Direct ownership or mutualized ownership?

Risks associated with Financial Context:

Two of the most significant risks for gold investors in this financial crisis are:

  • Counterparty risk, which 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 holding real 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. In both cases, investors were not the full owners of their gold; it 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 fell victim to those two companies.

There are clear differences between direct ownership and mutualized ownership of physical gold.

 

How is a gold investment held?

  • Mutualized gold takes the form of part of a gold bar (usually 400 oz). It is not a finite quantity like an ingot, but part of a bar.   
  • Direct gold gives full and total ownership of a bar or ingot, depending on the size of the investment.   
  • That is the choice: part of a bar (mutualized gold) or 100% of a gold bar.

 

 

Which is the better choice?

  • By definition, mutualized gold is a means to own gold alongside other investors (mutualization). The same bar is owned by many investors, with each owning a part.
  • Direct ownership means an investor owns an entire bar or ingot in his/her full name.
  • In one case, ownership is mutualized and in the other, it is direct (in full name) 100% ownership.

 

Do storage partners know the identities of the clients in both case?

All companies offering mutualized or direct ownership have established partnerships with independent companies specialized in the secure storage of precious metals, generally outside the banking system:

Mutualized gold: The storage partner is only aware of the investor’s client number and the serial number of the bar attached to that number. It does not directly recognize the identity of each client assigned to a number. And such companies offering mutualized gold ownership devote only a single storage account and a multitude of sub-accounts for each of their clients. The investor/client does not have an open account with the storage partner. The issuer of the mutualized gold investment stores the gold in the name of its own clients.

Direct ownership: The storage partner, issuing a storage certificate with the exact identity of the client along with the bar’s serial number, and/or opening a storage account directly in the client’s name, knows exactly each individual’s identity and knows precisely to whom belongs each 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/she 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 manages a single global account for said company.

 

 

Ownership and storage certificates

In the case of mutualized gold, storage certificates are issued by the storage partner in the form of a list including all the clients’ numbers and a list of the gold bars' serial numbers.

In the case of direct ownership, the storage partner issues a unique storage certificate for each client. It states the client’s first and last names and the serial number(s) of the bar(s).

In one case, the storage certificate is not personally assigned and, in the other, it is unique, personal, and shows the precise identity of the client and the serial number(s) of the bar(s) she or he owns, which constitutes a full name ownership certificate.

 

Verification & access

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 provider’s business model does not provide clients with easy access to their gold and withdrawing one’s physical gold usually entails stiff exit penalties.

Direct ownership: Access to the vaults is guaranteed. The storage partner knows the exact identity of the client and the serial numbers of her/his bars since a personal storage account has been opened in the client’s name. The storage partner has the legal obligation to allow access to one’s gold/silver, without the need for the selling entity’s employee(s) to be present. Taking physical possession of one’s gold is legally authorized (without any penalty), since the client is the direct owner of the bars.

 

Cost differences

Owning mutualized gold is less costly than full direct ownership, due to the additional costs inherent to owning gold directly in one’s name.

For example, there are additional costs related to the secured delivery and handling of not only a single 400 oz. bar (mutualized gold), but to each gold bar delivered on the client’s account to the secure vaults, as well as fees for storage-account opening on the client’s behalf by the storage partner, issuance of a personal storage certificate, and so on.

 

Conclusion :

These two solutions that enable gold ownership outside the banking system fit different investor profiles. Each has its advantages. Each investor must make his/her own choice depending on personal investing profile, i.e. trading, short or long term, costs, full ownership or mutualized ownership, guarantee of owning gold in one’s own name without any intermediary, direct access to the vault, ability to take possession of the bars quickly, liquidity of the investment.

 

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