Sunday, February 15, 2009

What are Gold Pool Accounts?

In today's increasingly borderless and digital world, different forms of "digital gold" have arisen as an alternate so that we can invest in gold conveniently online without the hassles and costs of storing physical bullion. One form of digital gold is the gold pool account. This is a type of unallocated storage account, meaning that you do not own any specific gold coins or bars, but rather own an "interest" in the pool, which owns a collection of gold. You can sell your stake in the pool at any time, or take possession of the physical bullion by paying a "fabrication charge".

What are the advantages gold pool accounts?

Gold pool accounts as a form of digital gold.Gold trading pool accounts are probably the simplest and cheapest way invest in or trade gold. The bid/ask spread (the difference between the buy price and sell price) is extremely narrow, you pay no storage or insurance fees, and if you never take physical possession of the gold then you pay no fabrication (melting or manufacturing) or shipping costs. And there are usually no commissions for purchases and sales, so you can buy and sell within your pool account as much as you want without cutting into your returns. Because of the low costs, pool accounts are a good way to trade gold as the gold market price dips and rises. If you buy physical bullion from a bullion dealer there is a wider price spread, and likely a premium or service charge over and above the cost of the bullion to pay for fabrication and shipping. Those extra costs mean that the price of gold has to increase by a much larger degree in order to turn a profit. This makes trading gold
on the peaks and valleys impractical. You also don't have to worry about how you are going to store the metals, because they remain in the pool's stock of assets.

But the big question is, if the gold pool is storing gold on the investors' behalf, then how on Earth can there be no storage fees? The answer is that the pool probably does not actually store any gold. Rather than take your money and buy gold and keep it on your behalf as most investors expect, these pools are widely believed to take your cash and invest it elsewhere in the hopes of getting higher returns than gold, and when you cash out they pay you what the gold is worth and keep the difference for themselves. Only if you want the physical gold delivered to your doorstep will they actually go and buy the gold for you, and that's why a fabrication charge is applied when you ask for delivery. Your stake in gold pool is not buying real gold at all, it is buying a paper representation gold that the vendor has not yet purchased. Sneaky, huh? But the financial world is full of this type of fraudulent insanity. The investor is put at risk to leverage the institution's other activities.

The biggest problem with this paper gold system is that most investors would like buy low and sell high, right? What would happen if the price of gold hit a landmark high and everybody with a stake in the pool tried to cash out at once? The pool would have no gold to sell on your behalf. Would they default on what they owed you? Would they lock the pool to all transactions until prices lowered? Would they try to lure a bunch of new investors and use their cash to pay you, just like a pyramid scheme? I don't know, but I'm suspicious.

I don't want to conjure up images of unlikely doomsday scenarios. I'm quite a positive person and live a fairly stress-free life. But my intention is to be informed and help you be informed so that we can be prepared for whatever happens and make appropriate choices with the risks in mind. Gold pool accounts do have their advantages as a simple and cheap investment that tracks the price of gold. I think it is important, however, to remember that this is not an investment in real physical bullion and lacks the security and accountability of an allocated storage account. In times of strife when owning gold is most critical, will your gold be available? Will your account be accessible? I don't know, but I'm not going to take the chance. Similarly to gold ETFs, I view pool accounts as a convenient way to trade gold on short term fluctuations. But the core of my precious metals holdings for longterm investment will be in physical bullion that belongs to me and only me.


Mark Herpel said...

ETF's are paper promises. Safe players always own the actual bullion either in hand or via allocated storage like

With these digital gold companies you own the actual gold in the vault, it's not a paper promise, you have title to the physical gold bar(s). If the ETF gets into trouble, you get in line as a creditor.

Mark Herpel

Sean said...

"Hassles and costs of storing physical bullion"

What exactly are these costs and hassles?

I enjoy storing my bullion because I can look at it, fondle it, and handle it. As if it was a piece of art. I also sleep very well knowing 100% that my gold is where I left it.

I just don't see the hassle you are talking about. Filing an asset with my insurance, covers theft an fire. So pls explain the so called hassle of owning physical bullion.