How to Own Gold: Private Vaults vs. Commercial Banks
The superior approach to precious metal ownership is via privately owned physical metals of the highest purity held in segregated/personally-named accounts and stored in the most trusted private vaults situated within the safest sovereign jurisdictions.
There is a human as well societal presumption of safety in numbers, which includes an almost unconscious faith in the leading and seemingly “too big to fail” commercial banks and their highly-credentialed overseers—from the Bank of International Settlements and the IMF to each of the world’s many central and commercial banks.
Unfortunately, those very same banks have been disappointing and mismanaging their clients (and global financial systems) with headline-making consistency for years, as the Great Financial Crisis (GFC) of 2008 or the recent currency, inflation and debt crisis since March of 2020 or the fall of names like Silicon Valley Bank or Credit Suisse have made openly clear.
In short, for those trusting familiar banking names (rather than blunt banking facts) for purchasing and then storing their precious metals, we warn that they are doing so at great and quantifiable risk.
Here’s why.
The Allocated vs. Unallocated Shell Game
Many well-meaning and high-ticket private bank clients will be warmly welcomed to open bullion accounts at Bank A or Bank B, C, or D etc. In fact, private bankers from JP Morgan to HSBC will often sweeten the deal by charging only a “general fee” that foregoes additional storage costs to give their private clients the impression of a special service/fee advantage.
Modern banks, however, are not in the silver and gold storage business—they are in the credit and fee-generation business. They make their margins executing paper transactions within a carefully downplayed fractional reserve banking system in which depositor/client money is immediately re-invested and grossly levered at considerable risk rather than carefully held for immediate liquidity. The Great Financial Crisis of 2008 or the banks runs of 2023 are an easy, but by no means sole, reminder of such risk.
Gold storage, however, is a lower margin business. Thus, hardly any of the major commercial banks manage their own vaults; instead, they sub-contract the work to intermediaries while leveraging and re-hypothecating the metals allegedly held on the books for their clients. Hence, the reason there’s no additional storage fees is because there’s no actual marked-to-book gold or silver to store within that account.
The official term for such gold and silver ownership is “unallocated,” which is merely a polite manner of saying “unavailable.”
Unallocated Bullion—No Safety in Those Numbers
Stated bluntly, commercial banks are fully and legally permitted to place client precious metals in unallocated paper/transactional (i.e., levered accounts), which despite Basel III, are still very much in vogue. There are no gold bars or coins with the client’s private or institutional identification numbers directly assigned to a specific bar waiting for delivery when needed. This makes the client an unsecured and non-priority creditor to the bank rather than a direct owner of the precious metals.
In the real event of another banking crisis, bank holiday, run or depositor-freeze which could occur for any number of increasingly evident reasons/scenarios, bullion clients will be standing in line behind other bank creditors rather than taking immediate delivery of their gold and silver when most needed. Furthermore, should the bank itself fail, as evidenced by the Lehman’s of the past and the Credit Suisse’s and Deutsche Banks of the present and future, gold and silver clients will be at particular risk of failed, delayed and/or partial delivery of their bullion assets.
Morgan Stanley’s “silver program” had no silver precisely when clients needed it the most. Similar delivery failures occurred at HSBC in 2008, when HSBC closed its retail vaults, requiring gold clients to wait months for actual delivery.
Today, levels of bank leverage in the US are 10X; in the EU, the leverage is 20X.
Given these objective rather than sensational risks and prior delivery failures, an increasing number of sophisticated bank clients have therefore requested that their banks provide them with what they believe are much safer “allocated” bullion accounts.
The Allocated Bullion—Safer in Theory, but Unsafe in Practice
Unfortunately, however, even the more reputed “allocated bullion accounts” at each of the world’s major commercial banks are riddled with risk. These accounts are managed by 3rd-party custodial vault contracts and intermediary middleman, which means even the “allocated” metals are passing through a daisy-chain of counterparties. The ubiquitous use of such middlemen and third-party custodian/vault services creates a number of problems.
First, there is the inherent counterparty and operational risks associated with the potential failure, insolvency or mismanagement of any of the intervening middlemen, custodians and sub-custodians—from outright fraud to inadequate (i.e., loophole-heavy) insurance coverage, as the 2008 crisis reminds.
Secondly, the number of intervening parties between the client’s account and the final vault (which can change without client knowledge) means the bank client cannot speak to (or access) the vault directly in the midst of a crisis.
Thirdly, even in an “allocated bullion account” wherein commercial banking clients are promised direct ownership of say 100 ounces of gold, those 100 ounces are often part of (i.e., comingled with) a larger 400-ounce bar of which the client only owns a ¼ interest/claim. How long do you think it will take to get that shared, 400-ounce bar refined to ensure immediate delivery/liquidity of the 100 ounces which the client owns and needs?
Segregated Private Bullion Accounts—The Superior Option
For sophisticated (i.e., serious) precious metal investors, segregated accounts held outside of this openly fractured banking system are the superior option. Unfortunately, not every private and segregated bullion account service or vault is the same. Most bullion banks, especially in the EU, don’t even offer segregated bullion accounts.
The Key Considerations in Selecting a Private Bullion Vault
When selecting segregated bullion accounts in private vaults, the key and primary considerations to tackle first are jurisdiction and vault reputation.
1. Jurisdiction
One must select a sovereign jurisdiction with the best available laws and historical reputation for investor protection, be they foreign or domestic. Given that many precious metal realists hope for the best yet prepare for the worst, they further recognize the admittedly real possibility of confiscation risk (outright or tax-based) in the otherwise unwanted yet real event of a shock to the global monetary system. In the event of such confiscation, holding physical metals outside of a government-controlled banking systems in jurisdictions where client privacy is protected, provides critical time and protection to segregated bullion account holders.
2. Private Vault & Service Reputation
As to private vaulting services, no two are alike and informed investors must carefully consider the following factors.
–Security
It’s equally critical to select a private vault service which has the most reputable gold storage history as well as military-grade security systems, addressing everything from fully safe-guarded (backed-up) client data, direct 24/7 access and IT protocols against malware to protect against natural and military disasters or even EMP threats. Investors, moreover, should ascertain that the private vaults and service providers are storing actual metals as opposed to mere “contracts on demand” for the same.
-Ownership Structure & Exclusive Focus
Unlike banks, the most reputed service specialists for private, segregated and vaulted gold storage are exclusively engaged in that service, and that service only. In selecting segregated, private bullion services, investors should also confirm that the wealth advisory service is fully-owned and independent, as opposed to being a subsidiary of some larger, and potentially compromised entity.
-Liquidity Options
For larger accounts, you will also wish to work with private bullion storage providers who offer instant liquidity options for two-way transfers in all major currencies in the event you chose to liquify all or a portion of your metal assets into actual currencies (of your choice) when and if needed.
-Enterprise Solvency
It is equally necessary to consider the same insolvency risks which prompted similar concerns for avoiding traditional commercial banks. It is critical to first understand and confirm the service’s own, and hopefully robust, balance sheet. Ask and you shall (or should) receive.
-Fully Insured or Just “Insured”?
Fully insured bullion is the only bullion worth holding in private vaults, but look carefully at the fine print. Is the bullion insured against mysterious disappearance? Are you, the client, added as a loss-payee, which means are you (or just the vault or client representative) the ultimate insured party? What are the coverage exclusions? The coverage maximums? Who are the underwriters? Lloyd’s or someone you’ve never heard of? Is the transporting of the metals to or from your vault fully insured as well, and if so, by whom and how much?
-Metal Purity
Traditional bullion banks may seem like the safest source of authenticated precious metals with clean chains of integrity, but counterfeit gold is an issue for which even JP Morgan, for example, is all too familiar…Sophisticated bullion investors should work only with private vaults and services that acquire client precious metals directly from the most reputed sources and refiners; greater than 70% of all gold bars worldwide are in fact refined out of Switzerland.
-Transport
Secure and managed delivery of client precious metals regardless of one’s domicile nation is another integral component of any credible private vaulting service, and the premier services will engage only the most reputable and fully-insured carriers (i.e., Brinks, Loomis etc.).
-Bullion Storage Fees: No Place for Skimping
For the manifold reasons discussed above, superior private vaulting of segregated bullion is typically priced higher than the fees of traditional bullion/commercial banks.
Each private bullion service will charge based upon the extent of its services (vault quality, logistical sophistication, transportation services, liquidity capabilities, insurance range, refiner relationships etc.).
Although it’s often true that “you get what you pay for,” the openly higher fees for higher security and superior service can only be justified if the foregoing service advantages are verified. Superior vaulting and security are costly; anyone charging nominal fees is either skimping on these two critical areas or subsidizing the cost from trading activities rather than safe gold storage.
Given the immense importance of wealth preservation via carefully owned precious metals, higher fees more than justify the higher service and security of the premier vaulting services.
