Where Should You Store Physical Gold and Silver?

Americans are buying physical gold and silver, some for the first time. One issue that they need to resolve is where to store their gold and silver safely. This article will help investors deal with this issue.

The South Vietnamese refugee experience

When Saigon fell to the North in 1975, thousands of South Vietnamese escaped with little more than the clothing on their backs. Airlifted to US ships in the South China Sea or to the Philippines, or escaping by small boat, some were destitute while others did not come empty-handed. Many middle-class Vietnamese businesspeople had hurriedly sold some of their property for portable physical gold.

American gold buyers from Deak-Perera met them in Guam and at refugee camps at Camp Pendleton in California, Eglin Air Force Base in Florida, Fort Indiantown Gap in Pennsylvania, and Fort Chaffee in Arkansas. The dealers bought one-tael (1.2 ounce) .9999 fine gold ingots that the refugees had sewn into their clothing or carried in satchels, providing the cash they would need to start lives anew.

A long tradition of safe-haven gold ownership

Owning precious metals, both silver and gold, was the way affluent people throughout history kept and preserved at least part of their wealth. It was also the way that the less-affluent assured that they and their family could survive in case of their uprooting or other major disaster.

Perhaps you have noticed that whenever there is a severe crisis, especially in Europe or Asia, the price of gold rises on so-called safe-haven buying because people want to make sure that they have something that has universal value, that they can carry with them, and that will be accepted in exchange for necessities like food or safe passage in case the crisis turns to disaster.

Recently, European safe-haven buying of gold has been triggered by fear that deposits in European banks may not be secure because the banks are holding large amounts of sovereign debt of countries that may not be able to repay it. Undercapitalized banks are unsafe counterparties who are subject to bank runs and closures, whereas holding gold yourself in physical form entails no counterparty risk.

Safe-haven gold buying in America

The US has been fortunate that it has escaped foreign invasion in the two centuries since the War of 1812. This is probably the main reason that American families have no tradition of safe-haven gold ownership. A second reason is that the administration of President Franklin D. Roosevelt called in all privately held gold and gold coins in 1933 to give the government more flexibility in confronting the depression and the ability to finance the first of the large-scale government-administered entitlement programs, Social Security. Gold ownership was not permitted from 1933 until 1975, when FDR’s executive order was repealed by President Gerald Ford.

From the mid-1960’s on, many Amercans collected or purchased 90% silver dimes and quarters, which had been minted prior to 1965, as a hedge against inflation. A large number of these were resold in the great runup of silver prices in 1980, when the Hunts tried to corner the silver market, but bags of silver coins with a face amount of $1,000 are still held by many Americans for investment purposes.

Some coin dealers now offer 90% silver coins in smaller lots of $250 or $100 face amount, which are more convenient to store. Each $100 bag contains about 71.5 ounces of silver, costs not too much more than a 1-ounce gold bullion coin, and satisfies the need of safe-haven investors for something of value that they could use to barter with if necessary.

First-time gold and silver buyers

In the past few years some Americans have turned to buying gold and silver for the first time, some concerned about the erosion of their purchasing power as the dollar is devalued, and some concerned about the collapse of the US financial system in the face of sharply rising government debt.

If you are thinking about buying physical gold or silver now, several factors should be considered in deciding which form to buy and where to store it. First, why do you want to own precious metals? If you want a hedge against inflation, especially in larger amounts, then you may want to hold an exchange-traded fund (ETF) or other commingled ownership vehicle that holds physical gold in its name in London or Zurich. If you want the gold held in your own name, there are non-bank depositories that will hold your gold for you in these cities (see the TradersGame Investor’s Guide for more info).

If you are mainly concerned about the risk of government confiscation and you think gold held outside the US will be exempt (as it was in 1933), then you will want to store most of your gold outside the country.

If you are mainly concerned about hedging against a future disaster, then you will want some precious metal in portable physical form that you can keep nearby. One-ounce gold bullion coins are easy to store and easy to sell. A stack of ten 1-ounce gold coins is worth about $16,000 and takes up less space than ten silver dollars. A small quantity of 90% silver coins, as noted above, would be convenient for barter and is relatively inexpensive. A bag of $100 face amount of dimes or quarters is worth about $2500, weighs about 5 1/2 lbs and is smaller than a coffee mug.

Some American investors are deeply concerned about both an upcoming disaster and the risk of confiscation. They keep their gold nearby and go out of their way to make sure the government will never find out about it. They might even bury it (at night) in a deep hole in their garden, tossing one or two flattened aluminum cans into the fill above to throw off someone with a metal detector.

Bars of silver take up much more space for a given value of material than gold. A 100-ounce silver ingot weighs less than 7 lbs and has a value of $3500. A 100-ounce gold bar also weighs less than 7 lbs but is worth about $160,000 or so. It would take 40 or 50 100-ounce silver ingots to equal the value just one 100-ounce gold ingot. The space consideration is an important reason for preferring gold as a safe haven over silver.

These are the issues most holders are concerned with. Now let’s look at one of the main pitfalls in holding physical gold — becoming a general creditor of the guy you bought your gold from, something you want to avoid.

Allocated and unallocated accounts

Some sellers of coins or small bars will store your precious metals for you; some will only ship to you or to a depository you designate. Those sellers who will hold it for you may hold it in allocated or unallocated accounts. The distinction is very important.

An allocated account is one in your name. If bars are stored, they will be segregated and identified in a bar list supplied by the depository with the following information: refiner, bar number, gross weight, fine weight and assay (fineness). If coins are stored, they will be held in sealed containers with an identification number and description of coin type and quantity. The depository will charge you a fee for storing the bars or coins. The bars or coins are yours, and you can demand that they be shipped to you.

An unallocated account is one where the seller owns the bars or coins, and you have a claim against the seller for a specific weight or quantity of material. This is a very convenient and inexpensive way to hold material. There may or may not be a fee for storage. However, you are not the owner of physical bars or coins. You are a general creditor of the seller, so if the seller goes bankrupt, you will have to file a claim with a bankruptcy court to assert your interest in the account. In fact, you may have no assurance that your seller actually has any material stored. You may be entitled to receive periodic audit reports showing that material exists — but you still have no way to know that the same material isn’t claimed by more than one buyer.

If you are going to the trouble of buying (and paying a premium for) portable physical gold or silver, don’t store it with the dealer. Have it shipped to you for storage in a safe-deposit box (if you are not concerned about banks closing), in your own gunsafe (make sure it is fireproof) or elsewhere on your property, or ship it to a non-bank depository where it will be held in your name segregated in an allocated account.

There are several precious metals depositories in or near Wilmington, Delaware, that will hold and insure material in segregated accounts for individual customers. An advantage to many buyers is that Delaware does not levy a sales tax on material shipped to a Delaware depository, nor a personal property tax on stored material, nor a sales tax on storage charges.

If holding portable physical gold is not important to you, then there is another possible storage arrangement.

The shared-interest “gram-gold” hybrid arrangement

Some sellers offer a hybrid arrangement. They allocate bars to their customers in the aggregate but not to individual customers. Here’s why this makes sense if you don’t want portable physical gold. A standard bar of gold weighs about 400 ounces (called a good delivery bar). It is the delivery unit that the London gold price is for, and therefore does not cost a premium to buy, as a small bar or coin would. But 400 ounces of gold goes for around $550,000 or so, a bit more than most people can afford. So some bullion dealers buy 400 ounce bars, sell undivided interests in the bars, and allocate the bars to customers in the aggregate, which enables an individual customer to buy a small quantity — as little as a gram — at a reasonable markup or commission.

This is the general arrangement of an exchange-traded fund (ETF) that holds physical bars. The bars are purchased in the name of the ETF’s trustee for the benefit of the ETF’s shareholders and are held in a vault by the trust’s custodian. A shareholder of the most liquid gold ETF can buy as little as a tenth of an ounce of gold, and the shareholder of the most liquid silver ETF can buy as little as 10 ounces of silver. This is an excellent arrangement for shareholders. If the trustee or custodian goes out of business or bankrupt, the trust has provisions for their replacement without resorting to a court.

This is also the general arrangement of several bullion sellers — so-called “gram-gold sellers#8220;. Some dealers who allocate shared bars to their customers will sell as little as one gram — about 1/30th of an ounce. If the nominal owner is not a trustee, be sure to determine what would happen to customers’ gold (and yours in particular) if the nominal owner went bankrupt. It may be that you would need to wait for a court to order a sale for the benefit of the whole class of buyers.

Conclusion

It is important that the storage arrangement you choose satisfy your investment goals. As you have discovered in reading this, there are considerations that are different from those that affect buying stocks. There are also opportunities for profit and security that are unique to precious metals. But unless you have experience with precious metals, it helps to have a guide.

For more information on where to store physical gold, see our precious metals investor’s guide.

Precious Metals Investor’s Guide from TradersGame.com

To learn to invest in gold and silver, avoid pitfalls and save money by buying the form that is appropriate rather than one a salesman wants to sell you, read our precious metals investor’s guide, How to Buy Gold and Silver Today. Read it tonight and start protecting your purchasing power tomorrow.