July 5, 2022

Precious Metals Storage – Everything You Need To Know But Probably Don’t

By Nick Barisheff:

Worldwide economic uncertainty has created a growing interest in precious metals as a way to preserve wealth. Today, global risks for investors include currency devaluation, sovereign debt defaults, bond market collapses and stock market losses, all underpinned by ever-increasing government debt.

For protection from impending economic Armageddon, investors are turning in increasing numbers to the traditional safe haven of precious metals. Unfortunately, many today don’t know how to purchase or store bullion, and consequently may find themselves as vulnerable to financial collapse as those who didn’t purchase any bullion at all.

This increased interest in precious metals as portfolio insurance has spawned a new generation of precious metals-based financial products, many of which are paper proxies or derivatives of bullion. There are even unregulated markets for the exchange of “digital gold.”

A clear case for transparency

In 2007, former Bank of Canada Governor David Dodge gave a speech entitled “A Clear Case for Transparency”  to the Canada-UK Chamber of Commerce. “…[I]investors will have to take on more responsibility for diligent research,” he said, “so that they can better understand the nature of their investments and demand greater transparency where it is now lacking … they must do their own homework and make a concerted effort to understand what they are buying.”

Most investors do not read the fine print of the agreements they sign with respect to financial investments; they make assumptions, but do not definitively know if they own actual bullion. Some are attracted to certain bullion investments because of low premiums and low storage fees, but when was the last time Wall Street and the major banks gave the investing public a deal?

Investors who don’t do their homework may be dismayed to find that their safe haven asset has proved to be anything but. These same people perform rigorous due diligence when purchasing a home, car or boat, demanding that they have clear legal title to the asset in question. The same attention to detail must be paid when investing in bullion.

The most important concept to understand is that a financial institution CAN sell an investor’s bullion if the agreement states that it can. Banks are not raiding allocated accounts; rather, they are following the provisions of the contract, in which the bullion is not allocated despite an investor’s assumptions.

There does appear to be cause for concern regarding the transparency of bullion products. As reported by the economic news website ZeroHedge, financial services giant Morgan Stanley paid out $4.4 million in June 2007 to settle a class action lawsuit brought by clients after the firm charged them to “buy and store” precious metals, but did neither .

Similarly, a class action lawsuit filed in New York’s federal court accuses UBS Financial Services of misleading silver investors, and charging them storage fees for metals that were never purchased, let alone allocated or stored for them.

A larger problem has been brewing for several years now, that of exchange-traded funds (ETFs). These are generally viewed as a low-cost panacea that replaces almost any investment strategy, including the purchase of gold bullion, and they are giving investors a false sense of security.

False sense of security for ETF investors

ETFs started as equity index vehicles, in which brokers acting as Authorized Participants borrowed shares from institutions, hedge funds, mutual funds or their clients’ margin accounts to contribute to the Origination Basket of shares. They received ETF shares at Net Asset Value (NAV) in exchange, and sold them to investors at NAV – keeping all of the money. This is standard practice, as brokers have always been able to borrow shares from clients’ margin accounts for the purpose of shorting or for lending to other brokers.

Essentially, many ETFs hold assets that have been borrowed. Because there are no specific prohibitions to prevent the same practice from being used in precious metals ETFs, the same methodology is likely being used. Many investors are attracted by the low management fees offered by precious metals ETFs, but few understand the problems that may arise when more than one person has claim to the same asset.

ETF-based financial crisis could make 2008 look like child’s play

This ETF structure will work during normal market conditions. However, it may result in losses and disputes if the Authorized Participants, acting as market makers, become insolvent or step aside during a precipitous decline. If a bank or brokerage firm becomes an insolvent Authorized Participant, either the lender of the assets or the ETF shareholders will suffer losses. During a market crash, existing holders may be unable to sell their ETF shares.  Although this possibility was considered remote when ETFs were created, the recent and recurring failures of banks and brokerage firms make these concerns far more real .

The bottom line on ETFs is that they are tracking vehicles with multiple claims/counterparty risks on their assets as well as their shares. As debt-based stress on the global financial system continues to build, the flash-crash of 2010 may well have foreshadowed an ETF-based financial crisis that will make the subprime mortgage crisis of 2008 look like child’s play.

Own bullion with clear title

When we at Bullion Management Group sit down with clients seeking to own bullion, we present them with our Precious Metals Pyramid Chart. Moving up the pyramid increases risk; moving down the pyramid increases safety. A portfolio’s foundation should consist of physical bullion owned outright. Farther up the pyramid are proxies of bullion in one form or another that are more risky and often less liquid; in other words, the opposite of a safe haven asset you can count on in times of financial stress. Bullion should always meet two criteria: It should not be someone else’s liability, and it should not be someone else’s promise of performance.

To establish a physical bullion portfolio foundation with metals that are stored on an allocated and insured basis, one that will protect against what could be called ethical mayhem in today’s financial sector, investors must, as Governor Dodge advised, make a concerted effort to understand what they are buying. While reading legal documents and prospectuses is tedious, the truth is in the fine print and investors must do their own due diligence, and beware of complex investment structures.

Demand documentation that transfers title directly to the purchaser

For a bullion product, be it a fund or actual bullion bars, to earn its place as the foundation of a portfolio, the bullion purchaser must demand documentation that legally transfers title of specific, physical bars directly to them. Do not accept IOUs, paper proxies or derivatives. It is important to read the purchase documents carefully to ensure they convey legal title. Only after the purchaser has legal title can they enter into a binding custody agreement for bullion storage on an allocated, insured basis. In that agreement, the purchaser must be able to identify all terms and rights concerning insurance and secure, allocated storage.

Proper insurance and allocated storage in a credible, guarded vault costs money, so steer clear of bullion products promising low fees. If the deal appears too good to be true, the physical bullion may not exist. What the investor may have is paper bullion that will not offer protection when it is most needed; they may simply be an unsecured creditor of the dealer. It is hardly prudent to be tempted by low storage fees that will save a fraction of a percentage point while risking an entire bullion holding. Short cuts and penny pinching are inadvisable strategies for any asset intended as an ultimate safe haven of wealth protection.

Home storage not worth the risk of invasion or physical assault

Many people think that storing their bullion at home is a good way to economize on physical bullion storage fees, but be aware that any sizeable amount of home-stored bullion will not be covered by a household insurance policy.

Keeping a modest—and secret—stash of small-denomination gold or silver for barter purposes is recommended in the event that ATM machines aren’t working, or a ‘bank holiday’ is announced. This may seem like an excess of caution until you consider that, earlier this year, the Bank of Italy authorized the suspension of payments by Bank Network Investments Spa (BNI) without first advising depositors .

Unless absolute secrecy is maintained, home storage means putting yourself and your family at risk of a home invasion. There has been an increase of home invasions in England during Asian wedding season, when gold gifts are stored in homes, and street gangs and professional thieves are only too happy to relieve people of their precious metals .

Even in peace-loving Canada, a British Columbia man lost his life savings of $750,000 in silver bars to knife-and-gun wielding thugs who arrived at his door disguised as police officers. When he let them in, the ‘officers’ forced him to open his vault and stole the silver . For any sizeable amount of bullion, home storage is clearly not worth the risk.

Many precious metals dealers do not trust banks for storage, and prefer private vault facilities. They may rethink this approach on reviewing a British case where authorities raided three private safe deposit box centres, and opened 6,717 private boxes . The owners of the boxes were required to provide proof of the contents of their box before their possessions were returned. Most could not do so, and much of the cash involved went missing while other items are in dispute. The ensuing litigation will likely last for decades; in the meantime, those who stored bullion in their boxes have been relieved of their metal, and may only receive compensation in the amount of the value of the bullion at the time of the raid.

Another consideration is that safe deposit box contents cannot be insured, and there is no proof that anything is actually in the box. Investors who are still interested in private vaults or safe deposit box centres should perform due diligence on the financial condition of the operator and the owner of the vault, since stored assets may be at risk in the case of a private vault’s insolvency.

Storing bullion at home, in a safe deposit box or in a private vault is another form of false economy, wherein investors put their safe haven asset at risk to save a small amount in storage fees.

LBMA bullion in LBMA member vaults

Another important aspect of due diligence for a proper foundation of wealth preservation is the assurance that your bullion is in the form of Good Delivery bars, and stored in the vault of a London Bullion Market Association (LBMA) member.

The LBMA is a wholesale, over-the-counter market for trading gold and silver. Its members include the majority of the bullion banks that hold gold, plus producers, refiners, fabricators and other traders throughout the world.

The reason for insisting on LBMA bullion is that it assures the purchaser of the quality and fineness of the bars. Once gold is outside a chain of integrity such as that of the LBMA, it may need to be re-assayed before it can be sold. This prevents gold-plated Tungsten bars from entering the chain of integrity. Re-assaying is time consuming, engenders extra cost and once again defeats the purpose of a safe haven store of wealth that offers efficient liquidity.

We constantly hear stories of discount bullion, or bullion sold at no premium to the spot price. The likelihood that this is pure bullion from an ethical source is slight to none.

In case of fire, you need an extinguisher, not a picture of one

Bullion demand is clearly growing as both sovereign nations and the world’s largest financial institutions buckle under the burden of unserviceable debt, leaving helicopter-loads of new money printing and associated currency devaluation as the only way out.

Investors can protect their portfolios by purchasing physical bullion. Just as with any large asset purchase, demand documentation that confers legal title to the bullion you are purchasing, review a written custodial agreement that specifies insured, allocated storage without giving the custodian the right to deal with the bullion in any way, and insist on Good Delivery bars.

When the next financial firestorm erupts, you need real, physical bullion and not a paper proxy; just as in a fire you need a real fire extinguisher, not a picture of one.

Nick Barisheff is President and CEO of Bullion Management Group Inc., a bullion investment company that provides investors with a cost-effective, convenient way to purchase and store physical bullion. Widely recognized in North America as a bullion expert, Barisheff is an author, speaker and financial commentator on bullion and current market trends.  His first book, $10,000 Gold: Why Gold’s Inevitable Rise is the Investors Safe Haven, will be published in the fall of 2012. For more information on Bullion Management Group Inc. visit: www.bmgbullion.com.

Comments

  1. Some sagacious advice in this article.

    As the legendary Jim Sinclair once said “If you don’t hold it you don’t own it”

    Many today only want to hold physical coins and bars or allocated bullion in a secure vault.

  2. Goldbull says

    Precious metals in secure vaults can be stolen or confiscated too. Having you precious metals in a “supposedly” secure vault is really no more safer than having it in a safe deposit box at a good sound local bank. Sorry but if things turn out to be as bad as some seem to think just try to get your precious metals from a secure vault or anyone else that is holding your precious metals such as BMG. All they are trying to do in this article is to promote their product. And as with a lot of sales pitches they make their product sound better than it is and the competition to sound worse than they are.

  3. Just to clarify and add to what I said in my previous post. Virtually all bank safe deposit boxes are as secure as any “secure” vault or storage facility like BMG as I will show. And after checking out safedepositboxinsurance.com and doing some investigating, there is no real need to get insurance for the precious metals stored in your safe deposit box. There are about 7000 banks in the U.S. of which there are about 90000 offices or branches. Of these 90000, only about a dozen or so catch fire in which they are heavily damaged or destroyed each year. Some of these banks were destroyed simply because they did not have a sprinkler system or because the bank was located in an area that did not have an adequate fire department. And even then, from the several accounts that I read, the vault and the safe deposit box contents were unharmed. So there is no chance that your precious metals are going to be melted in a bank safe deposit box that is inside a vault if in the very rare event that your bank burns down. Now what about theft and burglary. At safedepositboxinsurance.com they state that on average there are approximately 5000 bank robberies and burglaries annually. Yes and virtually all of them are robberies where the robber demanded money from a teller or in much rarer instances where a burglar broke into a bank and pried-open the cash drawers and stole what they easily could take. It is a very, very rare occurrence that the contents of a bank vault are stolen. Probably about one in a million. But what about earthquakes, hurricanes, flooding and tornadoes, oh my. First off the vast majority of banks are not even at any real risk for any of these events. And even in rare occurrences when banks were severely damaged or destroyed by an earthquake, tornado or hurricane their vaults were still intact. I did read of a rare instance where a bank’s security system was crippled during the Japanese earthquake and subsequent tsunami which then caused the bank vault door to be open. However in other rare instances of banks damaged by earthquakes the vaults were intact. So bank vaults are certainly no less secure than “secure” vaults or a “secure” storage facility. I am not saying that all banks and their security systems are equal and that you should put your precious metals in just any old bank without doing a little homework. I am also not referring to banks in some foreign countries especially third world countries. The only real reason someone may not want to put them in a bank safe deposit box but instead have them in a “secure” vault or storage facility like BMG is if you have a large amount in precious metals, which very few people do, or maybe if they live in southern California and would be more at ease if they had their precious metals secured outside that region.

    Now some people say that they would never store their precious metals in a bank safe deposit box but would instead have them in their home. That way they could have better access to them and also to lessen the possibility of confiscation by the government, similar to what happened in 1933. Now while it is true that having precious metals in your home does give you better access to them and would make it harder to be confiscated by the government than having them in a safe deposit box, it greatly increases (relatively speaking) the potential risk of theft even if you have a good safe in your home. And for those that do worry about the rare possibility of confiscation of their precious metals by the government, the last place you would probably want them located in is in some “secure” vault or storage facility, this would include where gold and silver Etfs have their metals stored, since that would surely be the first place the government would look before they would take the time confiscate someone’s safe deposit box.

    So I believe the best place for the vast majority of people is to store their precious metals in a safe deposit box at a good sound local bank and only remove them if the need arises.

    And as for insurance from places like safedepositboxinsurance.com, they only cover loss due to natural disasters, terrorist attack or act of war which really has about a zero percent chance of happening. I am not talking about the odds of those events happening just the odds of suffering a loss if they did happen. They also cover loss due to burglary or robbery but only if there are signs that your safe deposit box was forced open. If you go into your safe deposit box and for some strange reason your precious metals are gone and there is no evidence of a forced entry then the loss is not covered. Also about a zero percent chance of your box being forced open.

    • Thanks for the in depth research you presented. How to best store precious metals is probably one of the top concerns of PM investors. Information like this is very helpful.

  4. Your welcome, admin. After spending time doing research on this subject I feel even more at ease about using a safe deposit box. However I now have a desire to sit down with a manager of my current bank and talk about how secure the bank and vault are. I have no doubt since it is a branch of a large bank that it is just a secure as the typically bank vault but I am still curious about it. Luckily for me my bank is only 1 mile away and since I live in the suburbs of a moderate size city we have good fire and police departments. Also I am not in an area that is prone to any natural disasters. However for those people who live in an isolated or very rural part of the country I can see why they would consider hiding the precious metals somewhere on their property.

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