Gold At Record Prices But Is There Any Silver Left?

Key Concepts

• Ownership vs. Possession: The distinction between legally owning an asset and physically holding it.
• Unallocated Accounts: Accounts where an investor has a claim on a commodity but does not own a specific, identifiable unit of that commodity.
• Allocated/Segregated Accounts: Accounts where an investor owns specific, identifiable units of a commodity, often stored by a third party.
• ETFs (Exchange Traded Funds): Investment funds that hold assets like gold, but owning shares in an ETF does not equate to owning the underlying physical asset directly.
• Chain of Custody: The process by which an asset is handled and stored from its origin to its final destination.
• Confiscation: The act of a government seizing private property.
• Numismatic Coins: Coins valued for their rarity and historical significance rather than their precious metal content.
• Above-Ground Silver Inventories: The total amount of refined silver that exists and is not currently in use in industrial applications or jewelry.

Ownership of Gold and Silver: Beyond "If You Don't Hold It, You Don't Own It"

Jeffrey Christian of CPM Group addresses the common adage "if you don't hold it, you don't own it" in relation to gold and silver. He clarifies that while there's some truth to it, the reality is far more complex, involving legal, security, and practical considerations.

Understanding What You Own

Christian emphasizes the critical distinction between owning physical gold/silver and having a claim on it.

• Physical Possession: If gold or silver is in your possession, you own it.
• Unallocated Accounts: Owning gold in an unallocated account at a bank, depository, or brokerage firm means you do not own the gold itself. Instead, you hold an "IOU" for a gold equivalent. This is analogous to money in a bank, where the bank uses your deposited funds, and you have a claim on the bank's solvency.
• Allocated/Segregated Accounts: Ownership in these accounts is conditional. While you may own specific units of gold, the allocation and segregation must be to you, not to your broker or intermediary. If the allocation is to the intermediary, it protects you from the depository's failure but not from the intermediary's financial problems, which is a greater risk. Careful review of account agreements is crucial.
• ETFs: Holding shares in a gold ETF means owning shares in a company whose primary asset is gold in a vault. Direct redemption of shares for physical gold is typically not possible unless you are a large, authorized counterparty.
• Other Account Types: Ownership through other forms of accounts, including accumulation accounts, gold bonds, gold notes, or gold-backed cryptocurrencies, depends entirely on the specific wording of the agreements. Delivery of physical gold may not be possible, especially with fractional ownership of larger bars.

Risks Associated with Holding Gold and Silver

Christian outlines three primary risks that investors face, regardless of how they hold their precious metals:

1. Theft, Including Fraud: This can occur anywhere along the chain of custody, involving anyone handling the material.
2. Financial or Other Collapse of Intermediaries: The failure of financial institutions (brokers, depositories, refineries) can lead to significant complications, even with special agreements. A case is cited where a refinery's bankruptcy froze gold until the court resolved ownership.
3. Confiscation: While often overblown, confiscation is a real possibility.

Historical Context of Gold Confiscation in the U.S. (1933)

Christian debunks common misconceptions about the 1933 U.S. gold confiscation.

• No Widespread Door-to-Door Seizures: Treasury agents did not go bank to bank or home to home forcibly taking gold.
• Voluntary Turn-In: The vast majority of gold was turned in voluntarily before the executive order was issued.
• Loopholes: Residents were allowed to keep up to five ounces of gold, and numismatic collections (two U.S. gold coins from each annual mintage) provided a loophole for holding larger amounts.
• Economic Rationale: The 1933 confiscation had an economic rationale: to reintroduce hoarded gold back into the banking system to stimulate recovery during the Great Depression. At that time, gold represented a significant portion of global financial wealth.
• Modern Irrelevance of Rationale: Today, gold constitutes less than 1% of global financial wealth, making confiscation economically insignificant for stimulating recovery.
• Data on Turn-Ins: Between FDR's inauguration and the executive order, approximately 40 million ounces of gold were turned in. Treasury estimated around 8.2 million ounces were exported, lost, or held under exceptions.
• Confidence Surge: The market experienced a surge of confidence in FDR's leadership, leading people to redeposit withdrawn funds into banks, which facilitated the gold turn-in process.

Broader Risks Beyond Precious Metals

Christian extends the discussion of risks to all assets, including homes and cars, which can be commandeered by governments. The three core risks (theft/fraud, intermediary collapse, confiscation) are not new phenomena but have been part of how the world has operated for millennia.

Cryptocurrencies and Stablecoins: Not Immune to Risk

Contrary to popular belief, cryptocurrencies and stablecoins are not entirely secure.

• Loopholes and Thefts: Crypto thefts have occurred at a higher rate than in traditional financial systems.
• Government Confiscation: Billions of dollars in crypto holdings have already been confiscated by governments, often from individuals involved in illegal activities, demonstrating the capability for such actions.
• Developing Security: While efforts are underway to improve blockchain security, criminals and governments are also evolving their methods to circumvent these measures.

Actionable Advice for Investors

Christian offers practical guidance for navigating these complexities:

• Due Diligence: "Caveat emptor" (buyer beware) is paramount. Thoroughly research what you are buying and with whom you are dealing.
• Verify Counterparties: Obtain financial reports of companies, check their insurance, and review complaint records on regulatory websites like FINRA.
• Read Documentation: Carefully examine all agreements and contracts.
• Understand Risks: Be aware of the risks of theft, intermediary collapse, and confiscation.
• Informed Investment Decisions: Base investment research on sober, detailed analyses of political, social, economic, financial, and equity market prospects.

The Truth About Silver Inventories

Addressing a common concern, Christian asserts that the world is not running out of refined silver.

• CPM Group's Research: CPM Group has presented extensive statistics showing historically large volumes of above-ground refined silver.
• Lack of Counter-Evidence: Despite requests, no credible evidence has been presented to support the claim of a silver shortage.
• Misinterpretation of Demand: Projections of high silver demand for solar panels do not equate to a depletion of existing above-ground inventories.
• Inventory Growth: Comex inventories are five times their historical levels, Chinese inventories are substantial, London market inventories are significantly higher than in the 1990s, and ETFs hold large amounts of silver.
• Anecdotal Evidence: Claims of an inability to find thousand-ounce silver bars are dismissed as potentially due to a lack of effort in sourcing.

In conclusion, Christian stresses that owning gold and silver should be viewed as insurance, and investors must be diligent in understanding the nuances of ownership, the inherent risks, and the importance of credible research.