Buying & Storage Options
If you’ve landed here after reading the Investing in PMs or Holding PMs?, you would have already been cautioned over this.
Should you decide to convert part of your savings in paper currencies into PMs as a hedge against inflation and currency debasement, make sure you land up holding physical gold & silver and not “paper gold” like Gold Certificates, Gold Savings accounts, Pooled gold accounts, Gld or Slv ETFs or anything besides real physical metals with atomic numbers 79 and 47!
Owning physical gold and silver has NO Counter-party Risk. All other PMs financial instruments are merely paper or electronic representations of gold or silver.
There are many ways to own physical metals, but I consider the following two as the most practical options for small to medium holdings.
- Buy bullion coins & bars and store them yourself. Here are some sources.
- Buy professional grade bullion from reputable vendors and store them in professional private vaults outside the banking system. You hold gold & silver because you don’t trust fiat currencies and the institutions that issue and manage them. In addition, the time you need your metals most is during a bank run. Hence, a bank’s safe deposit box or bank’s vault is the last place you would store your metals.
Option 1
You buy the metals from a reputable source, take physical possession and store them the best way you can. You have full ownership and custody. There are no third parties involved. Except for theft, you have virtually no risks. This option is ideal for coins and small bars.
Option 2
Due to the relatively high premiums of coins and small bars in many countries, it may be more advantageous to buy and own professional grade bullion bars stored in reputable vaults, especially if your holding is large. It has the added advantage of being much more liquid (easy to immediately sell in large quantities) compared to coins. You may want to apportion your holdings between coins in your own possession and professional bars stored in vaults according to the “Savings” & “Term Deposit” concept discussed here.
This option involves engaging a professional bullion service provider to procure and store the metals on your behalf. If done through an Allocated Account, you have full ownership, but custody is transferred to the third party (vault) through a bailment process. If done through an Unallocated Account, you do not have ownership, merely a claim to the metals. Before opening a bullion account, you need to understand the differences between Allocated and Unallocated accounts and be aware of Counterparty Risks.
| Bailment describes a legal relationship in common law where physical possession of personal property is transferred from one person (the ‘bailor’) to another person (the ‘bailee’) who subsequently has possession of the property. It arises when a person gives property to someone else for safekeeping.Bailment is distinguished from a contract of sale or a gift of property, as it only involves the transfer of possession but NOT its ownership. |
Allocated Accounts
When you purchase metals through an allocated account, you obtain and retain title to the metals. Amongst all the metals held on behalf of other clients, your bullion bars or portions thereof are specifically “allocated” to you. You own the metals outright , and your service provider is merely holding it on your behalf as custodians. Under common law, this relationship is known as bailment. Your metals in an allocated account do not form part of your service provider’s assets (not in their balance sheet). In the event of bankruptcy, your service provider’s creditors cannot lay claim on your metals. They belong to you.
Unallocated Accounts (Pooled Accounts)
When you purchase metals through an unallocated account, you do not obtain title to the metals. Units of fine weight of the metals are credited to or debited from your account whenever you buy or sell. The credits in your unallocated account merely represent your service provider’s obligation or promise to deliver your metals upon demand, and do not constitute your ownership of any specific bars or portions thereof. Title to the metals belongs to your service provider and forms part of the provider’s assets (appears in the provider’s balance sheet).
Counterparty Risks
Since owning gold or silver bullion through an unallocated account means that the credits in your account are backed by the inventory (general stock) of your provider, you are exposed to the risk that your provider may not have all the metals they claim to have. In fact, they are not obligated to maintain a 1-to-1 backing for all the metals “owned” by their clients. As is often the case during a crisis, when a large number of the provider’s clients demand physical delivery and there is insufficient metals in the inventory to back all the claims, you may end up loosing your holdings. In the event of bankruptcy, your service provider’s secured creditors will lay claim on their assets first, and you have little chance of claiming your metals because you are an unsecured creditor.
The same applies to banking. The minute you hand a bundle of paper money over the bank’s counter or when you electronically transfer money into your bank account, the title to that money instantly changes hand. It becomes an asset of your bank and in return, they hand you a certificate of deposit or a bank statement evidencing their debt to you. All that amounts to is a promise to pay you back your money at a future date. Again, you become an unsecured creditor of the bank and are now dependent on the bank’s creditworthiness and solvency. All the above risks are known as counterparty risks.
Allocated Bullion Accounts with established and reputable service providers
Back to options (1) and (2) for holding gold and silver.
It’s obvious that option (1) has no counterparty risks. When selectiong option (2), ensure that you open an Allocated Account. In so doing, you have avoided most of the major counterparty risks discussed above. While you are not dependent on the creditworthiness or solvency of your service provider, you are however still subject to a minor risk known as Performance Risk. This is the risk that your provider will not act and do things as they say.
| Registered Bars are specific bars with unique serial numbers registered in your name and are your exclusive property.Professional grade bullion bars come in standard sizes (gold 400oz, silver 1,000oz). If your holding is less than the weight of a standard bar, the service provider cannot assign a specific bar to your name. Hence, you own part of an Allocated Bar, sharing it with other clients. Title to your share of the bar belongs to you and not the service provider. Nevertheless, there’s always a 1:1 ratio of total client holdings to physical bullion in the vault. When you have sufficient bullion, you can request for a Registered Bar. |
To mitigate this risk, you’ll have to select providers that
- are established & reputable
- have strong governance procedures
- are subject to frequent periodic independent audits
- make such audit reports assessible to you or the general public
- Provides Registered Bars or Segregated Bars
Check out my reviews on three of the more reputable and established service providers, all offering Allocated Accounts.
- GoldMoney - Offers the widest choice of metals(4), currencies(9) & vault locations(3). Great for diversification.
- BullionVault - Great for active trading of gold & silver. Low trading & storage fees.
- Anglo Far East (AFE) - Great for medium to long term storage of gold & silver. Not suitable for trading or short term holding.
To minimise Performance Risk of your service provider, it would be prudent to spread your bullion holdings across various service providers. As you read the reviews, you’ll notice that each has its unique set of features and strengths, all of which are not present in any single provider. Within each provider’s account, request for Registered Bars whenever possible, and further spread your bullion across all vaults. On top of that, allocate part of your holdings to coins and small bars held close at hand for emergencies.
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More Charts: 1-Month, 1-Year, 5-Year, 10-Year
More Charts: 1-Month, 1-Year, 5-Year, 10-Year
“they are not obligated to maintain a 1-to-1 backing for all the metals “owned” by their clients”
Just a note that this does not apply to the Perth Mint’s unallocated.
I also think you need to differenciate between segregated allocated and unsegregated allocated a bit more strongly with respect of BV and GM versus AFE - they are not the same, see http://goldchat.blogspot.com/2009/04/gold-and-silver-how-do-i-own-thee.html
Hi Bron,
Thank you for your comments, and glad to learn that Perth Mint does ensure 1:1 backing for its unallocated accounts. This must be very reassuring for your clients.
My reviews of GoldMoney, BullionVault and AFE are based on my personal experience using their services for many years. I’m not sure if it’s a question of semantics, but these 3 service providers do not classify their accounts the way Perth Mint does (or as described in your article).
All 3 providers operate Allocated Accounts only, but instead of sub-dividing the Allocated Account into Segregated Allocated and Unsegregated Allocated, they merely provide clients (for GoldMoney & BullionVault) an online facility to select and register specific bars from their bar list once clients have sufficient bullion in their account for bar registration. Once registered, it will be equivalent to “Segregated Allocated” account as described in your article. AFE however does the registration (or segregation) of bars automatically upon each purchase. So for example if you purchase 500 oz of gold, they would automatically register and assign (segregate) one bar to your name while accounting for the balance (about 100 oz) in your allocated account as unregistered/unsegregated allocated bullion.
The process and fees for bar registration for all 3 service providers are clearly described in their respective detailed reviews under the sub-headings “Bar Registration” & “Fees”:-
AFE - http://politicalmetals.com/afe/
BullionVault - http://politicalmetals.com/bullionvault/
GoldMoney - http://politicalmetals.com/goldmoney/
A comparison table clearly identifies bar registration (or segregation) as a distinct feature and process. See http://politicalmetals.com/compare-afe-bullionvault-goldmoney/
As I’m not familiar with the way Perth Mint manages clients’ accounts, could you please clarify the following?
Going by your “strict definition of allocated, which is specific bars or coins in your name”, how does it work if I bought 500 oz of gold in an Allocated Account at Perth Mint? I mean what do you do with the odd ounces after segregating one bar? If you hold it as coins that don’t have serial numbers, how are they physically assigned to me?
Thanks.
With Perth Mint Allocated you can’t buy odd ounces - you have to buy whole units of specific physical product which is set aside in the vault.
I do have a bit of an issue with BV and GM using the word Allocated as to my mind and I believe industry practice is that Allocated means specific bars & numbers “allocated” to a specific client. The general BV and GM accounts are not Allocated in this sense, more pooled Allocated. This is not to say that BV or GM or AFE are not safe, it is just about being very clear as to what the investor is getting.
If a provider will not give you a specific bar number, or allow different sized coins and in addition, for example, specifically track that you hold 1998 dated 1oz Kanagroo Perth Mint coins, then they are not really offering an Allocated account in my opinion. This sort of tracking costs more than just maintaining a list of clients and a separate pile of physical bars against it.
It is not just semantics, but can be a material consideration for some investors. The reason some people want “true” Allocated (and pay for it) is that there is no delay in getting their specific metal out of the Depository in an emergency.
Hi,
There are two types of storage in GoldMoney. Both of them are “allocated storage”. “Allocated” is used here in the traditional way that term is defined in general commodity usage. Namely, when it is allocated, the vaulting firm providing the storage (or for example, the grain operator providing the silo) has no ownership interest in the asset being stored. Title rests with the owner of the asset, i.e., the customer seeking storage.
1) allocated and identified - it is possible in GoldMoney to own a specific bar and have your ownership of the bar identified by the bar’s Serial Number. Take a look at our gold bar list here https://secure.goldmoney.com/bar-list.php. You can skim through the different vaults and the different pages for the bar lists at each page. Wherever a Registration ID is provided, ownership of that bar is “allocated and identified” by the owner. No one has access to a Registered Bar except the owner, and these Registered Bars are consistent with the quarterly audits by one of the Big 4 accounting firms. Learn more about 100% precious metal ownership here http://www.goldmoney.com/complete-ownership.html.
2) allocated and undivided - this is storage where the title denoting ownership of an allocated bar rests with one or more of GoldMoney’s customers and is not a liability on GoldMoney’s balance sheet. Note that “pooled” does not apply to GoldMoney because it has a different meaning than “undivided”. Pooled does not convey ownership. Undivided means ownership, but what the customer owns is not specifically identified.
Regards,
Paul
Hi Bron,
I’ve requested GoldMoney and BullionVault to respond to your latest comments regarding the usage of the term “Allocated”. They’ve kindly provided their respective clarifications. For some unknown reason, BullionVault’s comments did not appear in here, so I’ve posted Adrian’s comments sent in by email below:
————- Quote ————-
Dear C.K. – yes, Bron Suchecki’s suggestion of “unsegregated allocated” works for BullionVault. Reserving specific bars is available if you hold multiples of 400-oz gold (or 1000-oz silver). But it doesn’t improve on your absolute ownership. Because all gold and silver at BullionVault is already fully allocated, and each client owns their specific weight outright, at the very lowest costs.
The allocation to BullionVault clients is clearly stated on the formal bar lists, from the independent custodian, which we freely publish on the web each day:
http://bullionvault.com/audit.do
This central register also proves each individual client’s holding is where it should be, with no scope for double-counting. BullionVault then makes the client’s ownership very clear in each of…
* its formally filed Balance Sheet
* its Storage Agreement with the custodian (ViaMat);
* its freely published Terms and Conditions online;
* and the client’s payment of a commercial safekeeping fee (which has previously proven decisive in proving the custodial relationship in law).
Under the law, BullionVault users own “an identified part of a reconciled pool of all users’ property.” As also stated in our Terms & Conditions:
“BullionVault undertakes that your gold will not be subject to any kind of lending, collateral or derivative transaction of any type and will remain your property in the safekeeping of ViaMat until sold or withdrawn according to your instructions received via BullionVault.”
http://bullionvault.com/help/terms_and_conditions.html
Thus the gold is fully allocated – i.e. physically delivered inside the vault; never lent or leased – but each individual user’s share is not then physically segregated, nor does it need to be. Because your metal is off risk for anyone else’s financial solvency. Should a customer choose to take possession, we can either get them a whole bar (if their holding is that size), or smaller units (coins, retail bar) to the full weight of their holding. We also have the option, of course, of cutting up large bars. All clients’ full allocation is all there inside the vault, after all, proven by the public Daily Audit and NOT on our formally filed balance-sheet:
http://bullionvault.com/help/GalmarleyAuditedAccountsOct2009.pdf
It’s delivery which gives you the protection you want from gold ownership. Delivery means you become the owner of gold. Thereafter you are not exposed to the bankruptcy of your supplier or your custodian. Were either to fail their liquidator could not touch your gold. This is the legal essence of employing a custodian to look after your gold, and not depositing it as a credit balance. Emergency or no, retrieving your property starts with knowing your property is there in full, and belongs to you.
Adrian Ash
Head of Research
BullionVault
————- End Quote ————-
Hope this clarifies how different parties use the term “Allocated”. Other terms used by the industry to further classify Allocated bullion include “Segregated”, “Registered”, “Identified”.
Regardless of the different terminologies and business processes employed to handle “Segregated”, “Registered” or “Identified” Allocated bullion by various service providers, the key and undisputed fact is that TITLE of Allocated bullion belongs to the Allocated Account holder rather than the service provider.
Some good points there by BV and GM. Undivided Allocated I like and I suppose it is consistent with the fact that Perth Mint has called its new product Pooled Allocated, as the specific bars backing the client liabilities are on balance sheet along with the liability.
Interested in your opinion……..I am BRAND spanking new to commodities, PM’s, especially gold and silver. I mean we are talking just days into understanding this industry so I may as well be a newborn child. Here’s the thing….I have been dealing with the same criminals in other industry’s for years that I have now understood have been controlling yours for years as well. Based on what I have seen from these same criminals here’s whats going to happen in your industry: These criminals know ALL ABOUT the fact that the price of silver and gold will increase. Thats why they have kept it a $5/oz for 20 years. They have hoarded every speck for decades. Now that the scam is coming to a close and “suddenly there’s no silver”….who do you think has it all?!! Its these same criminals for the last 20 years. They will sell you the idea that they “shorted”(100 to 1 or whatever) and there’s nothing to deliver. Thats the scam that people will then have to buy. Just like the real estate scam, no one will be charged and no one will go to jail. People will simply accept that they have been scammed(bought long) and take there lumps because theres nothing they can do. When the price of silver and gold go through the roof….who do you think will SUDDENLY have ALL the physical gold and silver? It will be the SAME criminals which got caught shorting in the first place. Remember they have been hoarding into their back pockets for decades. These criminals are always 2-4 scams ahead of the world. By the time the world is told to hoard silver, like now, its way too late. They already have it all. The only thing to do is to convince you that its gone and theres nothing you can do….while the price grows and you cant afford to buy any.
Hi Tom,
Welcome to the PM bandwagon. Never too late to join!
Very interesting theory indeed! I’ve to say that it’s a fraudster’s game plan I have not read about until now.
This sounds like a winner for them if in fact they have been working behind the scenes preparing for the introduction of a new gold/silver backed currency. They will emerge to be in control (again!) of the new curency after their game with the current fiat currency is over.
But I’ve never thought of it that way before, nor have I come across any data to support this theory, yet.
Assuming this is their game plan, wouldn’t it make sense to convert our fiat into metals now before it happens?
Going by current industry estimates http://www.sprott.com/Docs/MarketsataGlance/2011/0311%20Follow%20the%20Money.pdf there’s about 1 billion oz of silver bullion inventory. At current prices, it’s only a paltry $50B. If we include all known gold inventories (~2.2Boz), it will only come up to several trillions at today’s prices. Compared to actual currency in circulation and the hundreds of trillions in derivatives, they got to be playing at a valuation of gold and silver many multiples of today’s prices. My point is if indeed they’re going to reveal or unload their years of hording, it will be at much higher prices. Hence it’s not too late to start accumulating even at today’s perceived high prices compared to decades ago. Makes sense?
Dear Sirs,
Recently I got to know that Gainesville Coins is offering Security Storage service. Please see below the link:
http://www.gainesvillecoins.com/secure-storage.aspx
Would you mind to give your comments on this service compare to what Goldmoney and Bullionvault is offering?
Thanks in advanced.
The most important question to ask when considering using a particular storage service is “Who owns the title to the bullion?”.
Clause (2) of their Storage Agreement clearly states that it is a Segregated Storage facility where the title belongs to the customer, and that the assets are held based on a Bailor/Bailee relationship, as explained in the article above. Based on this alone, it is safe to use their service. GoldMoney and BullionVault are also offering allocated/segregated bailment-based storage services.
Other points to consider would then include storage fees, spread & commission (if you plan to buy and sell through them) and Reputation. I shall briefly discuss these issues below:
[1] Storage Fees
Gainesville specializes in smaller minted coins & bars while BullionVault, GoldMoney & AFE deal exclusively in larger LBMA good delivery bars. Due to this Gainesville’s storage fees are comparatively higher (especially for gold), and the difference can be significant when you’re looking at a large holding. For silver, their fees are very competitive. You can compare Gainesville’s fees to those of GoldMoney & BullionVault here.
It’s a great place to start. When your holdings gets bigger, the other service providers reviewed here may offer better value.
[2] Buy/Sell Commission & Spread
While Gainesville does not charge any trading commission, their quoted prices already include a premium. So, depending on the product type and quantity, you may be paying considerably higher compared to vendors who charge you a trading commission based on spot price (eg. GoldMoney).
A very useful feature of their online store is the feature to sort products by premium. A random check through their store reveals some excellent deals. For example, 10oz PAMP Suisse gold bars are offered at about 1.1% above spot and 1kg bars at only a 0.7% premium!
Their buyback prices for selected products are published here
The spread (difference between their sell & buy prices) for the 1kg bar is only 0.6%, while that of a more common 1oz American Silver Eagle is at about 5%. These are generally very low spreads.
It’s difficult to do a direct comparison with GoldMoney & BullionVault because it depends on your holding size and holding strategy. Based on their low premiums and low spreads, it looks like an an excellent place to start.
[3] History & Reputation
Based on Internet archives and corporate filings, Gainesville Coins Inc. started operation as a coin dealer in July 2006. Their current website does not have information on the history of their storage business, but based on archives, they did not offer storage services before July 2011. So it’s a pretty new service and obviously not much can be said about it.
The company is run by Michael Yaffe (President) and Joseph Yaffe (Director). Michael is associated with several companies, including El Dorado Discount Gold, Inc.
GoldMoney & BullionVault stands out in this area due to their long established history, very high web presence and high profile in the gold & silver community. The people behind GoldMoney & BullionVault are well known, whereas little is known (at least online) about the Yaffes.
Hope this helps
Hi CK,
Thanks for your comments above regarding Security Storage offer by Gainesville Coins, and yes the main reason I am interest with their storage is mainly due to they are offering segregated storage facility. Otherwise I wouldn’t bother to look into it.
I agree with your findings above. Due to certain reasons I can’t open an account with BullionVault and I just activated an account with GoldMoney recently. Due to my personal preferences I prefer Silver over Gold. I found the sales commission of 3.99% (below USD9,999.00) charge by GoldMoney is actually quite expensive compare to what Gainesville Coins is charging (even after taking the consideration of buy and sell spread). Most importantly, Gainesville is offering small size silver bars and rounds which GoldMoney does not have at the moment. The disadvantage of Gainesville Coins is that they storage fees is significantly higher than GoldMoney.
Thanks again CK for your input. It help me a lots.