When considering how to store gold, there are a number of considerations that differ from other assets.
Storage Jurisdiction
It is worth keeping in mind that gold can act as insurance against the failure of the banking system if stored in a certain way. For this reason, it does not make sense to store gold in a bank. Failure of the banking system can lead to new government policies that are worth anticipating. In 1933 Roosevelt passed a law to confiscate all the gold in America. For this reason it can make sense to store gold outside the jurisdiction of your own government and in a country where the government is not heavily indebted. It also makes sense to consider the jurisdiction of the business that owns the storage facility as well as the jurisdiction of the storage facility itself. If the gold price rises considerably in a short period of time then governments could impose a windfall tax on gold. In these circumstances it is likely to be the jurisdiction of the owner of the gold, not the actual gold itself, which is relevant and the only way to mitigate this risk would be through international tax planning.
Insurance
Unlike money in the bank, it is possible to store gold with a third party and retain ownership of that gold. This means that even if the third party goes bankrupt then you retain ownership of your gold. So the main risk of storing gold with a third party is that it is stolen from that third party. This means that the insurance cover provided by that third party is important.
Retrieval & Sale
Another consideration when storing gold is how easy it is to retrieve the gold and / or sell the gold.
Gold Storage Options
The options for gold storage include:
a. private safe on your own property
b. safety deposit box
c. specialised vault
a. Private Safe
Although this may seem like a good option, there are a number of considerations. This option is clearly the easiest for retrieval and re-sale of the gold, but it does not mitigate the risk of confiscation by the government. Insurance is likely to be expensive and you may not want to tell anyone (including the insurance company and / or safe fitters) about your gold for personal security reasons.
b. Safety Deposit Box
A safety deposit box in a bank is within the financial system and therefore not a logical choice for someone looking to protect themselves from failure of the financial system. A private safety deposit box not linked to a bank is a better option. Compared to a private safe, insurance is likely to be cheaper and there are no personal security issues, but the location of safety deposit boxes is usually visible to burglars. This option would not mitigate against confiscation by the government unless the safety deposit box was abroad, but this would create the added complication of needing to go abroad when you want to retrieve and / or sell the gold.
c. Specialised Vaults
Specialised vaults are owned and run by businesses that specialise in storing precious metals very securely. The gold can be held abroad mitigating the risk of confiscation by your government. The storage costs and insurance costs are relatively low because of economies of scale. Generally these vault operators do not deal directly with the public so it is often necessary to deal with intermediaries. These intermediaries are also able to sell your gold for you. It make sense to consider the jurisdiction of the vaults, the vault operator and any intermediary because they could all be subject to new laws by local government.
When storing gold in a specialised vault it is important to understand the degree to which the gold is “allocated”.
“Fully” allocated gold is uniquely identifiable gold coins or bars that are held in the name of one specific client and segregated from other gold in the vault. All the gold is owned outright by the client who can take delivery of the gold if required.
“Pool” allocated gold refers to big gold bars (also called good delivery bars) which have a standard gold content of 400 troy ounces, weigh about 12kg, cost several hundred thousand pounds and are jointly owned by many clients. Due to joint ownership of a single unit, it is not possible to take delivery of the gold but it is possible to buy and sell gold quickly and cheaply. This is because the intermediaries who supply “pool” allocated gold act as exchanges between buyers and sellers using automated trading systems.
Fully allocated gold and pool allocated gold both have the following characteristics. The gold does not form part of the vault operator’s assets or the intermediary’s assets. The gold cannot be accessed by a liquidator in the event of business failure by either the vault operator or the intermediary, because the client is the outright owner of the gold and is not a creditor of either business.
In general, “pool” allocated gold may be better for novice buyers wanting to buy small amounts to start with, where as “fully” allocated gold may be better for more experienced buyers wanting to buy larger amounts.
In contrast, “unallocated” gold equates to buying a liability from a supplier. The supplier treats the client as a creditor for gold, which the supplier is under no obligation to actually buy. Although this approach is easily accessible and has relatively low dealing costs, it is not recommended because there is no guarantee that the gold has actually been bought. And even if it has, it still remains the property of the supplier not the client who is at risk from the liquidation of the business which may occur due to unrelated events.
When buying gold it is worth considering the gold dealer options.