Prerequisites for Ownership Status
There is a near truism in the industry which states that “If you can’t touch it you don’t own it”.
This statement is true in most cases because storage solutions which rely on generic quantity or weight counts are, by definition based on an IOU system, making the client, in a legal sense, an unsecured creditor rather than an owner.
In the industry you will often find that bullion storage are categorized in “Unbacked”, “Unallocated”, "Allocated" and in some cases “Reserved” as follows:
- Unbacked, your position is simply a financial bet (long or short). – You are not an owner as there is nothing to physically own. Legally you are an unsecured creditor.
- Unallocated, there is a small amount of bullion to cover everybody’s claim – You are not an owner as the small amount of bullion is on the provider balance sheet. Legally you are an unsecured creditor.
- “Fully” Allocated, the provider tries to buy or sell bullion to match, with a delay unless they distinguish between in-stock and pre-order bullion, the buying and selling of bullion by clients so that claims are matched with physical. However even in this case you are still not an owner because your claim is still a generic ounce(s) liability against assets held on the provider's balance sheet. You are an unsecured creditor.
- “Reserved”, only when physical bullion is present, uniquely identified and uniquely tracked (not just listed by generic oz quantity) and the bullion/goods are transferred to your name via an invoice to attest the legal title transfer would you be an actual owner under the jurisdiction in which the invoice was issued.
Keep in mind that these terms, other than "reserved" which requires documentary proof, are often used quite loosely and as this is mostly a self-regulating industry so full allocation often comes down to how transparent the storage system is.
 Reserved Storage @TSH - Only 1000 oz silver bars (shown above in pallet TSH P032) do not require a tamper evident parcel bag, instead the Bar Serial Code and DUX Tamper Proof Label (TPL) are used.
"Unsecured Creditor" vs. "Owner" Status and Why it Matters
From a legal point of view, investors are normally unsecured creditors because their money is recorded as a liability with their immediate counterparty which typically will become an unsecured creditor themselves as they transfer funds to other counterparties along the counterparty chain.
As the name suggest unsecured creditors are completely dependent on the solvency of their counterparties which is not a good situation if you seek to minimize risk to protect yourself from systemic risks. The typical exceptions of this rule are real estate – where you receive legal title to your property - and buying and taking home a physical good, such as bullion, yourself – in which case legal ownership was transferred via an invoice.
So if you purchase bullion for storage and do not get an invoice – the vast majority of cases - you can be pretty certain that your status is that of an unsecured creditor because you own a claim, not a physical asset. On the other hand if you receive a valid invoice you would be an owner of the bullion as evidenced by the invoice. To issue an invoice for goods the issuer must be in possession of the goods and the goods must be uniquely identifiable if they remain under custody of the seller.
So a storage invoice stating “monster box of 500 Maple Leafs” for example is essentially an IOU because it does not specify what specific box you own nor does it guarantee that bullion exists at the time of the transaction. So ultimately it is a promise. On the other hand a sealed parcel ID SB20005XXX owned by Silver Bullion Pte Ltd containing a monster box would be valid property because it is specific existing asset giving the client ownership of the parcel and relegating Silver Bullion Pte Ltd to act as a storage agent for the client owner.
An advantage to being a legal title owner is that it makes it very difficult and illegal to encumber – see encumbered bullion – your bullion. Another advantage is that your claim to the parcel survives the dissolution of your dealer. In other words if your dealer goes bankrupt you would still be the owner of the parcel and a bankruptcy court would not be able to claim it for creditors whereas, as an unsecured creditor, you would probably have lost any claims you had. Furthermore in Singapore falsifying an invoice is a criminal rather than civil matter making the humble invoice a very powerful document indeed.
However from a dealer perspective issuing storage invoices for physical parcels does not allow for shortcuts and is much more complicated and expensive compared to issuing promises and virtual quantities because:
- An invoice dealer would need to own sizable bullion amounts as buffer as only bullion owned by the dealer and physically present can be transferred to a customer. Furthermore a distinction between bullion in-stock and pre-order would need to be made. In the case of virtual quantity dealers there are no such restrictions allowing minimal capital to be invested in the dealership.
- Physical Parcelization is a lot of work and physical risk to the dealer and requires much more complex operations compared to a dealer that issues promises and can easily outsource operations.
- Storing Bullion in parcels that are individually retrievable also requires at least three times more space (and more cost) compared to simply stacking bullion up a wall on a first in first out basis.
- It does not allow for bullion leasing because the bullion is not on the dealer balance sheet.
Ownership@STAR
We have developed the “Reserved” characteristic of S.T.A.R. to support invoicing and customer ownership from the beginning. Ownership is a bedrock characteristic of our storage program and a key to our success as customers are becoming more sophisticated and understand the value of having legal title to one’s bullion.
See 9 more reasons that make S.T.A.R. @ The Safe House unique.
by Gregor Gregersen
and The Safe House / Silver Bullion Team |
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Silver Maple Leafs - over 45,000 of the 2014 coins in-stock.
Silver American Eagles - Available for pre-orders and small quantities in stock. Premiums are considerably higher than maples.
Johnson Matthey 100 oz Poured Silver Bars - Availability is good 22,000 oz of these bars in-stock and more incoming.
Platinum Credit Suisse Bars are still difficult to procure. Recent mining disruptions restricting supply.