Most of the world’s gold is held in unallocated accounts provided by financial institutions and large bullion dealers. While those accounts are described as the most convenient, cheapest, and most common ways to gain exposure to bullion, specific bars are not set aside for the client and the account is backed by the credit worthiness of the institution.
“Unallocated” storage means you own part of a pool of gold with no title to any particular bar. Precious metals held in this form do not entitle the holder to specific bars and the holder only ranks as an unsecured creditor of the dealer or bank in the event of an insolvency or bankruptcy. This bullion can be considered part of the general pool of metal held by the dealer or bank, and may be lent out or sold without the owner’s knowledge or consent. As a result, storage fees are much lower than for full custodial storage and are not paid until the account is closed or the bullion delivered.
The London Bullion Market Association clearly mentions that with such account, “The client is an unsecured creditor.”
The reality behind these accounts is that they are an investment structure whereby the investor provides free capital to the supplier (and sometimes pays a small fee to do so) and risks the loss of his capital should the supplier become insolvent. As an investor in unallocated gold, your metal is on the balance sheet of the supplier as a liability and you remain exposed to its insolvency. The actual metal doesn’t necessarily need to exist, pursuant to the terms and conditions of the unallocated storage contract. These accounts typically charge no storage fee or a small fee and do not allow for physical delivery to clients. Unallocated accounts usually have an option to convert into allocated at the investor’s option and additional cost.
With an unallocated account, the client does not own bullion, but is merely an unsecured creditor of the bank. The bank may or may not have physical gold to back its liability to the client. The units of these accounts are typically 1 fine ounce of gold and 1 ounce of silver, based upon a London Good Delivery gold bar of a purity of at least .995 and a .999-fine London Good Delivery silver bar, respectively.
There are several types of unallocated accounts offered by different suppliers:
1
With an unallocated account, the client does not own bullion, but is merely an unsecured creditor of the bank. The bank may or may not have physical gold to back its liability to the client. The units of these accounts are typically 1 fine ounce of gold and 1 ounce of silver, based upon a London Good Delivery gold bar of a purity of at least .995 and a .999-fine London Good Delivery silver bar, respectively.
2
Large refineries offer unallocated accounts to their clients. Of all unallocated accounts, those offered by reputed refineries are probably the safest option because they have a natural flow of gold to refine.
3
Large bullion dealers offer unallocated accounts that are backed by the rolling inventory of the company. Those accounts work in a similar way as described above and are usually put in place for the dealer to finance its inventory required for its operations.
4
Retail bank metal accounts work similarly to a bank account, with the currency of account the being gold gram. As an indication of the fee involved with retail gold accounts, a Singaporean bank charges 0.25% per annum of the value of the account.
GOLD FUNDS
Several vehicles allow investors to own bullion indirectly. The investor owns shares in a vehicle that is the direct owner of bullion. The most popular such vehicles are exchange traded funds (ETF) that hold assets and issue shares that are traded on the stock exchange. Large broker dealers (the Authorized Participants) act as market makers and make sure the shares trade at the net asset value. Other vehicles are mutual fund structures with a distinction as to who provides the custody of the metal: a bank or a non-bank custodian.
THE ETFs
Gold ETFs offer a convenient way to add tactical gold exposure to a portfolio. With an annual fee ostensibly ranging from 0.25% to 0.4% for most ETFs, this convenience comes with a price given the many drawbacks of these products.
For the purpose of this guide, I will examine the workings of the largest gold ETF (which will remain nameless in this report) which currently holds over US$160 billion worth of gold bullion. In such structure, investors hold units issued by the trust, with each unit representing an undivided interest in the assets of the trust.
What makes an ETF different from another type of fund is that investors cannot interact with the trust directly for the purpose of creating or redeeming shares. This process is intermediated by Authorised Participants, who are for the most part large banks and only they can instruct the trust to create or redeem shares in baskets of 100,000 shares (representing about 10,000 oz of gold, worth approx. US$46 million in April 2026). There is no legal obligation for the Trust or the Authorized Participants to deliver 10,000 oz of physical gold upon presentation of 100,000 shares by an investor (only the Authorised Participants may). Most ETFs are therefore paper gold instruments for investors because the physical redemption feature is only available to Authorized Participants.
Furthermore, the gold bullion is in an allocated account held with a bullion bank in London for the account of the trust. While this seems fine, the prospectus authorises the custodian to use undisclosed sub-custodians holding the bullion in undisclosed locations. The prospectus also places several limitations to the liability of the custodian and sub-custodians, to the ability of the trustee to audit the holdings of the trust and the quality of the bullion held.
Conflicts of interests also have been pointed out between the custodians of such ETFs and their investors. Custodians of the two major gold and silver exchange traded funds, HSBC and JPMorgan Chase, hold great quantities of bullion on behalf of unit holders while at the same time holding significant over-the-counter derivatives in both gold and silver and significant short positions in both gold and silver on the COMEX.
Many investors are lured by the seemingly low cost of holding an ETF, but they should realize that a management fee of 0.4% is not justified for such a large institutional structure. It is also obvious that the bulk of the management fee (0.3%) is not used to run the product, but to pay the fees of the sponsor and the marketing agent.
Investors also should factor in the brokerage fee they need to pay to their stock broker to acquire the units, and these can be substantial, depending on the provider used. While the brokerage fee may seem to have nothing to do with the ETF, it adds to the total cost to get in or out of the investment and must be taken into consideration when making comparisons to the other options available (such as the purchase of physical bullion).
Most metal ETFs can be regarded as products created by the banks and for the profit of the banks. Their workings are intricately intertwined with the London Bullion Market and should be avoided by the wise long term precious metals investor (please read the Appendix for a more detailed analysis on the London Bullion Market).
THE ETNs
An exchange traded note (ETN) works in a similar way to an ETF with the difference that the investor does not own a share in the trust, but owns title to a debt which is secured by bullion owned by the trust. The investor is therefore a creditor and is one more step away from the ownership of bullion. In fact, he does not own bullion at all, not even indirectly.
BANKS’ SPONSORED FUNDS
Many banks have sponsored their own fund and act as fund manager and gold custodian. Many such funds have been established by Swiss banks which hold the gold in their own vault, often located in the basement of their main building. Such investment funds are clearly superior to ETFs but present some evident drawbacks:
Investors can face high fees to subscribe or redeem units of the fund, depending on the particular distribution channel into which they fall. This is not applicable to the funds that are listed, but brokerage fees and larger spreads for relatively low liquidity stocks might prove very expensive.
Those funds are holding large bank bars of 400 oz, which are worth more than US$1.84 million (April 2026). Physical redemption is possible, but only for such bars and therefore is only available to large investors.
The bank acts as the provider of many services needed by the fund, including custody of the gold. This might create conflicts of interest in situations of distress for the institution in question.
Rules and regulations are changing fast in European countries and the conditions for the redemption of units for physical metal might change in the future and be out of the control of the provider.
FUNDS WITH NON-BANK CUSTODY
Funds such as the Sprott Physical Trust or the Central Fund of Canada have long earned the best-in-class reputation of all precious metals funds. They are closed-ended funds that acquire metal after each round of share offering and store the metal with non-bank custodians. Their shares can easily be acquired on stock exchanges in Canada and the USA. While superior to the bank sponsored funds, they suffer from a few drawbacks as well:
Acquiring the shares can be pricey, depending on the investor’s brokerage arrangement and the liquidity and spread of the stock.
The funds are backed by large bars which then constitute the minimum holding required to request physical delivery.
Being closed-ended funds, their shares can trade sometimes at a significant premium or discount to the Net Asset Value, adding another layer of volatility to an already volatile asset.
FUTURES AND OPTIONS TRADING
Futures contracts constitute an efficient way to purchase and take delivery of metal in lots of 100 ounces for gold and 5,000 ounces for silver. It is one of the cheapest ways to acquire and take delivery of metal for investors who have access to a broker that allows for physical delivery (most brokers do not).
Buying futures contracts and rolling them over does not, however, constitute a viable alternative to holding bullion. The investor who acquires his bullion in this way also should have sufficient capital on margin, given the high volatility of precious metals prices. The Wise Investor can acquire his metal on the futures markets and get it delivered to his allocated account held with a non-bank professional vaulting company.
The main commodity exchanges for gold and silver are COMEX in New York, TOCOM in Tokyo, and MCX in India. Gold also can be traded on other commodity exchanges, including the Chicago Board of Trade, Istanbul Gold Exchange, Chinese Gold and Silver Exchange Society, the Shanghai Gold Exchange, and Dubai Commodity Exchange. Only a small percentage of the futures market turnover ever comes to physical delivery of the gold or silver represented by the contracts traded.
SUMMARY
The chart below summarizes the various ways of holding bullion. Please note that taking possession of metal located in an unallocated or pool account is possible, but only after switching to an allocated segregated account.
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