Dec 182015

I am often asked by US residents whether precious metals are reportable under IRS and FinCEN foreign asset/account reporting obligations:

  • Form 8938, Statement of Specified Foreign Financial Assets
  • FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)

According to the IRS comparison of these requirements, “precious metals held directly” is not reportable.  So what does “held directly” mean? The IRS’ own Q&A confirms that safe deposit boxes are not reportable but otherwise provides no explanation of the term.

Mark Nestmann says that “direct ownership means you don’t hold the assets in any type of account” and that “assets you hold in a box at an offshore private vault to which only you have access may also to be non-reportable” but that “you must report offshore holdings of physical gold offshore to which you don’t have exclusive access on the FBAR”  (my emphasis).

Simon Black confirms this interpretation, saying that “gold in a ‘gold account’ does need to be reported, like GoldMoney. But storing coins or bars in a safety deposit box offshore does not”.

The most detailed analysis I have come across is from Michael DeBlis, III, Managing Partner at DeBlis Law, who, like Nestmann, sees access as the key to determining reportability:

“In a case where unrestricted access is granted by the owner to the foreign financial institution (or person engaged in the business of banking), it would indicate that the vault is a financial account and an FBAR is required if the currency notes exceed the reporting threshold. On the other hand, where the owner maintains exclusive control over the vault and does not give the foreign financial institution (or person engaged in the business of banking) access, reporting currency cash notes stored in such a vault is not required regardless of value.” (my emphasis)

This means that to avoid having to report your offshore gold and silver you need to store it in a safety deposit box, or similar, to which only you have the key such that the custodian/operator does not have unrestricted access without you being there.

Of course the problem with this arrangement is that if you need to sell your metal, you have to fly over and physically visit the storage operator to withdraw your metal so that it can then be delivered to the bullion dealer (which may be the same person operating the facility). This obviously adds significantly to the cost and makes such transactions uneconomic.

It is therefore with interest that I came across a new product by mobile/cell phone accessory firm Dog & Bone called LockSmart. It is a keyless Bluetooth padlock which is controlled from your phone, and allows you to “share your ‘key’ with someone in a different region, city, state –even country –in an instant. And could securely share multiple ‘keys’ instantly, yet still enjoy the confidence to, just as quickly, take those ‘keys’ away”.


One could argue that a safety deposit box or similar secured with LockSmart would satisfy the “exclusive control” and “restricted access” requirements, but allow you to remotely give access to your metal to your custodian to remove and ship your metal as directed, and then upon relocking the box you can withdraw your digital key and thus restrict access to the box again. Sure, you have to trust the custodian not to take all of your metal out and/or follow your instructions, but that is the same trust one has to have with conventional, and reportable, storage facilities.

Of course I am not guaranteeing that such an arrangement would satisfy the FBAR/8938 requirements, which would probably hinge on how much “restriction” constitutes “directly held”, and you should get your own tax advice. I would note that even if metal stored under such conditions was not reportable, the fact is that if you have a reasonable value of gold and silver, the US government would be able to trace that you had purchased it by following bank transfers to the bullion dealer.

Dec 152015

Last week I wrote about the gold warehouses associated with the CME’s kilo futures contract. Today I’ll have look at the Comex New York warehouses but rather than focusing on the eligible/registered debate, which has been done to death, I want to look at the fight between the warehouses for storage customers and the entrance of JP Morgan into this $30 million per annum business in early 2011 (hence my tacky topical title).

The stacked area chart below shows Comex gold stocks by warehouse. It shows the build up from 3 million ounces to nearly 12 million ounces during gold bull market and then a fall, similar to what we have seen with ETF stocks. The point marked (1) is the entrance of JP Morgan into the vaulting business in March 2011 and their impact on the other two major warehousers, HSBC and Scotia.


A better sense of the impact of JP Morgan’s entrance into this business can be seen in a percentage stacked area chart, see below.


Before JP Morgan’s arrival, HSBC and Scotia had over 90% of the market but this chart shows clearly that JP Morgan quickly cut HSBC’s market share from 50% to 35% and also into Scotia’s as well. During 2013 HSBC fought back and regained market share, initially from JP Morgan but then in 2015 eating into Scotia’s business.

The storage market dynamics are a bit difference in silver, with total silver stocks being somewhat consistent around 100 to 120 million ounces during the bull market and in contrast to gold, showing a ramp up to 180 million ounces as silver has fallen.


The storage business is also more competitive, with Brink’s and Delaware having larger roles and market share being spread out. Again we see the impact of JP Morgan, although it took until mid 2012 before they gained business. CNT also entered the market in late 2012.


From a market share point of view, it would appear that JP Morgan and CNT together have mostly taken business away from HSBC and Scotia and been able to maintain it.

While both the gold and silver warehousing market seems quite dynamic and competitive, it is interesting that the players don’t compete on price, with all of them charging according to CME $15 per 100oz gold contract per month and $8.50 per 1000oz silver bar per month (excepting CNT, who charges $6.75). At current metal prices that $15 fee equates to 0.17% per annum and for silver the rates are around 0.75%.

In addition, those fees also have not changed at least since June 2014, which is as far back as the Wayback Machine recorded the fee file. No one charges a Delivery In fee (which makes sense, you don’t want to dissuade people from putting metal in), but Delivery Out fees do vary, indicating some competition for those clients who do use Comex to source physical.

The lack of price competition is unusual in what is not an insignificant market. The table below shows the total estimated storage fees earned from 2011 to today.


Given that vaulting has large fixed costs, every additional ounces stored generally represents clear profit – the marginal cost of additional ounces stored is close to zero. With that set up one would expect more jockeying on storage fees.

The big loser in the warehouse wars has been Scotia, who had 32% of the $30 million per year storage revenue on offer during 2011, falling to 14% in 2015 ($4 million worth). The winners were CNT which moved from zero to 8% and JP Morgan who currently sit at 24%, equivalent to $7 million.

Dec 112015

Back in July I pondered what happened to 110 tonnes of gold in one of the Hong Kong gold warehouses registered by CME for its kilo futures contract. The chart below updates the figures and shows that wherever the gold went, its is gone for good.


Note that the straight line marked (1) is just an extrapolation between the last figure reported in the CME’s submission and the first figure reported on CME’s warehouse stocks report (see previous post for an explanation) and is not reflective of the actual movements during this “blackout” period.

The Malca-Amit warehouse dropped down to one tonne when the contract started trading and has only increased to 1.148 tonnes since. The Loomis warehouse I haven’t shown as there was no history reported by CME and it is only held around half a tonne since it came online mid this year.

All the action in Hong Kong is in the Brink’s warehouse, which appears to average 1 million ounces (or 31,103 kg). However, this has no relation to the volume that is being put through the CME kilobar contract.


As the chart above shows, the average daily volume is about 300 contracts and open interest at say 30 contracts (30 kg). In terms of an Owners per Ounce metric the contract is running at 0.001, or to put it another way, there is 1 tonne of gold “backing” each contract. Those that get worked up about Comex “leverage” ratios should be interested in the fact that the Hong Kong warehouse report only shows eligible stocks and has never shown any registered, which probably has something to do with the fact that the delivery notice report shows no issues/stops for the kilo contract so far this year. Forget your 300:1 Comex “leverage” – that would put the OI/Registered Stocks ratio as divide by zero error, or in other words, the CME’s Hong Kong contract has infinite leverage!

While the CME Hong Kong kilo contract is basically dead (even though they have 12 firms on their Market Maker Program), the Brink’s warehouse is far from morbid. This chart from Nick at Sharelynx shows that there has been over 840 tonnes of gold withdrawn (and pretty much that much received in) since the futures contract started trading.


Obviously this activity has nothing to do with the kilo contract and must be related to other over-the-counter (OTC) trading. For example, company A has gold with Brink’s and does a private sale to company B, the trade is settled between the two banks by their settlement departments, and then company B then instructs Brink’s to ship it out, at which point Brink’s reports that to CME as a withdrawal. These movements are only now visible to the market because the gold in the Brink’s warehouse is in the form of kilobars, which are eligible for the contract, and therefore have to be reported even if they have nothing to do with futures trading.

So even though the CME kilo contract doesn’t seem to be getting any traction, we can at least thank them for doing it because it now gives us visibility into the Hong Kong gold trade. One part of that trade that can be shown from the warehouse stocks data is the inventory build up prior to the Chinese New Year. The chart below shows the warehouse stocks in Brink’s leading up to Chinese New Year, indexed to 100 so they are easily comparable between each year.


The data is a bit chunky as CME only reported monthly average historical stocks in its submission, but it is clear that there is generally an inventory build two to three months before the new year. So far for this year, leading to the 2016 new year, we see the stock build up and now it is being worked down as metal gets delivered to jewellery firms for production into finished pieces.

Just one final observation. As per CME storage fees note, Brink’s charges $6.50 per contract per month, which works out at around 0.22% per annum storage rate. Malca-Amit only charges 46% less at $3.50 a month, but that hasn’t got them any business. By my estimation, Brink’s has earned over $13 million in storage fees since January 2011, and $2.3 million so far for 2015 – a lot of money Malca-Amit and Loomis are missing out on.

Dec 092015

In July I did a post on How much gold does China really have? which looked at the rate China was accumulating gold reserves based on their occasional announcements of how much gold they had. Extrapolating out their average monthly rate of 8 tonnes gave the chart below, which projected to 2,186 tonnes by the end of 2020.


Since then China has begun to report its gold reserves every month and has accumulated 86 tonnes in five months – an average of 17.2 tonnes. That is a lot more than their previous rate and you can get a better idea of the acceleration if I update the chart above with the new reserves figures and then project that rate into the future.


If China keeps at this rate then it will have 2,792 tonnes by the end of 2020, which is 606 more tonnes than I initially estimated. In my previous post I noted that official reserve additions plus commercial bank additions seemed to average 45% of monthly flow of gold into the Chinese market (that is, imports and newly mined domestic gold). The chart below shows these two estimates in green and blue.


What is interesting is that the average of the green and blue over the May 2009 to June 2015 (the two dates where reserves were announced) comes out at 17.1 tonnes a month (the red dotted line) which is very close to the average Chinese accumulation rate of 17.2 tonnes (the purple dotted line) since July 2015. The average of the June 2011 to June 2015, a period where inflows into China increased significantly, is 20.5 tonnes, which is close to the two largest monthly additions to China’s reserves.

These figures would seem to imply that now that China is reporting its reserves it can accumulate officially at the rate it was doing so unofficially in the past. Of course that theory implies that Chinese commercial banks would no longer be adding to their gold inventories, which seems unlikely as long as the gold market in China is developing and expanding. On the other hand, as financing trades unwind possibly the commercial banks are reducing inventories and this is being absorbed into official reserves.

I would also note that the above analysis assumes China adds to its reserves by sourcing from the domestic market only. Koos Jansen is of the view that China is acquiring 400oz bars from overseas markets. I do not discount that this may occur but my view is that even if done via the Bank Of China as Koos speculates (and I think that is the most likely candidate) such buying would be obvious to the Western bullion banks. If PBOC via BOC gold buying was consistent and ongoing I think it would make them prey to traders and hence my view would be that any such activity would be sporadic and tactical, taking advantage of times when western gold market demand was weak. As we receive more data over the next year on China’s reserves, commercial bank stock, imports and mining we should be able to confirm which theory is correct.

Dec 012015

The Perth Mint’s latest minted coin and bar sales are out, which reflect retail investor interest. In silver we posted our fifth best month in four years, although the September figure probably should be ignored because we were stocking up for months beforehand for the launch of our silver Kangaroo coin and didn’t expect to sell that all in one go.


For gold, sales dropped back down to the circa one tonne per month they have been averaging this year.


The gold chart shows a general decline, ignoring spikes, where silver is more consistent. This divergence between gold and silver coin buyers is more obvious when you look at US Mint and Royal Canadian Mint sales over the last 15 years.

For silver you can see that sales were flat and then grew dramatically as a result of the financial crisis in 2008 and while easing off, yearly sales are still increasing year on year.


For gold, it too had the financial crisis spike but from that initial “fear trade”, but in contrast to silver, each year’s sales have been lower than the last (and it is not like that happened as a result of the gold price peaking in 2011, the decreasing interest was from 2009 onwards).


I have commented on this divergence between gold and silver before and it is also obvious in the balances of ETFs. The charts below from Nick Laird show the total ounces held in ETF, futures warehouses and other online storage services.


Gold ounces held have declined with the gold price but for silver it has held up in the face of a much larger price drop. Seems silver investors are fearless whereas gold’s are fickle.

This article has been translated into German on Goldseiten.