There are many risks associated with storing gold in the banking system, notably the risk of bankruptcy or government confiscation. But there is also a more complex risk, related to price manipulation.
Risk of Bankruptcy or “Bank Holidays”
Investing in gold is generally done as a security measure to protect oneself against the risks associated with the fragility of the financial system, and to have access to a universally accepted means of payment in case of bank failure or temporary closing (bank holiday).
If you hold your gold in a bank’s vault and the bank closes temporarily or, worse, goes bankrupt (as was the case in Argentina), you lose the advantage of immediate access to a means of payment for your basic needs in times of trouble, when access to traditional means of payment like cash or bank cards is hampered.
Even though the risk is small, confiscation has occurred (Roosevelt’s Executive Order 6102 in 1933). Confiscation could happen following panic in the banking system or just before announcing a new monetary system. In that case, owning gold in one’s country of residence is risky because it can be legally seized.
We have storage facilities in Switzerland, which eliminates the risk of confiscation for most of our clients.
Whether one’s gold is “allocated” or not, to understand the amount of risk associated with storing gold within the banking system, one has to grasp the mechanism of price manipulation occurring through the sale of previously leased physical gold.
Traditionally, the central banks have leased physical gold to investment banks that specialize in gold trading, which helps them make a profit on their idle gold, while keeping the price low.
Price manipulation can only happen in two ways (often combined): with the sale of (previously leased) physical gold on the market, or with a massive sale of virtual “paper” gold.
In both cases, the sheer mass of “supply” helps keep (manipulate) the price low.
Let’s start with the “physical” part as documented by
These last few years, central banks have stopped leasing their gold; after having leased quite a bit in the past, they are now holding on to their reserves.
When leasing gold, the rate is determined by the Gold Lease Rate.
This rate is extremely low, being based on LIBOR (Gold Lease Rate = LIBOR- Forward Rate). And we now know, with the LIBOR scandal, that it has been manipulated to the down side.
And we now see the scope of that scandal when we relate it to gold price manipulation.
Who will lease physical gold to a bank for such a ridiculously low rate now?
Nobody. Central banks have done it for years, but that trend is over, due to their low reserves.
Central banks own 10% of existing gold, and the rest is in private hands.
Which begs the question, since physical gold leasing hasn’t stopped, where does the physical gold come from, knowing that the central banks have stopped leasing it?
One is left to wonder if that gold might not come from some private accounts of “allocated” gold, ETFs or futures contracts gold stocks…
The physical gold would be recuperated by certain banks without the consent of its clients (via rehypothecation) and then leased to the commercial banks who then turn around and sell it on the market. What this accomplishes is that, by keeping the price of gold low, trust is being maintained in the actual fiduciary system.
a definition of the rehypothecation mechanism here.
Risk of bankruptcy, risk of confiscation, inter-connectedness of the banking system, rehypothecation, price manipulation… Those are real risks that must be considered before deciding where to store one’s physical gold.
We have put together an investment and storage solution that offers maximum security for rightful ownership of physical gold and silver.