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Why store your gold in a safe deposit box?

8 April 2014

Christopher Barrow of Metropolitan Safe Custody explains why individual investors and collectors increasingly keep their gold bars and coins in a safe deposit vault

When individual investors want to buy gold bars or coins from an online 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, but it is also an issue of safe storage, proper insurance cover and “ownership”.

Online bullion dealers offer a delivery service normally to a home address. The problem is where to store the gold (or silver) at home. The most common recommendation is to install a home safe and an alarm system. More elaborate measures include safes under the floorboards, hidden storage compartments and secret bookcases. All these ideas are sensible precautions against the average, opportunistic burglar.

However, burglars are becoming more sophisticated and often target specific communities, such as Asians. The effect is that the “value” of having physical possession of your bullion at home is often “outweighed” by the constant fear of theft. That is one reason why families are increasingly turning to independent vaults to rent safe deposit boxes. You maintain the benefit of having physical possession of your gold and, at the same time, you can relax in the knowledge that your assets are kept in a secure vault.

Many online bullion dealers now offer an option of “secure gold vault storage” in recognition of the fact that many customers have growing concerns about storing bars and coins at home. This option does provide a sensible solution to the risks of home storage. However, it is not possible to visit these secure storage facilities, where customer access is prohibited. These secure gold vaults are designed for professional investors and traders. The warehoused gold does not normally move, despite multiple changes in ownership. You can request withdrawal of your physical gold, but there is normally a substantial surcharge for this service.

For the individual investor, there are essentially three different “delivery” models in the marketplace. There is the online bullion dealer that offers an integrated trading and storage service, which is particularly suitable for professional investors and traders. Secondly, there is the online bullion dealer 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 vault. 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. Most investors do not consider the full implications of allowing their bullion provider to store their precious metals in a communal pool. If the company goes bust, each investor becomes a creditor. Furthermore, it is highly unlikely that the entire stock of bullion would be insured to its full market value.
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.
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 (according to one well-known gold supplier) only 4% of gold is regularly traded.

All three of the above examples (communal storage, fraudulent operators and paper metal programmes) 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 or silver; in other words, to secure ownership on an allocated basis in a professional vault or by storing it yourself in a rented safe deposit box. 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. If, on the other hand, you store “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.

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. Metropolitan Safe Deposits even provides clients with £10,000 of complimentary insurance on each rented box. Unlike the banks, our 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 our viewing booths), you can view your latest gold bar or coin acquisition at the same time as returning your jewellery after a family wedding or depositing your title deeds for your property. You can view all your valuable possessions in one safe place until the next time you visit.