What does it mean to “own” something? It’s a question you should be asking … especially if that something is gold.
The Oxford English Dictionary defines ownership as “the act, state, or right of possessing something.” That sounds about right. But what does it mean to “possess” something?
After all, you can own something that’s in someone else’s legal possession. For example, I own a house in Cape Town. My tenants have formal right of possession under a lease. I sleep at night because the sheriff of the Simon’s Town Magistrates’ Court will enforce my superior right of possession under South African law if needed — say, if they stop paying rent.
In other words, the “state or right of possessing something” that isn’t under your physical control depends on contracts and on law. That in turn depends on the ability and willingness of those who honor contracts — and enforce laws — to do so.
If you “own” precious metals under certain types of arrangements, you may be shocked to find that you’re in a legal limbo where ownership and possession are hazy at best.
It’s not a place you want to be.
Deutsche Bank Unter Alles
German mega bank Deutsche Bank is in serious trouble. The International Monetary Fund (IMF) has publicly called it one of the greatest threats to the global financial system. The Russian government (no doubt crying crocodile tears) is investigating its role in rampant money laundering. And the U.S. government has just announced a fine related to its behavior before the 2008 crisis that is more than the bank’s current market valuation.
Over the last few years, Deutsche Bank has been the principal banker and repository for a popular exchange-traded commodity fund (ETC) called Xetra-Gold. As you know, we here at the Sovereign Investor Daily don’t like metals ETFs and ETCs because you don’t really own any gold — just a claim on gold.
Xetra-Gold, however, differentiates itself from other ETCs by stating in its investor contract that “every gram of gold purchased electronically is backed by the same amount of physical gold” stored in the Frankfurt vaults of Clearstream Banking AG, a wholly-owned subsidiary of Deutsche Börse AG, one of Deutsche Bank’s subsidiaries.
Xetra explicitly says that every time an investor buys shares, a corresponding amount of gold is purchased and put into the vault, so that “investors always have the possibility of demanding delivery of the securitized amount of gold per bearer note.” Because of this promise, Xetra is extremely popular. During the first seven months of this year, order book turnover on Xetra stood at approximately €1.5 billion. The assets managed by Xetra currently amount to €3.5 billion.
But recently, an Xetra investor encountered a big surprise. When he went to arrange for delivery of physical gold, a Deutsche Bank account executive informed him that physical delivery “is no longer offered for reasons of business policy.”
Dude, Where’s my Gold?
People piled into Xetra because it promised the small spreads and low fees of an ETC and the promise of quick physical delivery of gold on demand. Usually you get one or the other, but not both. It seemed too good to be true. It was.
As things stand, Xetra is a paper-only ETC. If you want to turn your shares into gold, you have to sell them to a willing buyer and use the proceeds to buy gold somewhere else. That’s not what Xetra promised at all.
What about those promises of full gold backing? Nobody is quite sure how Xetra and Deutsche Bank are justifying their failure to deliver gold, but the likely culprit is a clause in investor contracts that allows Xetra to modify its terms as the need arises. Many contracts include such boilerplate, and many people ignore it precisely because it is boilerplate.
The problem is that any contract that allows one party to alter the terms at will means that the other party has no real rights of ownership. In this case, Xetra investors don’t have gold in their possession, but neither do they have an enforceable right to convert their shares into the metal.
Possession Is 9/10 of the Law
The speculation about Xetra is predictable. Deutsche Bank has probably raided its gold holdings in its scramble to remain solvent. And there’s nothing any Xetra investor can do about it, since they never really owned any gold in the first place — just a piece of paper.
If you want the protection that ownership of real gold bullion provides, you need to own it yourself and store it in your own name. You may pay a bit more in spreads and fees, but if you’re owning gold as a hedge against financial calamity, that shouldn’t matter.
The upside of avoiding massive loss far outweighs the extra cost of being a real owner of gold … not of a worthless piece of paper.
Editor, The Bauman Letter