Anyone looking to invest in precious metals is often better off exploring the chap and safe options. Pooled accounts are often mentioned as an option, yet it is crucial to be aware of what this entails exactly. No decision should ever be made without knowing all the facts.
The Concept of Pooled Accounts
At their core, pooled accounts are interesting solutions to buy and store physical metals. More often than not, they can be used for gold and silver, but also cater to other precious metals in certain cases. Dealers will hold metal owned by their customers, but without disclosing which customers own what quantity or particular pieces.
Several advantages can be identified when exploring pooled accounts. First of all, it saves the customer the hassle of physically storing the precious metal themselves. Despite there being plenty of ways to do so safely and securely, it can be daunting to newcomers. Avoiding any hurdle to entry is crucial, yet convenience doesn’t trump everything.
Second, pooled accounts do not discriminate based on the size of one holdings. More specifically, it is available to small investors, as well as those hoarding massive amounts. Even if one just wants to pool a few ounces of silver, the service provider will happily do so. It is a great concept for newcomers, at least from this perspective.
Third, it is possible to avoid potentially large bid-ask spreads for both physical bars and coins. Collectors of gold and silver will often obtain coins and bars to store wealth. However, price differences between asking prices and what people are willing to pay can be quite large. Pooled accounts negate these spreads altogether, which can offer an extra layer of peace of mind.
Last but not least, storage of assets is often free, or very cheap. Another big advantage but one has to wonder if these outweigh the potential risks.
Making Money as a Dealer
Keeping all of the above in mind, many people wonder how a dealer providing this service can make money. As it turns out, they will often buy and sell small amounts of metals to and from customers. If their supply dwindles, they will buy it in the wholesale market. If customers offload a lot of metals, the dealer will move the excess to the wholesale market as well.
Another way of making money is to help customers convert between bars and coins and take delivery. Doing so allows dealers to charge a small service fee for the service. This is “free money’, as the dealer isn’t physically converting anything. Instead, they explore the price differences based on the preferences of their customers.
What About the Drawbacks?
There is no such thing as a free service business that comes without risks. Pooled accounts for precious metals provide a lot of benefits, but their potential drawbacks cannot be overlooked either. This doesn’t mean no service provider can be trusted, yet it is crucial to see if one side of the equation outweighs the other.
First of all, there is the chance of a dealer engaging in wholesale fraud. Not having the metal customers have paid for is not as uncommon as one may think. It is very easy to trick customers, as there isn’t always an option for customers to physically verify their holdings are there. Pooled storage is often unallocated, creating a very significant risk factor.
Secondly, the employees of a dealer pose a security risk. Even if the dealer is honest, and employees are not, customers will get hurt. While the chances of finding bogus bars among real ones is small, it would not be the first time such embezzlement occurs, Dealers are often insured, but that may not always be sufficient to cover expenses.
Third, there will be times when demand for small bars and coins increases. As a result, temporary shortages may occur. Dealers will not be able to accommodate the needs of customers during such a time, especially if they aim to convert between the different types. It is a minor problem, but still one to take into account.
Perhaps the biggest concern is bookkeeping. It is a daunting procedure for any business, but even more so where pooled accounts are concerned. All metals stored through this model are not legal property of the dealer, thus any potential dealer creditors will not have access to it. However, if a dealer goes bankrupt, things can escalate quickly. Any metals not allocated properly in the bookkeeping will become “fair game”. There is no guarantee customers would be able to get their own assets back.
Pooled Accounts Conclusion
Pooled accounts for precious metals – particularly the unallocated version – can be very problematic for many different reasons. It offers a degree of convenience, but the risks cannot be ignored. Some offers sound too good to be true, and most of these will eventually harm the customer. It is advised to do thorough research before exploring pooled accounts for gold, silver, or other metals.
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