Suppose you're purchasing gold or silver certificates (From your bank, which carry the possibility of zero actual physical backing and transportability). In that case, you should read this article about the possible opportunity cost of owning them. It could save you money by helping you dodge a purchase of gold or silver costing as much as 10% or more than it should. It might also prevent you from buying into the incorrect certificate program, which could cost you all your gold or silver, especially if you genuinely want physical gold and silver.
But more importantly, it could also prepare you to buy real, tangible bullion, which, in our opinion, is the only way to buy gold or silver.
Gold and Silver certificates were like the world's first-ever paper banknotes. In the 17th century, goldsmiths issued certificates in England and Amsterdam to customers depositing gold or silver bullion into their safekeeping. These certificates then acted as evidence of ownership. In time, the certificates were utilized, just like cash payments, without the difficulty of having to move the actual gold or silver.
In the mid-1800s, the US Treasury started issuing gold and silver certificates to substitute bullion from its vaults. These certificates circulated as money until 1933, when the US government banned private gold ownership in the United States due to history's most significant economic depression.
Unfortunately, certificates continue to be issued by several banks worldwide and right here at home in Canada and by gold pool programs in Australia, the US and Canada. These certificates symbolize ownership of a specific quantity of bullion or coins. The certificate owner benefits from saving money on trading/buying/selling, delivery, storage and insurance costs. But what about the other side of these potential savings?
The Settlement Conundrum
Having been in the industry for over 17 years, I discovered that investors had a solid connection to certificates earlier in this bull market. Somehow there was a feeling that an ornate and expensively produced piece of paper indicated underlying value. However, nothing could be further from the actual reality.
The truth is that the literal walls of finance and banking companies everywhere get festooned with many historically interesting but worthless certificates of title all the time.
Other than giving back or collecting all of the certificates in issue, there is no way to be assured that they are backed by an exact equivalent quantity of gold or silver, and all sorts of things can cause this not to be the case.
Identical certificates issued in good faith, intentional over-issue, good forgeries, lousy management, changes of address, abandonment of old classes of certificates and their substitution, failure to destroy old certificates relinquished, institutions no longer existing etc.
Certificates can be replicated, copied, and duplicated about as effortlessly as paper money, which is somewhat ironic given the modern-day bullion buyer's motivation - frequently to avoid the debasement of their currency or purchasing power through the process of fiat money printing.
We have always felt at Delta Harbour that there could be an easy solution of transparency that might offer some institutions the ability to quash any suspicions about the legitimacy of their certificate programs. Quite simply, they could be using modern technology to publish, every day, an accessible list of all gold and silver owners with interest in a specific vaulted store or location, not by name but by number.
The list could be provided with or without serial numbers, depending on the type of product you choose or that is available. This would prove that the total number of owners claiming gold or silver equals the vaulted total. Additionally, all investors' holdings can be individually inventoried and sent using a discreet email address known only to them. While validating their holdings to them, it cannot identify them.
In addition, you can never audit your certificate holdings, so you have no way of knowing whether or not the bullion has been purchased, allocated or even hypothecated to you and others simultaneously. Delta Harbour proves your gold ownership daily by allowing physical audits and sending inventories with serial numbers of bars allocated and segregated to you only as a client.
Gold Certificates and Unallocated Gold
Gold certificates usually are unallocated gold with an option to convert into allocated at the investor's option and high cost. They do NOT include a reasonable audit option and, therefore, can never be verified against that in physical form with the institution, which in many cases is NIL.
Delta does not favour unallocated gold. We consider it an investment structure that provides free capital to the merchant and runs the buyer's risk of total loss. Before picking a certificate program, ensure you know if the gold or silver is allocated or unallocated. In my experience, 90% of the time, it will be unallocated – and if you choose the program, then give plenty of thought to the considerable risks associated.
If the certificate program permits the conversion from unallocated to allocated bullion, know the costs associated. Usually, allocating is prohibitive - involving a high fabrication cost and ongoing storage, which could run you an additional 5-10% initially and between 2-3% per annum after storage. 2-3% is "highway robbery" and far more than most reputable storage programs cost, especially Delta Harbour. In addition, some certificate programs charge storage for the "supposed" unallocated gold being stored on your behalf. Yet you never have the chance to see it. These artificially high rates usually achieve their primary purpose of keeping the gold unallocated. (Yes, they are deterring you from taking allocated most often due to the wall of fees associated with doing that)
As a certificate holder (potentially holding unallocated gold or silver), you should realize that your unallocated gold and silver are on the balance sheet as liabilities. You should also recognize that you have zero recourse if the supplier goes bankrupt.
Lastly, please note perhaps the most crucial point when owning gold and silver certificates. GOLD AND SILVER CERTIFICATES ARE NON-TRANSFERABLE.
I have zero confidence in the government's backing of gold investments. Until recently, I may have believed there was an exception to the broader pool of unallocated certificated gold schemes. I thought the Perth Mint was a good program for the most well-known and respected certificate provider. However, even this program is now under fire for the possibility of unallocated, unverified holdings. Although they seem to have quashed suspicion, I think there is little or no reason to use the program.
Please keep it simple. If you want physical gold or silver, deal with a reputable dealer like Delta Harbour Assets or any other good dealers in North America or overseas. Visit your product or at least get a video audit of your holdings. If that option is not offered, then there is no way you can ever verify your holdings.
Please Note: This article is issued to enlighten your thinking, not to be used as a tool to decide for you. Previous price movements are no guarantee of future performance. Before you own any asset, you should seek financial counsel if you are unsure about the suitability for your wealth strategy.
Yours to the penny,
Darren V. Long
Delta Harbour Assets Inc.