KUALA LUMPUR, The Edge Malaysia, 17 October 2016 – Last year, the global demand for gold bars and coins hit the 1,011-tonne mark and were valued in excess of US$37.7 billion, according to the World Gold Council. In contrast, central banks around the world bought 588 tonnes (US$21.9 billion), or about 58% of the total demand. So, where do the other investors, presumably without a vault like central banks, store their gold?
Like cash, there are three main ways to store gold: somewhere at home, in a safe deposit box or in a precious metals vault. There are obvious pros and cons associated with each method. Let’s take a closer look.
The safety of hearth and home
Let’s start with the least secure method: in the house, be it in a safe or under the bed. Just as with cash and jewellery, many individuals like to store small amounts of gold at home for privacy or cost reasons. But frankly, the home is neither very safe nor very private.
Gold stored at home is susceptible to theft, either directly from the house or when the gold is being transported to or from it. A few years ago, my son’s mobile phone was stolen when he was standing right outside our house. But more importantly, the knowledge that a house stores significant wealth makes it a likelier target of crime.
Some may argue that there should be no reason for anyone other than family members to know that there is gold stored in the house. However, in today’s regulated environment, bullion dealers are required to keep records of investors’ gold purchases and sales for all but the lowest amounts. Therefore, in reality, the ability to keep gold transactions secret is limited.
Another critical disadvantage of storing gold at home is that it introduces illiquidity to the owner’s assets. This is something people are often unaware of. Because the gold is not stored in a certified and regulated environment, bullion dealers often require that the bars be refined and assayed again so that the gold content can be re-verified, particularly when large amounts are involved. The process takes time and involves significant cost.
In short, keeping gold at home — save for jewellery and trivial amounts — is not a good idea.
The safety of a safe deposit box
While significantly safer than the home, safe deposit boxes offered by banks or third-party service providers also exposes the gold to the risk of theft. Although the security of a safe deposit box depends on the service provider, the level of security is generally insufficient.
In April last year, The Independent reported that the Hatton Garden Safe Deposit Company, an underground safe deposit facility in London, was burgled and an estimated US$300 million worth of valuables stolen. Unfortunately, many customers had not insured their valuables as they relied solely on the security of the service provider to protect their wealth. To make things worse, these service providers typically do not insure the contents as they do not know what is kept in the safe deposit boxes. This meant that the victims in the abovementioned case were not compensated for their losses.
Gold stored in a safe deposit box suffers from the same illiquidity risk as home storage. Also, this is usually the most expensive method of storing gold as the annual rental of a safe deposit box ranges from US$100 to US$300.
While safe deposit boxes offer greater security than the home for small amounts of gold or jewellery, they are, for all intents and purposes, unsuitable for investment reasons.
The safety of a precious metals vault
Precious metals vaults used to be the exclusive domain of corporate clients and high-net-worth individuals. The main advantages associated with these specialist vaults are lower storage fees on a per ounce basis; adequate insurance to cover loss, damage and theft; and daily updates of the gold inventory in their custody similar to a daily bank statement.
More importantly, gold that is delivered to and continuously kept by recognised vault operators is trusted in terms of its purity because of its “good delivery” status. This means bullion buyers accept the gold bars without questions when they are sold in the marketplace. In contrast, gold that has not been continuously held by vault operators, meaning they have been kept at home or in a safe deposit box, is likely to be sold at a discount to their market value or needs to be refined.
Up until recently, the average retail investor did not have access to these vaults. However, the creation of partial ownership of standard gold bars has allowed retail investors to enjoy the benefits that were previously only available to a privileged few. From these perspectives, it is clear that bullion is best kept in a precious metals vault.
The safety of … the ground?
Some people have been known to bury their gold. In 2014, a Californian couple found gold from the 19th century Gold Rush buried in their garden. It was valued at US$10 million.
The fact that the gold had been buried for so long is itself a cautionary tale — it is possible to hide your gold so well that you cannot find it. Nevertheless, regardless of the storage option, the most important consideration should be peace of mind as this is worth its weight in gold.