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. Bullion banks (such as JP Morgan, HSBC, Bank of Nova Scotia, Barclays, UBS, Deutsche Bank) offer unallocated accounts that are available to investment companies or high-net-worth individuals through their private bank account. Those banks are members of the London Bullion Market Association and conduct most of the trading in the London gold market. Please read the section on the London Bullion Market to understand the nuances of that market.
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. This is also the least available to the common investor and only reserved for professional dealers (with the exception of the Perth Mint, where unallocated storage is available to retail clients).
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. The cost of conversion from unallocated to allocated is usually prohibitive, involving a bar fabrication cost and a storage fee. This artificially high rate achieves its primary purpose of keeping the gold unallocated. Physical delivery is possible only after conversion from an unallocated to an allocated account.
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 (despite there being no gold to store and the deposit being an interest rate free loan to the bank) and there is a bid/ask spread of 1.5%.
5. Gold certificates are typically unallocated gold with an option to convert into allocated gold at the request of the investor and after paying the fabrication fees.
Unallocated gold generally is not insured (because there is not always metal to insure) and you would not necessarily have suffered a loss if it were stolen (the liability of the supplier remains). If the account documentation mentions insurance, chances are high that this is not an unallocated account, but rather an allocated account.
It is interesting to note that most investors holding an unallocated account are not aware of the true nature of such account. This is evidenced by several lawsuits that have been brought against bullion banks in recent years:
