Owning Gold Is One Thing, Storing It Quite Another

CNBC.com

As eager investors enter the fray of this modern-day gold rush, an important question arises: Where and how should gold buyers store the precious metal?

“There are only two ways to buy physical gold,” says James Turk, founder of GoldMoney.com. “Buy it and store it yourself, or buy it and have someone store it for you, which is what GoldMoney does. Each alternative has advantages and disadvantages, so everyone needs to weigh these and decide which alternative—or maybe both—works best for their own individual needs.”

Louis Palafoutas, a gold bullion trader with Morgan Gold who has spent three decades in the gold industry, says while some buyers choose to keep gold in a safe in their homes, others ask to have accounts set up at Brink’s or Delaware Depository, where the Comexand the Internal Revenue Service keep their gold.

“It goes from one extreme to the other,” says Palafoutas. “Some want gold delivered to an account they control, like their IRA. Then you’ve got the other extreme: People who are anti-government, who want to have gold in the event of gloom and doom, and they want it in small units because they believe they’re going to be buying groceries and gasoline with it.”

Weighing The Options

There are really only three ways to store your gold—keep it at home, use a bank's safe deposit box or pay a third-party storage firm.

Mike Clark, president and general manager of Diamond State Depository, points out the danger of investors storing gold bullion on their own.

“If you lose it, it’s gone,” Clark says. “It’s not like your stock certificate where you can pay an administrative fee and have it replaced. If you lose your 10-ounce gold bar, it’s gone. You can insure them under certain circumstances. We ship precious metals to people who want to bury it in the backyard, literally, or store it in their garage in a hidden place. They feel good about it because it’s within reach, but it’s fraught with all kinds of problems.”

Turk says another problem with storing gold at home is the illiquidity factor.

“To make it liquid, you need to return your coins and bars to a dealer to sell them, which is a hassle,” Turk says. “What is worse, even before the dealer accepts them, you may even need to get your gold bars refined so the dealer can verify the gold content, which costs money and takes time.”

For one, they are inexpensive. Boxes (most are five inches wide and 24 inches long) start at around $50 dollars a year. Mid-size ones (5 inches high) are about $100. The largest (10 inches high and wide) run about $200.

A key consideration, however, is whether the metal is conducive to a quick resale.

For example, gold bullion coins, such as American Eagles, which are guaranteed by the federal government, have inherent liquidity because they are bought and sold by coin dealers, banks and commercial dealers without question, says Clark.

“The coins don’t need to have an assay, something that certifies the gold,” he explains. “If you buy Eagles they’re very liquid, they’re internationally recognized. If you store them in a safe deposit box, you can be sure if you go retrieve them someday and take them to a coin dealer they will buy them over the counter, without exception.”

However, the safe deposit box option is not without its flaws.

The obvious one is access. Bank hours are limited, as is your opportunity to get to it.

"If there’s a huge market move on Friday afternoon and you’re at work and you go, ‘Oh my God, gold just went up to $120 today,’ you can’t get to the bank before it closes," says Clark. "You may wait until Monday morning to get your coins out of the bank to get to a dealer to buy them. That all takes time and the market move, whether it’s for you or against you, may evaporate."

There's also the matter of insurance.

“The bank doesn’t insure the contents of a safe deposit box," says Clark. "If you want to feel really comfortable and secure, you have to buy separate insurance, which can be expensive, and it’s hard to get for precious metals in safe deposit boxes. You also have the security risk going to and from the bank."

Finally, size can be an issue. If an investor chooses to make a large investment in coins, the holding could be bulky, exceeding the capacity of the ordinary box.

Storing your gold at home also has practical considerations, says David Small, a New Jersey-based gold-bullion buyer.

“If you buy a safe, you should buy it with cash, and install it yourself as best you can,” says Small, noting the fewer people know you are buying gold and storing it on your property, the better.

“If you are buying it because you are skeptical of mainstream financial institutions, you want it in a place where if something does go wrong, the government can’t confiscate it like they did in 1933,” adds Small.

While he started out purchasing gold bullion in bar form, Small says more recently he has been purchasing American Eagles and Canadian Maple Leafs because he believes “they are more fungible.”

Storage Option

The final option for storing gold is using a private firm, known as a depository.

Small sees the wisdom of that for those investors with larger holdings, especially if they want to spread their holdings among several countries.

Using a depository has become increasingly popular, says Turk. Five years ago, his firm GoldMoney.com was safeguarding $137 million of metal owned by 4,600 customers. Today, the firm is responsible for $2 billion in gold, silver, platinum and palladium, belonging to more than 19,000 customers in 87 countries.

GoldMoney.com allows customers the option to store their gold in London, Zurich and/or Hong Kong.

“So in addition to benefiting from secure, specialized bullion vaults that are insured, you obtain good geographic and political diversification for your gold,” Turk says. “Also, you have exceptional liquidity because you can sell your metal 24/7 and have the proceeds wired the same day to your bank account anywhere in the world.”

When considering storing gold in a depository, Clark says investors should always ask if their investment is being held on or off of the holding company's balance sheet.

“If their precious metals are being held on the company's balance sheet, they should understand that their investments are co-mingled with the assets of that company, and they will become general creditors in the case of the company’s bankruptcy or failure,” says Clark.

“In such a circumstance, investors will receive whatever portion of the company's total assets the bankruptcy court or ‘receiver’ may determine, which may very well be only a fraction of the actual market value of their precious metals, Clark adds.

“If held off the company's balance sheet, investor assets are held separate and apart from those of the company, and thus, they will not get tied up in bankruptcy proceedings should the company fail," he says.

In addition, Clark says investors should always know whether their holdings are insured and, if so, under what type of policy.

“Are their precious metals simply covered by a general liability policy of the company holding them, or is there a specific "all risk" custody policy in place, underwritten by a reputable insurer — like Lloyds of London — that specifically protects the precious metal of its customers?

Finally, investors should be certain their metals are in an account or sub-account titled in their name, so in the event a company fails its records will show who owns what.

Turks says one clear advantage of using professional storage is independent third-party audits, which confirm essential details and come with unlimited online access.

Clark also notes that investors can take delivery of their gold at any time. The precious metal can be delivered by armored car or shipped overnight. In addition, Clark says, gold can be posted as collateral to receive a loan, avoiding tax consequences of selling the commodity. Multi-redundant security systems also make depositories an extremely safe option, he notes.

The fee structure for storing gold in a depository is similar to purchasing any other financial asset.

Fees can range from 1/3 of 1 percent to 1.25 percent, depending on the depository and the account value, according to industry players.

Clark says at Diamond State, an account valued at $50,000 would incur an average storage fee of $375, or 0.75 percent. Firms calculate the fee daily based on the price of gold multiplied by the number of ounces in an account, multiplied by the percentage fee and divided by 365 (days) to determine the annual rate. Fees are also based on a sliding scale up to $5 million, the larger the account value, the lower the fee.

No matter which storage option investors choose, most agree peace of mind is worth its weight in gold.