"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