London Coin Galleries


Is Your Silver Really Yours?

By Patrick A. Heller – April 25, 2011  (


In early trading April 25, the price of gold ranged about 1 percent and silver almost 8 percent. It was not unusual to see the price of silver jump or drop by $1 in a matter of minutes.

This increased volatility in prices resulted in wholesale traders widening the spreads between their buy and sell prices. Some wholesalers simply widened their spreads, for self protection. Others pretended to keep tight spreads, but then quoted a significantly higher selling spot price compared to their buying spot price. As a result, retailers also widened spreads for their own protection. This development is to be expected as markets become more volatile.

However, the increased volatility also is a warning sign to those who would like to think they own precious metals because they happen to own a paper contract instead of having possession of the physical metal.

Higher volatility is a sign that those who have a legal obligation to supposedly have available physical metal upon demand or at some specified future date are at a greater risk of default. For instance, when the COMEX March silver contracts matured, an inordinately high percentage of them were settled for cash rather than with delivery of physical silver out of COMEX warehouses. Not only were a higher than normal percentage settled for cash, but the cash prices paid in some instances were reported to be at least 30 percent above the spot price.

In markets as volatile as they were on April 25, it could easily happen that you are thinking of buying or selling your position and the prices moved so quickly that you missed your target price. The same problem could unexpectedly and instantly develop with a plan to take delivery of physical metals or close out your paper position to be replaced by physical gold and silver.

I am not trying to start a panic, but those who think they own a position in precious metals because they own a paper contract should seriously consider either arranging to take physical delivery on a prompt basis, or else sell the paper position and simultaneously purchase an offsetting amount of physical gold and silver.

The paper contracts about which I have the greatest apprehension about are those positions that are more susceptible to multiple ownership claims against the physical metal underlying the paper asset.

For instance, it is not a secret that COMEX bonded warehouses hold so little registered silver in the vaults that it would cover less than 10 percent of outstanding contracts that could be called for delivery. Even including 100 percent of eligible inventories in COMEX bonded warehouses, which are inventories held by private owners and not available to fulfill COMEX contracts unless the owner so elects, there is less than 20 percent of the silver needed to fulfill all contracts. The percentage of coverage on the COMEX gold market is similar. (Note: It is the standard practice of the COMEX that it holds only enough gold and silver to cover part of its outstanding liabilities, but the coverage percentage is now toward the low end of the long-term average.)

Gold and silver stored by exchange traded funds are kept in what are called “unallocated accounts.” That means that the owner of shares in an ETF has a claim against some of the physical inventories held by the fund, but does not own any specific bars or portions of a bar. Precious metals stored in unallocated accounts are considered to be assets of the warehouse or ETF, not the owners of the outstanding shares, which mean the assets are subject to outside claims against the warehouse or ETF. In addition, it is possible that some of the physical metals may have been pledged as collateral to satisfy other commitments. To the extent this is true, the first people to take physical delivery of their accounts stand the best prospect of obtaining their whole position. Those who wait too long may end up with little or nothing.

In theory, contracts traded in the London Bullion Market Association are supposed to be backed 100 percent by metal in the London vaults. In the Commodity Futures Trading Commission hearings on March 25, 2010, two different speakers, Adrian Douglas and Jeffrey Christian, stated that there was only enough gold or silver in London’s vaults to cover 1-3 percent of the amounts owed against outstanding gold and silver contracts.

What kind of multiple claims could there be against stockpiles of physical precious metals? An owner might lease some of his or her gold or silver. Or perhaps, the metal could be committed to cover an obligation on an option contract that was sold or used to sell a derivative that another party purchases to protect himself against the risk of a default on delivering physical metal. A lessee may pledge metal as collateral to obtain financing. A party may have even purchased a derivative that theoretically ensures the ability to repay a lease even if the metal is not available to return at the end of the lease. If the counterparties to derivatives are unable to meet their commitment in the event of a default, you would see a domino effect of defaulting parties. This is not an exhaustive list of all the potential kinds of ownership claims.

There are some companies that have stringent accountability standards for the metal they are storing for customers. A company that offers “segregated” storage, where specific product is physically segregated from other assets an titled in the name of the owner rather than the storage company, is the most secure. Segregated assets, because they are not property of the storage company, are not subject to claims by the creditors of the storage company.

In addition to segregated storage, the best means of making sure that the precious metals you own are not subject to ownership claims by outside parties are 1) to have it in your direct physical possession, and 2) to store them in safe deposit storage in accounts under your personal name.

So, if you own shares of precious metals ETFs, London Bullion Market Association or COMEX contracts, metal stored in unallocated accounts and other forms of paper metals, I urge you to take prompt action to make sure that you really do own the underlying metals. Even if you have certificates for unallocated metal stored at the Royal Canadian Mint or Perth Mint, seriously consider paying the fabrication charges and taking physical delivery. Finally, if you have stored any of your purchases with the company you bought them from (a practice I urge people to never do), take delivery now, even though you may have to pay various fees to do so.

Even though the price of silver is close to its January 1980 all-time high (ignoring inflation), we are still seeing a strong trend in our store of the public buying more silver than liquidating to us. The approximate ratio is 10 times as many sales to the public as purchases from them. Back at the peak of the 1979-1980 market, we were buying about 20 times as much from the public as we were selling to them. This is just one more indicator that we are nowhere near to peak market prices.

Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at