ownership of gold? After all, it would be so much easier to offer you a gold account.

    The reason is risk of default. One of the patterns which recurs throughout history is that growing financial sophistication leads to widespread expansion of credit and exposure to default, and few people successfully avoid it when it matters.

    Banks, pension savings, mortgage guarantors and all the major financial institutions on which we depend are now tied up in a web of undelivered assets. A is the registered owner of a bond payable by B, the principal on which has been credit-swapped out to C. The terms are controlled by a deed drafted by an investment bank D, which itself receives the interest, which has been aggregated with 30 others and sold notionally to E. E is foreign, and flattens the FX risk with a bank F, who sells and rolls a future on his long currency book, which is bought by another bank for an assured profit by running the position against a higher yield bond bought from a junk-status borrowing customer, which has been insured against the risk of default with G, a major insurer, who happens also to be A.

    These are the styles of relationship which dominate the world in which ordinary peoples' savings are bound up, and they are profitable in the short term. This is why financial rather than commercial companies increasingly dominate the list of the top companies in America and Europe. They find it easier to make profits by providing credit and assuming eventual repayment, rather than by actually demanding settlement; a habit which could put off no end of potential customers.

    All our common savings products are bound up in these webs. At BullionVault we do not know when and where these webs will break, and, with the greatest possible respect, we don't think you do either. But it is so certain that they will break, and at an unexpected place and time, that we believe every forward thinking person with a respectable private reserve would do well to opt out with at least part of their savings.

    A purchase of gold is a good way to do this. But gold accounts, indexes, spread bets, and futures all fail to extricate the buyer from the web of dependencies, because they are based on undelivered gold. The only way to opt out of the web is to own physical property outright.

    This is why BullionVault has concentrated on being the best way in the world to do just that.

    Regards,

    Paul Tustain, Director
    www.BullionVault.com

    ____

    All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer
    Last edited by FRED; 04-15-07, 02:18 PM.
    Ed.

  • #2
    Re: Physical Gold - Why?

    I agree that physical gold is extremely important but I disagree that Bullionvault or Goldmoney and similar schemes are the same as owning physical gold. They are not. In fact they are not physical gold at all.

    1. your gold may not be there when you want it

    2. your gold could be confiscated by government

    3. the company could be unable to deliver your gold because they don't have it, outright fraud, or mismanagement

    4. your "physical" gold is a liability of someone else. They owe you the gold. You have a paper claim on it. They do everything to convince you with a good story -- and I'm not saying it's untrue -- but the fact remains that this is what you have. A claim on the company for your gold.

    It isn't yours, it isn't physical gold, unless you can hold it. It is paper gold.

    There are degrees of paper gold. Futures gold is just a promise. GLD is probably more physical than futures. CEF is probably a bit better. Bullionvault may be better still because of its allocated claims.

    But they are all paper gold. They are not physical gold. It is a huge mistake to think they are.

    Physical gold has the following properties:

    1. it is in your possession.

    2. you don't need anyone's permission to sell or trade it.

    3. it is nobody's liability.

    Don't try to tell me that this is anything like Bullionvault.

    Do I think Bullionvault belongs in your portfolio? Sure. But so does gold coins and silver coins and bars in your possession.

    Comment


    • #3
      Re: Physical Gold - Why?

      Originally posted by grapejelly
      I agree that physical gold is extremely important but I disagree that Bullionvault or Goldmoney and similar schemes are the same as owning physical gold. They are not. In fact they are not physical gold at all.

      1. your gold may not be there when you want it

      2. your gold could be confiscated by government

      3. the company could be unable to deliver your gold because they don't have it, outright fraud, or mismanagement

      4. your "physical" gold is a liability of someone else. They owe you the gold. You have a paper claim on it. They do everything to convince you with a good story -- and I'm not saying it's untrue -- but the fact remains that this is what you have. A claim on the company for your gold.

      It isn't yours, it isn't physical gold, unless you can hold it. It is paper gold.

      There are degrees of paper gold. Futures gold is just a promise. GLD is probably more physical than futures. CEF is probably a bit better. Bullionvault may be better still because of its allocated claims.

      But they are all paper gold. They are not physical gold. It is a huge mistake to think they are.

      Physical gold has the following properties:

      1. it is in your possession.

      2. you don't need anyone's permission to sell or trade it.

      3. it is nobody's liability.

      Don't try to tell me that this is anything like Bullionvault.

      Do I think Bullionvault belongs in your portfolio? Sure. But so does gold coins and silver coins and bars in your possession.
      Kudos Grapejelly, you have figured it out!

      Comment


      • #4
        Re: Physical Gold - Why?

        Originally posted by Sapiens
        Kudos Grapejelly, you have figured it out!
        it isn't rocket science.

        Does anyone remember all the "store your gold for you" well-intentioned companies that didn't turn out too well?

        I can remember at the height of the 1970s precious metals mania, I would watch KWHY Financial News that was on channel 22 in Los Angeles. The network was run during the day and at night they used the station to transmit encrypted over-the-air movies (OnTV I think it was called).

        The "network" was nothing but nonstop shills and one was a guy named Jonathan something-or-other of Jonathan Coin in Inglewood, California.

        At its peak they were storing $100 million in gold for customers.

        Except they weren't.

        Because when the SHTF, the vault was opened by receivers and there were a few fake gold bars and nothing else.

        I don't know what ever happened after that.

        I'm not saying these guys are a fraud. I believe that both BullionVault and Goldmoney are good companies run by upstanding people and I love their business model.

        I wish that I could park my excess cash in allocated gold at my on line broker's and know for a fact that the gold was there sitting in a vault managed by DirectTrade or whomever.

        Even if I could and even if I did, I wouldn't mistake that for owning physical.

        Comment


        • #5
          Re: Physical Gold - Why?

          Originally posted by grapejelly
          it isn't rocket science.

          Does anyone remember all the "store your gold for you" well-intentioned companies that didn't turn out too well?

          I can remember at the height of the 1970s precious metals mania, I would watch KWHY Financial News that was on channel 22 in Los Angeles. The network was run during the day and at night they used the station to transmit encrypted over-the-air movies (OnTV I think it was called).

          The "network" was nothing but nonstop shills and one was a guy named Jonathan something-or-other of Jonathan Coin in Inglewood, California.

          At its peak they were storing $100 million in gold for customers.

          Except they weren't.

          Because when the SHTF, the vault was opened by receivers and there were a few fake gold bars and nothing else.

          I don't know what ever happened after that.

          I'm not saying these guys are a fraud. I believe that both BullionVault and Goldmoney are good companies run by upstanding people and I love their business model.

          I wish that I could park my excess cash in allocated gold at my on line broker's and know for a fact that the gold was there sitting in a vault managed by DirectTrade or whomever.

          Even if I could and even if I did, I wouldn't mistake that for owning physical.
          Fair enough, except that under some conditions owning physical in the US is more risky than gold in a Swiss vault. See my argument here.

          Also, I will take your points as questions to Paul when I interview him.

          Comment


          • #6
            Re: Physical Gold - Why?

            Originally posted by EJ
            Fair enough, except that under some conditions owning physical in the US is more risky than gold in a Swiss vault. See my argument here.
            I think there are other less obvious ways to store physical gold offshore. BullionVault is very high profile. Just the threat of shutting them down will force them to cooperate in the name of "terrorism". I don't blame them for it either. But if one were to store gold offshore, one could do better than BullionVault although it would not be nearly as convenient.

            Comment


            • #7
              Re: Physical Gold - Why?

              Originally posted by grapejelly View Post
              I think there are other less obvious ways to store physical gold offshore. BullionVault is very high profile. Just the threat of shutting them down will force them to cooperate in the name of "terrorism". I don't blame them for it either. But if one were to store gold offshore, one could do better than BullionVault although it would not be nearly as convenient.
              Editor's Note: We are posting this reply by BullionVault founder and directer, Paul Tustain, at his request, to comments by iTulip community members Grapejelly and Sapiens.

              Hi. I’m Paul Tustain, founder of BullionVault. This thread was bought to my attention by a customer, who suggested I reply.

              Grapejelly and Sapiens have a point of view and it’s not an uncommon one. But both are too keen to offer advice to you perhaps without knowing as much as they should on matters of fact, law and history. As a result I believe those who followed them would at best waste money unnecessarily, and at worst fail completely in their efforts to secure themselves financially through buying gold.

              I’ll try to straighten their facts, correct their understanding of the law, and provide some examples from history. You’re all capable of drawing your own conclusions.

              Here is what Grapejelly wrote …

              “I agree that physical gold is extremely important but I disagree that Bullionvault or Goldmoney and similar schemes are the same as owning physical gold. They are not. In fact they are not physical gold at all.

              1. your gold may not be there when you want it

              2. your gold could be confiscated by government

              3. the company could be unable to deliver your gold because they don't have it, outright fraud, or mismanagement

              4. your "physical" gold is a liability of someone else. They owe you the gold. You have a paper claim on it. They do everything to convince you with a good story -- and I'm not saying it's untrue -- but the fact remains that this is what you have. A claim on the company for your gold.”

              Physical Gold

              Both BullionVault and Goldmoney store physical gold. This is the true simple fact, and Grapejelly is mistaken. In both cases this is proven by independent third party documentation from fully accredited bullion market participants who operate high integrity vaults as part of the professional bullion markets. I have touched BullionVault gold myself. It is 100% solid and physical - period.

              Guys : if you would like to see it then pay your own air fare (mine too if we’re going to NY) and I’ll take you to the vault. In case you have any doubts we’ll double check the bar numbers against records which are 18 months old. It’s been there all the time. If we do this I insist you write to this forum again, apologising publicly for your error, and putting the record straight.

              The Asset/Liability Question

              Now let’s get clear that a company has a duty to list its assets and liabilities on its balance sheet, which it must file formally once a year.

              BullionVault’s filed accounts do not list customers’ gold. That’s because it belongs to customers. It is not the company’s liability. It has nothing to do with the company’s assets and liabilities and it is not on the company’s books.

              Grapejelly writes of a liability as some loose relationship where your gold is somewhere else. He does not understand the difference between a liability and customer property held in custody. Without this knowledge his advice is dangerously naive.

              Here is a text I wrote in 2004 – a year or so before BullionVault launched – explaining the issues of physical gold and liabilities …

              Gold and Custody Law

              The majority of investors who buy gold do so in the belief that it is "the one asset which is no-one else's liability". But there is a nasty legal subtlety which causes many of them hold it in such a way as to achieve the exact opposite, and they expose themselves to a hidden risk which may in many cases be exactly the risk they were trying to avoid.

              Property and Liability

              Money can't easily belong to a saver and his bank at the same time, so in well established law money deposited in a bank becomes the bank's property and its liability. Simultaneously it stops being the saver's property and becomes his asset, so if a bank fails the saver must stand in line with the other creditors and maybe accept a few cents on the dollar.

              But there is a different way to put money in the bank such that it remains the private property of the saver.

              Western law generally recognises the fundamental difference between a deposit in a bank (banking law) and a safekeeping relationship (custody law). With a custody arrangement the saver expects safety, and no other benefit, such as the free payment services associated with checking/current accounts, or interest associated with deposit accounts. Instead the bank is paid a fee for looking after the property, and may not put it to its own use.

              The technical legal difference is that when you open a bank account you transfer your property to the bank and permit them to utilise your property for your benefit. Conversely under a custody arrangement private property is not transferred to the working capital of the bank, and may not be used by the bank. It is there only to be kept safe, and it will be returned in its entirety to the owner, even if the bank fails.

              Even cash can be placed in a bank so as not to become that bank's liability (for example in a safe deposit box). So in fact it is not the form of the money handed to the bank that defines whether or not it is the bank's liability but the terms under which it was placed there. Anything tangible - bank notes, diamonds, teddy bears - can be put in a bank vault or a deposit box in a way which avoids it becoming the bank's liability, and this is exactly the same for gold.

              The Gold Account

              But the flip side is that depositing gold into an account is legally like depositing money into an account. It stops being private property and becomes the bank's liability and the investor's asset. It is important that gold investors fully understand the consequences as there is a critical difference in how they are treated as account holders if the future becomes difficult - as many gold investors expect it to.

              The two types of treatment - custody and account - have very similar sounding names in the gold industry. They are called 'allocated' and 'unallocated' storage.

              Allocated gold

              Allocated gold is gold deposited under a safekeeping or custody arrangement. It is held as numbered bars, on labelled shelves, and it is the property of the individual owner. Even though it is held in a vault it is neither the property of the bank nor the liability of the bank. It stays off the bank’s balance sheet. As such it is safe from bank insolvency.

              Investors have to pay for the storage of allocated gold. Arranging for the physical security of bullion bars requires strong vaults, wise use of technology, carefully constructed systems for security, and the monitoring and control of human factors. There is no point in arranging for all of this and then not charging for it, and all institutions which offer allocated storage must charge. In fact the charge is an important part of establishing the custodial nature of the relationship. The courts accept that payment of a fee to the custodian is powerful evidence that the relationship is a custodial one, and not a deposit into an account.

              Fortunately gold is a remarkably compact store of value. A tonne of gold bullion is worth about $14.5m (November 2004) yet needs only a 14 inch block of space for storage. For this reason allocated storage is not very expensive compared to - for example - typical investment management fees. It can be found for as little is 0.1% per annum for volume buyers.

              You should note that with allocated gold cover against theft is important. The gold is the owner’s property and is not the legal liability of the bank. Instead the bank has a duty of care over the security of the gold, but if it were the victim of a supremely well organised theft which it would not have been reasonable to defend the investor from then the loss is a loss of the owner's property, and the bank is not technically liable. Therefore your allocated gold needs to be specifically covered against theft.

              Fortunately theft of bullion from vaults is extremely rare. The result is that cover against theft is exceptionally low cost, and is usually included in the storage charge - which is a vote of confidence in the security of the vault.

              Unallocated Gold

              Unallocated gold (frequently held in accounts referred to as "pool", or "metal" accounts) is simply the provider's liability. It forms part of the working capital of the bank and it can be legally used by the bank for profit. Unallocated gold is on the bank’s balance sheet. The gold investor is therefore exposed to the insolvency of the bank.

              But not being a depositor of currency the saver is not ordinarily subject to any degree of depositor protection.

              This means the 'owner' of unallocated gold in a gold account is more dependent on the financial system's robustness than even the straightforward depositor of cash, a situation which for many gold buyers would be considered upside-down.

              Unallocated gold is always likely to be put to use by the bank in one way or another. Although it is sometimes believed that there is a non-specific pile of gold somewhere in the bank which the customer has a share of this is not reliably true. There need be no physical pile - pooled or otherwise. And even if there is a pile of gold it is legally the bank's property, not the account holders, and would be sold for the benefit of all classes of creditor (not just the gold holders) in the event of bank insolvency.

              So unallocated gold's free 'storage' is a bit of a misnomer because it is quite likely that there will not be anything tangible to store. This should not be surprising, after all banks do not store the money in our bank accounts; they put it to use. With gold accounts they are just doing the same with your bullion, and the bank makes more money out of unallocated gold accounts than out of allocated storage, just as it makes more out of its current accounts than out of safety deposit boxes.

              This is why unallocated gold is more aggressively marketed, and being generally free for 'storage', is much more popular than allocated.

              I followed up on this explanation with another article illustrating how nasty (and how widespread) unallocated gold could be. If you are interested here is the link.

              Cover against theft

              Fraud is an important issue where someone owes you money, or gold. There is the possibility of a trick being perpetrated on you, such that it becomes impossible to pay you what you are owed.

              But when you own something physical the issue is simpler. To deprive you of your property it has to be stolen. This is theft, not fraud.

              There is indeed a small probability that someone will find a way to steal your gold, even from BullionVault, and to deny it is to deny reality. However, BullionVault is insured against your gold’s theft; we publish the insurance contract on our site. Some (but not many) insurance companies will offer to insure gold in your private possession too. You can compare BullionVault’s storage+insurance cost (0.12% per annum) against private storage premiums, calculated independently of BullionVault on the basis of actuarial probabilities of loss. You will find that according to people who are paid to assess these things your gold is far, far less likely to be lost from a vault than from your possession.

              Also there are careful controls on the removal of BullionVault gold from the vault under legitimate instructions from BullionVault’s management. These controls are designed to ensure that withdrawals (i) must be publicly forewarned and cannot be done in secret (ii) must be for identified customers who have sufficient gold in their account (iii) must be subject to a 5% daily limit, so as to prevent any wholesale and sudden removal of value, and (iv) are always subject to checks performed by an independent and separate organization. The following is extracted from the storage agreement with Via Mat, BullionVault’s independent vault operators.

              Withdrawal requests shall be subject to public and private controls designed to ensure transparency and security regarding the withdrawal procedure.

              Public Controls

              The public controls are not confidential and will be publicised by Galmarley on the BullionVault website.

              The publicised information:

              1. Shall be publicised on or before the second day before withdrawal is due to occur

              2. Shall specify in fine troy ounces and fine kilograms the amount of gold to be withdrawn.

              3. Shall be accompanied by a list specifying for each bar to be withdrawn the bar number, the brand, and the fine troy ounce weight.

              4. Shall specify the business day upon which the withdrawal shall occur.

              5. Shall state that withdrawal does not imply a shipment of goods out of the vault on than date, and may occur as a transfer within the vault to the acquirer's storage location within the VM vault.

              6. Shall identify an Owner's alias so that VMI can check on the BullionVault website that sufficient gold exists under that Owner's alias to fulfil the withdrawal, and this shall be checked by VMI such that a breach would cause the withdrawal to be abandoned.

              7. Shall not cause more than 5% of the gold stored under the Allocated Gold Account in any one vault to be withdrawn in any one day, and this shall be checked by VMI such that a breach would cause the withdrawal to be abandoned."

              Confiscation

              Gold held in – say – Switzerland could be confiscated by the Swiss government. And gold held in – say – the USA could be confiscated by the US government. But without an invasion confiscation of foreign held gold is not a practical proposition.

              So, if you’re afraid of confiscation the trick is to identify which government is most likely to do it.

              A casual review will show that governments confiscate private wealth when they have big financial problems. A case in point is modern Zimbabwe, where a government desperate for foreign currency still allows miners to export, provided they surrender 15% (I think) of their gold to the state.

              Switzerland on the other hand has neither trade nor budget deficit and its government is under no financial pressure. It is at peace with all its neighbours, and everyone else, and it makes its money by being the trusted depository of international wealth. It has nothing to gain and everything to lose from indulging in arbitrary confiscations.

              The whole confiscation issue is misunderstood in the modern context. The 1933 USA confiscation occurred when gold and money were effectively the same thing. The USA underpinned the 1933 dollar with gold, so private hoarding, which was widespread, was punching a hole in the government’s faltering monetary honesty. Since the dollar and gold are now wholly independent there is no similar motivation for confiscating gold today.

              My view is that a modern government finding itself short of a few hundred billion dollars a year is very unlikely to chase an insignificant sum of hard-to-get foreign gold when it has a sitting duck in the form of its citizens’ stock of privately owned real-estate. Certainly in London the inexorable rise in property taxes is bearing out my fears here, and we are constantly being reminded to expect further rises in future.

              If not straight confiscation I do anticipate all forms of asset experiencing a false gain manufactured by a rotten currency. Gold – for example – might gain dramatically against tumbling paper money, and the government in charge of that currency might levy capital gains tax to ever more punitive levels – thereby effecting a confiscation of wealth, if not directly gold. Under these circumstances domestically held gold will be caught even if its owner managed to leave the country.

              The shrewd owner, whose gold is offshore in a widely chosen location, would not be trapped.

              We do not dictate your storage location because we recognise it is an important choice – and it should be your choice. That is why, uniquely, we offer three locations for storage : London, New York, Zurich. BullionVault allows you to sell your gold and re-buy instantly in another location. Both trades are instantaneous settlement. Retaining flexibility and the ability to act is an important part of asset protection. We know of no other way of crossing borders with tangible wealth which can be effected so quickly.

              Here is the full text of an email I am often asked to send to people who are nervous …

              BullionVault Finances - March 2007

              At BullionVault we do everything in our power to make you as secure as possible. BullionVault runs its finances very cautiously: it has immediately liquid reserves of gold and cash substantially in excess of all its liabilities. A current indication of financial strength is that net shareholders' funds, after paying down all debt, are sufficient to run all our planned operational expenses for four years - without a cent of revenue.

              Fully 100% of customer property is segregated and immediately available to customers on demand. Additionally more than 90% of company resources are held as immediately available gold or cash, with the rest being in the computers we own. This compares with the benchmark 12.5% liquid reserve of the modern bank.

              Preventing a slide into insolvency

              Badly run businesses often get into difficulty because modern managers may benefit from ignoring worsening financial signals. They may be incentivised - by salary and employment terms - to tolerate passively a slide into insolvency as long as they are being paid, and this frequently causes the position to worsen for less privileged creditors.

              Managers with a material financial stake in the business rarely tolerate such a slide.

              BullionVault has been carefully structured to give its management the material interest in the financial health of the business which prevents this passive slide developing.

              By far the largest, and the only long term debt the company has is in the form of an undated management bond, and it is the lowest ranking debt on the company's books - meaning it would be the last to be repaid if upon liquidation the company were unable to meet all its debts in full. This undated bond is required to be owned beneficially by BullionVault's top management - who therefore lose their own money first if the company liquidates in insolvency.

              Furthermore being structured as debt, rather than equity, is important. As a debt it obliges the board to act if the company has insufficient resources. A director cannot knowingly allow a company to trade while insolvent. This means as soon as their own bonds are not capable of being repaid BullionVault's board must take action as a matter of law - and this will occur before there is any risk to other creditors or customers.

              The result of this set-up is that BullionVault's board has both the motivation and the obligation to repair deteriorating finances rapidly. This is a dynamic which is missing in very many businesses which are supposed to be looking after other peoples' money, and perhaps that is why they are not set up with the same degree of financial caution which applies on BullionVault.

              Segregation for your property

              Even then the bankruptcy of BullionVault would not affect your ownership of your gold. It is your outright property because you have taken delivery in a carefully structured way. You have not deposited your gold with us, you have employed us as agents to look after your property on the condition that we place it with a professionally competent bullion custodian.

              It is very important that you have not deposited gold with us. The essence of a deposit is a loan to a company (usually a bank) for your benefit. It means you transfer your property to the bank in order that they put it to use for your gain. In modern banking this usually means you get free banking, or interest. In gold's equivalent you could get free unallocated storage.

              But instead of depositing you can - alternatively - pay a bank to look after your property. This could create a safekeeping or custody arrangement. Then you have not transferred your property to the bank - you have retained your property right and the bank looks after it for a fee. The bank cannot then put your property to work. This is the nature of a safety deposit box filled with banknotes, and of allocated gold storage - which is what is held at BullionVault.

              What happens in the event of failure

              When a company fails a liquidator looks at the documentation surrounding the placement of funds by customers with the failing company. Usually it is established that - in a legal sense - consumers have paid money into unsegregated company bank accounts, thereby transferring their property to a bank account under the control of the failing firm. Then the law requires the liquidator to use company assets - including the customer's money - for the equal benefit of all creditors of the bankrupt company, because no general creditor should be given preference over any other. This would be the status of unallocated gold bought through a modern bank.

              But to greatly improve your protection this is not how BullionVault works.

              Where the gold is the subject of a custody/safekeeping arrangement then it is still your property, and it must be returned to you by a liquidator in full. This is how BullionVault is set up - through the structure of bailments, which define you as the owner even if the custodian has possession.

              Sometimes - where things are ambiguous - liquidators might try to argue that gold was, in fact, the subject of a deposit, and should be sold for the benefit of liquidators (themselves) and other creditors. Then the status of your gold could conceivably be settled in court. To avoid this it is important to set up very clear documentation establishing the nature of the safekeeping service, so as to make a claim by a liquidator untenable. BullionVault's Terms and Conditions are exceptionally solid in this area.

              But were there any perceived documentary weakness a secondary evidence, which previously has proven decisive in defining the custody relationship, has been evidence of a fee paid by the owner to a custody service provider. In the courts this persuasively marks the relationship as a custodial one, and it too is in place on BullionVault.

              Finally the company’s balance sheet makes everything formal. Customers’ gold is neither asset nor liability on the balance sheet, so creditors have no case for considering it their protection from the company’s failure.

              BullionVault is set up to make it extremely clear - in its Terms and Conditions, through the payment of a commercial safekeeping fee, and in its balance sheet - that your gold is your property. No liquidator can get his hands on it. None would even try because there is no ambiguity and it would be futile to waste time and money on the attempt. We can therefore say with as high a degree of confidence as any business in the world that we have secured your property for you - regardless of what happens to us.

              Control against double counting

              Having established that the property is Customer property we must then ensure that there is enough gold and money segregated for all clients. This is why we publish the Daily Audit, accessed from the front page. You can prove - via the third party's bar list and your alias - that the gold in the vault includes your full and exact entitlement. We publish this proof every day on a publicly accessible web page, so every single BullionVault user can check, using their nickname, that there is no under-vaulting of gold. Detailed explanation.

              Your uninvested money - meanwhile - is held at Lloyds TSB. Lloyds TSB is the UK's only Aaa rated bank (the highest rating there is). Lloyds TSB's rating exceeds many of the largest names names in global banking - whose riskier financial profile make them less secure than Lloyds TSB. We demanded from Lloyds TSB an acknowledgement that the money in our BullionVault Client Accounts has trust status - meaning Lloyds TSB recognizes the money is customer money and claims no right of set-off against the company's operational bank accounts [a copy of this agreement relating to our Sterling account is attached. The same agreements have been executed for both US Dollar and Euro accounts].

              Furthermore we daily reconcile our BullionVault Client bank accounts to all customer balances and publish the result in the same way as for gold - on our Daily Audit.

              No other business we know of subjects its record set to daily public scrutiny in this way.

              These are some of the ways we have set about providing the most secure store of wealth we can. We try to address these very serious matters frankly and responsibly rather than bury them under a raft of pleasant sounding soundbites. We understand that gold buyers take these issues extremely seriously.

              By all means call me to discuss any particular concerns.

              Paul Tustain
              Director

              Good Delivery

              Finally on this subject let’s cover the ‘good delivery’ issue. If you buy small bars and coins for private possession you will be wasting about 6% of your money.

              “Big gold bars & the professional bullion market

              The most competitive gold prices in the world are enjoyed by the participants in the professional bullion market: large gold dealers, refineries, government agencies and bullion banks.

              This professional market only deals in what are known as Good Delivery bars. If you're not trading these bars you are excluded from their market - and their very competitive prices.

              Good Delivery bars are cast by a small group of metals refiners accredited by the professional bullion dealing communities in London, New York and Zurich. They are accurately assayed and guaranteed always 99.5% pure gold or better. The market trades their pure gold content, known as fine gold, so you don't pay for the impurities.

              From the day they're first manufactured, Good Delivery bars are kept in bullion vaults recognized and monitored by the local gold dealing community. Every time bars are moved a careful record is maintained, showing continuous storage through trusted hands. This guarantees gold bar integrity in a way that keeping gold at home, or even in safety deposit boxes, simply cannot match.

              The result is that professional buyers accept deliveries of these bars direct from the seller's vault without re-checking their purity - and that greatly reduces bullion dealing costs. This is why they're called Good Delivery bars.

              Good Delivery bars are large — usually 400 troy ounces each (12.4kg). The professional market doesn't allow you to own part of a bar.

              But having enough money to buy a whole bar or two would only solve half the problem. You still need that relationship with a formally recognized vault to look after the gold while you own it. The starting balance for an accredited storage account is 15 to 20 of these 400-ounce bars, and the agreements take a lot of time, cost and effort to set up.

              These barriers keep private users out.”

              Small bars and coins are much more expensive to trade than good delivery bars. The cost is likely to be a 3% premium at purchase, and a 3% discount at sale. A small bar or coin purchase costs you about 6% of your capital.

              How to buy gold

              My recommendation is that you are best advised to hold physical gold in good delivery form in a foreign country where there is the strongest likelihood that in the future its sale will be legal and unrestricted, and where exchange controls are going to remain unlikely. I also think you want to own it directly, which removes artificial devices, like trusts, between you and your gold.

              Do this and you won’t need to worry too much about your own country introducing exchange controls. Generally you’re quite welcome to bring your money back in; it’s exiting a country in crisis which is usually difficult. But if you can’t bring your wealth back home then it is still relatively easy to go and join it yourself – offshore.

              Clearly if you agree with me you’ll need to trust somebody, and that can run against the grain of the gold buyer. I understand that. Above I have tried to set out why you might choose to trust BullionVault, and you can make your choice. There are others to choose from.

              But I think you would be singularly ill advised to hold gold at home. There are any number of pitfalls.

              To finish this long reply I’ll try and illustrate some of the problems of the domestic hoarder.

              Problems for the hoarder

              I launched www.galmarley.com to help people research gold in 2002, and used it to gather data about what people wanted from a gold service. Two of the survey questions were about custody location.

              "It is best to place gold in the custody of an established offshore institution of good credentials."

              "I prefer to keep my gold in a bank in my own country, because at least I generally understand our law."

              I invited people to :

              Strongly agree
              Agree
              No view
              Disagree
              Strongly Agree

              The answers showed a perfect and very polarised split. Exactly half were strongly of the opinion that gold should be kept at home, and exactly half were strongly of the opinion it should be kept abroad.

              So because we had many responses from Americans we thought we’d load BullionVault’s US vault with slightly more gold than the Swiss vault when we launched the service.

              Yet as it turns out that almost all our wealthy American customers choose Switzerland and generally only smaller customers choose the US. In fact BullionVault’s US customers have bought over 30 times as much Swiss gold as American gold. This is because the people who buy in Switzerland usually buy much more gold.

              I find this a fascinating result. It raises a question which I still don’t know the answer to. “Are people wealthier because they don’t hoard?”. I suspect there is a logical reason for the answer being “yes”, because it would be so restricting in your choices of investment if you always required everything to be in your personal possession. There are so few things you can actually do this with!

              Here are a few stories from history which illustrate the plight of the hoarder :

              1. The Mississippi Bubble. When the whole of France got caught up in a paper bubble under the infamous John Law’s questionable guidance the result was eventually catastrophe for everyone who had not got their gold offshore quickly enough. The early movers sent their gold and silver to England, Belgium and Italy. The rest were trapped and, their gold was unusable unless it could be got out, which is what its owners attempted. So John Law got the innkeepers on the highways to report rich looking people on their way to the border. The local tax-collector were called to the inn, inspected the luggage, confiscated the valuables, gave a commission to the innkeeper, and sent the travellers on their way – minus their gold and silver.

              2. Jews who held their money domestically through the thirties in Germany gave themselves a stark choice. Leave penniless, or stay and hope for better times. Many stayed because their life’s work was bound up in their domestic savings. Those who had the foresight to get money offshore had a far easier decision to make.

              3. Argentinians in 2001 who got their money out before the crisis saved themselves a massive loss, and multiplied their domestic purchasing power. Their currency was supposed to be pegged to the dollar, but the country lacked the dollar reserves to honour the promise. So when the exit barriers went up those whose money was already out were fine. Trapped Argentinian money – even dollar pegged – lost more than half its value. Foreign held dollars were later easily repatriated, undiminshed.

              4. I have a flat in London which I let, and in 1997 I let it to an Iraqi dentist and his doctor wife, who had fled Saddam with their two children. When they found out I deal in gold they told me their story.

              Becoming every day more terrified of the arbitrary seizure of decent homes, and the murder of the people who owned them, they took their small cache of gold coins and set off for the northern borders. But the first time they paid in gold for something in the village where they hoped to buy a lift to the turkish border suddenly everyone’s attitude changed. The promised lift did not materialise for many days, until it was clear they had no gold left to distribute among the villagers. Only then did they get out - with nothing.

              5. To further prove a point (primarily to myself) I carry a single sovereign, which is Britain’s most widely recognised gold coin. When a restaurant bill comes to about the right level – in other words a little less than the open market value of a sovereign – I offer it in payment. It has never yet been accepted. Gold is not suddenly going to become widely recognized. I am far better advised to sell gold to someone who appreciates its value, and use the currency they give me in return to pay to suspicious restaurateurs.

              6. A problem for the hoarder is who to tell. Put gold in someone’s custody and – to a greater or lesser extent – you expose yourself to that person. But keep it a true secret and maybe you will benefit posterity as the provider of one of the famous museum hoards …

              ”The Hoxne Hoard. The Hoxne (pronounced 'Hoxon') hoard consists of over 15,000 gold and silver coins, gold jewellery and numerous small items of silver tableware … The latest of the coin issues in the hoard establishes that its burial took place some time after AD 407/8. This was the period when Roman rule was breaking down in Britain, and the Hoxne hoard might be related to these events. The careful burial of this treasure probably means that the owner intended to come back and recover it later, but for whatever reason was unable to do so.” from the website of the British Museum.

              The British Museum has several others with a similar story. Take your pick from the older Snettisham or Winchester, or the Tregwynt - one of over two hundred hoards that have been found from the time of the English Civil War (1642-51).

              7. From the legendary "Popular Financial Delusions" - by R.L.Smitley [1933].

              "Son, I've made up my mind to put about $50,000 in gold in a safe deposit box"

              "Go ahead, Dad. If it will ease up your worries, no one will seriously object. But that's about all the good it will do."

              "What do you mean by that?"

              "Well, I will not guarantee that history will always repeat itself, but history is about all I have to go on. At the time of the French Revolution any one found hoarding gold - which the then constituted state had called in - was either hanged to the most convenient lamp post or he made the acquaintance of the guillotine. During the Russian Revolution, the possession of gold, when discovered, resulted in the possessor becoming acquainted with the firing squad. A young German told me his dad, a manufacturer, buried 100,000 marks in gold at the commencement of inflation about '21. His dad's bookkeeper had knowledge of the hoard, and systematically filched from it. When the theft was discovered, the manufacturer complained to the authorities and the State confiscated the rest."

              The young man's stories are accurate and his position in the matter of hoarding one of extreme common sense. If one is to retain his place in the existing social scheme during a period of chaos, he cannot allow his neighbors or associates to know anything about hoarded gold. The act becomes violently anti-social. The hoarder automatically becomes an outcast. He is at the mercy of pillagers and every man becomes his enemy.

              The only time that a gold hoard is theoretically of value - it never is practically - is when there is a complete breakdown in the social order, financial structure or war. Such instances are illustrated by great revolutions, the hyper inflation in Germany, Austria, and Poland, or a reversal to the dark ages after the Roman Empire fell. During these periods no-man's life is safe if he is discovered as a gold hoarder. And therefore he cannot use his hoard.

              In cases where a redemption of paper money inflation follows - our own greenback episode - or a devaluation of currency - as illustrated by France and Italy - the gold would never be needed by the hoarder for there is always a continuation of a purchasing power ratio between the paper money and gold. Of course, following the well known economic law (Gresham's) that bad money will drive good money out of circulation, the gold will be hoarded and only the paper used. But this ratio of value makes little difference in the social scheme so long as the ratio exists.

              Whenever it happens that gold is found to be the only money which can be used, the personal risk is too great to use it.

              -------------

              All this excellent history and factual information was related by the young man. Dad had no argument to meet it and did not make any great rational effort. But he pondered the subject for a long time and finally reached his conclusion.

              "All you have said, my son, may be true and correct but I will feel safer with that gold stacked away in a safe place"

              "Go to it, Dad" said the boy, "anything at all to improve your disposition and prevent a nervous breakdown."

              -------------

              P.S. In April 1933 by order of President Roosevelt, any one found hoarding over $100 in gold or gold certificates was made subject to two years imprisonment and $10,000 fine.

              -------------


              P.P.S. Dad hoarded the gold but had a nervous breakdown, anyhow, until he got it back to the Federal Reserve Bank.
              Last edited by EJ; 07-23-07, 09:57 PM.
              Ed.

              Comment


              • #8
                Re: Physical Gold - Why?

                Comment


                • #9
                  Re: Physical Gold - Why?

                  Originally posted by metalman View Post
                  i disagree. i found that long reply illuminating.

                  Comment


                  • #10
                    Re: Physical Gold - Why?

                    Me too. And even if you don't buy all of it, I think it's safe to say that BV has been set up with a lot of the 'physical only' objectors' fears in mind. They've at least attempted to address the shortcomings of not having gold in your possession.

                    Comment


                    • #11
                      Re: Physical Gold - Why?

                      Originally posted by WDCRob View Post
                      Me too. And even if you don't buy all of it, I think it's safe to say that BV has been set up with a lot of the 'physical only' objectors' fears in mind. They've at least attempted to address the shortcomings of not having gold in your possession.
                      Agree. BV is for investors who are interested in hedging outlier political risks to capital presented by currency crisis (e.g., S. Korea 1997/1998). Not for traditional goldbugs. Paul continues to offer rigorous and robust descriptions of his business. We appreciate his attention to our community's issues and concerns.

                      Comment


                      • #12
                        Re: Physical Gold - Why?

                        Originally posted by EJ View Post
                        Agree. BV is for investors who are interested in hedging outlier political risks to capital presented by currency crisis (e.g., S. Korea 1997/1998). Not for traditional goldbugs. Paul continues to offer rigorous and robust descriptions of his business. We appreciate his attention to our community's issues and concerns.
                        think I just been spanked

                        Comment


                        • #13
                          Re: Physical Gold - Why?

                          Originally posted by EJ View Post
                          Agree. BV is for investors who are interested in hedging outlier political risks to capital presented by currency crisis (e.g., S. Korea 1997/1998). Not for traditional goldbugs.

                          I think that's fair.

                          Comment


                          • #14
                            Re: Physical Gold - Why?

                            Originally posted by metalman View Post
                            What is the meaning of this?????
                            Jim 69 y/o

                            "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

                            Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

                            Good judgement comes from experience; experience comes from bad judgement. Unknown.

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                            • #15
                              Re: Physical Gold - Why?

                              Originally posted by Jim Nickerson View Post
                              What is the meaning of this?????
                              me being a wiseass. that's the international beating a dead horse symbol.

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