GOLD

[Steve Netwriter]

$879

 

Getting interesting

 

[Magpie]

No.

 

They could need to reduce the daily limit if there was a lot of selling and no buying.

 

I was extrapolating - they don't actually say they couldn't reduce the limit to zero do they? They probably wouldn't though because of the panic it would cause.

 

There is risk with every system. That's why I always suggest diversification.

 

I even have some rather risky fiat money

 

But I thought there was no risk with this system? Now it seems there is a risk, so maybe my argument isn't complete balderdash.

 

 

[Magpie]

Is that a serious question ?!

 

It is actually. When a company goes out of business there are always legal issues surrounding ownership of the assets. If I sell my product to a company to fulfil an order but they haven't paid yet, in theory those are my books. But the law doesn't always treat it as straightforwardly as that.

 

I know the law on bank deposits. I don't know the law on the contents of bank vaults, and I don't know for sure that a judge wouldn't choose to treat the gold as a deposit rather than as contents of a vault in any case. You may have a certificate and assurances that this is your gold from the company - but does the law necessarily treat it that way?

 

Any precedent cases?

 

[pmaupoil]

Makes sense - but doesn't answer all my questions.

 

The question is "Is this business model resilient in the event of a major gold price fall?" (in the way that so many practises in the housing market clearly weren't).

 

So there's one answer in that document:

 

"We may lower these daily limits at any time during periods of unusual market activity or high order volumes."

 

So they limit the amount you can sell, and can even suspend your right to sell. Presumably any more than a temporary suspension would kill their business as they need people's trust that they can sell as well as buy.

 

So if prices fell and kept falling they'd be put in the position of having to sell gold in a falling market to raise cash. Their sales (and those of other similar companies) would create a feedback loop pushing the price down further. They are also at this stage having their cash reserves depleted. If in a prolonged fall they start to have problems selling the gold, they either have to impose further suspensions and risk a serious 'run on the bank' or they have to try to pay out cash they don't have.

 

That seems to me at least a possibility, albeit one that would only come about in a serious price fall (like say 65%, as happened within living memory...)

 

Also, suppose they went out of business either for this reason or for extraneous reasons. No problem, you own the gold, right? But now you have to go get the gold. Plus they have other creditors whose only hope of getting any money lies in claiming against their assets, and the only assets they have are your gold. Does their legal assurance it's your gold hold up in court. Could creditors get the return of gold suspended, so it turns into a bankruptcy where you only get a share of the gold after a delay, while the gold price keeps falling?

 

I'm just thinking aloud but I think it's worth pondering whether business models developed in a benign period are robust in a downturn - I guess the housing market proves that.

 

This is quite an extreme case you are trying to describe, not just a significant fall but a collapse where there are very few buyers and in that case if you own your gold at home and try to sell it to your dealer nobody will want it for a decent price so I do not see the advantage of having gold at home in that particular context.

 

 

[G0ldfinger]

Magpie, some of your questions seem ill-posed.

 

How do the laws do this, and how do the laws that apply to BV and GM differ from those that apply to banks?

The law knows a difference between something that is owed to you (promise to pay) and something you actually outright own. The first one is gone in a bankruptcy of the borrower (=bank), the second one not in case the custodian (BV, GM) goes bust.

 

Their sales (and those of other similar companies) would create a feedback loop pushing the price down further. They are also at this stage having their cash reserves depleted. If in a prolonged fall they start to have problems selling the gold, they either have to impose further suspensions and risk a serious 'run on the bank' or they have to try to pay out cash they don't have.

This doesn't make sense to me. BV or GM could enter forward contracts (shorts) of the same size at the same time their clients want to sell gold. This would lock in the price and the problem would be solved. Hence, there is a pretty direct link between you and the world gold market, that is liquid and deep.

 

Plus they have other creditors whose only hope of getting any money lies in claiming against their assets, and the only assets they have are your gold.

NO! YOUR gold is not THEIR asset. Is this really so difficult to understand?

[G0ldfinger]

State Street Subprime Damages May Reach 12 Times Reserve Amount

...

May 8 (Bloomberg) -- State Street Corp., the largest money manager for institutions, may have to pay more than 12 times the $625 million it set aside for damages from lawsuits over losses from subprime-mortgage investments made for pension funds.

http://www.bloomberg.com/apps/news?pid=206...&refer=home

 

Litigation killing the Street. Sinclair is right.

[G0ldfinger]

...

The risk here comes in a situation where gold falls in terms of currency and they have to give a lot of currency out in a hurry, whilst not being able to exchange their gold for currency to cover this.

...

That's non-sensical for the reasons explained above. They will give you the paper that they can get by selling it for you into the world market. If this is not much paper, then that is your problem (not theirs).

[Magpie]

This is quite an extreme case you are trying to describe, not just a significant fall but a collapse where there are very few buyers and in that case if you own your gold at home and try to sell it to your dealer nobody will want it for a decent price so I do not see the advantage of having gold at home in that particular context.

 

I'm not arguing for keeping gold anywhere in particular, just exploring possible weaknesses in the business model.

 

 

 

[ologhai]

I don't think I can add anything that hasn't already been said, Magpie, but I can say it as well! (And apologies in advance if I'm teaching Grandma to suck eggs.)

 

Under normal circumstances, when someone deposits money at the bank, it's no longer their money. Instead it's the bank's money, and only the depositor's asset -- an asset that may or may not be repaid should the bank encounter difficulties.

 

However, if you pay a bank to keep something for you in a safety deposit box, the contents of the box doesn't belong to the bank at all -- it's simply yours, and if the bank goes bust, any stuff in safety deposit boxes is just handed back to whoever owns it. This type of relationship -- where you pay to have something of yours kept -- is called a 'custodial' arrangement.

 

When someone buys gold via, say, Bullion Vault, the gold purchased is kept in a custodial manner for the buyer (what in precious metal parlance is called an 'allocated' account), and if problems arise, the gold still belongs to the buyer.

 

Does this help?

[G0ldfinger]

...

But I thought there was no risk with this system? Now it seems there is a risk, so maybe my argument isn't complete balderdash.

There is always risk, e.g. operational risk. The important point is that many here think that there is quite a bit more risk in paper currencies and (particularly: UK) bank accounts at the moment.

[Magpie]

Magpie, some of your questions seem ill-posed.

 

 

The law knows a difference between something that is owed to you (promise to pay) and something you actually outright own. The first one is gone in a bankruptcy of the borrower (=bank), the second one not in case the custodian (BV, GM) goes bust.

 

a) the first one isn't necessarily gone in a bank liquidation, under state guarantee systems, at least. ownership in bankruptcies is very often subject to legal challenge by other creditors.

 

This doesn't make sense to me. BV or GM could enter forward contracts (shorts) of the same size at the same time their clients want to sell gold.

 

So it's all fine because everything is covered by shorts and derivatives? No danger of anything going wrong there then.

 

And wouldn't such shorting increase the feedback loop I was talking about?

 

NO! YOUR gold is not THEIR asset. Is this really so difficult to understand?

 

Yes, that's what you would say to the judge. Meanwhile the creditors would question the legal basis of this and at best the judge might freeze the gold. There is an obvious legal difference between the case of bank vaults and deposits, and this might guide the legal outcome, but taking your word or Goldmoney's word that your ownership is secured and has a sound legal basis seems a tad risky to me. The law doesn't always operate according to common sense.

[G0ldfinger]

...

Any precedent cases?

Any stock broker who holds shares for clients might be in the same situation (or actuall, from the holder's view, an even less safe situation).

 

I am sure we have precedents there.

[dst]

That could be a fairly significant difference as they presumably couldn't be forced to give you money for your gold if the market seized up and there were no buyers.

 

I assume you are asking if BV ran out of money and/or gold?

- as they point out - anyone could step in and provide the liquidity in the market.

Maybe a third party would increase the spread but as anyone could spot the arbitrage situation the spread should reduce.

ie - a third party buys the gold below spot and sells it at a profit on the real open market.

[Magpie]

I assume you are asking if BV ran out of money and/or gold?

- as they point out - anyone could step in and provide the liquidity in the market.

Maybe a third party would increase the spread but as anyone could spot the arbitrage situation the spread should reduce.

ie - a third party buys the gold below spot and sells it at a profit on the real open market.

 

No, I mean in the notional scenario I'm describing where prices are falling fast, Goldmoney would have the problem of giving people money back for their gold, whereas BV could simply leave it between customers, no obligation on them to give out money, so less danger of a cash crisis in the company.

 

[G0ldfinger]

a) the first one isn't necessarily gone in a bank liquidation, under state guarantee systems, at least. ownership in bankruptcies is very often subject to legal challenge by other creditors.

The same would happen to your stock broker. Only that they are more likely to go bust, since they built their hopes on always well-doing stock markets.

 

So it's all fine because everything is covered by shorts and derivatives? No danger of anything going wrong there then.

A physically covered short position is not really a derivative, but a forward. I see no problem. It's uncovered shorts that may cause physical shortage and price explosions at some stage.

 

And wouldn't such shorting increase the feedback loop I was talking about?

When a market goes down, it goes down. I see no new insight here.

 

Yes, that's what you would say to the judge. Meanwhile the creditors would question the legal basis of this and at best the judge might freeze the gold. There is an obvious legal difference between the case of bank vaults and deposits, and this might guide the legal outcome, but taking your word or Goldmoney's word that your ownership is secured and has a sound legal basis seems a tad risky to me. The law doesn't always operate according to common sense.

Fair enough, a judge could complicate things. But I see no reason why there should be more of a problem than with any stock broker that goes bust.

[dst]

Does this help?

 

the same thing from the BV help pages:

 

What does it mean to have "full legal ownership and title of physical gold" in BullionVault?

Ownership of your gold in BullionVault is outright. BullionVault gold is not subject to a trust deed, and it is not anyone's liability. It is - quite simply - your outright property from the instant you buy it to the instant you sell it.

 

In accepting the BullionVault Terms of Business you have engaged BullionVault as a custodian of your gold. BullionVault has subcontracted the physical custody of your bullion to Via Mat. BullionVault has retained responsibility for administration and record keeping, which is performed through the BullionVault.com website.

 

You can see the Via Mat bar lists on the BullionVault website, and reconcile them to the BullionVault customer-by-customer records. You should also know that in its agreement with BullionVault Via Mat fully acknowledges that the gold shall remain the property of BullionVault clients at all times.

 

These are unusually strong property rights for you because there is no intermediation via trusts or company balance sheets. The gold is your personal property and is treated under English law as a "bailment".

[Magpie]

Any stock broker who holds shares for clients might be in the same situation (or actuall, from the holder's view, an even less safe situation).

 

I am sure we have precedents there.

 

That's a fairly good precedent, although the physical situation is a little different.

 

However, if you pay a bank to keep something for you in a safety deposit box, the contents of the box doesn't belong to the bank at all -- it's simply yours, and if the bank goes bust, any stuff in safety deposit boxes is just handed back to whoever owns it. This type of relationship -- where you pay to have something of yours kept -- is called a 'custodial' arrangement.

 

When someone buys gold via, say, Bullion Vault, the gold purchased is kept in a custodial manner for the buyer (what in precious metal parlance is called an 'allocated' account), and if problems arise, the gold still belongs to the buyer.

 

Does this help?

 

Yes, actually that's a fairly clear legal way of putting it, thanks. Though if I were a creditor I might try putting the argument to a judge that Goldmoney were effectively operating a currency backed by gold, or operating as a bank, rather than as a vault. Might not work, but there are some slippery lawyers out there.

 

[G0ldfinger]

No, I mean in the notional scenario I'm describing where prices are falling fast, Goldmoney would have the problem of giving people money back for their gold, whereas BV could simply leave it between customers, no obligation on them to give out money, so less danger of a cash crisis in the company.

 

Again I see not much of a problem. GoldMoney could just go over to a mechanism where they take sell-orders that will be due at a certain date & time, and they would promise to pay you whatever the world markets yield at that time (e.g. London Fixing). This would avoid the short-selling mechanism described earlier and would ensure world market prices for the customers. Markets falling or not.

[dst]

 

and in case you will ask/asked about BV failure:

 

again from BV help pages:

 

Bailments and business failure

Owning your gold in this way gives you the soundest protection from business failure.

 

When businesses fail liquidators are appointed to take control of the company's assets, sell them and arrange a fair distribution to creditors of various classes including themselves. Liquidators generally claim ownership of every asset on a failed company's balance sheet (which would of course include unallocated gold). However they cannot lawfully treat bailments as the property of the company available for creditors' benefit.

 

Should they try to do so any dispute would be resolved - perhaps even in court - by reference to several key pieces of evidence.

 

The first is a clear documentary statement about who owns the bailed goods. This is stated in BullionVault's Terms and Conditions here, and it is unequivocally you. That fact is also evidenced on the contract between BullionVault and Via Mat.

The second is the company's balance sheet. This is a public document where the assets belonging to the company are annually listed and filed at Companies House. Creditors are entitled to expect that assets listed on the balance sheet protect them from a company's insolvency. But your gold does not belong to Galmarley and has never been on Galmarley's balance sheet. No creditor of the company can claim to rely for protection on gold which the company never claimed as an asset.

The third is the fact of your payment for a custody service. This is evidence that the gold is your property in BullionVault's safekeeping. It evidences the nature of the agreement - i.e. that you are paying for the protection of your property, and not transferring your property to BullionVault for gain. The custody fee is deducted from your cash balance and posted monthly to your statement.

[Magpie]

A physically covered short position is not really a derivative, but a forward. I see no problem. It's uncovered shorts that may cause physical shortage and price explosions at some stage.

 

 

When a market goes down, it goes down. I see no new insight here.

 

Well, for a start, if they need to start shorting in a turbulent market, it increases their chances of making cash losses that increase the danger of going out of business.

 

[Magpie]

and in case you will ask/asked about BV failure:

 

again from BV help pages:

 

That's interesting about bailments - I'm not a lawyer, but I know stuff like whether the goods are consignments or bailments or on or off the balance sheet can make a big difference.

 

I would say that they are going to some lengths to establish that a court would treat it as a bailment, which suggests to the sceptical mind it isn't an open and closed case. For instance I immediately see some problems:

 

"The first is a clear documentary statement about who owns the bailed goods. This is stated in BullionVault's Terms and Conditions here, and it is unequivocally you. That fact is also evidenced on the contract between BullionVault and Via Mat."

 

Fair enough, but the legality of that contract could be disputed.

 

"The second is the company's balance sheet. This is a public document where the assets belonging to the company are annually listed and filed at Companies House. Creditors are entitled to expect that assets listed on the balance sheet protect them from a company's insolvency. But your gold does not belong to Galmarley and has never been on Galmarley's balance sheet. No creditor of the company can claim to rely for protection on gold which the company never claimed as an asset. "

 

This is pretty important and reassuring.

 

"The third is the fact of your payment for a custody service. This is evidence that the gold is your property in BullionVault's safekeeping. It evidences the nature of the agreement - i.e. that you are paying for the protection of your property, and not transferring your property to BullionVault for gain. The custody fee is deducted from your cash balance and posted monthly to your statement."

 

Here things get a bit slippery. A bailment is "transfer of possession of something (by the bailor) to another person (called the bailee) for some temporary purpose (e.g.. storage) after which the property is either returned to the bailor or otherwise disposed of in accordance with the contract of bailment."

 

Now if I'm an investor, the gold has never been in my possession, so did I ever own it and transfer possession of it to BV? Is it clear that I am paying for protection of my property (as I clearly would be if I deposited jewellery in a bank vault) or could it be argued that Bullion Vault has transferred ownership to me, then I have allowed them to retain possession "for gain". Since most investors won't ever see their gold, and most sales of the gold will be through BV to other investors, is this a clear case of bailment? Or is there another legal principle that could be taken to apply?

 

As I said, I'm not a lawyer, but I'd be interested to see what a sceptical lawyer made of that last paragraph.

[Bobsta]

 

The others are far too polite.

 

Don't be a bl**dy fool !!!!

 

$879

 

Getting interesting

 

See Mr Jones.... KEEP THE FAITH!

 

OK, given the steep rise we've had today there's bound to be little dip at some point so if you are feeling uncomfortable with how heavily you've filled your boat, then maybe comfort yourself with shedding a little with the hope of buying back at 860 or so another day. Or, if you're a bit like me, maybe you just needed a day like this to make you believe your own convictions and you'll be happy to keep your holdings as they are.

 

Yen up, dollar down, FTSE flat, oil down .... G&S up ... bodes well.

[alexreeve]

Well, for a start, if they need to start shorting in a turbulent market, it increases their chances of making cash losses that increase the danger of going out of business.

Why do they need to short anything. They offer to sell small amounts at spot price, their market traders can do this without distorting the market dramatically. If you want to liquidate more than that, it is done at the price of the next London AM fix (I think, maybe next London Fix AM or PM). In all history gold has never been valueless worldwide, so there will always be buyers at some price.

 

If you are aware of a way of keeping wealth entirely risk free, would you share it?

[dietcolaaddict]

 

"The top US equity manager Francois Mouté believes the gold price should be 16 times the price of a barrel of oil and on a par with the price of platinum"

 

Mouté is the chairman of Neuflize Private Assets, a subsidiary of Fortis Investments. He is the top ranked US equity manager in Europe over time periods of three months, one year, three years and five years.

 

http://www.citywire.co.uk/personal/-/news/....aspx?ID=302771

[Magpie]

Why do they need to short anything. They offer to sell small amounts at spot price, their market traders can do this without distorting the market dramatically. If you want to liquidate more than that, it is done at the price of the next London AM fix (I think, maybe next London Fix AM or PM). In all history gold has never been valueless worldwide, so there will always be buyers at some price.

 

Goldfinger suggested shorting as a solution, not me.

 

The problem would arise when large amounts were involved in a market with many sellers - if the next day's fix is lower than the cash price they have to pay out today, then their cash reserves are at risk. Given the speed that gold moves at, that could be a bigger risk than one would wish to see.

 

If you are aware of a way of keeping wealth entirely risk free, would you share it?

 

Of course I don't - I'm just niggling at the Goldmoney business model to see if it as robust as people think. If the model isn't robust enough to cope with a major fall in price then there is a problem. Also if there is a risk of a feedback mechanism turning a moderate fall in price into a bigger one, that's also worth a moment's thought.

 

I'm looking at extreme cases. On the other hand, at one stage the financial institutions would have said that a collapse in the mortgage market and near-bankruptcy of major banks was an extreme scenario, so it seems a good year for wondering about such extremes.