Alan"s Money Blog

Jul 4, 2007

Why physical ownership of gold is best

check out this e-mail I received from Paul Tustain (the CEO of BullionVault)

Physical Gold - Why?

Why does BullionVault make sure you get outright physical ownership
of gold? After all, it would be so much easier to offer you a
gold account.

The reason is risk of default. One of the patterns which recurs
throughout history is that growing financial sophistication leads
to widespread expansion of credit and exposure to default, and few
people successfully avoid it when it matters.

Banks, pension savings, mortgage guarantors and all the major
financial institutions on which we depend are now tied up in a web
of undelivered assets. A is the registered owner of a bond payable
by B, the principal on which has been credit-swapped out to C.
The terms are controlled by a deed drafted by an investment bank D,
which itself receives the interest, which has been aggregated with
30 others and sold notionally to E. E is foreign, and flattens
the FX risk with a bank F, who sells and rolls a future on his long
currency book, which is bought by another bank for an assured profit
by running the position against a higher yield bond bought from a
junk-status borrowing customer, which has been insured against the
risk of default with G, a major insurer, who happens also to be A.

These are the styles of relationship which dominate the world in
which ordinary peoples' savings are bound up, and they are profitable
in the short term. This is why financial rather than commercial
companies increasingly dominate the list of the top companies
in America and Europe. They find it easier to make profits by
providing credit and assuming eventual repayment, rather than by
actually demanding settlement; a habit which could put off no end
of potential customers.

All our common savings products are bound up in these webs.
At BullionVault we do not know when and where these webs will
break, and, with the greatest possible respect, we don't think you
do either. But it is so certain that they will break, and at an
unexpected place and time, that we believe every forward thinking
person with a respectable private reserve would do well to opt out
with at least part of their savings.

A purchase of gold is a good way to do this. But gold accounts,
indexes, spread bets, and futures all fail to extricate the
buyer from the web of dependencies, because they are based on
undelivered gold. The only way to opt out of the web is to own
physical property outright.

This is why BullionVault has concentrated on being the best way in
the world to do just that.

Paul Tustain, Director

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