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Where do you keep your Gold?

11 December 2012

With Barclays opening another huge institutional gold vault on the outskirts of London, Metropolitan Safe Custody’s CEO Christopher Barrow examines the options for individual gold investors and collectors

Individuals are clamouring to buy gold. Many find it hard to articulate their reasoning, except to express their wish to buy insurance against a collapse of the financial system. It is less about valuing gold as an investment and more about fear. Even professional investors admit that gold is unanalysable with less than 10% of annual mine supply used for industrial purposes. Gold is regarded as a form of portable wealth, which makes the metal much more akin to money than a traditional commodity. Analysts and economists spend their time studying the relationship between gold and global money supply, as well as major supply-demand factors, such as the buying behaviour of the Asian central banks. However, it is generally accepted that even the experts do not really know what drives the gold price, let alone how to ascribe a value to this most unusual precious metal.

Individuals around the world have different appetites for gold, though instinctively people increase their purchases of the metal during periods of uncertainty. China and India have a well- known cultural penchant for gold jewellery, on top of which their burgeoning middle classes have substantially increased ‘investment’ demand for gold bullion. The Americans have long been passionate gold bugs, preaching Armageddon during periods of dollar weakness and often citing Franklin Roosevelt’s mass confiscation of gold in 1933. In Europe, investment in gold remains substantial and is not just driven by Euro uncertainties, but also by high taxes (not least in Germany and France) that tend to increase individual propensity to buy gold to avoid the tax net.

One of the biggest headaches for individual investors is the issue of safe storage. Most people still buy gold coins and put them in their home safe or even under their beds! Institutional or very wealthy investors tend to use the facilities of the large banks, for example the huge new gold vault recently opened by Barclays. That is fine if you are a client of Barclays and rich enough to buy the London Standard 400 troy ounce bars at £430,000 each! What options are available to most individual investors? Given the declining availability of safe custody facilities amongst the major retail banks, the answer is that there is an acute shortage of capacity in the UK. In the growing absence of a service from the banks, an individual’s only option is to find a reputable independent safe deposit facility with spare capacity and in the right location. Metropolitan Safe Deposits is in the fortunate position of owning substantial vaults in the heart of Knightsbridge and St John’s Wood, both of which still have the capacity to offer up to 20 different sizes of safe deposit boxes. These two branches have been offering a discreet service for investors in gold bars and coins (as well as jewellery, antiquities etc) since the mid-1980s.

The beauty of depositing gold into a safe deposit box is that, being a remarkably compact store of value, it is very inexpensive. For example, you can put hundreds of thousands of pounds worth of gold bars into a box costing little more than £100 per annum. Furthermore, since the theft of bullion from vaults is extremely rare, insurance cover will almost certainly be cheaper than household insurance cover. One important point when storing gold in a vault is to secure “ownership” on (what is called) an “allocated” basis. For substantial investors, this can be arranged through the operator of a specialist gold vault. For investors or collectors of small gold bars or coins, the best option is to hold the bullion in a safe deposit box, preferably in a convenient location to facilitate owner visits (which is not normally offered to customers of specialist gold vaults).

The reason for depositing your gold on an “allocated” basis can be explained as follows. There is a fundamental 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. Should the bank go bankrupt, you become a creditor in a long line of creditors. If, on the other hand, you deposit “allocated” gold, such as with Metropolitan, it becomes a custody arrangement. If Metropolitan goes bust, you can walk into our vault the following day and pick up your gold.

Many investors are not only increasing their allocation from traditional asset classes (such as equities and fixed income) into gold, but they are also diversifying their gold exposure. Individuals are spreading their investment across listed gold shares (indirect investments), exchange-traded funds (paper gold) and physical holdings. In periods of economic instability and currency crises, the demand grows stronger for all types of gold investment and, in particular, for bullion. It has also become increasingly evident that investors are requesting smaller units of exchange. Small bars and coins are growing in popularity. Individuals are now buying larger quantities of coins and bars of different denominations as a hedge against financial collapse. As one sophisticated investor told us the other day, “I am investing nearly a million dollars in gold and I want to have a significant portion invested in small denominations of bars and coins so that I can pay the wages and buy food for the family”. It is not just in the United States that ordinary individuals want an alternative exchange mechanism to cash. Whether Armageddon-type predictions are ever borne out or not, the strong demand for safe deposit boxes in the UK looks set to continue for the foreseeable future.