#Swiss banking and the lose-lose scenario of unallocated #gold - Mineweb.com

Yet another example of the attack on your Gold

Swiss banking and the lose-lose scenario of unallocated gold

INDEPENDENT VIEWPOINT

What the Swiss banks' move away from unallocated accounts says about gold, and about banking...

Author: Adrian Ash
Posted: Thursday , 07 Feb 2013

LONDON (BullionVault) - 

IMAGINE you could sell someone something, but keep ownership of it, and then use it yourself.

You could lend it out for interest, say, or raise loans of your own by pledging it as collateral. Or even sell it to raise cash when things get tight. And if your business fails entirely, the "owner" will just have to cue up with all of your other creditors, and be thankful with whatever small change is paid out by the courts.

This is pretty much what big banks get away with in gold – or they did. Now Swiss banking giants UBS and Credit Suisse are changing their gold-account fees for big, institutional clients. The aim is to discourage other institutions from keeping gold with them like this – so-called "unallocated gold". It looks a lot like putting cash on deposit. The bank gets to own it, and so it gets to go banking with the value as well. But now the business of selling gold but without selling anything no longer pays.

And if you can't make a return from that, what hope is there for big banking bonuses in 2013 or beyond?

You might wonder, as I did, if this news has something to do with the collapse of gold interest rates...

...but as you can see, there hasn't been much money to make in lending out gold – whether it belongs to you or not – for nearly a decade now. Yes, the collapse in cash interest rates played a part in that switch. (The returns above are what a gold lender makes after paying a borrower to take it away, receiving the gold's cash value in return, and then lending out that money instead. Just another oddity of the gold market.) But the slump in lease rates came as gold miners stopped borrowing gold, selling it for fear of further price falls, and instead began expecting higher prices for their future output. And lending was never really the point of unallocated gold accounts at the big banks anyway.

Instead, from what our friends in gold banking and Swiss bullion storage tell us, the big banks were keen to get big piles of shiny metal which they could then show to regulators. "Look, all this belongs to us, and not to clients," they could say, before going out and banking with it – investing, borrowing and lending with that weight of highly liquid, instantly priced bullion behind them. Or at least, banking with a hefty part of its value.

Most especially in Switzerland, the big banks gathered such unallocated gold from their smaller competitors – those private Swiss banks caring for very wealthy customers, but lacking the secure, underground gold vaults which such well-heeled clients might expect. Perhaps the big banks could help? Sure they could. But only if a chunk of the client's gold wound up on the big bank's balance sheet too.

Whatever the proportion of allocated to unallocated gold, this meant confusion for any private-bank customer wanting to own his or her metal outright. Because the bullion was now split between the big bank's balancesheet and the private bank's own account in the vault. So the actual client was a long way from fully allocated. Come a banking crisis – not that such things ever happen of course, until they do – he or she would most likely find themselves exposed to not one but two Swiss institutions.

Now, if this unallocated gold trail hadn't existed, neither would BullionVault today. Paul Tustain founded it in 2003 precisely because of the confusion – and risks – he encountered when trying to buy gold for himself a year earlier. The Financial Times, which broke the new move last week, explains the background:

"Under the more common 'unallocated' gold accounts, depositors' gold appears on banks' balance sheets. [But as regulations change, that is] forcing them to increase their capital reserves."

Just as with any loan the bank takes in – including household and business deposits – it has to match at least some of that debt with ready cash. Or rather, with reserves held at the central bank. This was always the way, but 2013 sees new regulations – aka Basel III – raise the requirements to try and avoid a repeat of 2007 and all that. Before now, offering unallocated gold at least put bullion onto the bank's balance sheet. But with these new regulatory hassles and thus costs (money unlent is dead money to banks, remember) unallocated gold has suddenly become lose-lose to the banks.

This marks a big shift in the banks' provision of gold, and there is more on this to come no doubt. Such as how the Swiss giants – who provide a lot of gold-vaulting to the smaller Swiss private banks – are actually raising their unallocated fees by 20%, as the press report. Unallocated gold shouldn't cost you an ongoing fee, because why would you pay to store something which isn't yours? On the other side, according to Dow Jones' report, they are actively cutting their allocated storage fees too. Suggesting perhaps that either they'd like to get the private-banks' clients directly. Or they've got a lot more spare capacity in Swiss vaulting than earlier press reports would suggest.

Either way, private savers trying to hide out in gold aren't likely to see vaulting fees drop. Swiss private banks charge 1% and more per year to their clients, and a 1/100th of a per cent drop in their costs is unlikely to show up in their "retail" pricing. (BullionVault is best-value worldwide, by the way, at 0.12% per year for specialist non-bank, fully allocated storage in your choice of Zurich, New York or London.)

So for now, this change simply marks another key stage for gold and for banking. One is making a long return as a core asset to be owned outright. The other is struggling to cream off the kind of fat margins which once paid so well.

Adrian Ash is head of research at BullionVault – the secure, low-cost gold and silver market for private investors online, where you can buy gold and silver vaulted in Zurich on just 0.5% dealing fees.

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Obstacles in the Path to a U.S. #Oil Boom

as new supplies are extracted, they are facing logistical and policy hurdles above ground

 
Obstacles in the Path to a U.S. Oil Boom
 Maria van der Hoeven
Executive director of the International Energy Agency

A boom in North American oil production is under way, thanks in part to technological advances that are unlocking millions of barrels of oil that were previously inaccessible. But as these new supplies are extracted, they are facing logistical and policy hurdles above ground. Resolving these challenges is of paramount importance if we are to benefit from this vast resource.
Advances in hydraulic fracturing and horizontal drilling are allowing the U.S. oil industry to recover millions of barrels of so-called light, tight oil from shale formations across the middle of the country. U.S. crude oil production has increased by 1.3 million barrels per day (mb/d) in the past two years, and the U.S. Energy Information Administration forecasts that the U.S. will produce a further 1.4 mb/d by the end of 2014.
But it is no secret that once the oil is extracted from wells in the country's midsection, it often faces a long and complicated journey to refineries, many of which are located on the coasts. Transportation bottlenecks are one of the main reasons U.S. crude trades at a discount to international benchmarks. It is now well-known that landlocked West Texas Intermediate (WTI) crude has been trading at a deep discount to other benchmarks such as Brent since production volumes started ramping up two years ago.

What is perhaps less well-known is that internal North American grades fetch even lower prices, trading at a deep discount to WTI itself. Ironically, American end-users do not benefit from this production windfall since U.S. retail product prices are still heavily influenced by international markets.
If this disconnect in prices were to continue, it could threaten the economic viability of these new supplies, potentially stopping the boom in its tracks.
Fortunately, new pipeline and rail capacity is set to open in 2013 that will allow more crude from the Plains states to move to refining hubs to the east and west and along the Gulf Coast. While these are welcome improvements, they will not bring the marketing problems to an end. That is because U.S. crude exports are subject to stiff restrictions, and America's refiners can only absorb so much of the new supplies.
The sale of U.S. crude overseas is governed by the Export Administration Act of 1979, which allows the president to prohibit or curtail the export of commodities -- namely crude -- deemed to be in "short supply." Exceptions do exist, but for the most part U.S. producers are hopelessly constrained in their capacity to export domestic crude to countries other than Canada and Mexico.
U.S. businesses have adapted by exporting refined products -- which are not restricted under U.S. law -- instead of crude. The U.S. refining industry has in effect become a conduit for crude oil exports, allowing rising U.S. crude production to be exported in product form. In just seven years, the U.S. has tripled the amount of products it exports, transforming itself from the world's top product importer to second-largest product exporter, surpassed only by Russia.
Effective as U.S. refiners may have been in mopping up the additional supply and sending it overseas, they have limited capacity to absorb additional barrels of high quality light, low sulphur oil. Much of their capacity is geared to processing cheap, low quality dense, high sulphur grades and maximizing their yield of high-value-added products such as gasoline and diesel.
They have limited appetite for the premium lighter grades from the Eagle Ford and Bakken shale formations. Moreover, U.S. refining capacity is set to grow by less than 300,000 b/d through 2017.
This will not be the first time in the history of the oil industry that changes in technology and market conditions expose a misalignment between resources and regulations. While much of the anxiety about energy resources in recent years has focused on "peak oil" or other aspects of resource scarcity, in fact some of the bigger challenges facing the energy industry lurk not below ground, but above.
Some may see this as a choice between keeping American oil within U.S. borders for reasons of economic security and allowing the U.S. to generate billions of dollars in new export revenues. But market realities suggest a far simpler decision ahead: either U.S. crude is shipped abroad, or it stays in the ground.
While new pipeline links, supplemented with increasingly efficient railroad links, will give producers short-term relief from depressed prices, new export outlets will ultimately be necessary to leverage the full potential and reap the benefits of the new American oil revolution.
Washington will need to address this misalignment, lest the great American oil boom goes bust.

Maria van der Hoeven is executive director of the International Energy Agency.

This article was originally published on 7 February, 2013, in the Financial Times. It is based on analysis that first appeared in the January 2013 issue of the IEA's Oil Market Report, a monthly publication that provides a snapshot of the international oil market and projections for oil supply and demand 12-18 months ahead. To subscribe to the report, please click here.


Maria van der Hoeven: Obstacles in the Path to a U.S. Oil Boom