What Wirecard teaches us about life post-Covid-19

Mark Pey

June 30, 2020

With the collapse of banking provider Wirecard, it’s worth revisiting the benefits of actually owning gold versus owning “paper gold” derivatives like ETFs.

Last week, the multi-billion dollar German banking provider, Wirecard, suddenly and dramatically collapsed and their CEO was arrested. The Wirecard board said, “There is a prevailing likelihood that the bank trust account balances in the amount of 1.9 billion euros (AUD $3.1 billion) do not exist.

In the Wirecard case, the trouble began to come to light when The Financial Times reported doubts about the complexity of the company’s accounting. The powerful top German regulator, BaFin, threatened to sue the FT for libel. Now, the top European regulator is investigating BaFin themselves and a class action lawsuit against Wirecard’s auditor, Ernst & Young, has been filed.

At SendGold, we have long held that the best way to own gold, whose function at the end of the day is to protect wealth through any and all financial market scenarios, is through individual outright ownership of physical gold metal, full stop. The reason we have structured our company this way is because complexity is the enemy of security, and we believe this is the simplest and most secure structure.

The structure of Wirecard was so complex that neither the regulator nor the auditor could reliably determine its ongoing soundness. We think customers should apply a similar “simplicity” (and transparency) acid test to owning paper gold derivatives like ETFs:

  • ETFs are shares. This means they are owned by the broker-dealer in what’s called “street name”, and the broker-dealer owes the value of the shares to customers. To repeat: The broker-dealer owns the shares.
  • Underneath this ETF share structure, there can be a number of subsidiary legal arrangements from different counterparts including “sponsors”, “marketing agents”, “authorised participants”, “custodians”, “sub-custodians”, and even “sub-sub custodians”.
  • Amazingly, in the case of the largest gold ETF GLD, these arrangements are not even covered by written contracts, monitoring, or insurance. We discussed the details of this in a prior blog post: https://www.sendgold.com/gold-etf-it-always-pays-to-read-the-fine-print/

We are all still figuring out what post-Covid-19 life will be like but a few trends seem to be emerging. People are seeking to simplify their lives and seek greater transparency from their financial providers and their relationships.

With financial and economic risks on the rise and headlines like Wirecard appearing, people want to protect what they have by knowing that they actually own it, no matter what the next news headline might reveal.

 

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