By MoneyMorning.com.au
You wouldn’t trust your sausages to a dog…
…So why trust your gold to a banker?
Last Friday we wrote this:
“We wonder how many investors think they’ve got gold safely stored in the bank without realising the bank has loaned it out to someone else.”
Over the weekend, the following story cropped up on Bloomberg News:
“Five gold bars and 15 silver bars underlie eight Comex contracts between the brokerage [MF Global] and its client Jason Fane of Ithaca, New York, the unit of London-based HSBC said in a court filing yesterday. Both parties have asserted claims to the bars, creating difficulties for HSBC, which is storing them, the bank said. HSBC asked a judge to decide who the rightful owner is.”
The total value of these bars is USD$850,000. So we’re not talking small potatoes. A few weeks ago, Mr. Fane had no worries about his status as owner of the bars.
Today, while he’s still confident he’s the legal owner, the decision is out of his hands. It’s up to a judge to decide.
It just goes to show that when you’re dealing with paper or electronic assets, when push comes to shove, what’s yours ain’t necessarily yours.
Look After Your Gold as You Would Your Sausages
That’s why we suggest you buy the metal, take delivery of it, and then store it in a secure facility. Preferably where you know some rascally banker won’t lend it to someone else… or even claim your gold and silver isn’t your gold and silver.
Anyways, this is a subject our old pal, Diggers & Drillers editor, Dr. Alex Cowie has banged on about for years. So we asked for his take on the story. Here’s what he told us:
“You have to be mad storing gold at a bank. It’s like getting a dog to guard your sausages!
“I feel for investors like Mr. Fane who understand the value of gold, but then stuff up the trade. The idea at the core of gold is that it’s no one else’s liability – so if you’re buying the stuff, it’s a good idea not to give it to a kleptomaniac to look after.
“But hopefully this gets people thinking. Investors who currently hold their gold electronically, through a foreign bank that doesn’t mind lending it out for you, or perhaps through a broker (which may turn out to be insolvent), should now think about the wisdom of this strategy. If enough investors see this for what it is, we should see a surge in demand for physical gold.”
What does the Doc mean by his last point? That this could “see a surge in demand for physical gold”?
Simply this…
Rushing into Gold
If investors start losing faith that there is actually any gold backing their paper or electronic gold, they’ll start trying to redeem their paper for gold. Or more likely, just sell the paper asset and buy the real stuff somewhere else.
In short, you’d get a run on paper gold assets. Like how you get a bank run when savers don’t believe the bank holds enough cash.
At the moment, investors still have faith. For instance, the Australian Securities Exchange-listed, GOLD ETF [ASX: GOLD] trades roughly at par with the entitlement to gold (currently, for each share in GOLD, an investor is entitled to 0.0969718 ounces of gold).
But if investors lose faith in paper gold, you’ll start to see physical gold trading at a premium to the paper stuff. Investors will want to hold the physical gold.
Add in the continued problems in Europe and North America and it means good news for the gold price… and good news for gold explorers and producers. Why?
Dr. Cowie explains in his article on resources stocks…
Cheers.
Kris
Related Articles
Special Report: Six Extraordinary Resource Investment Opportunities for 2012
The Only Gold and Silver Stocks to Buy
The Secret Aussie ‘Bank Run’ is a Sign to Buy Gold
Why Gold Should Become Your ‘Stay Rich’ Asset
From the Archives…
How to Turn Paper Money into Silver and Gold
2011-12-09 – Kris Sayce
Will Silver Break Through $50 an Ounce in 2012
2011-12-08 – Dr. Alex Cowie
Investing in the Market for Survival and Prosperity
2011-12-07 – Aaron Tyrrell
China, the U.S. and the Scramble for Commodities
2011-12-06 – Dr. Alex Cowie
Santa Claus: A Market Rally Not Worth the Risk
2011-12-05 – Kris Sayce
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