Now that our Wise Investor has decided on the type of bars that he wants to purchase, he needs to find out how and where to store them. There are many options and one easily can be overwhelmed by the various ways to invest in gold. This guide attempts to review the various options that exist (even the ones not involving ownership of any bullion, in the next section) and make the case for the only way to hold bullion for wealth protection that is to have the legal title to bullion bars or coins either in your possession or with a trusted supplier.
HOME STORAGE
The investor can visit a gold shop armed with his calculator and a well-stocked wallet and go home discretely making sure that nobody followed him. This works perfectly for small purchases and can constitute a smart regular saving routine. However, not many people would feel comfortable doing so for larger amounts, such as kilo bars worth US$ 129,170.34 each.
Let’s assume that our adventurous investor made it home safely with a few kilo gold bars. He can choose to store his bars in a safe located in his home but he should be aware that this brings an additional risk to the safety of his family should this fact be known by other people. Home insurance also is not much of an option in most countries and if it is, its cost would be prohibitive.
Burying the gold secretly in the garden is a great option for those who have a garden but the secrecy is difficult to maintain for the investor who wants to adequately plan for the transfer of his wealth to his heirs in case of an unfortunate event. Countless quantities of bullion are likely still resting below the ground since their owner passed away.
SAFE DEPOSIT BOXES
Safe deposit boxes managed by professional institutions are the best option for the storage of a few gold bars. However, there are limitations to the solutions provided:
The boxes are usually small and have a maximum weight capacity which is quickly reached with bullion. The storage of silver is also out of the question, given the bulky nature of the metal. Most providers of such boxes are banks. While they do not have access to the content (we hope), they are involved in granting access to the box. This means that the investor wouldn’t be able to access his box in the case of a bank holiday, which is when he needs it the most. Another detail is that he would need (in most cases) to open a bank account with the bank, which might involve some level of government disclosure and indicate that he has assets in that bank. Most bank safe deposit boxes do not offer the option to insure their contents, which might raise the question of what happens if the contents of the box disappear. And cases of items missing from deposit boxes are legion.
Another major problem with any safe deposit box is the loss of integrity of the gold that is stored in it. Bars that are kept at all times in vaults recognized by the gold bullion dealing community remain within what is called the “chain of integrity.” Within that community, a record is made of every movement of a bar between recognized vaults and such bar can be sold easily and quickly without the need to assay it. There are non-financial institutions that provide safe deposit boxes service with insurance. Being non-financial firms, they wouldn’t be impacted by a bank holiday and would not have the same disclosure regulations as banks. These firms are a far better option.
ALLOCATED METAL ACCOUNTS
Once the Wise Investor’s gold holding outgrows his safe deposit box, the next step is to consider the most secure storage of all: a private, precious-metal vaulting facility that takes care of the storage and insurance. The client retains total ownership of his metal and enters into a service agreement with the provider who acts as a bailee and cannot make any use of the assets whatsoever.
Such a solution is best for the storage of large amounts of bullion that do not fit in a deposit box or for the overseas storage of metal as part of a geographical diversification strategy (because it doesn’t require you to be there personally to move the bars). The greatest advantage of such a solution is the increased liquidity of the metal held, because it has remained in the custody of a trusted vault operator who can provide a guarantee to a potential buyer that the bars never left its custody and remained in the chain of integrity. Such a provider can, in some cases, assist in the purchase or sale of metal and arrange the transportation of the goods to other locations upon instructions by the client. Such arrangement, of course, necessitates a fair amount of trust in the provider, who should have an impeccable reputation.
With an allocated gold account, the client is the direct owner of the metal, and the metal does not appear on the balance sheet of the provider. The provider is merely acting as custodian and the investor pays a storage fee that usually includes insurance. The storage fee varies with the volume stored and the storage location.
There are two types of allocated accounts: pooled allocated accounts and segregated allocated accounts.
POOLED ALLOCATED ACCOUNTS
Such accounts allow investors to purchase a fractional interest in a pool of gold that most often consists of Good Delivery 400 oz bars. The gold must be purchased through the provider, which doesn’t allow for outside bullion to be deposited in its storage. Those accounts are entirely backed by physical gold, but the specific bars are not allocated to investors, who hold a collective claim on the metal, along with all other investors. These suppliers offer fully insured and unencumbered ownership in the pool of metal that is stored with non-bank custodians at very attractive rates.
Because the gold pool is not segregated on a client basis, several issues arise:
Clients cannot inspect their holdings.
Withdrawal of large 400 oz bars is the only affordable option. Withdrawal of smaller bars involves swapping large bars with smaller bars with a refiner and involves hefty additional charges. While these pooled accounts represent an easy way to own bullion, owning a fraction of a large bar will not be of much help should many investors ask for physical delivery at the same time.
Swapping large bars with smaller ones or getting them refined into small bars might not be possible in a scenario of economic panic. Should the refineries be operating at full capacity during that period, the bullion would be locked for a while due to its collective ownership. Such accounts offer the investor the option to “register” his bars and have them physically segregated but often at a prohibitive cost.
SEGREGATED ALLOCATED ACCOUNTS
With such an account the investor owns metal that is identified by bar type, unique serial number, gross weight, the assay or fineness of each bar, and its fine weight. Credits or debits to the holding are linked to the physical movements of bars, to or from the client’s physical holding. The investor outright owns specific bars that have been fabricated and are sitting insured in a vault segregated from holdings of other clients.
There are several types of providers of such accounts:
Bullion banks provide allocated accounts and charge a yearly storage fee ranging between 0.1% and 0.6% of the value of the metal, depending on the size of the investment and the relationship with the client. A feature of the London Bullion Market is that the clearing members act as sub-custodian for each other. This means that in the case of bullion held in an allocated account with a bullion bank, the property will exist but its location will be a bit of a secret. One clearer’s allocated collection (comprising individually identified 400 oz bullion bars) is most likely distributed across multiple vaults.
Most wholesale bullion dealers offer a storage solution since the vast majority of their clients need to store the quantities they purchased. Such dealers work with top tier vaulting companies with whom they get a wholesale deal on the storage due to the volumes they bring. Clients are often better off going through these intermediaries. Moreover, most professional vaulting companies are not too keen in dealing with private clients (and some simply refuse to). Lastly, the bullion dealer acts as a front for its clients to the vaulting company, which adds another layer of confidentiality for the cautious investor.
Most of the bullion companies that offer allocated pooled accounts (explained above) give the option to pay for the fabrication of the bars and have their segregated storage. The bar fabrication fees are usually prohibitive.
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