Gold and Silver Fraud Scheme Revealed

The WealthCycles Staff

Just last week we wrote about the dangers that MF Global revealed in the global banking system. The basic idea is that MF Global and probably every other Wall Street bank is gambling with their clients’ wealth. What’s clearly a fact is that these firms’ fiduciary responsibility is to themselves and their shareholders—it’s their clients that are the ones being taken out back for slaughter.

A Barron’s article today, published in Yahoo! Finance, proves many of those clients’ worst fears—that lost assets including cash, stocks, commodities, futures, and gold and silver will be commingled by MF Global’s trustee, and losses will be shared amongst all of MF Global’s creditors. But the holders of gold and silver had warehouse receipts identifying individual bars and coins that the clients believed were theirs. These clients, of course, assumed that their metals were safe and sound in the custody of MF Global, but as we have talked about before, when a bank goes under, anyone storing metals becomes an unsecured creditor—and in that case you are at the whim of the bank—or more accurately the bank’s bankruptcy trustee.

When we wrote this in July of 2010, many thought we were crazy. Ownership is ownership, they claimed, and it didn’t matter if you owned gold in ETF format, pooled account, or with a bullion bank.

Just as when you deposit your currency at a bank, the bank doesn't keep your dollars separate from everyone else’s dollars; the bank simply tells you in your bank statements how much it owes you. But, legally, when you buy into a gold pool or certificate program, the bank becomes the owner of the gold.

If the bank gets into financial trouble (gasp!) it can sell your gold to maintain its assets at a level where it won’t get shut down and where it will avoid a run on the bank. In that instance, you won’t be paid back in gold, but rather in currency—less currency than the value of the gold the bank owed you—because logically a bank in trouble almost certainly would be forced to sell assets at fire-sale prices. If you live in a country with some kind of bank deposit protection (such as the Federal Deposit Insurance Corporation in the United States or Financial Services Compensation Scheme in the U.K.), your gold will not be covered. That’s because deposit insurance only applies to currency—meaning that, in the event of a bank crash, currency deposits are safer than unallocated gold.

When we first heard the story of Jason Fane of Ithaca, NY, having his precious metals held from transfer by the bankruptcy trustee, we smelled something fishy, and assumed that something more sinister was going on.

Today’s Barron’s article proves exactly those fears—that precious metals owners who seemingly owned their metals outright will actually lose a portion of the value of their precious metals. Barron’s says this:

The trustee overseeing the liquidation of the failed brokerage has proposed dumping all remaining customer assets—gold, silver, cash, options, futures and commodities—into a single pool that would pay customers only 72% of the value of their holdings. In other words, while traders already may have paid the full price for delivery of specific bars of gold or silver—and hold "warehouse receipts" to prove it—they'll have to forfeit 28% of the value.

That has investors fuming. "Warehouse receipts, like gold bars, are our property, 100%," contends John Roe, a partner in BTR Trading, a Chicago futures-trading firm. He personally lost several hundred thousand dollars in investments via MF Global; his clients lost even more. "We are a unique class, and instead, the trustee is doing a radical redistribution of property," he says.

But a redistribution of property is exactly what is planned—with “owners” of precious metals held by the former-MF Global being forced to take a 28% haircut on the value of their metals. But it gets worse:

Adding insult to the injury: Of the 28% haircut, attorney and liquidation trustee James Giddens has frozen all asset classes, meaning that traders have sat helplessly as silver prices have dropped 31% since late August, and gold has fallen 16%. To boot, the traders are still being assessed fees for storage of the commodities.

So the big secret is out in the open now—and maybe, people won’t think we are crazy any more. As Mike Maloney has said for years: “If you can’t hold it, you don’t own it.”

The tangible things that we eat, use and/or buy. Commodities that are traded include Cattle, Cocoa, Coffee, Copper, Corn, Cotton, and Crude Oil, just to cover the Cs. Gold, silver and platinum also are traded on the commodities exchanges as futures contracts.

Futures are really nothing more than IOUs. Futures contracts are just standardized agreements to deliver a specific commodity, in an agreed quantity, at an agreed price, on an agreed date, someday in the future. They are traded like stocks on numerous commodities exchanges around the world. They differ from buying stocks in that you agree to a transaction at some point in the future.

Exchange-Traded Funds (ETFs) are securities that trade like stocks but are supposed to track the price of an index like the Dow or S&P 500 instead of an individual company, or they may be designed to track the price of a commodity like oil, gold, or silver.

Mike, I would like to know what you think of money in brokerage accounts? Can the same thing happen to equities in online brokerage accounts as well, or is this something that only happened in the futures market?


Online or not we believe if you can't hold it you don't own it. 

MF Global is a brokerage firm and you can see what happen to them.


The underlying message here is that investors who believe their gold and silver "physical" is safe in an ETF better re-visit that decision!

How does this crazy turn of events apply to Is the assets in safe or will it be up for grabs too if for whatever reason, it will belly up like MF global? Or that the company that handles the vault, what if they went belly up???


This crazy turn of events shows the importance of buying physical precious metals. wants to keep everyone from mistakes like this.


Former clients of MF Global should hire an attorney and try to get an injunction stopping the liquidation trustee from commingling readily identifiable assets, such as gold and silver bars. These bars have serial numbers, which should be on any warehouse receipts for them. With very little difficulty, it should be possible to quickly identify which owners are due which bars. These bars should then be delivered to their owners forthwith and without encumbrance.

They can easily identify the bars. The problem is that the trustee doesn't give a hoot about the individual owners and instead is distributing the losses amongst all of MF Global's creditors. 

Is it prudent, legal and SAFE to store gold and silver in a safety deposit box at a bank??

Hello fosterdb,

Check out our article on "How To Store Your Precious Metals" that offers our viewpoint on safety deposit boxes as a storage option.



I believe the article has answered your question, if you don't hold it, you don't own it!!!!!!!

it's a pretty simple concept.

Well, we like to think if you can't hold it, you don't own it. There are also drawbacks to holding everything in your hand and vault storage is must for big holders. The point is, if you can pull it out at your whim, you own it. If you can't, as what happened to MF Global customers, you're probably screwed.  

if you have that much to hold, you should have the resources to build something that will hold it, so you may access it at your whim.

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