So, You Think You Have Gold Held for Your Account by Your Bank. Hahahaha!
The entire article appears here: http://dailyreckoning.com/Writers/Mogambo/DREssays/MG121305.html
. . . a guy who likes to be an "anonymous source" reports, "If a bank has physical possession of some gold which it owes you as its creditor, the bank itself is the current owner of the gold." An interesting thing to consider! On the other hand, if the gold you deposited at the bank has your name on it as the owner, then you have what is known as "allocated gold." But if all you have is a deposit slip showing that some ounces of gold were deposited, then you have, unfortunately, unallocated gold. He goes on to say, "Unallocated gold is the most widely traded form of gold in the world. While this gold remains unallocated to you, the regulator considers it part of a bank's liquid reserve." He figures that 99% of gold deposits are in unallocated form, and therefore all the deposited gold is, in effect, in a big commingled pile in the basement of the bank.
Another way of looking at this stunning fact is, "This makes unallocated gold an attractive way for the bank to maintain its regulated liquidity, because you have paid for your gold, and the bank is free to use your money, while it is also able to add your unallocated gold holding to its own reserve."
Being stunned to speechlessness at the revelation, I nevertheless raise the Bony Pointing Finger Of The Mogambo (BPFOTM), and tap on your computer screen so that you pay special attention to where he says that the bank uses your gold as part of its reserves! If you are not impressed by the use of the exclamation point, or if you are not likewise impressed and horrified by the actual words, then I know that 1) you are still young and trustful, and 2) I also know that you don't realize that bank's reserves are the assets that the bank can legally use to offset its own losses. My mighty Mogambo Super Brain (MMSB) detects a sudden disturbance in the fabric of the cosmos, as you you are saying to yourself, "The banks can protect themselves and their owners by confiscating and selling the assets of the depositors? Yow!" Yow indeed, young grasshopper!
So, your unallocated gold could, and would, be sold if the bank were in need of cash. If the bank went bankrupt and insolvent, then you would be put in the line with all the other creditors, and you would divvy up what is left, if anything, after the bondholders have been paid and the secured creditors have been paid and lots, and lots of other people have been paid and the furniture has been repossessed. Hahaha! Trust the banks? Hahaha!
Now, learning this while you are still young, you perhaps now find that you are not quite as trustful anymore. Good! Now you are becoming wise, and you realize that, as they say, "The price of freedom is eternal vigilance."
So, what to do? Well, if your safe deposit box is full of gold, and the backyard is full of buried gold, and you are running out of places to store gold, and you want to deposit some gold at the bank so that you can make room in the den for a wide-screen TV, then the lesson is: always insist on having it treated as allocated gold. "Allocated gold is different," he says, "because you become the outright owner of gold and you are no longer a creditor. Your allocated gold is your property and it cannot be used as the bank's reserve."
December 13, 2005
The Mogambo Guru, aka Richard Daughty, is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter, and a vocational exercise to heap disrespect on those who desperately deserve it.
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