Paper gold and gold passbook shortcomings

[smurff]

Don't know if anyone has posted this one, but they cite examples from banks' (in Asia) own websites. It's about the shortcomings in the contracts and disclosures, but you should also know that goldsilver.com is trying to sell physical gold, and is hence a competitor.

The term paper gold means you have a piece of paper acting as a substitute for physical gold.

With paper gold, you don't own gold; in most cases you don't even own a promise to receive physical gold.

In plain english, it means you are a creditor of the party issuing the paper gold certificate or account, and thus subject to a myriad of counter-party risks and potential bankruptcy. 

Examples of paper gold are gold certificates issued by banks and mints, passbook gold accounts, pool accounts, futures accounts and many of the well known ETFs or exchange-traded funds.

Although paper gold accounts may give you short term price exposure to the gold spot price, if paper gold demand dries, it will become worthless since many of these vehicles give investors no right or abliity to redeem gold metal or bullion.

Unlike passbook gold or paper gold, physical gold bullion in hand cannot go bankrupt and has no dependency on any other entity(s) fullfilling promises made.

and

In this article, we will concentrate on the true shortcomings of paper gold and passbook gold, specifically citing eight examples within the Asian banking system.

http://goldsilver.com/article/paper-gol ... ook-scams/

[craigr]

This has some mis-information in it.

For instance:

"- Paper Gold is not principal protected and is not protected by the Deposit Protection Scheme in Hong Kong."

Ok Everbank says the same thing. But what this means (for Everbank at least) is that gold is not a *deposit* of the bank. It is held in custody by the bank. So FDIC does not apply as it only works with deposits. The custody agreement lies outside of deposit insurance as a result. And of course no gold is not "principal protected" because that would imply they are guaranteeing you against loss due to the price falling which no sane bank would do. BUT, this does not mean the gold is not insured. Everbank for instance insures their gold holdings along with other major bullion storage facilities. But NO these are not guaranteed deposits as they are different being as they are not deposits at the bank. Does that make sense? The gold custody agreements would fall under a different area of law vs. depositor loss. The custody accounts typically are not held as assets of the bank.

As for the paper promises of banks, it still applies to this other vendor as well. You are entering a contract with the custodian to hold the gold for you. It can be a certificate or it could be a safe deposit box. The issue then is do you trust them? This is something Bron Suchecki brought up and we quoted in the book:

If you don't trust the counterparty [Perth Mint or otherwise] you shouldn't give anything to them. Allocated, unallocated or not.

Great point! If we think the bank is going to hose you on a gold certificate, why can't they just go into the vaults and plunder the assets of the segregated accounts as well? Best option here is not to deal with any custodian if you feel that way.

All gold options have unique risks, but there is nothing here I'd get in too big a twist over. Allocated gold custody accounts are best, but the certificate programs these banks offer are not that much different than what this vendor is selling. IMO.

[bronsuchecki]

I'll be nice to goldsilver.com and not go through their storage agreement - those in glass houses ...