Paper Silver vs Physical Silver - True Story
Most precious metal investors have probably heard about the concept of paper silver versus physical silver. It's an an important yet widely misunderstood distinction.
There's nothing like a real-life story to drive a point home, and Jane Wells of CNBC offers a great example.
Bill Cramer of St. Louis wanted to actually own the silver. After all, he's from the Show Me State. So when he called his broker back east to try to take possession of 5,000 ounces he bought in 2003 at $4.94 an ounce, he was told he couldn't.
It was in "a pool". He immediately sold and then bought actual coins from Missouri Coin, losing a little in the transaction but buying peace (or piece) of mind.
Mac Slavo transcribed part the videotaped interview (below):
The metal I had purchased in January of ’03. I said “I’d really like to take delivery of my metal – the five thousand ounces.” They go “well, that’s not possible.” And, I go “well, I’ve been paying storage fees since January of ’03, what do you mean I can’t take delivery.”
“Well, it’s part of the account. It’s called a pool account. And, you don’t take delivery, you just participate in the appreciation.”
So I immediately sold that 5000 ounces at $18.33 and I had my cell phone in my hand and I immediately purchased 2500 silver eagles at $18.41 and that’s how I reconciled the problem of not being able to take delivery of my physical metal from a brokerage account.
Well played, Mr. Cramer.
Pooled accounts are common at big investment houses. In this type of account, firms don't physically hold all the silver their clients may think is there. They hold some percentage of the total bullion represented in the group of accounts, futures contracts, and some cash to cover withdrawls. The same is true with many gold accounts.
One important note: the details of this arrangement are spelled out in (lengthy) prospectuses, so it's technically legit. Firms are required to have cash/bullion in place to handle expected client demand.
That means CNBC's portrayal of pooled accounts as a "scam" isn't technically correct. It's more like an investment with risk of loss of principal, which you will find if you dig through the prospectus.
If half, or all those investors want to withdraw their money at the same time, though, they have to hope the broker has enough capital to cover the costs of paying all their investors at current metal prices. Despite paying "storage fees" don't actually own the underlying asset.
Investors who do as Mr. Cramer did, and buy physical silver with their paper profits will push prices higher. Before, Cramer didn't actually own all that metal. His "stake" had little if any effect on supply, and therefore price.
Now he's a participant in the real market. Before, he just owned a piece of paper that says IOU x amount of silver. We're good for it.
Source: Wealth Wire