"The complexity of this era of credit liquidation is far too great for the mob mind to grasp. It is hardly possible for them to see the picture wherein about 700 billion dollars of physical and intangible wealth is attempting to be turned into about 5 billion dollars of money."
Robert Smitley [writing when 'money' meant gold.]
Take care when buying from a bank
As you set out to buy gold the first thing you need to know is that 95% of the world's gold traders will automatically sell you the wrong type.
Unallocated gold is the most widely traded form of gold in the world. It hides a way of advantaging the provider - usually a bank - by subjecting buyers to a risk they will frequently remain unaware of until it is too late. The widely quoted 'spot price' refers to this unallocated gold, and this is how it works:-
When a
bank sells you unallocated gold on the spot market you become a
creditor - i.e. the bank owes you gold which you do not own. The
bank is taking advantage of the fact that you are not quite sure what
to do with any gold you buy, and it feels logical - to most gold buyers
- to put the gold safely in the bank. When you do this you
become, in law, a depositor of gold. Most people now relax in the
belief that they own gold completely securely, and they do not pay the
little extra - above the spot - to have their trade formally
'allocated'.
A bank is required by its regulator to hold a proportion of its
liabilities as certain types of assets capable of being turned into
cash quickly during times of crisis. It is a liquid reserve
and it's there to protect the bank from a common type of problem - a
liquidity crisis - which occurs when a bank has short term deposits,
long term loans, and insufficient cash to meet the immediate demand for
withdrawals. Physical gold bars are accepted as a very good form
of liquidity reserve because they can be turned quickly into cash.
If a bank has physical possession of some gold which it owes you as its
creditor the bank itself is the current owner of the gold. While
this gold remains unallocated to you the regulator considers it part of
a bank's liquid reserve. This makes unallocated gold an
attractive way for the bank to maintain its regulated liquidity,
because you have paid for your gold, and the bank is free to use your
money, while it is also able to add your unallocated gold holding to
its own reserve.
So your unallocated gold would be ditched if the bank were in need of
cash. It has no choice in the matter because liquid reserves are there
to be sold at short notice to protect the bank's general creditors -
all of whom, including you, must receive a proportionate share of
whatever is raised from the sale of assets should the crisis deepen and
the bank become insolvent.
If that did happen you would be in a bad position. The bank's
small gold reserve would be diluted by non-performing bond portfolios
and other assets which don't sell well in a crisis. The last line
of defence for bank depositors is deposit protection, which is a state
underwritten mainstay of banking confidence in the West. But it
does not apply on bullion debts like yours. Deposit protection is
there as a confidence-builder for the national currency only, which
means unallocated gold actually offers less protection from bank
failure than a cash deposit. So having been the provider of the
bank's liquidity reserve you will then be in the minority of those
offered no protection by the state's guarantee.
So it is important not to be impressed by unallocated gold, or by it being physically stored in a bank's vault, or by it being checked daily by bank regulators. Regulators are checking it to make sure the bank maintains a liquid reserve, and they are not interested in your entitlement as a bullion creditor.
Allocated gold is different because you become the outright owner of gold and you are no longer a creditor. Your allocated gold is your property and it cannot be used as the bank's reserve, so with allocated gold you get proper protection from systemic failure.
Unfortunately with allocated gold your money does the bank no good. And since modern banks reckon to earn 20% each year on capital employed, their loss of use of your allocated gold is disappointing for them. This is why banks usually charge nothing for unallocated storage and at least 1.5% per annum for allocated storage, with the result that professionals in the bullion market reckon that less than 1% of gold traded within financial markets is allocated.
This is how the huge majority of the world's owners of bank held gold are - probably unwittingly - storing their personal reserve in a way which fails to meet the most common objective of gold buyers.
Unlike banks some suppliers buy real physical bars. BullionVault is one, and it buys its gold from a major international bullion dealer, which also deals in volume with counterparties all over the world. BullionVault insists on physical delivery of bars into ViaMat vaults, which enables BullionVault users to become the outright owners of the gold they buy. It costs an extra dollar and a half an ounce.
As its customers buy gold BullionVault re-loads its inventory with physical purchases. So its 'Bar List' gradually grows, with batches of bars delivered sometimes a few days apart, and sometimes a few weeks. The bars were originally manufactured by a refiner, and stamped there with their unique bar numbers. They are the normal 'Good Delivery' size of 400 oz, which is the standard specification used to settle physical bullion market deals.
You can check out the actual BullionVault ViaMat list if you want because it is published daily on the internet (at http://www.bullionvault.com/audit/london_gold.htm) but the table below shows the important data.
| Bar No | Location | Delivery |
| 5812 | Zurich | 18-Jan-06 |
| 5813 | Zurich | 18-Jan-06 |
| 5814 | Zurich | 18-Jan-06 |
| 5815 | Zurich | 18-Jan-06 |
| 5816 | Zurich | 09-Feb-06 |
| 5817 | Zurich | 09-Feb-06 |
| 5818 | Zurich | 09-Feb-06 |
| 5819 | Zurich | 09-Feb-06 |
| 5820 | Zurich | 14-Feb-06 |
| 5821 | Zurich | 14-Feb-06 |
| 5822 | Zurich | 14-Feb-06 |
| 5738 | Zurich | 09-Mar-06 |
| 5739 | Zurich | 09-Mar-06 |
| 5740 | Zurich | 09-Mar-06 |
| 5741 | Zurich | 10-Apr-06 |
| 5742 | Zurich | 10-Apr-06 |
| 5743 | Zurich | 10-Apr-06 |
| NS 1226 | London | 09-Jan-06 |
| NS 1227 | London | 09-Jan-06 |
| NS 1228 | London | 09-Jan-06 |
| NS 1229 | London | 03-Feb-06 |
| NS 1230 | London | 03-Feb-06 |
| NS 1231 | London | 03-Feb-06 |
| NS 1232 | London | 21-Feb-06 |
| NS 1233 | London | 21-Feb-06 |
| NS 1234 | London | 21-Feb-06 |
| NS 1235 | London | 14-Mar-06 |
| NS 1236 | London | 14-Mar-06 |
| NS 1237 | London | 14-Mar-06 |
| NS 1238 | London | 25-Apr-06 |
| NS 1239 | London | 25-Apr-06 |
| NS 1240 | London | 25-Apr-06 |
See how over the four weeks from 18-Jan 2006 to 14-Feb 2006, with the delivery of three separate purchases, the bar numbers delivered to BullionVault in Zurich are sequential. Then over the four and a half weeks from 19-Mar-06 to 10-Apr-06 they were sequential again, for 2 more deliveries. Then in London notice that all five physical deliveries between 09-Jan-06 and 25-Apr-06 are sequential too.
What seems like a logical conclusion (and BullionVault's main market dealers have confirmed it) is that BullionVault is the only customer of this major firm to trouble it with the hassle of delivering the actual physical bars.
Trading gold on the ledger is cheaper and faster for banks, and it is natural - if sometimes wrong - for banks to think themselves 100% credit-worthy. With so much gold out there being unallocated investors should be careful because a financial crisis might not be profitable for them, and it ought to be.
The thinking behind BullionVault
It used to be very difficult for private individuals to find a secure, accessible and cost effective way of buying, storing, and later selling gold.
The big problem was that the narrow trading spreads of the professional bullion markets required settlement in 'Good Delivery Bars', so if you couldn't make delivery in these bars you were excluded from enjoying professional market prices.
These bars are both very large (usually 400 troy ounces [12.4kg]) and must have been kept continuously in recognized bullion vaults from the date of their original manufacture. So just having enough money to buy a bar or two was only half the problem solved. You needed a relationship with a formally recognised bullion vault, and generally they are not accessible to retail customers. The entry level was typically 15 - 20 big bars.
So the only route for retail buyers used to be small bars without the good delivery status, and this meant high dealing costs. Retail trading spreads were typically 4-6%, which compared to about 0.4% for main market gold.
BullionVault resolves this problem. It lets you buy a small part of the high-quality big bars in a way which eliminates the loss of value associated with buying small bars. The saving is substantial. It also guarantees your gold has never been tampered with.
On BullionVault you buy whatever quantity of gold you like. Trading is in multiples of 1 gram, instead of the 12,500 grams of a normal good delivery bar. You choose your preferred ViaMat vault from London, New York or Zurich.
When you choose to sell you can find gold buyers at BullionVault, and whereas before they probably would have thought you an untrustworthy seller, now, with your gold having stayed in good delivery bar form within BullionVault, your gold's quality is guaranteed. So as a seller you'll benefit by having gold of professional market status which can be offered directly to new buyers on a publicly accessible order board. And both you and your buyer will save again, because neither of you pay shipping charges.
But the biggest advantage of all is that you can cut out the middleman. BullionVault is an open marketplace in which private buyers can meet private sellers directly - without going through a trader. The buyer is assured that the gold is sound, and the seller is assured that the money will be paid. Their trade settles instantly, at the point of trade and because there is no middleman both get a better price.
Many BullionVault users never pay a trading spread. Many more routinely post prices inside the quote, narrowing the spread for everyone.
There are other important things for you to find out about BullionVault to assure you of your safety. Rather than explain them all here in this brief introduction I'll refer you to the BullionVault "Help" service. You will see a button for this on the home page at www.BullionVault.com.
There's an entire section dedicated to your safety. Pay particular attention to :-
Our objective is to make gold more secure, more competitive and more accessible: allowing private buyers to get themselves some bullion protection from what looks like an increasingly uncertain future. As well as comprehensive help our site has detailed answers to your queries on our 'Frequently Asked Questions' [FAQ] page, and just by reading what our customers say you will get a good feel for the service.
We also give you a free gram of Zurich vaulted gold so that you can experiment with dealing on our public order board. You can build your experience of how it all works before you fund your account, and entirely at our risk.
SIPPs allow 40%-cheaper gold in the UK
Because the UK government believes people are not saving enough for their retirement it is keen to promote pension savings.
BullionVault lobbied the case for gold and now, announced in the 2006 budget, investment gold is finally allowed in your tax-efficient pension savings.
If you pay income tax in the UK the government will now pay up to 40% of the cost of gold you buy for your personal pension fund.
To learn more about this new route into investment gold read the comprehensive guidance at www.GoldSIPP.com.