In this article, Nick Barisheff, CEO of Bullion Management Group Inc, guides physical gold buyers on safe storage. Choosing the right investment product from the start is the most important prerequisite for success.
Source article for the summary: Unallocated Gold Storage Or Accounts: Avoid This Risk When Buying Gold – GoldSilverWorlds
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Risks associated with buying gold
Barisheff defines the biggest risks associated with buying gold as follows:
- Gold scams
- Paper gold
- Gold in unallocated storage
Gold scams are as old as gold itself – counterfeit gold bars and coins have always been in circulation, now in even more sophisticated versions.
Paper gold can be a risky investment. A simple rule of thumb is that gold derivatives (ETFs, certificates, leveraged contracts, futures, or options) are suitable for trading but are not in themselves safe havens for wealth. Only physical gold stored in allocated storage can serve that role.
According to Barisheff, there has been significant concern regarding ETFs (exchange-traded funds), as they typically include investment products where the underlying gold may be borrowed. In the event of a financial crisis like that of 2008, institutions that have lent gold will be the first to redeem their shares, leaving shareholders in an uncertain position.
Therefore, it is advisable to consider only those gold products that do not undermine the fundamental characteristics of gold: liquidity, absence of third-party risk, and independence from management skills.
Defining ownership is the most important thing
Many do not understand that gold can be purchased without owning it – just like a car can be leased instead of owned. According to Barishev, defined ownership of gold is the same as making any other purchase where ownership clearly transfers from one person to another. Therefore, owning gold and silver requires proper documentation that transfers ownership from the seller to the buyer.
In practice, defined ownership must first relate to an individual gold product. Then the product is placed in a defined storage with a custody agreement. Banks or financial institutions cannot lease out products at that time because they do not have access to the defined products.
Undefined storage, on the other hand, means, according to Barishev, that one owns a part of a gold pool without clearly marked ownership of any individual bar. In this form of ownership, the holder remains an unsecured creditor in the event of the retailer's or bank's insolvency or bankruptcy. For this reason, storage fees are significantly lower than in complete custody storage.
Gold pool products and certificates are all undefined. A paper gold certificate is just a debt instrument.
"Intermediaries of undefined gold products exploit people's ignorance and unwillingness to read the fine print. Thus, when gold is most needed, it may not be available."
Barishev's advice is therefore clear: it is essential to require proper documentation for each precious metal product that legally grants rights to specific physical products.
Check if you own your gold
To facilitate the right choices, Barisheff has compiled a simple checklist to help assess the risk level associated with precious metal products.
If you can answer 'yes' to every question, you are likely a gold product owner. If even one answer is 'no', then alarm bells should ring:
- Is the investment structure of the service easy to understand?
- Will you gain possession of the product in the event of a bank or broker bankruptcy?
- Does the documentation clearly indicate that the ownership of certain products is legally and directly transferred to you?
- Is it clear that the document for your purchase is not a debt instrument?
- Are the storage and insurance terms of the defined inventory clearly stated?
- Is the bar manufacturer Good Delivery accredited and is the storage provider a member of the London Bullion Market Association (LBMA)?
- Are you sure you are not buying a discounted product (with no premium over the spot price)? Genuine physical precious metal products are not sold at a discount.
In his article, Barisheff refers to his colleagues in leadership positions in the financial sector who consistently favor physical gold bars stored in defined inventories, in a secure vault.
