When choosing a place to buy and store gold and silver bullion, there are several aspects that need to be considered, especially for those who are new to storing their precious metals. Physical precious metals are almost always purchased for the purpose of wealth protection but how good is such ‘protection’ in a systemic crisis?

Physical Ownership of Bullion – If you cannot hold it, you don’t own it!

When purchasing precious metals with a plan to physically own and store in a vault, it is important to make sure that buyers are the legal title owners of the stored bullion rather than just creditors being owed bullion.

Typically, banks and dealers will sell and store precious metals on an unallocated or fully allocated basis and issue statements showing an owed gold or silver balance. Such statements are almost always IOUs (I Owe You) that confer no ownership as the bullion remains on the balance sheet of the bank or a dealer. Legally this means that customers are just creditors who could be defaulted against rather than actual owners of physical property.

Furthermore, as it is still legally owned by the dealer, such bullion can potentially be leased out to third parties or be used as in-stock inventory for sale to other customers. Sometimes the bullion is not even there, despite the collection of storage fees, as banks often see no need to acquire physical bullion to cover a liability which could be hedged much more cheaply with paper and settled in cash or by ordering bullion on demand.

An illustrative example was a law suit filed by US resident Selwyn Silberblatt against Morgan Stanley. According to the complaint, the bank led investors to believe that "they were making one type of investment—the purchase of precious metals which the investor would fully own when, in fact, Morgan Stanley was actually making either no investment on behalf of its clients or an entirely different 'unallocated' investment for which there is no storage”.

Morgan Stanley later settled the case “to avoid the cost and distraction of continued litigation” for 4.4 million USD. So basically the bullion was never there, as it was just an IOU, and Morgan Stanley sold the IOU to the customer and then charged a fee it labeled "storage fees" without needing to acquire or store physical bullion.

A more recent example that raised a lot of international attention was, of course, the case of German gold in Federal Reserve Bank of New York. The German Government has been storing about half its gold supply in the vaults of NYC Fed. In 2012, Germany decided to bring home its gold, but the Fed said that isn’t able to do so, and it would need until 2020 to be able to accomplish the transfer.

The German government then asked to visit the Fed vaults to audit the gold and determine its actual existence, but the Fed also refused. The reasons given were “security” and “no room for visitors”. Finally, in 2017 Germany repatriated around 300 tons of gold from Fed (three years ahead of schedule) and brought it back to the Bundesbank in Frankfurt. As could have been expected, the whole situation caused a lot of speculations and raised questions if the gold was physically present there at all.

If these examples happened with the biggest banks and even between central banks, what can happen to ordinary people especially in a real crisis? Customers may easily find out that they have never been the actual owners of bullion and will be fully dependent to the dealer’s continued ability to settle their debts, essentially avoiding one of the very reasons to ‘own’ gold and silver.

The best way to ensure full ownership is to make sure that the purchased bullion is stored on a segregated ownership basis. This means that the bullion must be uniquely identified (usually numbered and/or bar-coded) and retrievable on demand at short notice. The bullion should also be regularly and physically audited by independent third parties. Ideally, photographs of each individual bullion item sold should be available as well.

The entrance to our 600-ton silver vault and 30-ton gold vault

Choosing a Safe Jurisdiction - Going ‘Locally’ Offshore!

Diversifying the country risk by storing precious metals offshore in a safe jurisdiction is one the most important aspects of wealth protection against seizures, nationalizations or other forms of confiscations in the home country.

Banks and large vaults are typically multinational companies which operate within the US or Europe and are subject to US and European regulations and laws. This is important because most storage contracts require the parties to agree to a Force Majeure clause to indemnify the storage provider should they comply with any governmental decree from any government.

Hence, in case of a gold nationalization by a major Western country, vault holdings can potentially be nationalized regardless of where they are stored in the world depending on how strongly the vault, middlemen or a parent company is tied to the nationalizing jurisdiction.

These events have happened in the past and not only in third world authoritarian regimes. The most famous case was Executive Order 6102 signed by President Franklin D. Roosevelt in 1933 which required all forms of gold bullion stored in the US to be delivered to a Federal Reserve Bank in exchange for U$20.67 per troy ounce. Non-compliance carried huge fines of 10,000 USD (around 250,000 USD in 2017 dollars) and imprisonment of up to 10 years if the gold was not turned in within one month.

Once US gold was nationalized the US dollar was then devalued against gold (from U$20.67 to U$35 per troy ounce of gold) thus causing a de facto loss of over 40%. As of today, the loss would have been 98.5% for those that turned in their gold in exchange for U$20.67, only bullion stored offshore, outside of US jurisdiction with non-US institutions, remained safe as US law did not apply.

Safe deposit boxes kept in bank vaults are also not out of governments’ reach and maybe the most telling example of this was as recent as 2015 during the Greek government-debt crisis. Soon after the Greek government imposed capital controls to prevent cash from escaping from the Greek banking system, the (then) Deputy Finance Minister Nadia Valavani revealed to Greek television that the government and banks had already agreed that people would also not be allowed to withdraw cash or valuables from safe deposit boxes for as long as the [capital] controls were in place. Valuables stored offshore, outside of Greek jurisdiction with non-Greek institutions, remained safe however as Greek law would not be applicable.

Whether we like it or not, a vault has to be subjected to some sort of governmental authority. Hence, it becomes a matter of choosing the right jurisdiction – single and offshore – with a clear rule of law especially when it comes to the respect of private property rights, has enough economic and military power to defend its sovereignty and which is strong enough to actually enforce its laws.

There will be more seizures and confiscation in the future, so take some time to read the fine print of your storage contract, or your dealers' contract with the vault, and be on the look-out for Force Majeure clauses that indemnify vault operators and dealers against any governmental decree from any government.

If you store in Singapore, for example, you should indemnify the vault only against governmental action by the Singapore Government, not seizures by any government worldwide.