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Wednesday, July 29, 2009

Storing Bullion Internationally

INTRODUCTION

“Tis the part of the wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.”

Many investors internationally will wish that they had paid attention to the wise old proverb used by Cervantes in Don Quixote in 1605.

The fundamental tenet of investment theory and of wealth growth and preservation is diversification. In layman's terms one should not have all the proverbial eggs in the one basket. This concept is crucial both in terms of an entire investment portfolio but also in terms of the precious metals component of a properly diversified portfolio.

Unfortunately, in recent years the majority of investors were not diversified – with most being very overweight equities and property. Now due to the asset price deflation of recent months, many are overweight cash and bonds. Very few have any allocation to gold whatsoever.

This is not a prudent strategy especially as in the coming years we are likely to see sovereign and systemic risk remaining elevated, and significant inflation and stagflation.

TAKING POSSESSION OF BULLION AND STORING BULLION INTERNATIONALLY

Diversification of assets and diversification amongst assets is important. Thus, it is also important that the precious metals (gold, silver, platinum or palladium) component of a portfolio is diversified.

This means that bullion owners should not allow themselves to be dependent on any one investment provider or institution. This is why a combination of precious metal certificates, gold or silver bullion coins and bars and semi numismatics in your possession and storage of bullion internationally with a secure and specialist third party should all be considered.

Companies, insurance companies, trusts, banks and nations can and do go bankrupt. The great advantage of gold bullion is that it has no third party risk. Gold and precious metals cannot go bust. Thus, when owning physical bullion one of the most important things to consider is where to store your bullion and what are the legal conditions under which it is stored.

Many would rather have their bullion closer to home. This may suit those with smaller amounts of bullion or for those 'who hope for the best but are prepared for the worst'. It is prudent to be at least partially prepared for a meltdown scenario of a currency collapse and hyperinflation by owning real money, gold and silver, that will help preserve wealth. It is important to have at least some bullion in one's possession – in a residence or office. Only do so if you feel it is secure there and make sure you have insurance (home or office insurance) that covers the bullion and other contents.

Some fear that in the event of a systemic crisis then there could be enforced bank closures or extended bank holidays. In this scenario, deposit boxes in banks and financial institutions could be sealed and the bullion confiscated. Under the Gold Confiscation Act of 1933 at the height of the Great Depression, Roosevelt ordered all gold be handed to the authorities at $20.67/oz (prior to revaluing gold from $20.67/oz to $35/oz). It is possible that in the event of such a crisis many pool accounts, digital gold providers and depositories in the UK and the US might have their gold confiscated and might have their assets nationalized.

In the light of these risks, one should take possession of some of your bullion. But for security reasons, generally larger amounts would be safer stored with a secure third party.

What type of facility or institution should it be stored with and should it be stored locally, nationally or internationally? The short answer is to store your bullion with the safest and securest facilities or institutions locally, nationally and internationally and to be sure that you are outright legal owner of the gold. Also be sure that the storage company or investment provider can and will ensure delivery of your bullion in a format that you require should you need it, to the destination of your choosing and in a timely manner.

US AND GLOBAL SYSTEMIC AND SYSTEMATIC RISK

Investors buy bullion primarily to insure and hedge against macroeconomic, geopolitical and particularly systemic risk. Systemic risk includes the collapse of a financial system as a result of events such as a general stock market crash, fiat currency crash and or a breakdown of our modern day fractional reserve and derivative laden banking system. Any of these would have serious ramifications and could lead to deflation, stagflation or hyperinflation in various jurisdictions and the collapse of the current global monetary and financial system.

It is important to remember that the modern global financial and monetary system is only a few decades old. As seen in recent months, it is by no means stable and the coming months and years may test it as never before.

Systematic risk describes risks which the global economy faces such as business cycles, pandemics, peak oil, extreme natural phenomenon (such as earthquakes, floods, tsunamis and hurricanes), climate change and geopolitical risk such as terrorism and wars, including cyber warfare.

Today in our globalised and massively interconnected financial world, a systemic or systematic financial crisis could result in a chain reaction involving waves of individual and corporate bankruptcies and large financial institutions and even sovereign governments would be at risk. In this environment, all the conventional investments – paper assets such as stocks and bonds, derivatives such as exchange traded funds (including the precious metal ETFs) and property – would likely be seriously affected, may become illiquid and fall very sharply in value.

This is not alarmist doom and gloom mongering. Many societies have experienced brutal economic conditions such as the hyperinflation in Germany in the early 1920’s, the Great Depression in the US in the 1930’s and the stagflation of the 1970's. In recent years, people in Italy, Israel, Thailand, Yugoslavia, Belarus, Russia, Peru, Ecuador, Angola, Mexico, Argentina and more recently in Zimbabwe (too name a few) have experienced currency crisis and hyperinflation.

These systemic and systematic financial and economic risks create political risks. Increasing diminution of civil rights in even the most liberal western countries must give pause for thought. These authoritarian trends generally become more pronounced in times of recession or depression. Historically protectionism, trade frictions, capital controls, gold confiscation, currency devaluation, extended “bank holidays” or bank closures (when safety deposit boxes and cash deposits cannot be accessed), nationalization, nationalism, radicalism, communism, fascism and militarism can result.

These factors mean that having one's bullion outside of the financial system is important, if not imperative. This can be either through personal possession or storage with a secure third party who can deliver the bullion upon demand.

However, these factors also mean that besides having one's bullion outside of the financial system it may be prudent to have some of one's bullion outside of the jurisdiction in which one is domiciled or is a citizen. This lessens geographic risk. For these reasons it is important that investors consider 'internationalising their bullion' to safe haven jurisdictions.

SAFETY DEPOSIT BOXES VERSUS DEPOSITORIES

Safety deposit boxes in banks and specialist depositories can be used but allocated accounts in specialist depositories are less risky and superior.

A safe deposit box or safety deposit box is a type of safe usually located in groups inside a bank vault, in a secure room of a bank or post office or in a specialist depository. It usually holds important and valuable possessions such as important documents (wills, property deeds), family heirlooms, cash and or precious metals that a person might be reluctant to leave at home due to fear of tampering, fire, flood and theft.

In recent months, safety deposit boxes have been targeted by authorities in some countries. In the UK, authorities said that one private deposit box company was facilitating money laundering and police raided the company and the 7,000 individual safety deposit boxes confiscating assets with an estimated value of £2.5 billion. In the U.S., family heirlooms, cash and bullion held in safety deposit boxes have been raided, appropriated and sold off at auction. Some state governments claim the contents are “unclaimed property” (a safety deposit box is considered “abandoned” after just 3 years) in order to raise funds for government states in grave financial difficulty.

Safety deposit boxes in financial institutions that are close to insolvent or may become insolvent are high risk, as are safety deposit boxes in states or countries that are close to bankruptcy. Especially as the contents of safety deposit boxes are normally not insured.

A depository on the other hand, is a place where valuable objects are kept or deposited for safekeeping or storage, e.g. a high security warehouse or vault for important documents, precious works of art, valuables, heirlooms, cash and bullion. Depositories are normally private companies that are not owned by banks and thus less exposed to economic cycles or to a collapse of the financial system. They are independently insured. They make no claim over assets stored and their sole purpose is to provide the safest environment for valuable possessions. Storage is not a secondary function as it is in a bank, rather it is a primary defining function and one which is carried out to the highest standards with far less risk.

A BETTER WAY TO STORE BULLION

Ultimately, the need to reduce counter party risk and intermediation means that many investors internationally are now requiring proximity (nearness in place and time) to their bullion. This need for the closest proximity to gold, silver, platinum, palladium and or rhodium coins and bars means that many take personal physical possession of at least some of their precious metals. Due to the many of the reasons outlined in this article many also choose to store their bullion in secure vaults internationally.

Safety, security and confidentiality are of paramount importance when entrusted with the storage of precious metals. There are many specialist depositories internationally which facilitate investors but the vaults of one of Europe's largest and oldest armoured transport and storage companies are a favourite in this regard. They have secure storage vaults in all major financial centers including in the tax free zone in Zurich airport in safe haven Switzerland.

Importantly, precious metals remain the property of the investor. This eliminates counter party and intermediation risk posed by business failure and company insolvency.

PERSONAL ALLOCATED STORAGE WITH BAILMENT

Owning bullion in this way gives you the soundest protection from company insolvency – bullion dealers, digital gold dealers, ETF trustees, banks etc). When companies fail, liquidators are appointed and take control of the company's assets, sell them and arrange a fair distribution of the assets to creditors of various classes including themselves. Liquidators generally claim ownership of every asset on a failed company's balance sheet, including bullion. However they cannot lawfully treat bailments as the property of the company available for creditors' benefit.

Bailment is the legal action of a client entrusting their bullion to another party for safekeeping. Bailment describes a legal relationship in common law where physical possession of personal property such as bullion is transferred from one person or entity (the 'bailor' or client) to another person or entity (the 'bailee' or company) who subsequently holds possession of the bullion.

Through bailment, an individual gives up possession of their bullion but remains the outright legal owner of their bullion, with the investment provider acting simply as a custodian. Over the centuries there has been much less case law and legal conflict on the subject of custody bailments than on the subject of trusts. This is because the legal standing of custody bailments is well defined and confers on the owners more security than if their bullion is held in a trust. Unlike in a trust where the legal owners of a trust asset are the trustees and this can lead to litigation and potentially loss of the underlying asset.

When choosing where to store bullion it is also important to consider access to and the ability to have worldwide transportation of bullion. Very few providers can offer domicile-to-domicile solutions to all important financial centers and locations internationally. This is an important consideration as is insured storage for valuable goods in customs-free warehouse, customs clearance of shipments including neutralizing, dividing and repacking and monitoring of transit mailings.

Bullion storage should be considered from a cost and security perspective but in these very uncertain times flexibility and accessibility are also important considerations.

SUMMARY

Don't delay in deciding what the optimal storage solution is for your bullion. Decide on a storage plan and the securest location and order your bullion coins and or bars or move your existing bullion as soon as you have done your due diligence.

Importantly, be sure that you can access and ship your bullion in a format of your choosing, to a destination of your choosing at the time of your choosing.

Gold and silver bullion are the ultimate form of financial insurance and in these uncertain times all investors and savers should have an allocation and own this essential insurance in the safest ways possible.

ABOUT GOLDCORE

GoldCore, www.GoldCore.com , specialises in international bullion dealing, asset diversification and wealth preservation offering bullion storage in the US, Asia and Europe. GoldCore are experts on global macroeconomics and the gold and silver bullion markets and the company is the EU Approved Dealer for the Perth Mint of Western Australia.

GoldCore has an international media profile (CNBC, Bloomberg, CNN, BBC, FT, Wall Street Journal, Bloomberg, Dow Jones, Associated Press, Reuters etc.) and takes part in the Reuters Precious Metals Poll and the Bloomberg Gold Survey.