Treasure Chest 2 – Game Changer

Thank you to everyone who donated in support of continuing this blog for a fourth year! Donations were rolling in last Tuesday pretty much on par with my other two fundraisers. But then on Wednesday, with the $100 plunge in the price of paper promises of future gold, the flow of donations pretty much dropped off a cliff. So I'd also like to thank the CME for messing up my fundraiser. Thanks a lot, CME!

As I've mentioned in the past, one of the best parts of fundraising for me is the comments I receive from supporters. In some cases, people take the opportunity to ask me questions after I send them a thank you note. One of the most frequent questions I get has to do with converting individual retirement accounts (IRAs) into physical gold. I also get questions about how best to buy and store physical gold in amounts that are too large for the sock drawer. And people often ask me what I think would be the "second best option" to physical in your immediate possession.

These are all related questions and they are some of the toughest to answer from my hard-nosed "physical in your hands" perspective. Other similar questions I have received are what would be the best way for a managed fund (say a Trust) to invest in physical gold outside of the banking system? I have one reader who is an investment banker for banks. He finds investments for actual banks. He asked:

Do you know anything off hand about the gold rules for banks chartered in the USA? I've had more than a few clients tell me their Boards are proposing gold buys for their banks since they can't get out of their illiquid equity position.

I have another supporter who is a registered investment advisor (RIA) who just left a big firm to start his own. His client base includes a lot of friends and family and he wanted to know what I thought was a good way to move people into a gold investment that would fit the FOFOA outlook; and these are people with large 401Ks that have never even considered gold as an investment. Poor guy, an RIA who happened to stumble upon FOFOA and then realized he had his friends and family's money in the wrong stuff. What he really needs (business-wise) is some kind of true physical investment platform he can offer that will also pay him a commission to keep his business going.

I have a doctor with a lot of physical gold who wants to buy something on credit. He asked me, if you've put your savings into physical gold, what do you show the loan officer to prove you have assets? I constantly have people asking me what I think about CEF, GTU, PHYS, GLD, GoldMoney, Bullion Vault and others as an alternative to physical gold in your immediate possession. And I really struggle with all these questions because I don't like to give out financial advice. I'm not a financial advisor. In fact, I don't give financial advice other than telling people to avoid the gold dealers that advertise on TV because they'll try to sell you high premium numismatics that you don't want. That's how they can afford TV commercials.

The point is that the A/FOA/FOFOA view leads to one conclusion. You want to own actual physical pieces of gold, preferably stored outside of the banking system. You don't want to own shares in a pool of gold, or shares in a bar. If you've got enough for 100 ounces, you don't want to buy a quarter share of a 400 ounce bar. You either want your own 100 ounce bar or, preferably, 100 one-ounce bullion coins. It's a pretty simply conclusion, but it makes answering the questions above kinda difficult.

On July 2nd, Joe Y. sent me his second donation. I thanked him by email and he wrote back:

No, thank you.

I am in the process of walking away from being a successful cog in the Wall Street Machine to join a new gold company involving some big names as well as partners at some major wall street powerhouses. If it weren’t for the hours I’ve poured over your writings there is no way I would be on the precipice of this awesome opportunity. I must have spent well over 100 hours reading your stuff over the past few years and it’s been quite a ride. Thank you! I am walking away from selling one manufactured wall street product after another to help build something I truly believe in. Something that will help people through what’s coming. It’s an enormous, exciting undertaking and the reading on your site has played a not insignificant part.

Warmest Regards,

Joe Y.

I thought that was pretty neat. Well, Joe sent me another donation for my blog birthday on Tuesday and included this note:

I’m finally starting work at the gold company in two weeks, and I owe a great deal of this decision to your writings. Thank you!

Joe

So I asked him about the new company (emphasis mine):

It's Bullioninternational.com, or GBI.

It is essentially an open architecture platform that allows people in the financial community to buy individually allocated gold in the form of their choice, stored at the facility of their choice (NY, London, Zurich or Salt Lake City), deliverable at the time of their choosing. All independent of the financial system. Trades are executed on a best price basis, and can be processed at up to 30,000 trades a minute. In reality, it’s the world's first physical metal electronic exchange.

We've already had one major national firm sign up and we’re currently working on bringing on more. Bullion sales through our platform have been growing every month and August was almost a double from July, it’s really exciting.

I believe this is the next step, allowing retail brokerages to buy gold for their clients, real gold, not paper gold. My hope is to take billions of physical off the market in the coming years.

I’m very excited about this opportunity to grow a firm for a cause I have a deep conviction in, thanks in large part to you.

I could chat about this all day, so if you have any questions, by all means, fire away.

Costata and I looked over the website and we were both very impressed with the model. We agreed that this has the potential to be a real game changer! One of the first things I noticed on the website was the curious list of investors/advisors: General Wesley Clark, former House Majority Leader Dick Gephardt, former SEC Chairman Arthur Levitt and John Hathaway, who I quoted at the top of my 2009 post All Paper is STILL a short position on gold. That 1999 quote comes from the Gilded Opinion page at USAGold linked in my right sidebar.

Not only could this be a game changer in the physical gold market, but if it's all it seems to be on the surface, it may well be the closest thing to physical possession outside of the bullion banking system that also provides a "transition-friendly" financial solution to all the questions at the top. The significance of this cannot be overstated. And so I had a few question for Joe.

FOFOA: Thanks, Joe! I do have some questions for you, because I have several HNW readers who are constantly asking me about options.

Joe: I’ll do my best, thank you.

FOFOA: First of all, how is this different than Bullion Vault or Gold Money? I think I know, but I’d like to know your answer.

Joe: We are different from bullion vault and gold money in that we do not sell you a “share” of a bar, we do whole bars/coins only. You have the choice to buy gold in whatever form you want. Krugs, Eagles, Pamp Bars, Kilo Bars, all the way up to 400 oz bars but it’s never a share. GBI created this model because we don’t believe owning four ounces of gold that is a part of a larger bar qualifies as actually owning gold. We want clients to own whole bars with zero counterparty risk. We really want to democratize the ownership process. Until now only the ultra-wealthy could order whole, allocated bars, stored in non-banks, audited and insured by a real firm. Now, literally, anyone can.

FOFOA: Is it true allocated storage? Do I have bar numbers on my statement? In other words, am I technically just a creditor of GBI, or am I hiring you to find, buy and store a specific, discrete product for me? And what happens if GBI goes bankrupt?

Joe: The specific bars are allocated to specific clients. If GBI went bankrupt, or if any firm purchasing gold through our platform went bankrupt you are NOT a creditor of GBI or those firms. The metal is held in your name. We have the ability to show serial numbers on statements for larger bars if requested.

FOFOA: What are the barriers to me taking physical possession of my gold? Can I come in and see my bars or coins, touch them, spend some time with them? Say I buy some gold bars through GBI and ask to have them stored in SLC, and then something happens in the world that makes me want to drive to SLC and walk out with my bars. Can I do that and how much would it cost? One concern I have is how variable conversion fees could potentially be used as a deterrent during the decoupling of the unknown value of physical from the known, official paper price of gold.

Joe: Delivery or take-out! We strongly, and I emphasize strongly prefer to deliver the metal to you at a set modest fee plus actual delivery cost, either through UPS up to $250k or armored transport for more. The reason behind this is we store with commercial, non-bank vaults. The issue is that they are primarily commercial facilities. They aren’t really set up with a customer service agent waiting for people to drop in, and they already request 24-48 hours notice before someone comes by, only because if someone “drops in” they may or may not have someone there authorized to even enter the gold vault that may only be accessible by some people at set hours of the day.

That being said, you are free to go to the vault, see your gold and touch it. If you want to take delivery in person there'll be a nominal fixed fee no matter how much gold you're picking up. That's to dis-incentivize those with say 10 coins in storage, but it would be a very modest take-out fee for someone storing few kilo bars.

However, if you store smaller amounts, if you come to look at your gold, you'll have to take it. What we want to avoid as a business matter is every guy out there wanting to stop by and see his 10 Krugerrands. So what we’ll likely do is if you want to see it, you need to pay the fee and take it, or just let us ship it to you. Obviously for larger amounts we will accommodate a free viewing, but from a business standpoint we’d prefer to discourage that so as not to have a problem with our custodian.

The bottom line is clients will always have the ability to have their gold delivered, always. This point is key to who we are.

FOFOA: Would GBI be an acceptable investment in physical for an IRA? I get this and similar questions a lot. Owning physical gold in a "transition-friendly" account can be problematic depending on the third-party restrictions placed on some funds.

Joe: GBI does accept gold through two different trust companies. The IRS requires a trust company to hold the bullion in your IRA. And yes, we do handle trust accounts. I hope that answers your question.

FOFOA: I have an investment advisor that wants to recommend physical to his clients. But it’s hard to make a commission off that. Will you have such arrangements with small RIA’s?

Joe: Yes, yes a thousand times yes. We envision this platform being utilized by advisors and banks, foreign and domestic, to offer gold accounts alongside traditional checking, saving and brokerage accounts. GBI is in discussions with many of these institutions now, and my job is going to be reaching out to more, large and small in this country and around the world. We fully integrate gold holdings into the client statements, and placing a buy or sell order will be as easy as entering it from the workstation at the branch, or of they prefer, a privately labeled web portal for their clients to do real time transactions.

The whole purpose of this platform is to give financial professionals the ability (wirehouse, RIA’s, etc) to provide their clients physical, allocated gold, with live trading and best price execution with storage independent of banks and financial institutions. When I started interviewing at GBI they were up front that in their mind, they were a technology company first. They are on a mission to create the first, most efficient real time physical exchange that can be fully integrated into clients' financial accounts. My job is to market this platform to financial institutions, and at some times, to the advisors themselves. The technology is fantastic, and the platform is extremely user friendly. I placed an order through my own account just to see the prices. They were very competitive and when placed through an advisor will, to some degree at his discretion, depend on how he prices his business.

I gave up a very comfortable job and a great situation to take this position. I truly believe this has the potential to be a game changer. No one does what we do, and as we add more and more firms, I believe the sky is the limit in terms of potential. The growth is really just starting. We are starting to see unsolicited demand from overseas clients, and chatting with the CEO the close ratio on the meetings he’s going on is very high. I believe that’s because once these institutions see what we offer, it’s something they have never seen before, but they’ve been looking for it.

The beauty of our platform is that it’s completely white labeled, in that to an "Acme Financial" client and advisor, it looks like Acme's own program and we’re content keeping it that way. The same would be the case with any client we bring on. We privately brand our platform for any client we bring on and we have the capability of fully integrating it into their systems. There are many applications to hedge funds as well, specifically that we can set them up with their own web portal and they can make real time transactions to buy and sell physical. It may not be how they do their very active trading, but I don’t see why every hedge fund wouldn’t want to buy and custody their core gold position this way. It’s much more simple and cost effective than trying to broker the transaction, transportation, storage and insurance themselves.

I hope none of you think this is an advertisement or a paid endorsement of GBI, because it's quite the opposite. I asked Joe if I could have his permission to write about it. He even asked me to take some of the best stuff out because, unfortunately, it is proprietary non-public information. But I thought it would be easier to write it up in a post than to email all the readers individually who I thought would like to have this introduction. That's what this post is. A DYODD introduction to Joe and GBI.

I have no stake in this company, I have not been paid, and I will not be buying gold through GBI myself. I still recommend taking delivery and keeping your physical in your possession (or at least under your immediate control), but I do understand that this is not always the most practical advice for some of my HNW readers, nor is it practical for some types of funds under various restrictions. So I'm happy to announce that I have finally come across an alternative that I believe rises above the rest in terms of being "transition-friendly".

What do I mean by that? Well, if you take the time to really understand Freegold-RPG, what I write about here, you'll know that getting there consists of three phases: a stasis followed by a punctuation followed by a new stasis. And it is during the punctuation phase or "transition" that I believe we will have a brief period of "peak risk". What risk, you ask? Well, it is the risk that your expected transition gain will be taken (or simply kept) by someone else, and you'll be cashed out at the official, legal price of gold; a price at which no physical can be found at that time. I'm not going to say much more about it here. But as ANOTHER would say, think long and hard on this. [1]
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[1] I believe that allocated storage at the Perth Mint would be a comparable solution for restricted money if you physically reside in Australia. But for residents of Europe and the US, I would personally choose the storage facility closest to me. I like knowing that, if conditions suddenly warrant it, I can drive or fly there to pick up my coins or bars for a fixed fee; a fee independent of the size or value of my stash. I would not request delivery, though, during the "transition" while the official price of gold backed by the legal system cannot fetch any actual physical gold. I'd either leave it there with everyone else's (ride it out) or pick it up in person.
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But what I found particularly post-worthy about this topic was that we have a true insider at this company! Joe has been reading FOFOA for more than two years now, and that's what gave him the confidence to leave a very nice job in order to pursue a golden dream. And as he said, GBI is primarily a technology company, an electronic trading platform integrated with actual physical off-take, which is why they hired Joe for his physical gold market savvy. To me this is a brilliant opportunity for both him and us. The company is still new enough that Joe's presence there is shaping its structure. My emails with Joe have already influenced company policy. Granted, it was in a very small way (sorry, can't tell you exactly how), but it was beneficial to the durability of this business model from a "transitional" perspective. So yay, it's already more Freegold-friendly.

There are three main points that caught my attention:

1. This business model/trading platform has the potential to be a real game-changer in the physical gold market. It opens a door to a massive pool of potential demand that was previously cut off from the accumulation of physical gold in true, *UNAMBIGUOUS* personal (or institutional) ownership, outside of the opaque and dubious bullion banking system. I could even see this as a good way for all types of corporate entities to hold real gold assets safely through the transition.

As the CEO says in the videos below, it democratizes an important method of physical gold accumulation that was previously a difficult, expensive and sometimes-exclusionary process. It makes including real gold in an investment portfolio by individuals, IRAs, Trust funds and institutions as easy as stocks and bonds. Best of all, for the first time, it gives money managers a financial incentive to recommend unambiguous coins and bars in a portfolio rather than trying to steer clients away from physical gold.

2. It answers almost all of the toughest questions I get from readers and supporters.

3. There's an FOFOA reader inside this company who understands the principles and concepts we explore, and he's in at the ground floor (or close to it anyway).


Here's a video that Joe sent me of Savneet Singh, the CEO, and Peter Custer, the Chief Technology Officer, explaining their new gold trading platform at Finovate last May in San Francisco:



And here's another one of Savneet on Bloomberg last week:



In one of his first posts back in 1997, ANOTHER wrote the following:

"The LBMA problem"

I can now make clear for all to see.

Background; to understand the following you must rethink your basic knowledge of money and investments. Get your aspirin ready.

Some time ago gold not only was used as money but also circulated as currency. It had always been money and people had no use for a separate currency to represent "gold money" so they stamped the gold itself and used it as circulating currency. From the start, one thing most thinkers can't quite grasp is that "money does not have to circulate"! The first "world money", gold money that is, could stay locked up and still represent value and wealth. People had but to agree on who owned it in exchange for goods and services.

The idea of physical gold sitting somewhere in a centralized vault and only its ownership changing hands is not a new concept. Neither is it an essentially flawed concept. I believe it is perfectly safe today (as long as the wheels stay on this bus) to store your gold with a credible custodian. And I believe it will be perfectly safe, and perhaps even preferable, to do so in the new monetary system of the future. But the time of "peak risk" will be, I believe, that brief period of phase transition between the $IMFS and Freegold-RPG.

It is in preparation for this transition that we want to be holding our gold in the most *unambiguous* way possible. And the most unambiguous way is paid in full, in your hand ownership. But when that's not possible or at least practical, we'd like to own our gold in unambiguous lots (either specific coins or numbered bars) outside of the bullion banks and their opaque networks built upon the flexible concept of ambiguity.

When gold is finally revalued, it will happen in the dark. You won't be able to see it happening on your ticker. And the de facto transfer of wealth that will occur will only flow to specific ounces of physical gold, not to ambiguous claims on some amorphous thing called gold. Ambiguity leads to more people thinking they have exposure to the revaluation than the amount of value there will be to go around. It also leads to the potential for the abuse of claims, since for a brief time the price backed by the legal system may be very different than the value of the actual physical in custody.

During "normal times" this is not an issue. Today, as well as after the transition, if you store $100K in gold you hold $100K worth of unleveraged real money. But it is during this dark, hidden transition that the unleveraged becomes hyper-leverage. ANOTHER wrote:

Our history will read, that persons of simple life, will find they have made the greatest leverage investment ever seen and thought of it as only a small trade. When gold moves from "bottom to top of world currencies", many will find their assets in the "Estate Of Kings"

And here are a few FOA quotes on the hidden leverage in unambiguous physical gold ownership:

Today, physical gold advocates are the real gold bugs as they now possess the real leverage paper players only think they have!

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Well, I can tell you that the further we travel this trail, the higher the eventual cash settlement of all gold paper will be and the less that settlement will be allowed to match any "free physical" price.

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By holding physical gold you are owning a super leveraged
"derivative" that will be exchangeable against the value of real things at a par level lost to the minds of most investors. Today, physical gold purchased in dollar values is discounting its worth by perhaps 100 times. For us PGAs, that is a leverage worth "playing the physical game for"! (smile)

++++++++++++

It is from here that we can understand the awesome leverage contained in holding but one ounce of gold. Here, on this ledge overlooking the entire golden valley, we can see this truth! Yet, it is a revelation to gold buyers as much as a curse on gold industry and leveraged paper investors. They spend their days, consuming their wealth, betting on a price that cannot represent gold until it fails. Destroying all they wait for.

From here, we understand why the current prices for gold do not have any bearing on the buying habits of the major players that walk this trail. As Another has said "The price you know, it be your price, not my price".

It is true, we are buying gold, not to trade for a paper value created today. Rather, to hold it beyond the paper destruction that must come tomorrow. Gamblers, traders and gold substitute players will all witness a colossal shift in world wealth that degrades their holdings. Even as their bet on half the process is proven as a folly very typical in human nature. Only unseeable as it exists.

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The leverage today will be in a physical gold position, not any other form of gold ownership. By accumulating physical gold today, we are truly walking in the footsteps of giants; advancing with them as they work thru this singular, long term political move.

In this game of musical chairs, unambiguous, discrete pieces of physical gold are the chairs. Do you have your chair? Or do you own a claim ticket good for a portion of a chair? How will the newly revealed value be distributed? Will those that could potentially keep it for themselves hand over your fair share? Another wrote:

The BIS will not allow the distribution of all gold to settle claims.

And then FOA:

Somehow, the BIS and the major private gold holders know the total claims, as does Another. The Euro group is going to force those claims into real bids instead of just claims!

Again, what do you have? Do you have your chair, or do you have a claim check that's supposedly good for a chair? And when will the music stop? I don't know and I don't care, because I've already got my chair. The greater "precious metals investment" industry has many different products to sell you. This is a big discussion and one that lends itself to a lot of different viewpoints. In reality, it all boils down to risk assessment and your personal situation. But I don't know anywhere else on the net where you'll get more straight talk than here.

So what do you think of GBI? Am I correct in my three points above? Is there anything they could do to make GBI more Freegold-RPG transition friendly? I know that Joe will be following the comments here with great interest, so please let him know what you think.

And if you are one of those who would have supported this blog last week had the market not puked on Wednesday, it's never too late. It's not just about FOFOA's third anniversary. It is a contribution to keeping this blog and discussion forum alive in the hope that others may experience the benefits you have received.

For some it has strengthened their "weak" hands, it has gotten other people out of paper and into physical, for others it has reset their valuation of gold above levels they would have already sold at long ago and for others it has helped to crystallize their thinking about the importance of gold in preserving their wealth.

And it provides a continuing benefit to all of us as a forum for discussion, intellectual stimulation and a place where we can get a confidence boost when the dreck from the MSM rattles our nerves.

Maybe you had an "A-ha moment" as a result of this blog and realized that your small stack of gold may someday have the same purchasing power as an LGD bar at today's prices. If so, then please click on my small, but most definitely *unambiguous* stack of gold coins and make a contribution. Thank you! :)

Sincerely,
FOFOA