What's Behind Moving Swiss Bank Clients From Unallocated To 'Allocated' Gold Accounts?
Swiss banks UBS and Credit Suisse, have moved to offer 'allocated' gold and silver accounts to their clients, including high net worth individuals, hedge funds, other banks and institutions. The move allows these entities to take direct ownership of their bullion in 'allocated' accounts. In addition, their storage fees have been raised by 20%.
The reason being is that the banks say that they are making the move to reduce exposure and risks on balance sheets and in an effort to be more transparent. Is there more to this than meets the eye? We believe there is, much more and it is a warning for us!
First let's look at what the actions mean.
The London Bullion Market Association defines an "Unallocated account as an account where specific bars are not set aside and the customer has a general entitlement to the metal. It is the most convenient, cheapest and most commonly used method of holding gold."
The story of Germany's gold being repatriated to Germany highlighted that Germany's gold is 'unallocated' in foreign central banks. Most gold owners hold their gold in storage systems where it is 'unallocated'. The downside is that the owner of 'unallocated' gold is an unsecured creditor of the storage company. So if you hold your gold at a bank in this way and it goes bust, you will have to wait and hope you get at least some of your money back.
An 'allocated' gold account is where a customer has his gold physically segregated and is given a detailed list of the weights and assays of his gold. The gold is held in the customer's name and owned by him still. In this case his gold cannot be taken by the Custodian or bank's creditors should the bank go bust. The gold would, in that case be moved on the instructions of the beneficial owner.
Please note, though, that the clients of UBS and Credit Suisse have been 'offered' allocated accounts, they had not requested them. 'Allocated' accounts are more costly so it is no surprise that the costs of storing customer's gold has risen 20%.
As we said, there is far more behind this story than is apparent at first.
The history of UBS and Credit Suisse in the U.S.
Let's look at the recent history of UBS and Credit Suisse in the U.S. Add to this other Swiss banks under investigation for assisting U.S. citizens evade taxes, an investigation that is ongoing and costing Swiss banks [in the U.S. - not in Switzerland] huge fines to keep banking there.
Switzerland has laws which protect banking secrecy. If a Swiss banker discloses client information outside the bank he is liable for imprisonment. Switzerland, after all, has a history of over 300 years of protecting the assets of foreigners during World Wars and from outside governmental pressures.
Even in the recent UBS scandal where it was accused by the U.S. I.R.S. of harboring U.S. tax evaders, these bankers of UBS in the States, face imprisonment inside the U.S. if they did not disclose the names of account holders and faced imprisonment in Switzerland if they did disclose names.
After lengthy negotiations that included the Swiss Government, it was decided to disclose the names of 4,050 names out of 45,000 U.S. client so UBS. It appears that the Swiss government acceded to the principal that a tax evader was a criminal and so his information could be handed to the U.S. authorities, but the Swiss government refused to allow the disclosure of all 45,000 names, which is what the I.R.S. wanted. So the Swiss kept their integrity, the I.R.S. got [only] 4,050 tax evaders and Swiss bankers did not go to prison, but UBS got a massive fine, which they had to pay to continue banking in the U.S.
During that entire time and through until now, Swiss banks have been loathe to take on U.S. clients and have been nervous about continuing to keep the ones they already have. It becomes clear that the current story of offering 'allocated' accounts fits neatly into this story. Many Swiss banks simply dropped U.S. customers and refused new ones, erroneously believing that it would get rid of the problem.
The Threat of FATCA
What is particularly terrifying to Swiss bankers is the new tax system being formulated called FATCA [ Foreign Account Tax Compliance Act] which came into effect in 2010, but will only be fully in effect in 2014 with IRS agreement. In this system there are features that will affect financial institutions worldwide. Here are some of the reasons why Swiss banks are changing their handling of clients: -
FATCA will impose all sorts of reporting requirements on U.S. taxpayers with foreign financial accounts. This is in ADDITION to form TDF 90-22.1, which is due to the Treasury Department each year by June 30th, and IRS form 1040 schedule B. Transparency will become the order of the day.
The law requires ALL financial institutions across the world to share personal customer information with the U.S. authorities. Undoubtedly, all allies of the U.S. such as Canada as well as the rest of the developed world will cooperate with them quicker than others. Under certain conditions this could be extended to include gold and other precious metals, easily.
FATCA has failed to define the terms, "foreign financial institution" and "foreign financial account". These are defined generally just as a "financial security" is a transferable ownership right over an asset. Likewise a "financial institution" deals in and handles "financial securities". Foreign nations have their own definitions of "foreign financial institutions" and 'foreign financial account's. No doubt these definitions will be accepted by the U.S. authorities.
The law was passed in 2010 [final implementation 2014], when it became the responsibility of the IRS to interpret Congress's intent in implementing FATCA. We expect a release of their interpretation of FATCA any time now.
Swiss Banking reactions
So Swiss banks are opting for the pain-free option of having their clients own their gold in their own name, in 'allocated' accounts. This allows them to duck the issue of disclosure to the authorities and passes it to the clients themselves. It also allows Swiss Banks to step out of the way should the U.S. authorities want to reach out and take that gold! And we feel that this is a real reason behind their move.
While gold dealers are not regulated and not treated as financial institutions, the concept of transparency will apply to them under certain circumstances, which could have huge ramifications in the future, for their clients.
At the moment, there is no requirement for reporting gold holdings or other precious metal holdings offshore, but if the IRS does not extend such reporting to precious metal owners it's a small step for them to do so and at their discretion.
What future events are the Swiss Banks pre-empting?
We have to look at this more closely. If banks are doing this now, why? What monetary situation do they see? Do they expect the U.S. authorities to reach out for their citizen's gold outside of the U.S.? The pains they have suffered at the hands of the I.R.S. so far have forced them to look ahead and ensure they stay on the right side of these people.
So let's look around at what they are seeing;
Germany has decided to bring half its gold home to be available for use in future crises, which they seem to expect. Which other central banks will follow?
Emerging nation's central banks are continuously buying gold now, likely for the same reasons.
There is a massive change due in the global reserve currency scene when the Yuan arrives as a global reserve currency, no matter how careful China is. Uncertainty and instability will be present as power moves east to the detriment of the developed world, it's unavoidable.
Gold is moving to a pivotal position in the global monetary system [see the World Gold Council's OMFIF report released two weeks ago - www.gold.org ].
The future holds a scene of tremendous uncertainty in the international currency scene and one where gold is going to have to play a significant and possibly central role!
You can be sure that the Swiss banks foresee a coming situation that will keep them out of the crosshairs of the U.S. monetary authorities. It's on the direct owners of that gold that the crosshairs of the authorities will settle.
Not enough Gold out there!
And the fact of the matter is that the gold market doesn't have enough gold at these prices. With newly mined gold supply at around 2,800 tonnes and 'recycled gold over the last four years at around 1,700 tonnes and usually re-bought by the sellers at lower prices, the open market would be too small to supply the central banks and the commercial banks [who would want them in their coffers as a counter to the currencies they hold in their reserves] even if prices were pushed much higher.
Add to this that gold producing countries would probably take the local production directly into their reserves just as China is believed to be doing now, which would severely lower the newly mined gold availability.
Yes, higher prices and the resultant gold selling may well yield a greater supply, but prices would have to be significantly higher. And then the scramble between central banks for that extra gold would destabilise and disrupt the gold market. That's just what the banking system would not want to see. Nor do buyers of gold. They would act in a manner that would leave gold markets stable. There is only one way that that could be the case.
The only way for central banks to get a sizeable quantity of gold would be to take it off their citizens, through confiscation, nation by nation;
There the gold could be taken and paid for at current market prices.
The largest sources of local gold would be Custodians, gold dealers and the large holders of gold.
But governments would have to issue a blanket confiscation Order covering all gold owners. In the last 'Confiscation Order' in the U.S. in 1933 citizens were allowed to retain 5 ounces of gold each. The Order was rescinded in 1974.
This is not only our opinion it seems. The highly respected Casey Research and renowned Marc Faber sense the dangers coming in the gold market. Marc Faber has warned of confiscation and Casey Research advised holding gold outside the U.S.
Gold dealers in the same place as Swiss bank and allocated accounts
The key point to understand in the moves of the Swiss banks is that they are pushing clients to hold their gold directly in their name. This is what happens when you live in the U.S. and hold your gold overseas. You may think that holding gold outside the U.S. in your own name will protect you from the rapacious arm of your government, but it will not!
A repeated fact of history is that governments do not venture into a foreign Jurisdiction to impose their laws. They attack those they feel they should within their own Jurisdictions.
UBS and other Swiss banks were attacked inside the U.S. Remember, under FATCA and FBAT your personal information is fully available to your authorities including foreign holdings. It is a small step to extend that to precious metal holdings!
The authorities will also require gold dealers as well as all financial institutions to disclose client holdings too. Under FATCA this is likely to be extended to gold dealers overseas particularly those in Britain [and the Channel Islands] and in Canada. This will even include Swiss institutions doing business in those countries.
Then it is simply a matter of forcing you to either transfer your gold to them or under threat of penalty forcing you to repatriate your gold!
The gold will flow home, Swiss banks will be in the clear and your friendly neighborhood gold dealer will have to exit the business.
But your national banking system will look healthier with the gold countering the falling value of currencies.
The way out of the trap
There is a way out of the closing net being prepared [if Swiss bank actions are anything to go buy], but this article is not the place to give you all the details [and the author does have an interest in the system -he designed it] but it was designed with FATCA FBAT and the Confiscation of gold in mind.
The system is designed to let you continue to own the gold you now own [sell it when you want], not have it confiscated and to not disobey the confiscation order at home, so as to not be liable for the penalties that will surely be threatened! Please send your enquiries to firstname.lastname@example.org
We know of no other system that offers you protections against confiscations and we are certain that confiscation has now moved from possible to probable.