Thursday, April 19, 2012

Banks, the Titanic and Your Money

With all the talk of the one hundred year anniversary of the Titanic's sinking, I thought I'd mention Banks.

What have Banks got to do with the Titanic? Nothing really, except that they both involve risk.

You recall how everyone thought the Titanic was unsinkable, yet on its maiden voyage it did indeed sink. This was the stuff of legend and the mystique of this story has grown over time.

Yesterday, I was listening to an interview by Chris Martenson with Paul Tustain of Bullion Vault fame. A small thow-away phrase at the end of the interview caught my attention.

The gist of it was this. Next time you get a bank statement take a look at the little two letter description next to your ending balance figure. If you have savings it will say 'CR'. This means you are in credit to the bank and you are a creditor to the bank. On their balance sheet they owe you that balance. But also remember, once you are on their balance sheet you hold counter-party risk to all other creditors who may rank ahead of you and all debtors (eg mortgage holders).

Once you enter the hallowed halls of a balance sheet, you hold counter-party risk to that organisation. If mortgage holders begin to default or if assets do not perform (or are undervalued) the Banks financial situation could deteriorate and you would find your savings at high risk.

This is why our Government here in New Zealand setup the deposit guarantee system during the height of the GFC in 2008. Finance companies found themselves in the unenvious position of not being able to pay their creditors.

This concept of counter-party risk, also holds with gold bullion companies. When you buy gold or silver, you need to make sure that the physical precious metals are stored in an independent vault and are allocated to you. That you hold the bar numbers and the gold/silver in your name. This means there is no counter-party risk if either the bullion company or the vault go into liquidation.  The precious metals are yours.

Now possession is 9/10ths of the law, so nothing is 100 % sure in this world, short of holding the stuff in your hot wee hand. But that isn't applicable to most as it's just too darn dangerous these days to hold too much in your home.

Be careful out there.

Gold in New Zealand dollars: $2013.98 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $38.80 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)

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