THE DIFFERENCE BETWEEN BANKING AND CUSTODY
As a client of AFE, it is absolutely imperative that you understand this critical difference between banking and custody. For many years, the terms in use in the storage industry have been the subject of much writing and analysis, yet I still find it to be the least understood aspect of precious metals ownership, particularly for the retail investor.
I have seen many articles over the years which point out that no matter what, if you are going to store metals with any entity besides yourself, make sure you do it using “allocated storage.” While this is great advice, it does not address the legal issues of banking versus custody. This is where the whole if-you-get-allocated-you-are-safe idea has come to play, but it is a dangerous safety blanket.
The term "allocated" is used to describe a situation where a storage provider can identify both by inventory, serial number, manufacturer, and weight an exact bar or bars owned by a particular investor or institution. If needed, they can walk to it in a vault and identify it by sight.
From time to time I have seen it recommended that you only store metal in allocated storage but outside of the banking system. The question is, "Why?"
After reading much of the commentary surrounding this subject, I have come to the conclusion that many who write about it don’t really understand why to hold it outside of a bank either. They have assumed that if it is allocated, even with a bank, it is somehow safe from loss.
Recently in Cyprus, the two largest banks were on the verge of insolvency. After multiple rounds of hardball negotiations with the ECB, Cyprus agreed to confiscate depositor funds to help recapitalize the banks calling it a “bail-in” instead of a “bailout.” If it did not do this, Cyprus would have had its credit lines cut and banks fail causing a complete collapse of the Cyprus banking system. Following these events, stories have broken that virtually every country on the planet is in various stages of implementing the legal and systemic requirements to do the same thing should banks in their jurisdictions fail.
The idea that any depositor of a bank is considered a creditor, and even an investor, is being accepted among central bankers and governments as the policy to follow in the event of future bank failures. This means that as a depositor, you are actually an investor in that bank. If it fails, you as an investor could lose the entirety of your deposits. The legal basis for this is that your bank is paying you interest, which can be argued this makes you an investor since your capital is put at risk. In return for this risk, the bank offers you a profit. If a bank fails/goes insolvent/bankrupt, your “property” held by that bank is considered part of that bank's balance sheet and assets. In other words, it is no longer your property as far as a court sees it; it is able to be used to satisfy the recapitalization of that bank.
If you have allocated storage with a bank, pay close attention to the details of the contract. Always bear in mind that even if a court recognizes that the gold or silver belongs to you, it does not mean you will have access to it if a bank’s assets are frozen during a crisis. The confusion arises because most people have incorrectly assumed that banks are acting on the same legal basis as a custodian, which is simply not true and never has been. The moment you signed your agreement with the bank for your account, you were no longer the owner. Be careful here, as most agreements with financial services providers, including broker dealers, operate the exact same way.
Legally this is critically different to a custodial arrangement with a private custodial agent such as AFE. In a custodial arrangement, you are working with a private party, not a bank, to temporarily safeguard your property. An example of this is when you give your car to a mechanic for repairs. The car does not become the mechanic's property, and it is not added to his balance sheet. He is a temporary custodian of it. If his auto repair company happened to go out of business while he had custody of your car, the court could not declare your car as property of the mechanic to be used to recapitalize his business or satisfy his creditors. The same goes for when you ship something by Federal Express or other well-known courier. They don’t become the owner of what you are shipping; they are a temporary custodian of it and release responsibility for that custody the moment the receiving party signs for it.
This is not some mysterious new legal concept; its history goes back thousands of years. Warehousing has been called the “second oldest profession,” stemming from the biblical story of Joseph who stored grain during the seven good years against the famine of the seven bad years. In custody, the legal concept is called “bailment.” (There is a plethora of information about how it works easily available to anyone who has access to Google.) Without it, goods could never be stored, warehouses would be out of business, and all of commerce globally from manufacturer to end buyer would come to a screeching halt.
Even the American IRS acknowledges the difference between a financial account and privately-owned gold in private custody:
Q20. I directly hold precious metals for investment, such as gold, in a foreign country. Do I need to report these assets on Form 8938? (IRS Basic Questions)
No. Directly held precious metals, such as gold, are not specified as foreign financial assets. Note, however, that gold certificates issued by a foreign person may be a specified foreign financial asset you would have to report on Form 8938 if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you.
It is important that your custodian not provide “banking,” not offer interest on gold in its custody, and not engage in the business of placing its client’s assets at financial risk for returns. By contrast, these are by nature the standard daily business practices of the banks you hold your cash (and gold?) with. Private custody agents such as AFE are only a custodial agent and not a financial services provider or bank, which means the gold is never added to the custody agent’s balance sheets, never becomes the custody agent’s property, and in the event of the custody agent’s demise, cannot be claimed by a court to be used for the custody agent’s recapitalization or to pay off its creditors.
FRIGHTENED BANKERS AND MORE FRIGHTENING GOVERNMENT
So the recent story goes, a wealthy gentleman, who was a friend of a well-known precious metals commentator, had gold held in "allocated storage" with a Swiss bank. The precious metals commentator was a professional in terms of trading gold, but an expert (not a professional) in gold custody. The wealthy gentleman asked the bank to give him physical delivery of the metal, but the bankers refused to do so. The assumption is made that the gold simply isn’t there, allocated storage is bogus, and thus you must store it yourself. Trust no one!
This is a dangerous assumption. Based on AFE's professional knowledge of the subject, it is most likely not only incorrect, but could cause great harm to a precious metals investor who really needs the services that private custodial agents provide but is influenced against it by someone who does not fully understand the difference between banking and custody. As I mentioned before, most wealthy and institutional investors have resources to recognize this difference by hiring professional legal counsel with experience in law pertaining to bailment as well as across jurisdictions. Most retail investors do not.
We recently had an inquiry from a USA domiciled billionaire who was holding tens of millions of USD worth of silver in a recognized Swiss bank, whom we shall not name. He was informed by that bank, as have many other US clients been informed, that he had until January 1, 2013, to figure out what to do with it as the bank was closing the relationship. The billionaire wanted to have AFE take delivery of his metal and assume custody. We have received many similar calls since this process has been driven all through the banking sector in Switzerland in anticipation of having to comply with FATCA. Anglo Far-East did a great deal of work in terms of offering options and solutions, even going so far as to accept a metal transfer directly with our refinery accounts which this bank also has an account with. At the end of the day, the bank did not want to transfer the metal but preferred to cash the client out. Here is the interesting part, and this comes from direct conversations with Swiss Bankers. In Switzerland right now, every banker is in fear of being charged by the US Government at some later date with terrorism or some bogus financial crime and apprehended as he travels through the US, for example while on vacation to Disneyland with his family, only to be locked away for the rest of his life and maybe tortured or who knows what else.
AFE METAL IS NOT PURCHASED THROUGH BANKS
AFE METAL IS NOT VAULTED WITH BANKS
AFE METAL IS NOT SOLD THROUGH BANKS
As a client of AFE, it is absolutely imperative that you understand this critical difference between banking and custody. For many years, the terms in use in the storage industry have been the subject of much writing and analysis, yet I still find it to be the least understood aspect of precious metals ownership, particularly for the retail investor.
I have seen many articles over the years which point out that no matter what, if you are going to store metals with any entity besides yourself, make sure you do it using “allocated storage.” While this is great advice, it does not address the legal issues of banking versus custody. This is where the whole if-you-get-allocated-you-are-safe idea has come to play, but it is a dangerous safety blanket.
The term "allocated" is used to describe a situation where a storage provider can identify both by inventory, serial number, manufacturer, and weight an exact bar or bars owned by a particular investor or institution. If needed, they can walk to it in a vault and identify it by sight.
From time to time I have seen it recommended that you only store metal in allocated storage but outside of the banking system. The question is, "Why?"
After reading much of the commentary surrounding this subject, I have come to the conclusion that many who write about it don’t really understand why to hold it outside of a bank either. They have assumed that if it is allocated, even with a bank, it is somehow safe from loss.
Recently in Cyprus, the two largest banks were on the verge of insolvency. After multiple rounds of hardball negotiations with the ECB, Cyprus agreed to confiscate depositor funds to help recapitalize the banks calling it a “bail-in” instead of a “bailout.” If it did not do this, Cyprus would have had its credit lines cut and banks fail causing a complete collapse of the Cyprus banking system. Following these events, stories have broken that virtually every country on the planet is in various stages of implementing the legal and systemic requirements to do the same thing should banks in their jurisdictions fail.
The idea that any depositor of a bank is considered a creditor, and even an investor, is being accepted among central bankers and governments as the policy to follow in the event of future bank failures. This means that as a depositor, you are actually an investor in that bank. If it fails, you as an investor could lose the entirety of your deposits. The legal basis for this is that your bank is paying you interest, which can be argued this makes you an investor since your capital is put at risk. In return for this risk, the bank offers you a profit. If a bank fails/goes insolvent/bankrupt, your “property” held by that bank is considered part of that bank's balance sheet and assets. In other words, it is no longer your property as far as a court sees it; it is able to be used to satisfy the recapitalization of that bank.
If you have allocated storage with a bank, pay close attention to the details of the contract. Always bear in mind that even if a court recognizes that the gold or silver belongs to you, it does not mean you will have access to it if a bank’s assets are frozen during a crisis. The confusion arises because most people have incorrectly assumed that banks are acting on the same legal basis as a custodian, which is simply not true and never has been. The moment you signed your agreement with the bank for your account, you were no longer the owner. Be careful here, as most agreements with financial services providers, including broker dealers, operate the exact same way.
Legally this is critically different to a custodial arrangement with a private custodial agent such as AFE. In a custodial arrangement, you are working with a private party, not a bank, to temporarily safeguard your property. An example of this is when you give your car to a mechanic for repairs. The car does not become the mechanic's property, and it is not added to his balance sheet. He is a temporary custodian of it. If his auto repair company happened to go out of business while he had custody of your car, the court could not declare your car as property of the mechanic to be used to recapitalize his business or satisfy his creditors. The same goes for when you ship something by Federal Express or other well-known courier. They don’t become the owner of what you are shipping; they are a temporary custodian of it and release responsibility for that custody the moment the receiving party signs for it.
This is not some mysterious new legal concept; its history goes back thousands of years. Warehousing has been called the “second oldest profession,” stemming from the biblical story of Joseph who stored grain during the seven good years against the famine of the seven bad years. In custody, the legal concept is called “bailment.” (There is a plethora of information about how it works easily available to anyone who has access to Google.) Without it, goods could never be stored, warehouses would be out of business, and all of commerce globally from manufacturer to end buyer would come to a screeching halt.
Even the American IRS acknowledges the difference between a financial account and privately-owned gold in private custody:
Q20. I directly hold precious metals for investment, such as gold, in a foreign country. Do I need to report these assets on Form 8938? (IRS Basic Questions)
No. Directly held precious metals, such as gold, are not specified as foreign financial assets. Note, however, that gold certificates issued by a foreign person may be a specified foreign financial asset you would have to report on Form 8938 if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you.
It is important that your custodian not provide “banking,” not offer interest on gold in its custody, and not engage in the business of placing its client’s assets at financial risk for returns. By contrast, these are by nature the standard daily business practices of the banks you hold your cash (and gold?) with. Private custody agents such as AFE are only a custodial agent and not a financial services provider or bank, which means the gold is never added to the custody agent’s balance sheets, never becomes the custody agent’s property, and in the event of the custody agent’s demise, cannot be claimed by a court to be used for the custody agent’s recapitalization or to pay off its creditors.
FRIGHTENED BANKERS AND MORE FRIGHTENING GOVERNMENT
So the recent story goes, a wealthy gentleman, who was a friend of a well-known precious metals commentator, had gold held in "allocated storage" with a Swiss bank. The precious metals commentator was a professional in terms of trading gold, but an expert (not a professional) in gold custody. The wealthy gentleman asked the bank to give him physical delivery of the metal, but the bankers refused to do so. The assumption is made that the gold simply isn’t there, allocated storage is bogus, and thus you must store it yourself. Trust no one!
This is a dangerous assumption. Based on AFE's professional knowledge of the subject, it is most likely not only incorrect, but could cause great harm to a precious metals investor who really needs the services that private custodial agents provide but is influenced against it by someone who does not fully understand the difference between banking and custody. As I mentioned before, most wealthy and institutional investors have resources to recognize this difference by hiring professional legal counsel with experience in law pertaining to bailment as well as across jurisdictions. Most retail investors do not.
We recently had an inquiry from a USA domiciled billionaire who was holding tens of millions of USD worth of silver in a recognized Swiss bank, whom we shall not name. He was informed by that bank, as have many other US clients been informed, that he had until January 1, 2013, to figure out what to do with it as the bank was closing the relationship. The billionaire wanted to have AFE take delivery of his metal and assume custody. We have received many similar calls since this process has been driven all through the banking sector in Switzerland in anticipation of having to comply with FATCA. Anglo Far-East did a great deal of work in terms of offering options and solutions, even going so far as to accept a metal transfer directly with our refinery accounts which this bank also has an account with. At the end of the day, the bank did not want to transfer the metal but preferred to cash the client out. Here is the interesting part, and this comes from direct conversations with Swiss Bankers. In Switzerland right now, every banker is in fear of being charged by the US Government at some later date with terrorism or some bogus financial crime and apprehended as he travels through the US, for example while on vacation to Disneyland with his family, only to be locked away for the rest of his life and maybe tortured or who knows what else.
AFE METAL IS NOT PURCHASED THROUGH BANKS
AFE METAL IS NOT VAULTED WITH BANKS
AFE METAL IS NOT SOLD THROUGH BANKS
It
very well may be that it is not so much that the metal isn’t there for
delivery (we believe it is), but it’s that no banker in Switzerland is
willing to sign his name on transfer documentation for a US person that
may be used to charge them with a crime. This applies to an individual
banker's name on something that has to do with a US citizen and nothing to do with confiscation or other issues in regards to private gold ownership in Switzerland.
This brings me back to a very important point of why it is imperative to vault outside of banks. Not only could your property be potentially caught up in a bank recapitalization or failure, but the people who operate there are subject to banking regulation. Conversely, private property is a completely different animal falling under Swiss private property laws that are not regulated in Switzerland the same way as the banks are. Bankers in Switzerland and many other nations have to deal with potential ramifications of anything they sign off on, and everything they do is scrutinized by a government authority.
All of AFE’s operations in Switzerland fall under Swiss private property laws and do not touch the banking system or banking regulation.
In conclusion, be careful what you assume to be the reality of any market commentary you hear. There are different perspectives that may improve the quality of your decision making. With your wealth protection planning, be careful of and understand the specific viewpoint of any commentator, be they an Academic, an Expert, or a Professional, and weigh this into your discernment of what they are saying.
This brings me back to a very important point of why it is imperative to vault outside of banks. Not only could your property be potentially caught up in a bank recapitalization or failure, but the people who operate there are subject to banking regulation. Conversely, private property is a completely different animal falling under Swiss private property laws that are not regulated in Switzerland the same way as the banks are. Bankers in Switzerland and many other nations have to deal with potential ramifications of anything they sign off on, and everything they do is scrutinized by a government authority.
All of AFE’s operations in Switzerland fall under Swiss private property laws and do not touch the banking system or banking regulation.
In conclusion, be careful what you assume to be the reality of any market commentary you hear. There are different perspectives that may improve the quality of your decision making. With your wealth protection planning, be careful of and understand the specific viewpoint of any commentator, be they an Academic, an Expert, or a Professional, and weigh this into your discernment of what they are saying.
- Alex Stanczyk
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