A nine-point checklist for secure gold investment...
LOOKING TO buy gold today? Here's a nine-point check-list for secure gold investment presented to this week's Investor's Chronicle Gold Conference, hosted at the London Stock Exchange...
#1. Don't take it home, except maybe a few coins
History is littered with sad stories of people who bought gold (rightly) because they feared severe economic contraction in their home country, and then made the mistake of holding their gold at home. When they needed it they could not release its value because it had become contraband.
Think of Zimbabwe (now), Argentina (2001), Yugoslavia (1990s), Vietnam & Cambodia (1970s), Nazi Germany (1930s), the USA (1933), Russia (1917). Gold secures your wealth when it is held in a reliable country. This is unlikely to be your own country if you are wise to be buying gold.
2. Buy 'Good Delivery' fine bullion to save 6-10% over coins & small bars
The world's best gold (assayed at 99.5% or better, and traded 100% 'fine' – i.e. gross bar weight x assayed purity) has a rock-solid perpetual guarantee of its quality and is, surprisingly, also the cheapest. Good Delivery gold also sells for the highest prices. That's because Good Delivery bullion is the spot market standard and is massively more liquid than coin markets.
3. Use allocated storage at a commercial vault – not a bank
Persuading you to hold your gold 'unallocated' lets banks finance their own liquidity reserve with your gold. It is so attractive to banks that they significantly overcharge for the safer 'allocated' storage option. So don't use banks to store gold. Instead, use fully allocated and insured commercial vaults; they don't have a liquidity reserve requirement, and therefore have no motivation to overcharge for allocated.
The wholesale storage rate (including insurance) is about 0.1% per annum in a commercial vault. It will usually be many times that much in a bank. BullionVaultcharges 0.12% per annum, with a minimum of $4 per month.
4. Direct overseas ownership
Don't get caught out by a trust deed or vault in the wrong jurisdiction. Think about exchange controls. In a world of severe economic contraction, you would almost certainly still be able to travel (if you can afford to buy the ticket), enabling you to physically collect your gold and realize its value outside controls in your home jurisdiction. This is why direct overseas ownership often works better than ownership through a trust. An intermediating trust deed could result in the ownership of gold effectively being trapped in the country where the trust was set up.
5. Avoid certification. Insist on regular publication of bar lists & reconciliation
There are two big problems with gold certificates. Firstly they convert your gold into a security, i.e. the certificate becomes the thing you own, not the gold itself, putting the issuer between you and the gold, which means the problems of trusts apply again. Gold is a tangible good, so it does not need the complexity of being wrapped as a security. You can own the stuff itself, and involve no-one else in your title.
The second problem with certificates is that there's no way of knowing how many certificates have been issued, which is a threat to your unique ownership. Modern technology can help here, by allowing you internet access to view the register of all owners. BullionVault is the only custody service in the world which publishes – every day – bar lists reconciled to individual private holdings. You can see the public evidence of your holding, reconciled to the current bar list; our central register defines who owns what, and eliminates the possibility of double counting. But however you choose to buy gold, check your metal is separately identified on the reconciliation.
6. Make sure ownership records are independently audited
You want the auditor, and not the service provider, to vouch for how this thorough study reconciles your ownership records with the physical property. See that the bullion is checked and reported on annually by a qualified assayer.
7. Consider your crisis response
Could you effect a rapid location switch and/or international shipment? Currency crises blow up with alarming speed. Gold stored via a stock-exchange traded instrument (such as a Gold ETF) is not particularly mobile. There will usually be only one vault in one jurisdiction storing all the gold. The problem is that trading out of that jurisdiction requires a three-day stock exchange settlement period, after which your stockbroker will send your money to you, probably incurring another few days' delay.
You may well be safer if you can either instantly sell your gold and buy in another physical location, or ask for your gold to be shipped. Both of these are simple transactions on BullionVault. The first you can do on-line. The second takes advantage of the fact that BullionVault's vault operator routinely transports bullion from one international vault location to another. The shipment can be arranged without the bullion ever leaving the control of the commercial vault operator, which makes it much easier and cheaper to set up – fast.
8. Right to withdraw for personal possession
If you choose the cost-savings, liquidity and security of using safe custody, you must also retain the right to withdraw your property in full. All BullionVaultcustomers have the right to take possession of their gold. Each gram is physically present in the vault of their choice, available for withdrawal.
9. Liquidity – look for 24/7 trading; don't rely on just one counterparty
Gold is not like a stock-market share. Most stocks only move when their local market is open. Gold moves all the time. Since price action occurs during Asian, European and American market hours, you should be able to act when the price moves, too. So you need a marketplace which stays open.
BullionVault is currently the only gold market in the world which is open 24 hours a day, 7 days a week. On BullionVault, users also quote their own prices. So there are thousands of counterparties free to quote to you, and to whom you can freely quote your own price.
One-counterparty systems, in contrast, force you to sell your gold back to the system operator. This eliminates competition and allows the provider to quote wide spreads. Whereas free competition on price massively reduces the cost of the spread.
Ready to Buy Gold...?
LOOKING TO buy gold today? Here's a nine-point check-list for secure gold investment presented to this week's Investor's Chronicle Gold Conference, hosted at the London Stock Exchange...
#1. Don't take it home, except maybe a few coins
History is littered with sad stories of people who bought gold (rightly) because they feared severe economic contraction in their home country, and then made the mistake of holding their gold at home. When they needed it they could not release its value because it had become contraband.
Think of Zimbabwe (now), Argentina (2001), Yugoslavia (1990s), Vietnam & Cambodia (1970s), Nazi Germany (1930s), the USA (1933), Russia (1917). Gold secures your wealth when it is held in a reliable country. This is unlikely to be your own country if you are wise to be buying gold.
2. Buy 'Good Delivery' fine bullion to save 6-10% over coins & small bars
The world's best gold (assayed at 99.5% or better, and traded 100% 'fine' – i.e. gross bar weight x assayed purity) has a rock-solid perpetual guarantee of its quality and is, surprisingly, also the cheapest. Good Delivery gold also sells for the highest prices. That's because Good Delivery bullion is the spot market standard and is massively more liquid than coin markets.
3. Use allocated storage at a commercial vault – not a bank
Persuading you to hold your gold 'unallocated' lets banks finance their own liquidity reserve with your gold. It is so attractive to banks that they significantly overcharge for the safer 'allocated' storage option. So don't use banks to store gold. Instead, use fully allocated and insured commercial vaults; they don't have a liquidity reserve requirement, and therefore have no motivation to overcharge for allocated.
The wholesale storage rate (including insurance) is about 0.1% per annum in a commercial vault. It will usually be many times that much in a bank. BullionVaultcharges 0.12% per annum, with a minimum of $4 per month.
4. Direct overseas ownership
Don't get caught out by a trust deed or vault in the wrong jurisdiction. Think about exchange controls. In a world of severe economic contraction, you would almost certainly still be able to travel (if you can afford to buy the ticket), enabling you to physically collect your gold and realize its value outside controls in your home jurisdiction. This is why direct overseas ownership often works better than ownership through a trust. An intermediating trust deed could result in the ownership of gold effectively being trapped in the country where the trust was set up.
5. Avoid certification. Insist on regular publication of bar lists & reconciliation
There are two big problems with gold certificates. Firstly they convert your gold into a security, i.e. the certificate becomes the thing you own, not the gold itself, putting the issuer between you and the gold, which means the problems of trusts apply again. Gold is a tangible good, so it does not need the complexity of being wrapped as a security. You can own the stuff itself, and involve no-one else in your title.
The second problem with certificates is that there's no way of knowing how many certificates have been issued, which is a threat to your unique ownership. Modern technology can help here, by allowing you internet access to view the register of all owners. BullionVault is the only custody service in the world which publishes – every day – bar lists reconciled to individual private holdings. You can see the public evidence of your holding, reconciled to the current bar list; our central register defines who owns what, and eliminates the possibility of double counting. But however you choose to buy gold, check your metal is separately identified on the reconciliation.
6. Make sure ownership records are independently audited
You want the auditor, and not the service provider, to vouch for how this thorough study reconciles your ownership records with the physical property. See that the bullion is checked and reported on annually by a qualified assayer.
7. Consider your crisis response
Could you effect a rapid location switch and/or international shipment? Currency crises blow up with alarming speed. Gold stored via a stock-exchange traded instrument (such as a Gold ETF) is not particularly mobile. There will usually be only one vault in one jurisdiction storing all the gold. The problem is that trading out of that jurisdiction requires a three-day stock exchange settlement period, after which your stockbroker will send your money to you, probably incurring another few days' delay.
You may well be safer if you can either instantly sell your gold and buy in another physical location, or ask for your gold to be shipped. Both of these are simple transactions on BullionVault. The first you can do on-line. The second takes advantage of the fact that BullionVault's vault operator routinely transports bullion from one international vault location to another. The shipment can be arranged without the bullion ever leaving the control of the commercial vault operator, which makes it much easier and cheaper to set up – fast.
8. Right to withdraw for personal possession
If you choose the cost-savings, liquidity and security of using safe custody, you must also retain the right to withdraw your property in full. All BullionVaultcustomers have the right to take possession of their gold. Each gram is physically present in the vault of their choice, available for withdrawal.
9. Liquidity – look for 24/7 trading; don't rely on just one counterparty
Gold is not like a stock-market share. Most stocks only move when their local market is open. Gold moves all the time. Since price action occurs during Asian, European and American market hours, you should be able to act when the price moves, too. So you need a marketplace which stays open.
BullionVault is currently the only gold market in the world which is open 24 hours a day, 7 days a week. On BullionVault, users also quote their own prices. So there are thousands of counterparties free to quote to you, and to whom you can freely quote your own price.
One-counterparty systems, in contrast, force you to sell your gold back to the system operator. This eliminates competition and allows the provider to quote wide spreads. Whereas free competition on price massively reduces the cost of the spread.
Ready to Buy Gold...?
Paul Tustain, 27 Nov '09
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