Less than one year ago REFCO, a New York based financial services company, collapsed. Last week the London Metals Exchange took the extraordinary step to postpone what looks like the inevitable default of contracts in its nickel market. What do these two events have in common?
The customers of these firms who thought they owned metal in fact didn't. The defaults made clear to these firms' customers that they owned someone's promise to deliver metal to them, but they did not own the metal itself.
Both of these events are 'wake-up calls' and should be heeded by everyone who owns 'paper gold' instead of gold itself. The same logic applies to silver. I highly recommend reading the very informative essay by Ted Butler analyzing the LME's pending default. The implications he makes for 'paper silver' are also relevant to 'paper gold'. His essay can be found here:
We are in an environment where people increasingly demand ownership of things in preference to promises. People are opting for tangible assets in preference to financial assets. As a result it is inevitable that there will be more defaults in the future. The nickel fiasco explains why. The promises to deliver nickel are greater than the amount of nickel available for delivery. There is not enough metal available to enable the shorts to deliver under their contract to meet their obligation.
Importantly, the same situation exists in gold and silver. Though the gold and silver shorts are not yet in such dire straits as the nickel shorts, they are in the same predicament. There are more promises outstanding to deliver gold and silver than the amount of physical metal available at the current price. A higher price in both precious metals as well as nickel is needed to bring their markets back into balance. The only other way to achieve that balance is a default by the shorts, reducing the size of their delivery obligation, which is where the LME is headed.
This imbalance between longs and shorts is like musical chairs. When the music stops - as it does from time to time - someone is inevitably left standing. Don't let that be you. Do not get caught on the wrong side. Own metal, and not someone's paper promise.
Examples of 'paper gold' are gold certificates issued by banks and mints, pool accounts, futures accounts and GLD, the NYSE listed exchange-traded fund. With these products you own a piece of paper rather than gold itself. Own physical metal and not a certificate purporting to be metal.
Examples of physical metal that you can own are coins, bars, high-karat jewelry and of course, GoldMoney. With GoldMoney you own physical metal. We simply place your gold and silver in a specialized bullion vault and insure it for you with Lloyd's of London. GoldMoney is not 'paper gold' because each customer retains title to the metal he/she owns, as explained in VIII(C) of our User Agreement. And if anything were to happen to GoldMoney, your gold and silver is still safe. Section VIII(C) also explains that ASL Financial & Commercial Services Limited, a regulated trust company in Jersey, British Channel Islands, will "promptly arrange distribution from the Vault of the bars" of gold and silver "to the various GoldMoney Users."
If you use someone else other than GoldMoney to store your gold and silver for you, be sure they meet the same high standards that GoldMoney achieves. Ask for the audit of the gold and their operating systems. Look for their insurance certificate. In short, compare their governance procedures to those of GoldMoney to ensure that they provide the same assurances of integrity.
Use the REFCO and LME events as a reason to take a close look at your portfolio of precious metals. Evaluate your exposure to paper, and take the safe alternative. Replace those paper promises with physical metal.
Gold should be viewed as the bedrock asset in your portfolio. In view of its importance, do not take any risks with it. So for this reason, be sure to own physical metal, and not just someone's promise.
Published by GoldMoney