Types of gold storage
There are plenty of ways to store gold. Some people dig a hole in their garden, others use a hidden drawer in their desk or a small safe in the wall, but most investors use the service of a storage company or bullion dealer for safekeeping.
Such companies use a myriad of words to describe the type of storage that they offer, such as allocated, pooled, commingled, segregated, or reserved. Combined terms such as ‘pool allocated’ or ‘fully allocated and segregated’ are also used. There is no universally accepted definition of the various storage types and two storage providers can use the same term despite offering very different solutions.
In general, there are three main storage options for precious metal: At home, in a safe deposit box or in a vault.
Home storage is a very popular choice for smaller amounts of bullion. Your house, apartment or garden offers many hidden locations and – as long as your home is not flooded, burnt or ransacked by burglars – it is usually a safe choice. Sometimes too safe, as many people tend to forget where they put their precious metal leaving it there for posterity.
Larger amounts of precious metal are best stored outside of your home. Many investors consider bank safe deposit boxes as the best option. They ignore the fact, that banks are not storage companies. Their safe deposit box service is not covered by banking regulations and often has no or very limited insurance coverage. Each year single storage items and even whole boxes disappear. As more and more bank outlets are being closed, the same applies to vaults in the affected branches. If you are unlucky, you might not have enough time to withdraw your possessions before this happens, and it might take quite some time to recover them.
Private safe deposit box operators are a much better option. They specialize in storage and security, as they consider it their core business. Companies that have been in the business for many years or even decades and provide full transparency about their management and owners, are usually reliable.
Professionally managed safe deposit boxes offer the advantage, that in addition to bullion, you can also store other precious objects such as jewelry, stamps, personal documents, external hard drives and USB sticks. Their disadvantage is, that you have to be physically present to add and withdraw items. Covid-19 related travel restrictions have shown, that this is not always possible. Especially safety boxes in foreign countries might not be assessable for many months or even years. If opening by an authorized representative is not possible, you might end up starving to death despite being a millionaire.
Some individuals and almost all institutional investors store their precious metal in vaults. Such facilities offer four distinct storage forms: unallocated, pool allocated, allocated and segregated.
Much of the world’s gold is held in unallocated form. Investors don’t have direct ownership of precious metal, but only a fractional interest in bullion held by the storage provider and included in its balance sheet. The storage company can lease or rehypothecate the gold at its discretion and physical delivery of the metal to the “owner” is usually severely restricted or not possible at all. Examples of unallocated storage are gold accounts with most banks. Refineries and some bullion dealers also offer such accounts.
Pool allocated storage (also called commingled storage) occurs, when money from different investors is pooled to purchase one or several large pieces of bullion, which a single investor could not afford. Physical delivery is usually not possible for obvious reasons. If an investor bought 5 ounces of a 400-ounce gold bar, the storage provider does not want to melt the bar to create one 395 oz bar and one 5 oz bar, as this would not only be impractical but also prohibitively expensive. Gold-backed Exchange Traded Funds (ETFs) use pool allocated storage, though in many cases intermediaries are involved.
Allocated storage means, that several pieces of precious metal, which are legally owned by various investors and were placed into the vault independently and at different times, are stored together.
In case of weight allocated storage, each investor has a legal claim to a clearly defined amount of bullion, but not to specific coins or bars. A typical example is a storage box containing 100 gold coins belonging to a dozen investors. Physical delivery is possible, but if you withdraw a single coin you will get any one of the 100 coins and most likely not the one that you have purchased. So instead of the 2020 Austrian Gold Lunar, you might get a 2016 Canadian Maple Leave. In the worst case it is possible, that instead of the 15 x 1 oz gold coins that you bought, you receive 1 x 10 oz gold bar, 3 x 1 oz gold bar and 2 x 1 oz gold coin.
The risk of receiving lower quality bullion or a different bullion composition can be avoided with bullion allocated storage. In this case you have a legal title to the particular piece of bullion that you bought or delivered for storage. Precondition is, that the bullion is uniquely identifiable by its brand and serial number. As individual coins have no serial number, allocated bullion storage usually only applies to bars.
The most secure but also most expensive form is segregated storage. Bullion belonging to one investor is placed in a separate box, that is sealed and stored apart from precious metal owned by the vault operator or other customers. Some providers offer storage in a customer-specific safe, that is installed in the vault and can only be opened by the investor or its legal representative. Large holdings can also be stored in a clearly marked area of the vault or even in a separate room. In recent years vaults have started to place each purchase order into a separate parcel, that has its own bar code or RFID chip and can be sealed tamper proof. The parcel is then stored together with other parcels in the vault, but can easily be recovered with the use of a barcode or RFID scanner.
Bullion dealers and vault operators have a tendency to misrepresent their actual storage form. Unallocated storage is often called allocated, and allocated storage is portrayed as segregated. Some also use the wording “fully allocated and segregated” for what we just call segregated. If you want to be sure about the actual storage form, you have no choice, but to read the whole storage agreement, ask additional questions and visit the facility to see by yourself how everything works.
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 fees 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. Pool allocated storage can be as low as 0.1% p.a. for gold and 0.5% for silver. Safe deposit boxes even in expensive countries like Switzerland can be found for as little as USD 200 per year.
Diversification strategies
Gold storage is a matter of trust and there is no 100% guarantee that your assets will always be safe. Purchased items can prove to be fake, companies with an immaculate reputation earned over several decades might turn out to be frauds, or governments might confiscate your assets. This needs to be considered when thinking about the best way to store your precious metals.
For ordinary investors, we recommend 3 storage elements:
- Home storage
Gold and silver worth a few thousand dollars should be kept at home to be readily available in times of crisis. Smaller gold coins and especially 1 oz silver coins are preferable, as they can easily be exchanged for goods and services, while trying to buy groceries with a 10 oz gold bar might prove to be a challenge. It is important to hide all bullion well and remember the location (the latter is more important than most people think) - Domestic safe deposit box
Larger holdings can be deposited in a safe deposit box managed by a private operator in your country of residence. Storage at a bank should be avoided. It is essential to find a professional operator with high-quality facilities, even if that means having to travel a longer distance. The safe deposit box can also be used to store computer back-ups, documents, jewelry, and other precious items - Offshore vault(s)
To reduce gold confiscation and jurisdiction risk, offshore storage in a safe location makes sense. Due to the geographical distance, bullion trading should be offered by the storage provider
A lot depends on your specific situation. If you plan to invest 5,000 dollars, having 3 different storage locations is far too costly. In this case one location is probably sufficient. On the other hand, if you have bought bullion worth 500,000 dollars, using 2 offshore locations in addition to a domestic safe deposit box and home storage makes sense, provided that there is a proper balance between risks and storage costs. There is no one-fits-all solution. Everything depends on your personal preferences.
If you require specific advice, please contact us at info@livebeyondborders.com.
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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.
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