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Thursday, April 22, 2010

Allocated Gold or Unallocated Gold – That is the Question

What is the difference between allocated and unallocated gold? Why should there BE a difference? And what benefits are there for the gold investor when it comes to the security of allocated and unallocated gold accounts?

Firstly let us look at how the allocated and unallocated system works.

Allocated Gold Account

An Allocated gold account means that the gold is owned outright by the investor or account holder. Usually this will be in a size comparative to the holding of the investor. It might be small bars and coins for a small investor but large 400 ounce gold bullion bars for a large investor. The account holder pays a storage and sometimes an insurance fee.

Most importantly the holdings are secured against the account holders name and the serial numbers or other identification is registered to that account holder. The account holder can redeem, or take out, the gold he has in their name at any time and have it shipped else where.

It should be noted that gold exchange traded funds do NOT include allocated gold.

Unallocated Gold Account
Unallocated gold accounts are an entirely different story. Here the account holder does not own specific physical gold but only a value 'backed' by gold kept in storage by the bank or company, such as GLD for example, who hold the gold 'in trust'.

This is the exchange traded funds at work. The gold is not secured to any gold account and there is no guarantee of ownership of any gold. In fact the LBMA description of unallocated gold disturbingly points out:

"Unallocated accounts. This is an account where specific bars are not set aside and the customer has a general entitlement to the metal. It is the most convenient, cheapest, and most commonly used method of holding metal. The units of these accounts are one fine ounce of gold and one ounce of silver based upon a .995 LGD (London Good Delivery) gold bar and a .999 fine LGD silver bar respectively."

It also states "The client is an unsecured creditor." Which is somewhat contradictory to the previous statement. Whereas the client who has an allocated gold account can point to some gold and say, "This is mine!" The unallocated gold account owner can only say they have lent money, at cost mind you since they have to pay for the privilege, to the institution who promise that those funds are backed by gold and the price is index-linked to gold. But the resemblance to owning gold stops there. You cannot redeem unallocated gold since you do not actually own any of the gold in the first place.

The institution may or may not have sufficient gold to cover the total value of all unallocated gold accounts and even if they do, they are also not bound to NOT use that gold elsewhere for another purpose, neither do they assume any responsibility for the safe deposit or storage done by a third party on their behalf.

This enters into the fractional system of using Paul to pay Peter. A common pastime of banks in general.

Conclusion
Our recommendation, if you want to have or own or hold actual gold, is to buy gold, and not a representation of it. Buy physical gold and have it stored. You can buy small bullion bars or large one depending on your own personal financial situation and one can buy on a regular basis to build up a gold store. But certainly we do not recommend you buy unallocated gold as, really, you are only buying a piece of paper that says your account is worth the same as the futures gold price. Not actually gold.



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