Thursday, April 22, 2021

"Every physical silver ounce has been sold up to 1,000 times"

 

Following my article on Tuesday about the safety of money in banks, in which I mentioned that one of my family's financial precautions is to keep a small (very small - we ain't rich!) amount of money in silver bullion coins, a number of readers wrote to agree with that step.  However, some said that they had purchased gold and/or silver shares in so-called "Exchange Traded Funds" or ETF's.  In other words, they don't own physical metal:  instead, they have pieces of paper promising that a certain quantity of that metal is held in their name at or by a central facility.

Swiss asset manager Egon von Greyerz believes that's a very dangerous mistake.  The title of this article is the headline from his discussion of the issue.  Here's a lengthy excerpt.


EVERY SINGLE OUNCE OF PHYSICAL INVESTMENT SILVER IS ESTIMATED TO HAVE 500-1000 PAPER CLAIMS.

The LBMA and Comex clan has sold their physical silver up to 1,000X over.

If a salesman has a demand for 1,000 items of a product of which he possesses the only one available, he will first rub his hands and then perform a victory dance. He knows he will achieve an astronomical price.

And that is exactly what would happen in a free silver market. But since the paper silver issuers know that they are dealing with totally clueless buyers who don’t understand that there is no silver, they will continue to stuff the gullible buyers with more fake silver.

That is, until the buyers wake up and ask for delivery to find out that the silver vaults are empty.

We know that the silver market is very strained already. Retail silver can fetch margins up to 50% and they have been at 100% premium. But at least when people buy retail silver from a reputable dealer and take delivery, they know that they have real silver.

I have warned investors many times not to buy gold or silver ETFs or funds of any kind. The risks are multiple. Here are some of them:

  • It is a paper security held within the financial system
  • It has multiple counterparty risks
  • The gold/silver holdings are not segregated from custodians’ assets
  • It owns no gold/silver directly
  • The gold/silver is stored within the banking system
  • The gold/silver held is probably rehypothecated
  • The gold/silver is not fully insured
  • Investors have no access to their gold/silver

There have been many reports of problems of getting physical delivery from mints and bullion dealers.

. . .

BUYER BEWARE OF ANY PAPER GOLD & SILVER

It is not easy for precious metals investors to navigate through the jungle of problems in the precious metals market.

  • You can’t trust the bullion banks and their paper metals.
  • You can’t trust certain mints or bullion dealers.
  • You can’t trust gold or silver ETFs or funds.
  • You can’t trust futures exchanges.
  • You can’t trust banks to hold your metals.

Gold and silver must be owned and held directly in physical form. The precious metals must be stored outside the banking system in the safest vaults and jurisdictions. The investor must also have direct personal access to the vault.

You should never store more gold and silver at home than you can afford to lose. It doesn’t help with a good safe when burglars come to your house and threaten members of your family when you are in.


There's more at the link.

Of course, Herr von Greyerz strongly recommends gold as an investment - that's his business, after all - but one can allow for his motivation in judging his advice.  Based on other articles I've read (see, for example, the prevalence of precious metal derivatives and leasing), I think his comments hold water.  He highlights problems with Australian mints and facilities where investors demanded to take delivery of their metals, but faced delays of many months.  I've heard similar reports from some British investors, and even national banks have sometimes found it difficult to repatriate their precious metal holdings from other nations.  For an interesting perspective on that problem, see these three articles.  (Note that the source is, again, a precious metal dealer, so one has to allow for that bias while reading them:  nevertheless, the factual basis for the articles is referenced if you wish to do your own research.)


Where Has All The Gold Gone? Part 1: The Past

Where Has All The Gold Gone? Part 2: The Present

Where Has All The Gold Gone? Part 3: The Future


Those articles are talking about national gold reserves;  but similar problems exist with private reserves, and with the silver market.  Those who physically possess and/or control the metal can be doing any number of things with it about which you know nothing.  Rehypothecation is a known issue.  Who knows how many times an ounce of gold or silver has been used as security for a different financial transaction?  If anything goes wrong with the latter, the physical metal may be demanded as collateral - and if that happens to be metal you own (on paper, at least, through an ETF) where does that leave you?

Basically, if you want to hold some of your assets in the form of gold and/or silver, whether coins, bars or some other form, I highly recommend that you own the physical product, rather than trust a piece of paper promising that someone else is holding it for you.  To coin a phrase:  "Yeah, right!"  If you believe that sort of promise, there's a bridge in Brooklyn, NYC I'd like to sell you.  Cash only, please, and in small bills . . .

Peter


14 comments:

Flugelman said...

I have been buying smaller lots ($6k) OF small gold coins for a while as the budget allows. Your previous article makes me think I should be mixing some silver in with the yellow stuff. My early concern about precious metal was in the event of a catastrophe one would not be able to research the going worth of an ounce. Then I realized the worth in that scenario is whatever someone is willing to give for said ounce.

-XC said...

I've always kept several hundred (each) of very well used silver dimes, quarters, etc. The stuff you can buy for the weight of the silver alone.

Should the SHTF in a real way, I do not want to try to change a gold coin, or try to argue that a "mint" (see what I did there?) quarter in acrylic is real silver and not the fake you can buy for a buck in Chinatown.

-XC

Aesop said...

If it isn't in your hand, you don't have it.

Most kids grasp this concept by around age three.

Dave64 said...

Gold jewelry is a very effective way to own gold. It's a common practice in India.

Stuart said...

"Every physical silver ounce has been sold up to 1,000 times"

Which is absolutely irrelevant if you have physical possession. That, my friends, is the lesson for today.

Old NFO said...

Concur with Aesop!

boron said...

It's interesting, however, to watch the movement of platinum and palladium as the Russians try to convert their metals to dollars

Quartz said...

Having silver or gold in coin form is not bad but is sub-optimal in a crisis: if you need to use them then the person to whom you give a coin will likely assume you have more, with possible adverse consequences. But if you have it in the form of rings or jewelry (per @dave64) then you can pull the ring off your hand or jewelry out of a pocket and they will be none the wiser.

You do need to consider inheritance tax: here in the UK, silver and gold bullion are IHT-free but I'm not so sure about jewelry.

The Freeholder said...

If the other 999 claims on my physical PMs would like to try getting them, they may feel free.

Will said...

Some year back, Germany requested that the gold that the US had been holding since ww2 be given back. Unfortunately, the NY Bank that was holding it in trust had sold it earlier. Whoops! No idea how that little problem was resolved. Maybe a 1000 tons, or so?

On paper, it looked like the gold was still in their vault, but, reality bites...

Chris Nelson said...

No one knows if how much gold is in Fort Knox or if there is any large amount is still there anymore. Attempts to force audits by Congress have been denied.

Also China is buying as much physical gold as they can, plus build large stockpiles of strategic materials. Almost like they are preparing for supply lines to be disrupted by war or something.

I used to have a stockpile of metals, mostly brass and lead, but it was lost in a unfortunate boating accident...

Will said...

Chris,
the fact that NO ONE has been allowed to audit Fort Knox since the Nixon days clearly indicates the vault is empty. Scuttlebutt is that Nixon sold that stash to pay for the Vietnam War. The rest of our gold is held in that NYFC vault, which can be seen, apparently.

Kevin said...

why are the gold and silver infomercial guys so eager to exchange their "inflation proof wares" for my "soon to be worthless" Paper Money? What do they know that they aren't telling us/ :)

Unknown said...

Just remember that specie is a hedge against instability, not an investment.

The silver market is absolutely borked, and his been since at least the late 1980s.
On paper, it looks great. Demand greatly exceeds supply, increasing production has a number of large bottlenecks, and an inherent scarcity exists.

But virtually every central bank, large financial concern, and government has a vested interest in driving the price down.
And they do.
Borderline frauds like paper silver are just the tip of the iceberg.

This is not investment advice, and I am not a investment advisor. That I lost my shirt in that market a few decades ago and have kept an occasional eye in it since do not make me an expert.