Thursday, May 31, 2012

Not All Physical Gold & Silver Held as Custodial or 'Allocated' for Safekeeping May Prove Not to be So!

More Behind-The-Scenes Positive Prospects For Higher Gold Prices

By Patrick A. Heller

Commentary on Precious Metals Prepared for CoinWeek.com
While a lot of attention is focused on European debt problems and the US elections, there are a few developments in the works which bode well for higher gold prices in the future.
These developments have nothing to do with technical trading signals or standard supply and demand curves.  Instead they point out that demand for physical gold could be much higher in the future or that supplies could be lower.


First, a brokerage customer purchased four kilogram-size gold bars in 2009.  The buyer was given the serial numbers of the bars and was told by the brokerage firm that his bars were held in “allocated storage.”  Allocated storage is specific merchandise stored with the customer’s name on it.  It is theoretically titled in the name of the owner of the metal and not in the name of the brokerage or the storage company.  Therefore, the metal is not an asset subject to outside claims against the brokerage or storage company.

Last fall, this buyer started the process to take physical delivery of these four kilogram gold bars.  For a time, he was given the runaround.  Eventually he did receive four kilogram gold bars.  Unfortunately, none of the serial numbers matched.  In fact, upon further checking, it was determined that the bars the owner received had been manufactured in 2011!

Although this particular owner was eventually made whole, the question still exists about what happened to the bars he supposedly held in allocated storage.  If brokerages and storage facilities are defrauding customers of their gold in allocated storage, a little publicity could spark soaring demand for delivery of physical metal that that simply does not exist!

Second, when banks are judged on their solvency, different assets held by the bank are classified as different tiers in terms of the “quality” of the asset.  Tier 1 assets are calculated as being valued at 100% of the asset value, even if such an asset is Greek sovereign debt.  Gold is currently classified as a Tier 3 asset, meaning only 50% of its value can be treated as bank capital.

Well, the times may be a-changing.  The Basil Committee for Bank Supervision, an operation of the Bank for International Settlements is studying a proposal to reclassify gold as a Tier 1 asset.  This Committee is the highest level of international bank supervision.  Its role is to define bank capital requirements.

Bank capital requirements are being increased in 2013.  While it is uncertain when or to what degree gold might be allowed as a Tier 1 asset, Ross Norman, an analyst for Sharps Pixley, believes that private bank demand could absorb as much as 1,700 tons (almost 55 million ounces) of gold should this occur.  A bonus for the banking industry is that gold is almost certainly of higher safety in terms of capital preservation than some of the debt banks now hold.  Should this reclassification of gold occur, there could be a competition among banks to advertise that they hold the higher percentage of their reserves in gold.

Third, Iran recently announced that has in place an international payment system that does not use the US dollar.  This alternative would be extremely popular for China and India, which are major importers of Iranian oil, if the US government carries through with its threats to cut off from the SWIFT international transaction payment system of any nations that trade with Iran after the end of June.  Russian President Putin’s decision to boycott the Group of 8 meeting in Camp David, Maryland two weeks ago could also be a sign of that nation’s solidarity with Iran, China, and India to further decrease the usage of US dollars for international trade.  Such a development would further hurt the value of the US dollar, resulting in higher gold prices.

The prices of precious metals are not all about standard supply and demand factors and technical trading signals.  Every once in a while, the market shifts for other reasons.  The long-term prospects for gold look extremely positive.

Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed athttp://www.libertycoinservice.com. Other commentaries are available at Numismaster 

(http://www.numismaster.com under “News & Articles). His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.
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