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Where do investors store their gold?

15 December 2021

There are three options for individuals to keep their gold bullion or coins. Peter Wollege of Monitronic Safe Deposits examines the contrasting benefits of a home safe, a third-party storage firm and a safe deposit box. 

When individual investors want to buy gold bars or coins from a bullion dealer, they are faced with a number of important issues. Most people have little idea of how best to participate in the physical market. It is not just a question of finding a trustworthy dealer offering high-quality product at competitive prices, but it is also an issue of safe storage, proper insurance cover and “ownership”.

Today, an individual who wishes to purchase and store gold (or, for that matter, silver or platinum) faces two different types of online bullion dealer. It is important to understand the benefits (and potential disadvantages) of these two distinct business models, not only in terms of buying and selling bullion, but also to determine where best to store and insure the gold.

To illustrate this, two leading online bullion dealers, BullionByPost and BullionVault, provide very different trading and storage solutions. The clue to these key distinctions is in their corporate names. BullionByPost primarily offers USA individuals the ability to buy gold bars in specific sizes for next day home delivery. BullionVault is an online investment gold service, which allows retail investors to trade frequently and in any quantity on their gold exchange, and store their bullion in professional vaults in various financial centres. Both businesses, whilst very different, have been extremely successful in tapping retail demand for physical gold as a hedge against inflation or, perhaps more accurately, as an alternative currency.

BullionByPost suits those who wish to take delivery of their gold bars, whereas BullionVault provides a trading exchange platform (without taking possession of the gold). Both are arguably the best of breed. When it comes to storage, BullionVault’s integrated service is ideal for retail investors and traders who have no interest in taking physical delivery themselves. In fact, BullionVault’s sheer scale allows them to offer extremely competitive buying and selling prices, as well as a storage and insurance fee at only 0.12% per annum for gold. If a customer wants physical withdrawal and personal delivery of gold, their business model is not suited to such a request, which is reflected in relatively high “bespoke” management charges.

BullionByPost, on the other hand, does offer fully-allocated storage for those who do not want their bullion delivered at home (e.g. for fear of burglary or excessive home insurance). However, the cost of storing a BullionByPost customer’s bullion, which is held by the reputable high-security logistics company, Brink’s Global Services, is relatively expensive compared with depositing gold in a safe deposit box.

The table above shows the different levels of storage and insurance fees between BullionByPost and Monitronic Safe Deposits. The reason for the differential is that online gold dealers (such as BullionByPost and GOLD.co.uk, another online bullion dealer that uses Brink’s Global Services) charge by applying a fee based on the value of the gold, whereas a safe deposit box is rented on the basis of the size of box. Indeed, as the size and value of a gold holding rises, the safe deposit box becomes an increasingly cheaper option than a third-party storage firm offered by online bullion dealers.

For example, BullionByPost’s storage and insurance fee is 1½ times more expensive on gold valued at $5,000 but, for gold valued at $100,000, the fee is 2½ times the cost charged by Monitronic Safe Deposits. An additional factor is that a safe deposit box customer can store other items such as jewellery, which reduces the storage cost of the gold component (subject to space and weight constraints).

To sum up, for the individual investor, there are essentially three attractive “delivery” models in the marketplace. There is the online bullion trading platform (such as BullionVault) that offers an integrated trading and storage service, which is particularly suitable for active investors and traders. Secondly, there is the online bullion dealer (such as BullionByPost) that provides a delivery service by post, which suits those wishing to store their gold at home. The third model is to secure your purchase through a reputable bullion dealer (online or otherwise) and store the gold in a safe deposit box. If you want to “touch and feel” your gold bars and coins in a secure environment, the answer is to rent a safe deposit box in a convenient location to facilitate owner visits.

Last, but not least, is the issue of “ownership”. It is important for gold investors to understand the potential consequences of “counterparty risk”. Below are three examples of the risks that lie ahead for investors in precious metals:-

1. Many investors do not consider the full implications of allowing their bullion provider or bank to store their precious metals in a communal pool. If the company or bank goes bust, each investor becomes a creditor.
2. Increasingly, investors are being warned to avoid fraudulent metal traders and storage companies. Retail investors, in particular, are vulnerable to unscrupulous operators who are well aware that many investors do not carry out proper due diligence before transacting. This applies equally to online bullion dealers, gold bullion vault operators and safe deposit businesses.
3. Even sophisticated investors in “paper metal” programmes (such as ETFs) have become increasingly concerned that such issuers may not be able to meet their obligations. The issuer is geared on a “fractional reserve” basis, so substantial investor redemptions may be impossible to turn into cash, bearing in mind that only a very small percentage of gold is regularly traded.

All three of the above examples give rise to counterparty risk, which could result in total loss. The best way to avoid such a scenario is to become the absolute owner of your gold; in other words, to secure ownership on an allocated basis in a professional vault or by storing it in a rented safe deposit box. There is a key difference between a cash deposit in a bank (retail banking) and a safekeeping relationship (custody).

By the same token, depositing gold into a “gold account” or “pooled account” (otherwise known as “unallocated” storage) is legally like depositing money into a bank account i.e. the gold becomes the bank’s liability. If, on the other hand, you store “allocated” gold, whether it is placed in allocated storage by a bullion dealer or deposited in a safe deposit box, it becomes a custody arrangement. If any of those companies providing such a service go bust, the gold belongs to the customer. In addition, customers should always check that the custodian carries comprehensive risk insurance for loss or damage and that the policies are placed by qualified insurance brokers with a knowledge of the “specie” insurance market.

The beauty of depositing gold into a safe deposit box is that, being a remarkably compact store of value, it is very inexpensive. You can put hundreds of thousands of pounds worth of gold bars into a box costing little more than $100 per annum with relatively inexpensive insurance on top. Unlike bank vaults and gold bullion vaults, customers can visit their safe deposit box as regularly as they like, seven days a week, for no charge. In the security of the vault (and the privacy of a viewing booth), customers can view their gold bars or coins at the same time as returning their jewellery after a family wedding.