Once a systemic crisis occurs and counterparty defaults become common your preparedness in these matters will make all the difference to your wealth.
1) 'Fully Allocated' Is NOT Ownership
Our financial system is based on “IOUs” (IOU = I owe you) , whereby one party owes something to another party and is therefore dependent on their counterparty's solvency. Most bullion storage systems, whether allocated, unallocated or unbacked are also IOU based.
In these systems, bullion ounces are owed to, but not owned by the customer. Hence customers are relegated to creditor status and it is possible for the dealer to:
- Utilize stored bullion as inventory to sell to new customers
- Lease out their owned bullion to third parties for additional income
So if the statement from your bullion storage company only shows that you have X amount of ounces of bullion on your account without the bullion being accorded a unique identifier, there is a good chance the you are owed those X ounces of bullion. You do not own them. So should you decide to withdraw your coins someday, your request can be fulfilled by the company selecting any X ounces of the required bullion and handing/shipping it to you.
We routinely see evidence of such a system when customers transfer bullion from an IOU based storage system to us. On many occasions, bullion coins a customer bought in, say, 2012 would arrive at our vault, The Safe House, as coins from a later minted year, say, 2019.
Because a buyer could not possibly have bought 2019 minted coins in 2012 this evidences how his 2012 claim was settled with coins from a later mintage year as inventory is acquired either on an “as needed” or "replacement" basis by the bullion dealer.
The problem with this practice is that, should 2019 coins become unavailable in the industry, what would the customer receive if he request for delivery ? This is why the "If you do not hold it, you don't own it" saying still largely holds true.
Bullion storage does not need, and should not, operate in this manner.
At Silver Bullion, I have been adamant to never utilize an IOU storage system because, despite the many conveniences for the dealer, it is not in the long-term interest of the customer and, once established, it is difficult to switch from an IOU based system to ownership based system.
Instead we deal only in uniquely identified parcels whose legal title property is transferred to the customer through an invoice under Singapore law and removed from our balance sheet. This relegates us to be a storage agent for the customer's property and is more akin to the real estate (ownership) system than a financial (IOU) system.
Ownership of uniquely identified bullion parcels becomes important in times of shortages because it eliminates the risk of it being sold to somebody else and is essential in a currency crisis because it gives you legal property title instead of being a creditor whose claims risk being defaulted on in a crisis.
Being the legal title owner of your stored bullion is the single most important step you can take.
You can convert from a IOU system to ownership by taking delivery of your bullion yourself or having it transferred to us for storage, whereby we will also authenticate the bullion through DUX testing, allow for sellbacks and the option to get a Peer to Peer loan from a fellow S.T.A.R. Storage customer if you wish to. Topping it off, we are probably the only bullion company in the world that guarantees the authenticity of the bullion purchased directly from us or fully tested by our DUX testing.
2) Make Believe Security
Have you ever asked to see your stored gold and silver bullion in the vault but got a reply like this: "It would be a security breach to show you a picture of your bullion or the facility where or how your bullion is stored". This explanation is typically used to hide the fact that the dealer outsourced the storage to third parties or the bullion is stored in some retail shop backroom which would be too embarrassing to show to customers.
The above statement has no security value because, in practice, the locations of commercial vaults are well known. The logistical demands of storing and withdrawing metals imply frequent commercial deliveries, making it obvious where a vault is located. Blindfolding and spinning visiting reporters in circles before a visit is also mostly a media stunt rather than a genuine security procedure.
Real vault security encompasses three key risk factors:
- Prevention of Third Party Theft
- Prevention of Inside Jobs
- Prevention of Operational Errors
A facility's security rating is not based on how well the facility is hidden from its customers but is assessed by the facility’s insurer who, by being required to pay on an insured loss, has a keen interest to comprehensively evaluate and price the facility’s storage risk.
Security assessments are conducted by "Species Inspectors" whose feedback then determines insurance eligibility and costs. Vault procedures that minimize the possibility of operational errors and maximize transparency through redundant checks, division of roles, and effective internal monitoring form a large part of this assessment.
Our vault, The Safe House, received a "No Improvement Required Recommendation" grading from the species inspectors (who conducted the assessment on behalf of a Lloyd’s underwriter). This being the highest assessment grade, it allowed us to cover our storage customers against “mysterious disappearance” (whose significance is explained later) at a reasonable rate.
To better illustrate how unique The Safe House facility is, you might be pleased to know that it is listed, along with Le FreePort (formerly the Singapore FreePort), as the two world class storage facilities in Singapore by International Enterprise Singapore, a division of the Ministry of Trade and Industry.
In case you are wondering, Le FreePort is a facility which is rented to global vault operators,working with bullion dealers and retail storage providers across the world who outsource their storage services. Whereas The Safe House was built by Silver Bullion Pte Ltd to remove foreign jurisdictional exposure and middlemen to ensure exclusive Singapore jurisdiction and a single group counterparty.
3) "All-Risk" Insurance Does Not Cover All Risks
In insurance parlance, the term "all risk" refers to a type of insurance which covers against all risks, unless excluded on a list within the agreement. Therefore, without a list of exclusions, the term 'all risk' is effectively meaningless.
In practice the term 'all risk insurance" often misleads customers (and even most employees in the industry) into thinking that stored bullion is insured against all risks, when this is not the case.
Vault insurance - which is referred to as liability protection when applied to your bullion - mirrors the risks involved with storing bullion, and thus:
- Third party thefts - are covered by fire and theft insurance
- Inside jobs - are covered by infidelity insurance
- Unknown cause losses - are covered by mysterious disappearance insurance
Of these, mysterious disappearance coverage is the holy grail because it covers losses that cannot be otherwise explained and cannot be backed by police reports, thereby requiring the insurer to be extraordinarily confident in the processes and operators of the vault.
Commercial vaults seldom cover mysterious disappearance because of the pressure to minimize insurance costs and because very few customers have access to, or take the time to read the fine print of a storage contract, and therefore do not get to fully understand these insurance details.
Living with the risk of your bullion mysteriously disappearing does not mean your bullion will be lost, but you should be aware what you are really getting in exchange for your storage fees without being misled by the term "all risk" insurance.
The bullion storage industry at large suffers from a lack of transparency, not security. Customers are often told "you have fully allocated, all risk insured, bullion stored in a top secret and therefore safe facility".
Yet in practice most customers are only creditors, not owners, and fabricated security and "all risk insurance" claims are often used to derail or mislead legitimate customer enquiries. Without ownership and transparency on where, how and through whom bullion is really stored you cannot assess your risks and you are not nearly as well protected in a systemic crisis as you might think.
Understand the risks, ask questions, demand facts, and if possible, go visit the bullion dealer or the vault operator and see for yourself how your bullion is stored. It is not enough to buy physical precious metals to protect wealth. It is equally important to ensure that you are an owner(not a creditor) of the bullion that you store with a third party. Understanding how your bullion is stored and how it is insured is of paramount importance because once a systemic crisis occurs and counterparty defaults become common, your preparedness in these matters will make all the difference to your wealth.
Gregor J. Gregersen
Founder, Silver Bullion