Unsecured Creditor vs. Owner Status - Know the Gold Ownership Laws in Singapore
There’s lots of confusion surrounding gold bullion ownership; sometimes, not even the seasoned investors and wealth builders can tell for sure whether they are the legal owners of the gold bullion they have stored or simply unsecured creditors. While various bullion banks and dealers can assure you that you ‘’own’’ the bullion, the physical bullion may not even be present in the storage. This may be a controversial claim; nevertheless, as an investor devising a strategy for protecting your wealth in case of an economic crisis, you should look into different laws and regulations, as well as the practical side of gold ownership.
If you can’t touch it, you don’t own it
While it may be an oversimplification of the gold ownership issue, the statement presents the essence of the issue in a nutshell. Especially considering storage solutions that are founded on the IOU (‘’I Owe You’’) system. If you go for this solution, you are not the legal title owner of the bullion you stored but are considered an unsecured creditor.
So, who is the legal owner of the bullion? Technically speaking, it’s the bank, dealer or storage facility you chose to store your bullion. However, since they owe the bullion to you, you can claim legal ownership but you depend on their ability to honor their side of the IOU agreement, that is – the counterparty risk.
What does a creditor own?
In some cases, investors can purchase the bullion from a dealer and store it in the same dealer’s facility. The important thing to note is whether you receive an invoice for the purchase you make. The invoice for purchased goods serves as proof that you are the owner of a physical asset. Without the invoice, you are an unsecured creditor who owns the claim and not the actual physical asset.
An invoice serving as evidence of ownership can’t be issued before certain conditions are met. Namely, the party issuing the invoice has to be in possession of the physical bullion. The process of issuing an invoice for physical parcels is more complex and costly than issuing IOU promises on virtual bullion quantities. The issuer either has to have a buffer (an amount of bullion in stock) or the capacity to order the bullion within a certain timeframe. Here is where a clear distinction is made between in-stock and pre-order bullion, which is not the case with virtual quantities.
Additionally, the bullion must be uniquely identifiable.
What does this mean?
The goods stated on the invoice ought to be segregated/parcelized and have their unique number or bar code to be considered valid. If the storage invoice you receive states “monster box of 500 Maple leafs”, it doesn’t state either the number or bar code that would indicate a specific box owned by you. Without the specification (unique ID for each item/parcel), you are not the owner but a creditor in the IOU system. The specification also serves as evidence of the physical bullion’s existence, which in turn means that you are the owner of the physical bullion, whereas the storage provider acts as a storage agent (a renter of space) for you – the owner.
For you to be sure that you are the legal title owner of the bullion, a Storage provider should also enable you to audit and retrieve the parcels shortly after you have requested it.
The counterparty chain
As an (unsecured) creditor, the money you invest is used as the liability for your immediate counterparty. The counterparty, in turn, might become an unsecured creditor who can transfer the money to another counterparty. The process can be repeated by all subsequent counterparties, which is how the counterparty chain is created.
All creditors in the counterparty chain depend on the solvency of their counterparties. If you are investing in gold bullion in order to use it as protection against systemic risks, getting involved in a counterparty chain is not the best of ideas – counterparty chains involve counterparty risks, which is one of the things you wanted to avoid in the first place.
What if your counterparty goes bankrupt?
If you are an unsecured creditor, you might lose the claims you have on the gold bullion if your dealer/bank goes bankrupt. In this case, the claims are used to cover liabilities to (all) creditors. However, as a legal title owner of the physical bullion, the bullion belongs to you by law and cannot be claimed for creditors.
Owner vs. Creditor status in different bullion storage categories
There are four basic categories of bullion storage:
- Unbacked – in this case, you are betting financially (playing with the price of gold) during an investment cycle. As far as the law is concerned, your status is that of an unsecured creditor.
- Unallocated – with this type of storage, a limited amount of bullion exists and is used to cover your claim (and most cases many others). Again, the bullion is not on your balance sheet, and you are not considered the legal owner.
- Fully Allocated – this option typically means that the amount stated on your claim is matched with the physical bullion present in the storage. Nevertheless, this doesn’t guarantee you the owner status by law because your claim is still a generic ounce(s) liability against assets held by the storage provider.
- Reserved – for a dealer to claim that they provide a ‘’Reserved’’ storage option, they have to provide you with an invoice (a purchase contract). It serves as proof that the dealer has stopped being the legal title owner of the bullion they sold you, and the ownership has been transferred to you. The invoice that serves as proof of ownership has to indicate a specific amount of physical bullion present in storage, uniquely identified and tracked.
Be a legal title owner and not unsecured creditor with Bullion Storage
Silver Bullion’s Bullion Storage is a ‘’Reserved’’ segregated storage option that provides the customers not only with world-class storage in Singapore – investor-friendly jurisdiction – but also guarantees full legal title ownership of the stored bullion. Bullion Storage is continuously developing and perfecting the range of services so as to meet the diverse demands of our customers from all over the world.