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Letter 24: Gold Transactions

Public law 93-373 repeals the ban on private ownership of gold by United States' citizens. The new law becomes effective December 31, 1974. The Wisconsin Banking Statutes confer the power of "buying and selling coin and bullion" upon state chartered banks.

As a result of the protracted prior ban on private ownership of gold, banks, and indeed the general public, have very limited experience in the handling of this highly speculative commodity. In the light of this, state banks are urged to proceed with great caution should they decide to provide services relating to the purchase and sale of gold to their customers. This department feels, therefore, compelled to issue the following guidelines:

(a) Except under very unusual circumstances, banks should not act as the principal i.e., purchaser of an inventory of gold in their own name -- in gold transactions, but should attempt to satisfy customer demand by acting in an agency or consignment capacity. Acting as a purchaser is the equivalent of trading in gold. Trading in any commodity, including gold, is a highly speculative venture at best. The extreme volatility of the gold market and the relative lack of experience in this market by bank personnel accentuates the problem. This office has viewed speculation per se, regardless of the subject matter involved, as an unsafe and unsound banking practice. State banks should be guided accordingly.

(b) In the rare instance when it should become necessary for a bank to invest its own funds in gold bullion or coins, a resolution by the bank's board of directors must specifically authorize such a transaction before consummation.

(c) If a bank handles gold transactions on a consignment basis the risk of loss should be minimized by providing adequate security arrangements. The consignment contract should be carefully scrutinized to ascertain that the bank is not, in fact, entering into a disguised purchase contract (for its own account) with the dealer, but has the right to return the consigned gold without further obligation. Adequate steps should be taken to ascertain the true quality of the gold; this is important from a public relations standpoint, as well as with a view to possible legal liability.

(d) 31 U.S.C. 463, the so-called "gold clause resolution" prohibits contract which confer an option upon the obligee to require payment in money or a specified amount of gold. It would appear that public law 93-373 did not repeal this section. Deposit relationships entailing such options are therefore unenforceable.

(e) It is anticipated that banks will be requested by customers to finance the purchase of gold. As with other commodity loans, risk exposure, both as to the existence of collateral and sufficient margins, should be kept to a minimum. It is strongly urged to maintain a 50 percent margin at all times. This will necessitate frequent (at least monthly) revaluations and raises the possibility, indeed the probability, of periodic margin calls. Concentrations of gold loans must be avoided at all times.

(f) Except in those few instances where the gold loan is made for industrial or commercial purposes, these credits will foster and support speculation. They are therefore nonproductive within the meaning of the recently promulgated Federal Reserve Board guidelines.

(g) Banks should refrain from promoting customer activities relative to the purchase of gold. Such promotion -- even if well intentioned and in no way misleading -- could result in adverse public relations if the customer's expectations are not realized.

(h) If a bank holds gold for its own account, its value should be reflected on the bank's books under the category of "Other Assets." Monthly revaluations to reflect current market value will be required by this office.

(I) Any and all gold transactions by Wisconsin state chartered banks, including those in a fiduciary capacity, will receive close scrutiny by examiners of this office. If undue exposure is found, compensating capital and liquidity requirements will be made.

(j) Neither gold bullion nor gold coins will qualify for reserve purposes under Section 221.27, Wisconsin Statutes.

In summary, while the Wisconsin Banking Statutes and federal law do not permit this office to issue a rule in the form of an outright prohibition against transactions involving gold bullion or gold coins by state chartered banks, we take the position that these transactions entail an undue degree of risk to banks and should be approached with extreme caution. The contents of this advisory letter must be discussed by the chief executive officer with the board of directors and the minutes should reflect an acknowledgment of such discussion.

Bkg. Ltr #24, December 23, 1974, Commissioner Mildenberg