The aim of this article is to explain the differences between investment solutions offering direct ownership (allocated) and mutualized (non-allocated) ownership of physical gold.
Risks tied to the actual financial context :
Two of the most important risks for investors in this financial crisis when investing in gold are :
- Counterparty risk : this is the risk investors face when they hold their investment through an intermediary instead of directly. They are exposed to the risk of counterparty default.
- The risk of not really holding physical gold and the impossibility of verifying its existence.
As regards counterparty risks, the failures of MF Global and Sentinel Asset Management are quite revealing : both corporations were either selling gold certificates or gold stored in the banking system. But, in both cases, investors were not the full owners of their gold; their gold was held by MF Global and Sentinel Asset Management.
In both cases, investors didn’t have access to their gold and couldn’t verify it, or take delivery of it in a timely manner. They were thus exposed to the risk of counterparty default and have fallen victims to those two companies.
Direct ownership or mutualized ownership?
There are differences at many levels :
1) How is the actual investment in gold held
- Mutualized, or un-allocated gold, consists of a part of a gold bar (usually 12.5 kg). The gold held is not a finite quantity, like an ingot, but part of a bar.
- Direct, or allocated gold, gives full and total ownership of a bar, or of an ingot, depending on the size of the investment.
In other words, an investor may either own a part of a bar (mutualized gold) or a complete allocated bar or ingot.
2) What should an investor choose ?
- By definition, mutualized gold is a means to own gold alongside other investors (mutualization). The same bar is thus owned by many investors, each investor owning a part, not the whole bar.
- Direct ownership means an investor directly and totally owns a bar or ingot in full name.
In one case, ownership is mutualized and, in the other, it is direct (in full name) 100% ownership.
3) Ownership and storage certificates
- In the case of mutualized gold, storage certificates are issued in the form of a list including all the clients’ numbers and a list of numbered bars. It is issued by the storage partner, thus it is global and not personally assigned.
- In the case of direct ownership, a unique storage certificate is issued for each client by the storage partner. It is unique, issued for each client and it mentions precisely the client’s first and last name as well as the bar(s)’ serial numbers.
In one case, the storage certificate is global and not personally assigned and, in the other, it is unique, personal, and it shows the precise identity of the client and the serial number(s) of the bar(s) he owns, which constitutes a full name ownership certificate.
4) In which cases do storage partners know the identity of the clients ?
All companies offering mutualized or direct ownership have established partnerships with independant companies specialized in the secured storage of precious metals, generally outside the banking system :
- Mutualized, or un-allocated gold : the storage partner is only aware of the investor’s client number and of the serial number of the bar attached to that number. Il does not directly recognize the identity of each client assigned to a number. And such companies offering mutualized gold ownership only have a single storage account in their name with the storage partner and a multitude of sub-accounts for each of their clients. The investor/client does not have an open account with the storage partner, it’s the issuer of the mutualized gold solution who stores gold in the name of its clients.
- Direct ownership : the storage partner, as long as it issues itself a storage certificate with the exact identity of the client along with the bar’s serial number, and/or a storage account is open directly in the client’s name, knows exactly each client’s identity and knows precisely to whom belongs every numbered bar. In this particular case, both the company offering direct ownership and its storage partner know the client’s identity and the serial number of the bar(s) he owns.
In one case (direct ownership), the storage partner knows the client’s exact identity (first and last names) and, in the other(mutualized gold), the storage partner has a list of clients’ numbers, but does not know the identity of the clients other than through the company, and only manages a single global account for said company.
5) Verification, direct access to the secured warehouses and the possibility of retrieving stored gold
These questions are tied to the previous one :
- Mutualized gold : It is generally more difficult, even impossible, to physically access one’s gold. The mutualized gold providers’ business model does not provide clients with easy access to their gold and withdrawing one’s physical gold usually entails stiff exiting penalties.
- Direct ownership : Access to the storage warehouses is guaranteed. The storage partner knows the exact identity of the client and the serial numbers of his bars since a personal storage account has been open in the client’s name. The storage partner thus has the legal obligation to authorize the client access to one’s stock and, furthermore, without the need of the selling entity’s employee(s) to be present. Taking physical possession of one’s gold by the client is legally authorized (without any penalties), since the client is the owner of finite bars or ingots.
6) Cost differences
Owning mutualized gold is less costly than full direct ownership, which can be explained by additional costs inherent to owning gold directly in one’s name.
For example, additional costs related to the secured delivery of bars and ingots for each client, handling fees applied to not only a single 12.5 kg bar (mutualized gold), but to each gold stock delivered on the client’s account to the secured warehouses, fees for storage account opening on the client’s behalf by the storage partner, issuance of a personal storage certificate, etc.
Each of these two solutions for owning gold outside the banking system is meant for investors with different investing profiles. Each has its merits and different characteristics.
Each investor must then make his own choice depending on his investing profile, i.e. trading, short or long term investor, on his risk analysis, costs, degree of guarantee of ownership or the possibility of having access to his gold and taking possession (from the warehouses).
Fabrice Drouin Ristori