Ted Butler Commentary
August 6, 2014 |
| | OH, OH In 2007, I wrote about a highly suspect form of precious metals storage; the pool account or unallocated storage account. I mentioned the two leading providers of pool accounts at the time – Kitco and the Perth Mint. I contended that pool or unallocated accounts offered low prices and zero storage charges for a simple reason – no metal backed the accounts and this exposed investors to great risk.
Recently, I came across a web site that featured the bankruptcy proceedings for Kitco, which filed for reorganization three years ago following a large tax claim from Revenue Quebec. Kitco denied the tax claim and has been granted the ability to contest it while continuing as an ongoing business, which is the purpose of reorganization. In the latest financial report, as of May 31, Kitco held $260 million worth of pool accounts. As a result, I wrote to the monitor (called receiver or trustee in the U.S.) and inquired what assets or security backed this pool account. Despite an email exchange with the monitor, I still don’t have a sense of sufficient backing of the pool account.
Here’s some of what I wrote to the court appointed monitor: “You show a pool account of $260 million, primarily consisting of gold and silver held for customers of Kitco. Customers who purchased these assets are being assured the assets are held for them by Kitco. As such, this is a liability.
“There are no assets listed that satisfy this liability and if such assets can't be identified, that means the whole reorganization petition is a fraud. It looks like you have failed to grasp that the pool account is a liability that has no assets backing it. Is the judge in this case aware of this? If I am missing something, I would ask you to set me straight.”
This is a very worrisome situation. I’ve warned about the dangers inherent in pool accounts. There’s no assurance that the actual metal is there to back the pool account. In the most recent 2013 annual report, the Perth Mint indicated it had $2.17 billion in unallocated gold and silver certificates. This is more than 8 times the size of the Kitco pool accounts. I believe that represents around 50 million ounces of silver or 6% of annual mine production and 6% of the known about ground supply.
The offer of free storage has been responsible for the immense popularity of the Perth Mint’s unallocated silver certificate program. The most likely explanation for why no storage fees are charged is because no metal (or not enough metal) is being stored and set aside for customers holding pool accounts.
Whatever the actual circumstances behind the origin of pool and unallocated accounts, the message to investors is clear – get out while the getting is good and get into real silver or a real silver storage program.
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