Storage Risk

Tom Szabo of silveraxis.com has followed up on my post yesterday with some further detailed comments and a new category - Pool Allocated. he is right to split my Segregated Allocated into Allocated and Pool Allocated, as this can be important in some countries as to whether the "foreign account" is reportable to tax authorities. I interpret what Tom is saying as essential that in both the gold is physically put aside in a vault and title is with the holders (ie it is not on the balance sheet of the custodian), the difference being in whether this gold is then further separated by client.

I think it be best be thought of with the example of a person A buying 10 x 1oz coins and 10 x 10oz bars and person B buying 5 x 10z coins, both of them storing with the same custodian. In Tom's "Allocated", the custodian puts person A's coins and bars together in a pile/box with their name of it and then a separate pile/box for person B's coins.

In "Pool Allocated", the custodian has a pile of 15 x 1oz coins and a spearate pile of 10 x 10oz bars and has a ledger indicating that person A has 10 of the 15 coins and person B owns the remaining 5 and that all of the 10 bars belong to person A. As Tom points out, this can only be done with products that are the same, and not with 400oz bars or 1000oz bars, or indeed with 1oz legal tenders coins as they have different years on them (but can be done withing each year, to further confuse).

Most will see little difference between the two, as the key thing is that everything is 1:1 backed and not in the assets of the custodian. As Tom notes, Pool Allocated is more operationally efficient so should have lower costs (there is no difference in insurance cost for the custodian). It can matter, however, in how some tax laws define a reportable account. Some may be very specific that any "mixing" as in Pool Allocated makes it an account. Other may simply require the physical and title separation from the custodian's other business (if any).

With this further categorisation clarification, Tom also asks what the Perth Mint's "Allocated" is? For the most part it is Pool Allocated. I should point out that in respect of our legal tender coins, the segregation is by year. This means that if you buy 10 coins in 2005 and 10 in 2007, we have those years in storage because we make the coin in that year and put it in the allocated vault. Once put in, it stays there. But it is pooled in that if there are 10 clients with 10 2005 coins each, there is a pile of 100 2005 coins.

It gets a bit messy with numbered bars and the LBMA bars, because Tom says that "pool allocated accounts aren’t possible with good delivery bars". When you buy a numbered bar (whether consistent ounces like kilo bars or odd weight like LBMA bars), we put that specific numbered bar into the vault and allocate that number to you. But again, for practical storage purposes, the numbered bars are stored together. For example we will have a 1 tonne pallet of 80 x 400oz bars of varying weights, but even though they are together, if you pulled a specific bar out we know exactly who owns it.

Once we've worked all these variations out, maybe we need some agreed industry storage taxonomy so investors know exactly what they are getting. Marketing can sometimes get in the way of strict legal definition.