The selection of a storage company is a key decision that should not be taken lightly. If you chose the wrong company, you will end up paying excessive fees and receiving poor service. At worst, you might even lose part or all of your bullion. Below we will explain the main criteria that should be applied, when comparing various storage options.

 

Initial considerations

In our opinion there are three initial questions to ask, when appraising a storage option:

  1. Is the company the actual storage provider or just an intermediary?
  2. Is there a jurisdictional match, i.e. do the registered office of your contractual partner and the location of the vault fall under the same jurisdiction?
  3. Does the company offer your preferred type of storage?

If any of the above questions is answered negative, it makes sense to look for another option.

 

Storage provider or intermediary

A lot of bullion dealers offer storage. Some of them might have a small vault, but most just use the service of a third party. Irrespective of what is written in your storage contract, you can never be sure, whether this is also guaranteed in the contract between your bullion dealer and the actual storage company.

Often you don’t even know, whether your dealer has contracted directly with a vault, or uses an intermediary to arrange storage, which is not uncommon in the industry. In this case a direct contractual relationship is replaced by a chain of contracts. With each additional contract, your counterparty risk is increased, and your property rights are diluted.

Eventually your “fully segregated” bullion could end up being leased or rehypothecated and you could be denied physical withdrawal. In case that one of the companies in the contractual chain becomes insolvent, you might turn out to be an unsecured creditor instead of the legal owner. And if the bullion is stolen or disappears, the promised comprehensive insurance might not cover it. Therefore, having a direct contractual relationship with the vault operator, is by far the best solution.

 

Minimum jurisdiction risk

Limiting the number of jurisdictions involved in the storage of your precious metal helps to reduce the risk of confiscation and other infringements of your property rights.

Even if you contract directly with a storage company, this does not necessarily mean that the vault is located in the same country, where your contractual partner is registered.

The big global security companies Brink’s (USA), Loomis (Sweden) or Malca-Amit (Hong Kong) have own facilities in many countries around the world. The same applies to several regional companies. If you contract with the headquarter for storage in another country, you have elevated jurisdiction risk.

Always deal directly with the local subsidiary. But even then, you are not sure that there is no involvement of another jurisdiction. For marketing purposes, corporations often share customer data among group members or even compile it in a single database hosted at the headquarter or in a third country. The potential impact of this should not be underestimated.

We prefer to have a direct contractual agreement with a company incorporated in the country, where the bullion is stored. Preferably this company should not be part of an international group or have in any other way exposure to foreign jurisdictions.

Type of storage

Safe deposit boxes and segregated storage, where bullion of one customer is stored separately from the assets of other customers, offer the highest level of security. They should be the preferred choice for those, looking at gold as a strategic investment and insurance against the potential collapse of fiat currencies and our financial system.

As segregated storage is expensive, less costly bullion allocated storage, under which gold from several customers is stored together, can be an alternative. However, clear contractual arrangements need to be in place to ensure, that customers get pictures and serial numbers of all bullion stored, can personally visit the vault to check their property, and have the right to physical withdrawal. In addition, the storage provider must have reliable processes in place, to prevent wrongful withdrawal by accident or malicious intent.

Weight allocated storage and pool allocated storage carry larger risks. They are only acceptable to investors, who seek the lowest storage costs and are not too concerned about risks.

We certainly don’t recommend unallocated storage, as a potential default of the storage company will result in the partial or full loss of your money.

If a company doesn’t offer your preferred type of storage, it makes sense to walk away and look for a better solution.

 

For products that have successfully passed the initial assessment, we suggest to take a closer look at the company, the offered trading options, the storage conditions and some other factors.

 

Company evaluation

Many companies in the precious metal business prefer to keep their business shrouded in secrecy. This is highly unsatisfactory. As with other commercial relationships, you have the right to know with whom you are doing business.

Especially the identity of main decision makers is important. Most senior managers in the industry have an immaculate reputation. But there are some with a tarnished background or even a criminal record, and knowledge of their name might help you to identify this.

Some companies don’t disclose the name of their CEO or Managing Director. But even if they do, this is no guarantee that this person really runs the business and is not just a nominee of the real decision maker. Knowing the shareholder structure or at least the majority owners is important. Unfortunately, this information is only disclosed by very few players in the precious metal industry.

Financial reports can be very revealing. Has the company sufficient capital? Is it profitable or does it show high retained losses and mounting debt? The balance sheet can provide a clue, whether “fully segregated” customer gold is in fact included in the company’s balance sheet. Regrettably, the number of storage companies providing annual reports is very small.

Of the renowned gold storage jurisdictions, only Singapore has a public register of locally incorporated firms, where you can download information about their management, shareholder structure and key financials. Other countries disclose only the names of senior managers and some offshore jurisdictions don’t even confirm, whether a company exists.

Big institutional investors can conduct a detailed due diligence of the storage company and ultra-high-net-worth individuals (UHNWIs) can demand, that essential data is disclosed to them. Ordinary investors don’t have these options. They can only rely on company assurances and hope for the best. It is our mission to push for more transparency in the industry, so that ordinary investors can base their storage decisions on facts instead of beliefs.

Trading services

For the ordinary investor it is preferrable to work with storage companies, that offer a solution for the purchase and sale of bullion. For offshore facilities this is a necessary requirement. Otherwise you either have to travel to the vault to deliver or pick up your bullion, which is costly and might not always be possible. Or you need to have it send between the vault and a third-party bullion dealer, which might take a few weeks, is costly and also involves additional risks.

The above does not only apply to segregated storage, but also to safe deposit boxes. Operators of the latter usually require the personal presence of yourself or your legal representative to place items into the box or take them out. However, some companies have implemented solutions, that allow you to buy and sell bullion without having to visit the facility.

 

Buy-sell-spread

Pricing among respected bullion dealers can vary significantly. Compared to the LBMA gold price, premiums of 3% to 8% for the purchase of gold and – due to current physical shortages – even 15% to 30% for silver are common. For the sale of bullion, 0.5% to 2% are deducted from the LBMA price.

When analyzing a potential storage company, it is important to be fully aware of the difference between the buying price and the selling price, the so-called buy-sell spread. As some providers focus on making money with trading and others with storing, the buy-sell spread should always be evaluated in relation to the storage costs. For long-term investors, the profit impact of a higher buy-sell spread can easily be offset by lower storage costs.

 

Taxation

The purchase of bullion can be subject to Value-Added Tax (VAT) or General Sales Tax (GST). While investment-grade gold is exempt in most traditional storage locations, a levy on silver is not uncommon. For instance, in Switzerland a rate of 7.7% applies, except if the bullion stays in a duty-free or bonded warehouse. If the latter is not an option, it is better to look for another jurisdiction to buy and store silver.

 

Liquidity 

Irrespective of whether there is a crisis or not, you should always be able to buy and sell bullion at acceptable prices and without long waiting times. Whether this is possible depends on liquidity.

In normal times, market liquidity is not an issue. Dealers can buy bullion from refineries, wholesalers and partners located all over the world and arrange shipment to their facilities. Selling is just as easy. However, in times of crisis liquidity can dry up. The traditional supply chain breaks down and countries introduce high tariffs on precious metal or prohibit its im- and export altogether. In this case the market is not global but at best countrywide.

An established gold market like Switzerland provides high liquidity. There are not only scores of bullion dealers but also many renowned refineries. Under such conditions it should be possible to buy and sell precious metal most of the time. On the other hand, in a country with no established gold market and only a few bullion dealers, buying and selling might prove to be a challenge, especially for larger quantities. This needs to be taken into account when considering some exotic country as potential storage location.

Apart from market liquidity it is also important to look at vault liquidity, especially if you intend to use the same company for the purchase, storage and sale of bullion. To provide sufficient liquidity, the vault operator should have direct commercial relationships with a refinery or at least one of the main precious metal wholesalers. In addition, it should have a sufficient stock of own bullion to facilitate trading.

Most bullion dealers will tell you, that they have all necessary arrangements in place and that they can provide a bullion buyback guarantee anytime and without limit. Ordinary investors are unable to verify this claim, as no company will provide copies of their purchasing agreements, details about the company’s stock of precious metal and information about agreements with banks, suppliers and partners. Like many other aspects of precious metal storage, it eventually comes down to trust.

During the Global Financial Crisis 2007-09 and recently in the spring of 2020, we have experienced severe disruptions of the global precious metal supply chain, that even affected the big players. Some dealers were unable to deliver bullion for many weeks or even months and premiums went up significantly. As the global economy is in very bad shape, another deep crisis in the future is almost inevitable. It will test the liquidity of markets and providers. Many customers won’t be satisfied with the outcome.

 

Purchase and testing procedures

Even industry experts can be fooled, when it comes to fake gold. To avoid buying and storing counterfeit products, it is best to buy directly from respected refineries and have the gold tested upon arrival.

The average investor can hardly buy directly from a refinery and is forced to use a bullion dealer. Many dealers claim, that they order directly from refineries. But there is no way to verify this. As they also purchase gold from clients, it can be assumed that some gold is just passed on to the next customer. This is not a problem, if the gold never left the vault and has been tested thoroughly. But there is no guarantee for this.

To detect counterfeits expensive testing equipment is required. Small coin shops or private sellers don’t have such equipment. Even if a dealer or a storage company has the latest test equipment, this doesn’t mean that test results are safe. As testing is usually done in the absence of the customer, it all depends on whether management and employees are honest or not. A certificate of authenticity can be issued for a fake product, and genuine bullion can be replaced after testing just before it is put into a box or parcel for segregated storage.

To be certain, you have to send in your own independent test team with the latest equipment. Institutional investors and ultra-high-net-worth individuals (UHNWIs) do this, but it is hardly an option for the ordinary investor. Don’t count on the insurance company to pay for possible damage, as counterfeits are not covered by common policies.

As with liquidity, it eventually comes down to trust in the storage provider and the integrity of the supply chain. If this trust is not justified, you will be stuck with the losses.

 

Storage conditions and services

Vault security

Many operators of vaults and safe deposit boxes boast about their high security standards. Their marketing materials mention that they are class 3 according to UL 608 and UL 680, or that they are resistance grade XIII according to BS EN 1143-1: 2012. While this is probably very informative to experienced security specialists, ordinary investors have no clue what it means.

Many vaults highlight, that their security standards are regularly audited. Considering the many scandals involving audit companies, this is not fully reassuring. Institutional investors can send in their own security audit team. But if an ordinary investor with a small amount of bullion raises such a request, he or she will be shown to the door.

Having good security hard- and software is important. But most investors are not able to distinguish between a “good” and a “bad” vault. Nonetheless it makes sense to request a visit to the vault before you sign a storage agreement. It will certainly not give you the full picture, but you might become aware of a few issues, that appear unprofessional even to the untrained eye.

The best vault is only as good as the people working there. If some of them have a criminal mindset, no bullion is safe. But if there is valid insurance in place, it should protect you against theft.

 

Storage costs

Costs for storing precious metal vary widely. Some companies are charging as much as 2% of the value of bullion per year. This is excessive. Even for segregated storage costs should not be above 1% p.a. and with some research even ordinary investors can achieve 0.7% p.a. or less for gold and 0.9% p.a. or less for silver. Cost for pool allocated storage can be as low as 0.1% p.a. for gold and 0.4% for silver. Safe deposit boxes even in expensive countries like Switzerland can be found for as little as USD 200 per year.

 

Documentation

The importance of proper documentation should not be underestimated, as it is essential to prove your ownership in case of bankruptcy or legal disputes.

Every investor should get a sales invoice displaying weight, refinery, product and if available the serial number per item of bullion, as well as a confirmation, that the sales price was fully paid.

A storage receipt is equally important. It should show bar serial numbers and possibly also the parcel or box seal number.  Photos of the bullion should be provided as well. Without such evidence it is possible, that the “fully segregated storage” for which you pay, is in fact only weight allocated or even unallocated storage.

Many storage providers issue a monthly storage report or have a website with up-to-date information on storage items, current sales price and unrealized profit. Though such a service increases peace of mind, it should not be seen as a substitute for a proper sales invoice and storage receipt.

 

Physical Audits

Quite a few vault operators claim, that bullion stored with them is audited by an external auditor at least once a year. By checking the amount, weight and serial numbers of metal kept in the vault, the audit company verifies, that each item in the storage records is matched by physical metal. Testing for fakes is not part of regular audits. They therefore cannot confirm the authenticity of your bullion.

Honesty and integrity of the audit company are essential. Unfortunately, we know from many accounting scandals (e.g. Enron and Wirecard), that not all employees of audit firms are trustworthy. This is not surprising, as the incentive structure of the whole system does not promote honesty. Storage companies are free to choose their preferred auditor and pay a price that is high enough, to ensure full compliance with its expectations and requests. This is tantamount to a student choosing his or her teacher and also paying the teacher in exchange for a good grade.

We are certainly not claiming that all audit reports are trash. On the contrary, we assume most of them to be accurate. But as many employees of audit firms experience strong pressure to meet their budget, a few might be willing to look the other way in order to keep their job. And some employees might be willing to sign an incorrect audit report in exchange for a large amount of cash or a corresponding money transfer to an offshore bank account.

As with the auditing of financial statements, the proper approach would be to have a regulator pay audit companies and have them rotate every 2-3 years between companies. But this is not going to happen any time soon. Therefore, you have to conduct your own physical audit. To commission an external audit firm is probably far above your budget, but you can always request a personal visit to check, whether your bullion is really stored in the vault. If your provider does not allow this, look for an alternative.

 

Insurance

An insurance policy is a good safeguard against loss. The policy should at least cover damage, theft, employee infidelity and mysterious disappearance. It is important to ensure, that liability limits are constantly reviewed, to avoid underinsurance due to an increase in the amount of precious metal stored and/or appreciation in its price.

Typically, the storage company buys insurance for the whole vault or individual customers.  There is always the risk that your provider pretends to have insurance and provides written confirmation that is fake. To be certain, double check with the insurance company or the insurance broker, whether the policy really exists and provides the stated coverage.

Please keep in mind that normal insurance policies don’t cover company fraud and bankruptcy. As a result, having an insurance does not always mean that you are safe.

 

Physical withdrawal

If you store your bullion in a safe deposit box, you can always withdraw it personally during business hours (with prior appointment some operators also offer access at night and over the weekend). As you might not always be able to personally visit the safe deposit box, make sure to appoint a family member, a friend or a lawyer as authorized representative, who can access the box.

You should always be able to withdraw bullion held in segregated storage, either by picking it up yourself or having it sent to your address or another vault. Details need to be included in your storage contract.

Many providers of allocated storage claim, that they allow for physical delivery. However, it is important to read the details. One large company, with over 40 tons of gold held for clients in pool-allocated form, states in its terms and conditions:

You have a right of withdrawal of your gold, silver and platinum from XXX, but you acknowledge XXX is not designed primarily as a service for those who wish to take physical possession of bullion …. To make physical withdrawals you will be required to provide reliable forms of identification, address verification and, depending on the amount being withdrawn, professionally certified source of funds and source of wealth declarations (for which evidence may be required).”

You would assume, that storage providers have carried out their Know Your Customer / Anti Money Laundering (KYC/AML) duties, when you deposited money or bullion with them. For the withdrawal of gold, there should be requirement to provide a “source of funds and wealth declaration” and potentially even hand over additional “evidence”. The fact that they state this as a potential requirement indicates, that they don’t want you to withdraw physical metal.

Some companies have conditions in their storage contracts that are even worse. Never trust marketing materials or the words of sales agents. The right to physical delivery should be guaranteed in your storage contract without any restrictions and at reasonable costs. And even then, you cannot be 100% sure.

 

Other considerations

 

Use of cryptocurrencies 

There are gold bugs and crypto bugs. Many of them are convinced that their preferred asset is superior and that the value of the other asset is bound to decline substantially over time. We are neither gold bugs nor crypto bugs, but see value in both assets.

Precious metal such as gold, and cryptocurrencies such as Bitcoin, are an insurance against the ongoing decline of fiat currencies and our financial system. No one knows for sure, which insurance will turn out to be the better choice. Consequently, holding both assets makes sense.

As part of a portfolio adjustment, you might want to exchange gold for crypto or vice versa.  In this case, why split this into two separate transactions (e.g. gold to fiat money and then fiat money to crypto). It is a lot faster and saves transaction costs to trade gold and crypto directly.

In the event of capital controls or a collapse of the banking system, being able to exchange gold for crypto is crucial. Let’s assume that you store gold offshore and the government of your resident country prohibits international money transfers and confiscates all gold that is being imported. In this case you are unable to access your capital at home, except if you can convert gold to crypto.

Crypto transactions are borderless, as you can receive and send crypto payments from anywhere in the world. The same can’t be said of gold. While you might use it under exceptional circumstances to transact in your home country, doing trans-border transactions is far more difficult. In this respect crypto is superior to gold.

Bullion dealers that don’t accept crypto for the purchase and sale of gold provide limited value. They either adapt or will be replaced by more agile and innovative competitors.

 

Privacy and secure communication

Do you want your neighbor to know the balance of your bank account, the size and structure of your stock portfolio or the value of your life insurance policy? Most likely not. Similarly, you don’t want others to know how much precious metal you own.

Unfortunately, despite of what is mentioned in marketing publications, many bullion dealers don’t really care about your privacy. Documents for account opening such as passport copies and residence information as well as invoices and storage reports are sent by standard email. Only very few companies offer fully encrypted communication.

Web platforms also provide limited security and privacy protection. Most are accessible with a single password. Two-Factor Authentication (2FA) is only optional or not offered at all. This makes it very convenient to the average hacker to check out your holdings and perhaps even initiate withdrawals.

Fully encrypted email exchange and 2FA for the website should be the minimum standard for every bullion dealer and storage provider. Please request this every time you inquire with a company for storage.

 

The above evaluation criteria provide a general framework. As people have different risk profiles and preferences, it is up to you to adjust it by adding or deleting items.

To learn more about the best gold storage jurisditions please click here.

Click Gold Storage Guide for access to the full report.

Disclaimer: The above is for informational purposes only. It is not an offer or advice to buy or sell any products or services. LBB and its owner do not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.

 

© 2020 Live Beyond Borders. All rights reserved