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Morgan Stanley: Precious Metals Déjà Vu

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Bullion Bulls Canada) -- In 2005, Morgan Stanley (MS) was selling "bullion accounts" and charging its clients "storage fees." However, according to a 2007 class-action lawsuit by its clients, there wasn't actually any gold or silver being held in those accounts.

Morgan Stanley settled that lawsuit, without an admission of guilt, for $4.4 million.

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Having learned its lesson(?), Morgan Stanley is now back in the business of selling bullion accounts. This time it has refined its approach, as described by another commentator, Avery Goodman:
It is now offering to sell you gold, silver and platinum bars, and to keep them "safe," but in a scheme in which they refuse to segregate client assets that they falsely label "allocated" ownership.
Customers who take them up on their offer are going to be cheated. They will not be purchasing metal in allocated storage. Instead they will be purchasing an unsecured bond with repayment promised in the form of gold, silver or platinum. They will be investing in money, not to purchase real metal, but, rather, to fund the operations of a fractional banking scheme involving precious metals.

How does Goodman justify those strong remarks?
Under traditional concepts of allocated precious metals storage, the legal relationship between the warehouse facility and the owner is one of bailment. That means that the warehouse must segregate your property so that it is capable of being identified specifically as yours. It must be able to identify every exact coin, bar and/or piece of jewelry . . .

As Goodman himself concludes, the intent of Morgan Stanley is clear:
Apparently, investors who are looking to buy precious metals for the first time, are reading enough, beforehand, to know that they are supposed to be demanding that their holdings be placed in allocated storage . . . .

Just as in 2005, Morgan Stanley is explicitly promising its clients that it is buying metal on their behalf, and then storing that physical commodity in individual (allocated/segregated) accounts. What's different is that 2012 Morgan Stanley has invented its own definition of "allocated," where it is not required to actually hold any metal for clients individually. The dictionary definition of allocate is "to set apart, assigned or allotted." But those clients who choose to hand their money to Morgan Stanley for one of its "allocated precious metals accounts" will find (as Morgan Stanley explicitly acknowledges in the fine print) that nothing is being "set apart, assigned, or allotted" to them.

Should Morgan Stanley again find itself a defendant in litigation from this latest precious metals scheme, one doesn't have to have a law degree to predict their line of defense. This isn't "fraud," they might say, but merely a minor issue of "mislabeling."

Given the history of such cases before the courts, it is probable they will get away with it.

More generally, this is what is known as "counterparty risk," where the value of an asset (and sometimes its entire value) is based on a third party honoring its promise. Here we have the absurdity of investors committing billions of dollars of their own savings into various bullion "products" based totally upon the promises of various Wall Street bankers - and all to save a few dollars per month to store their own bullion.

The English came up with an expression for such logic many, many years ago: "Penny-wise and pound-foolish."
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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