It should come as little surprise that we generally tend to agree with Jeff Christian on many of his points and to disagree with GATA on many of their points, simply because the former makes his arguments on the basis of how the gold market actually functions while the latter makes up stuff purely for the sake of proving its predisposed views. Yet in at least one instance we can confidently declare that Jeff Christian simply does not get it whereas GATA might.
In a recent commentary from Mr. Christian stiltedly titled CPM Group Jeffrey Christian’s Final Response to GATA, we find the two sides in rare form, abusing each other verbally while dancing around perhaps the single-most critical aspect of the current gold market. Let’s quote Mr. Christian to set the mood:
4. Gold as a fractional reserve asset.
As I tore holes in GATA’s arguments, GATA tried to distract its audience by trying to change the subject, raising other issues. In so doing, it made a bigger fool of itself, demonstrating a lack of basic knowledge about the gold market, markets in general, the availability of information on market volumes, and other topics. One example of this was when GATA seized on part of my explanation of basic gold trading and banking practices and, once more misrepresenting and distorting both reality and my comments, implied that I had exposed gold as a fractional reserve asset, as if yet another conspiracy had been revealed.
The fact that gold trades on a leveraged basis, as well as on an ounce-for-ounce basis, should not be a surprise to anyone in the markets, and certainly should not come as any surprise to the self-described “experts” at GATA. However, because I have become aware that this is an area of confusion for many retail investors, I’ll take a moment to set the record straight.
Fractional reserve banking is not a new concept. It has existed for thousands of years. There is nothing shocking nor revelatory about this. The fractional reserve nature of bullion banking is analogous to the widely understood concepts of fractional reserve banking in currencies such as U.S. dollars. If one wants to own U.S. dollars outright, it is possible to keep a pile of bank notes (dollar bills) in one’s mattress or in a safe or vault. Alternatively, one may choose to deposit the money in a bank. The bank doesn’t really have enough cash on hand to allow all the depositors to withdraw all their cash at the same time. However, a system of checks and balances exists to ensure that a “run on the bank” can eventually be met, even if not immediately. Prior to the creation of the Federal Reserve System in the United States no such checks and balances existed, and people who put money in private banks often found that there was no money there when they came for it. FDIC insurance was implemented to give depositors more confidence in their bank deposits after bank runs in the wake of the 1929 stock market crash.
Similarly, if one wants to own physical gold outright, one may do that. In the bullion banking industry, this is called an allocated account, meaning that the investor has specific gold bullion bars allocated to them. The investor is the legal owner of that gold bullion, and the bank, if one is involved at all, is merely providing vault storage for a fee. This is exactly analogous to a bank offering safe deposit boxes which customers can use to store cash if for some reason they are skeptical of the bank’s ability to make good on money deposited in a regular account. Instead of being paid interest for depositing cash in a bank account, one would have to pay a fee for the safe deposit box. Similarly, allocated bullion accounts always involve the client paying storage fees to the bullion bank for the use of its vault to store their bullion.
However, gold also is a financial asset that is banked. In bullion banking jargon, this is called an unallocated account. Just like cash deposited in a checking account, the bank represents that it has enough assets to service the expected volume of withdrawals, but it doesn’t necessarily have enough bullion to allow all the depositors to withdraw all their gold all at once. many gold “certificate programs” are unallocated bullion accounts.This is well understood by professionals in the industry and by most investors involved in these assets. Again, it should come as no surprise to anyone with bona fide credentials as an expert of any kind in the gold bullion marketplace. Yet GATA has tried to portray the fact that banks are required to hold only a portion of their gold assets, as they do money, as somehow being scandalous. Again, GATA is only demonstrating ignorance of the gold market and its desperation to try to distract its readers from the reality that GATA is without any substantive arguments to make in support of its conspiracy allegations.
The fact that many retail investors incorrectly assume that unallocated accounts are backed by allocated gold bullion is certainly a legitimate concern. In fact I was an expert witness in a recent class action case against a bank brought by investor clients that felt they had been misinformed by the bank related to whether the metal they held at that bank was allocated or unallocated. However, the solution to that problem is level-headed education, not baseless allegations of fraud and scandal. For example, Jim Puplava’s FinancialSense Internet radio show recently ran a segment on this very topic. But GATA seems to prefer sensationalism and specious allegations of fraud and conspiracy over level-headed investor education.
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