Gold certificates aren't gold
This page is a copy of
http://groups.yahoo.com/group/gata/message/1535. We have included
this page to our website to explain the importance of owning physical gold
to paper gold. Although the writing is
now a bit old (June 7, 2003), the message remains relevant. To save
you time, we have highlighted in
yellow the text regarding paper promises.
Gold certificates aren't gold, but allocated gold is a lot closer
James Turk, Editor
Freemarket Gold & Money Report
Q: Regarding allocated vs. unallocated gold, I agree you
are at risk with the bullion bank's performance in regard
to the latter, in the case of a typical U.S. bullion bank.
But why not select someone like Perth Mint in Australia,
where your gold is government-guaranteed?
A: You are a general creditor of Gold Corp., doing business
as Perth Mint.
Its 2002 financial statement shows that it
has approximately 4.5 times more debt than equity, fairly
high leverage. Are you prepared to be a general creditor of
Gold Corp., given that kind of leverage?
The term "your gold" is not correct. You don't own the gold
represented by Perth Mint certificates. You own a PROMISE
to pay you gold, which was the basic point of my article.
Promises to "pay" gold are different from gold you own. If
you own a Perth Mint certificate, you do not own gold.
Q: Perth Mint guarantees to have physical gold bullion in
storage to cover your allocation -- unless I have been
misled. Doesn't this mean an air-tight guarantee?
A: This may be a guarantee but it does not deny that you
are a general creditor of Gold Corp., based on my reading
of the documentation. According to Gold Corp's 2002 financial
statement, there is $96.2 million of gold on hand against
$234 million of liabilities. Unfortunately, the financial
statement does not show what portion of these liabilities
is Perth Mint certificates, but it does show that $222.5
million represents gold liabilities, so the Perth Mint
certificates represent some portion of this $222.5 million
of debt. Unfortunately it is not possible to determine
from the financial statement whether there is less than
$96.2 million of Perth Mint certificates outstanding, as
the mint claims.
As for the "air-tight guarantee," if there is a problem, is
the Western Australia government going to pay you dollars
or ounces? Is it going to exercise a "force majeure" clause
to relieve itself of any obligations? My point is that one
should not take risks with his gold, which is the
cornerstone of your portfolio, particularly amid the
prevailing financial uncertainty. If you are relying on a
government guarantee, you may be relying on a hollow
promise. You don't risk relying on a hollow promise when
you have allocated gold.
Q: Perth is also a long way away from the U.S. government's
A: Maybe, but governments can be governments
regardless of where they are. Who can predict how any
government might act in a crisis?
Q: I recommend that bullion holders in the United States
purchase their equivalent holding in unallocated bullion (no
holding cost but a 1 percent purchase premium) and then
liquidate their physical holding in the United States to cover
the cost. You might do it in reverse if you think the buy/sell
timing/price is likely to be better.
A: Avoid unallocated gold. If you think you "own" gold with
an unallocated holding, you are mistaken.
Q: I have unallocated holdings with Perth Mint. What you
described in your article suggests that owning unallocated
gold and having only a certificate of proof of such means
that I am only a creditor of Perth Mint.
Q: If you suggest that Perth Mint and other gold operations
can default when they promise to have bullion holdings
equal to or greater than total unallocated gold certificates
issued, then I would say they could equally default if you
had certificates for an "allocated" holding, with bar serial
numbers and all.
A: No, there is a big difference. If they default on their
general obligations, allocated gold stored at Perth Mint
will not be affected (unless, of course, there was fraud,
but we are not talking about that possibility). Allocated
gold IS gold you own; it is not an asset of Perth Mint.
Thus the liquidator would return your gold to you if Gold
Corp. were wound up.
Q: After all, couldn't they decide to dispose of or sell or do
what they like with your "allocated" bullion if they decide to
A: No, they could not do this without breaking the law.
Q: If you see what I mean, having someone else hold your
physical gold means your holding is not fully in your control
and you are at the mercy of the people holding it for you.
A: Yes, you have more control over gold in your personal
possession, but holding your gold is not without its own
risks. In my view, owning allocated gold acquired within an
established chain of integrity (like the one established by
the London Bullion Market Association) and having that
gold insured is the safest way to hold gold, and this is the
standard we have achieved at GoldMoney.
Q: I would trust neither a commercial company nor the U.S.
government but feel a little more confident with the Western
A: I take the opposite view. I think a commercial company
with a strong governance policy and insurance for its
customers' gold is the preferred option. In contrast to
governments, commercial companies cannot unilaterally
change the rules of the game to their advantage, as
governments have a history of doing. Commercial
companies stay in business by serving their customers.
Governments stay in control regardless of how they act
-- unless, of course, they are overthrown.
Q: If you have any information suggesting that the Perth
Mint has some loopholes in its guarantee that could let it
default against holders of allocated and unallocated bullion
certificates, please let me know.
A: Perth Mint cannot default on its allocated gold without
breaking the law. Gold Corp. and the Western Australia
government can default on the Perth Mint's UNallocated
bullion certificates by using Perth Mint's "force majeure"
clause. Read all the fine print written on the certificate,
including: "The Perth Mint will not be liable or
responsible for delivery delays due to causes beyond its
I hope that you find the above useful. Storing gold can be a
complicated matter, and most people do not appreciate the
intricacies of the law, which is why I wrote my article. Most
people do not understand that when you own a certificate,
you do not own gold. You own only someone's promise to
pay you gold, and this credit risk should be avoided for the
cornerstone role gold fulfills in your portfolio.
Perth Mint replies: We're safe and government-guaranteed