Martin Armstrong on Australia's Bank Deposit Tax

Yesterday I spotted an article by Martin Armstrong (Australia First to Introduce a Compulsory Tax on Money Itself) that I think is misleading (no surprise that Zero Hedge was quick to republish it).

Before delving into Armstrong's claims, let us take a look at what he is presumably talking about (I say presumably because his article rant is light on facts & details about the subject at hand).

From the AFR, a tax on bank deposits:

"The federal government is planning a tax on bank deposits at the May budget in a move that will raise about $500 million a year but which bankers warn could be passed on to customers.

Sources have told AFR Weekend that the government is set to proceed with the bank deposits insurance levy, first proposed by the former Labor government, to shore up revenue and to act as an alternative to forcing banks to hold extra capital as insurance against collapse."

What does that mean in practice?

"The money would be put in a Financial Stability Fund and be used to protect depositors against the highly unlikely event of a bank collapse. In the meantime, the fund would also be used to offset gross debt. If the Coalition adopts the same model as Labor and if banks pass the levy on to customers, it would mean a term deposit currently paying 2.6 per cent would pay 2.55 per cent."

So to correctly frame the situation we need to define what this tax is, is it a tax on money (as per the headline) or a tax on savings as Armstrong suggests in his article?

"The new compulsory control is provided in the 2015 Australian budget, so that everyone who has any savings must pay taxes on their savings. The measure is expected to serve as a global test balloon for Europe and North America, who will watch for the outcome in Australia. If there is no massive resistance of Australian savers, the rest of the world should expect this outright confiscation very rapidly."

In my opinion framing it as a tax on money or savings is implying (wrongly) that bank balances will be reduced in order to fund it. Really it's a tax on deposits and it's levied on the banks, not customer balances. Of course any cost to the bank will likely be passed on in the form of higher fees or lower interest rates, but very unlikely to touch balances (i.e. it's not outright confiscation).

The original Labor proposal was for the levy to apply on deposits under $250,000. Why that amount? Probably because that is the deposit size per customer, per Authorised Deposit-taking Institution (ADI), that the government guarantees. Is it fair that depositors insured by the government (taxpayers really) fund the cost of their own bailout should it be needed? I think so (but welcome opposing views in the comments below).

I wrote about Labor's proposal back in 2013 ($250k+ in an Australian bank? Beware the bail-in.):

"The banks are up in arms over who will foot the bill and there has been a media storm over the tiny fraction of a % that this insurance will cost (for example a bank would need only lower the interest rate paid on a deposit from 3.50% to 3.45% in order to recoup the cost). While the media, banks and politicians get into a scuffle over who will fund the minuscule cost of insuring funds under $250k, there seems to be no investigation or reporting by the media on what might happen to funds over the 'guarantee' limit in the case of a bank failure..."

I'm no fan of 'Too Big To Fail' banking institutions and don't pretend to have all the answers on the best way forward from the position we're in. Ideologically I think banks should be allowed to fail and individuals could organise their own insurance against such events, but would it be responsible of the government to just implement a change like this and pull all guarantees in one swoop?

Armstrong continues:

"Take your money and buy tangible assets, even gold, but you just cannot store it in a bank. Movable assets will be the key and buying equities in the USA may be the only real game in town to protect money."

Now anyone reading this blog for some time (or even if you are looking at it for the first time) should be able to deduct that I'm an advocate for Gold ownership, but that doesn't mean I think you should take out all your savings and buy Gold. Also I think keeping your Gold stored in a safe deposit box with a bank is probably just as safe as any private facility (in Australia) as I concluded in a recent article focusing on this very topic (Storing Gold & Silver: Safe Deposit Box In Australia):

"Bank SDB facilities get characterised as unsafe due to their connection to the banking system, but in my opinion there are some pros and some cons that result from this association and on the whole I don't see bank SDBs as less safe than their private counterparts."

Armstrong concludes on this note:

"The introduction of this tax on money in Australia led by Tony Abbott is the trial balloon for the global economy. The IMF’s Christine Lagarde has led the battle to impose French socialism/communism upon the entire world. I have warned that she is the most dangerous woman on the planet. Do not forget, it was the French elite who sold the idea of communism to Marx – not the other way around. Now the French elite have control of the IMF and they have persuaded all other global financial institutions to also require such a compulsory levy for several years because they see it as the only way to resolve the debt crisis – just confiscate the people’s money."

We've already identified that this isn't really a confiscation of people's money, but rather a levy on the banks to fund a Financial Stability Fund in order to support depositors in event of a bank failure. Is Australia really the first country to implement such a scheme as suggested by Armstrong in the paragraph above and even his article's title (Australia First to Introduce a Compulsory Tax on Money Itself)? No. Perhaps Armstrong should take a look at the history of the FDIC, which could be seen as an equivalent to this fund, guarantee & levy, it looks to me as if the US has had something similar implemented for almost 100 years or more (from: A Brief History of Deposit Insurance in the United States):

Assessments on participating banks. All of the insurance programs derived the bulk of their income from assessments. Both regular and special assessments were based on total deposits. The  assessments levied ranged from an amount equivalent to an average annual rate of about one-eighth of 1 percent in Kansas to about two-thirds of 1 percent in Texas.

Australia's 0.05% levy looks rather small in comparison. And from the FDIC's website:

"The FDIC receives no Congressional appropriations - it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities. The FDIC insures approximately $9 trillion of deposits in U.S. banks and thrifts - deposits in virtually every bank and thrift in the country."

Australia is hardly the first country to implement such a scheme and we won't be the last.

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Storing Gold & Silver: Safe Deposit Box In Australia

Information is Australian specific for those interested in the use of a Safe Deposit Box (SDB) to store precious metals. Not investment advice, draw your own conclusions about the risks and how to best store your physical assets.

Regular readers would know that while I prefer physical ownership of precious metals, I'm no stranger to highlighting the risks associated with doing so. As I wrote recently (If You Don't Hold It, You Don't Own It):

There is no risk free way of owning precious metals (or any asset for that matter) and safe storage is the key factor when dealing with physical.

I've mentioned my preference for Safe Deposit Boxes (SDBs) in an earlier article (7 Ways To Keep Your Gold And Silver Safe):

Get a Safe Deposit Box

This is a personal favourite of mine. If there is anywhere that's likely to be safe for your Gold and Silver it's in a facility that is built for that very purpose. Just remember that not all safe deposit box facilities are created equally. Many large banks will offer safe deposit box services, make sure you shop around for the mix of safety and price that best fits your situation as in my experience both of these factors can vary substantially between providers. While I expect it's far less likely today than in times past, you should consider that keeping precious metals in a safe deposit box does make it an easy target for any government crackdown and confiscation should it occur.

SDBs offer the safety of a secure storage facility, while leaving the physical handling of precious metals or other valuables to the individual. This avails the owner with a level of privacy and independence that allocated or unallocated accounts don't, even if stored in a similarly secure premises (see my article 'How Safe Are Unallocated Bullion Accounts?' for more information about the risks that this type of precious metal ownership entails).

You can't choose to store your bullion in a SDB facility and expect that all service providers will offer the same level of protection. Several years ago I wrote about a Kennards facility which was broken into with SDBs emptied after the criminals (who were eventually caught and jailed) scoped the warehouse by hiring their own SDB with a stolen credit card. While the Kennards facility provided privacy (no 100 point ID check) and accessibility (24/7 access), it was these same features which put a hole in their security.

If we look to the more secure SDB services in Australia (those housed in a vault) then we still have a choice to make between independent private vaults and those provided by banks, though not everyone has the luxury of choice between these two varieties if they want to keep their metal stored locally. When an individual is considering a choice of facilities it's important they compare each specifically on it's own merits (not something I can do in detail here), the below is mostly a general comparison and anecdotal observations.

The eastern states have the widest selection of private vaults with well recognised names such as Reserve Vault (RV, Brisbane), Custodian Vaults (CV, Sydney) and Guardian Vaults (GV, Melbourne and Sydney).

All three of these vaulted SDB providers offer insurance options that are underwritten by Lloyds of London (CV and GV offer $10,000 complimentary cover). All three are privately owned and proudly state their independence (of banks and government) and while the vault operators may not be covered by all banking regulations they they are considered a financial service and governed by some of the same rules as the banks (for example the AML/CTF Act).

The private vault facilities are eager to differentiate themselves from the SDBs offered by banks. CV has a handy little table outlining the differences between their service and those of the banks.

Let's tackle these line by line. Some of my points will reflect personal experience, not all bank SDB facilities are identical.

Insurance: The complimentary ($10,000) insurance is a nice bonus, but if that's enough to cover your stack then a SDB is an expensive option anyway (e.g. $300/pa for the SDB is a 3% annual storage cost on $10k in metals). Having the vault provider streamline insurance options is convenient, but you can always organise your insurance independently through a broker.

Key Ownership: At the bank SDB facility I use each box is dual key, one held by the customer and they retain the second for opening in tandem. They do also keep a copy of my key, in a locked box with my signature over a seal. In my opinion the fact that you receive both copies of the key from CV is a false sense of security. As their terms and conditions state, if the Government has legal authority to access your box CV will provide it (with or without your permission and key) and if you terminate the agreement (not paying storage fees) then they reserve the right to open the box and sell the contents to recoup their loss. The bottom line here is that not having a copy of your key doesn't stop CV from accessing your SDB contents under the terms of your agreement with them.

Accessibility: I can't speak to an unlimited quantity, but at the bank SDB facility I use I was able to add a second operator with no extra charge. I also have unlimited access to the facility, though do know of some banks who limit the number of free visits during the year before additional fees start to be incurred.

Long Term Storage Discounts: This may be a unique attribute, though don't see the discounts listed on the Custodian Vault website, so they may be trivial.

Security: Ok, they've got the banks there. I don't have biometric entry to the vault and would be surprised if any other bank SDP facilities in Australia do either.

Storage Restrictions: This would vary between bank providers, but in my case I was not an existing client of the bank and was still able to open a SDB.

Regulations: It's true the banks are covered by a greater level of regulation ("Banking Law"), I will discuss this in more detail below, but while some may see this as a con, I see the tighter scrutiny and greater accountability for banks as a positive.

While each bank SDB facility will differ and need to be judged on their individual merits compared with CV, I don't think a strong case was made from the table for avoiding bank SDBs.

GV and RV embedded videos on their site outlining risks of the banking system such as excessive leverage, derivatives, monetary system change, bank holidays and bail-in risks. I would posit that 90%+ of the content was not relevant to the safety of your assets stored in a bank SDB. That said let's look at some scenarios where your precious metals might be at risk in a safe deposit box.

Gold Confiscation: In the past when discussing the merits of bank vs private SDBs, some have pointed to Part IV of the Banking Act 1959 (suspended) which can be paraphrased as being unable to "buy, hold or sell gold unless it is a legitimate part of your trade or in the form of jewellery" (via Bron Suchecki at Gold Chat). These restrictions were applicable across the board (until 1976) and while I think it's unlikely they are reinstated in their current form, I'd expect even if they are or new confiscation laws were introduced that any crackdown on SDBs would be across the board with both bank and private facilities affected in the same way. Private SDB facilities will be compliant with any government request to refuse customer access or seize contents as required by law just as their terms and conditions state. Those who think they will avoid confiscation by using a private facility because it's "out of the banking system" are being lulled into a false sense of security. In any event I think Gold confiscation is highly unlikely in Australia and if a trend emerges globally of governments doing so then we should have enough notice to change views on the risk of it occurring and act if necessary.

Internal Theft: While theft by an employee is an unlikely event, it could arguably be made easier if the SDB facility has a copy of both keys to your box. Furthermore I have seen some bank facilities where they retrieve the box for you from the vault (so your only key is to a padlock attached to the metal storage box). It may not be the case that every private facility gives you both keys or that every bank facility keeps a copy, but in my experience the risk of internal theft from an SDB is potentially higher at a bank facility (if ease of doing so is the only consideration).

The Canberra Times, 25th April 1991

External Theft: The risk of this occurring comes down to the security of each facility. I'd expect that some bank facilities exceed the security of some private vaults and vice versa. Reading through Guardian Vaults list of security measures leaves me impressed, but whether this is a significant step up from other facilities I can't be sure. While listing security specifics may help clients feel good about their choice, marketing in this way also puts more information into the hands of those who may want to get around it.

The Canberra Times, 10th October 1984

Insolvency: In the event of insolvency of any facility the contents of your SDB should be owned free and clear. The biggest risk here is if you want access to your SDB contents while the administration processes takes place (the facility may be closed for regular access while that occurs). Here is where a bank facility might be safer than a private facility. We have a greater insight into the solvency of the banks who are open to scrutiny from the public due to their annual reports and other financial transparency. Even if you don't personally understand how to read the financial position of the bank you have your SDB with, it's likely their share price will be an indicator of health and financial news outlets will be quick to report on any trouble. Furthermore it's a fair assumption that a bank insolvency would result in government support. Contrast that to private SDB facilities, we don't know their financial position and you're not likely to have any warning of their insolvency until the day they shut their doors.

Bank Holiday: In the case we see events unfold where there are wide spread bank failures then there's a chance we see bank holidays. Like insolvencies described above this should only result in a temporary lack of access to the contents of your SDB. Some have suggested that bail-ins may extend to SDBs, but I see that as a highly unlikely. I haven't seen any evidence to suggest that SDBs in Cyprus were seized as part of their recent bail-in measures.

Bank SDB facilities get characterised as unsafe due to their connection to the banking system, but in my opinion there are some pros and some cons that result from this association and on the whole I don't see bank SDBs as less safe than their private counterparts. 

The banks are written off by precious metal holders as shady, but if the last 12 months has taught us anything it's that the bullion industry has it's flaws too (ATO and AFP Investigate Australian Gold Industry Fraud). In fact one of the aforementioned private SDB providers (CV) has management ties to the refiner implicated in the GST fraud story from Vedelago.

As it stands there is no private vault SDB facility in Adelaide so my only option for local storage is with a bank, but I feel comfortable doing so and would only consider moving to a newly available private vault if there were measurable benefits in doing so.

Whichever you choose I think both private and bank (vaulted) safe deposit box services are a smart option and in most cases much safer than keeping your precious metals at home.

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If You Don't Hold It, You Don't Own It

'If you don’t hold it, you don’t own it' is a popular meme and catch phrase used by physical precious metal owners who like to encourage others to own it likewise (avoiding fraud of the 'paper' markets)... but what are the risks of owning physical?

There is no risk free way of owning precious metals (or any asset for that matter) and safe storage is the key factor when dealing with physical.

There's risk holding precious metals in safe deposit boxes. 

There's risk holding precious metals in unallocated form. 

And there's also risk holding precious metals at home.

As I pointed out in a recent article (7 Ways To Keep Your Gold And Silver Safe), there are burglars willing to turn a house upside down if they think you have something of value: 

"A recent thread on Silver Stackers highlighted the care you need to take if deciding to store your precious metals at home, where during a break-in thieves had emptied potted plants, pulled out electrical sockets, removed picture frames, moved furniture and more."

There have been four home burglaries reported by members of Silver Stackers in Brisbane over the last 18 months. They may not be related, but some of them had factors suggesting the individuals were targeted due to known ownership of precious metals. In one case a 500kg safe was broken into with heavy duty tools (cutting torch and jackhammer), equipment that a thief is unlikely to carry on them for a random burglary. Another case had the safe 'pried open like a tin can'. Bleach was sometimes used at the crime scenes to cover their tracks, making any DNA and other incriminating evidence difficult to collect.

For some of these stackers it was a near complete loss of their life savings or investment.

It's a horrible way to lose one's life savings or even a portion of one's asset portfolio (commiserations to those affected if you're reading). You'd have to be the scum of the earth to do that to another person, but investors need to remember these cretins are out there and make sure they're not an easy target. If you're going to keep precious metals at home, make sure you take precautions when trading e.g. don't arrange deliveries to or pickups from your home address, don't transact in public where you might be easily followed home and be wary of providing any details that might be easily linked back to your home address (e.g. does searching for your full name or phone number produce an address in the White Pages or Google?).

Some individuals may ignore this risk because they believe their home and contents insurance policy will cover their losses, but most contents insurers have specific limits in place to reduce the payout for any bullion stolen. Some (Australian) insurer examples are below (my interpretation of their policy, check with the insurer for clarity and any changes over time):

AAMI (Limited to $500) - Uncut and unset gems, gold or silver nuggets, bullion and ingots (not jewellery). 

Allianz (Limited to $2000) - Item containing gold and/or silver. We will not pay more than $2,000 for any one item, pair, set or collection unless they are separately listed in the current schedule as specified contents items. 

CGU (Limited to $20,000) - Doesn't mention bullion by name, but potentially falls under a 'collection/set of contents items' (which is limited to $20,000). 

QBE (Limited to $500) - Cash, bullion or negotiable securities. Up to 1% of the sum insured to a maximum $500. 

SGIC (Limited to $2500) - Collections – cards, stamps, uncirculated mint issue or proof coins or notes, ancient or rare coins or notes, sovereigns and bullions. 

YOUI (Doesn't cover) - Contents exclude: unset gemstones, gold or silver bullion or coins, cash or other negotiable items. 

Some of these companies (or others not covered above) do offer the ability to increase the limits or list special items (incurring additional premium), however that also means you need to tell your insurer exactly what you keep at home.

If you're not going to diversify your assets, at least make sure the location of those assets is diversified. If you don’t hold it, you don’t own it? If you do hold it (in one place), you may not hold it for long.

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