When you choose to invest directly in any commodity, that asset has to be stored somewhere. Gold and other precious metals are no different. We’ll discuss gold here, but the basic principles apply to any precious metals investment.
When you invest directly in physical gold, you take on several risks in addition to a decline in the spot price of gold:
- Physical loss: You just forget where you put it.
- External theft: A burglar or maintenance worker could find your gold and steal it.
- Internal theft: A family member or close friend could steal it.
- Government confiscation
Because gold is so valuable per ounce, without taking security measures, gold is also trivially easy to steal. By slipping just a single kilogram of gold into his or her pocket, it would be easy for a thief to walk away with more than $54,932 worth of gold. That’s based on the $1,708 per Troy ounce spot price listed as of this writing in early May.
And while outright theft has historically very rare, there have been incidents of thieves stealing millions in gold coins in a single stroke.
So it makes sense to use some additional security measures.
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Storing Your Gold
Most of us don’t have the option of depositing our gold holdings directly at Fort Knox. So you’ll have to choose an option that is short of that, while balancing security against cost.
Here are some options, from most secure to least secure:
These are private companies that build and operate ultra-secure storage facilities specifically to hold gold and other precious metals – particularly bullion. They invest in sophisticated security systems, carefully screen employees, and they generally carry substantial insurance policies in case your assets are lost or stolen.
Furthermore, your assets will be segregated from the vault company's corporate assets. With a properly run vault company, your assets aren't at risk from the vault company going bankrupt. If the vault company goes bankrupt, your assets will remain separate.
Many vault companies have an option to borrow cash, using the amount you have deposited with the vault company as collateral. They may not offer this option in all 50 states. If the ability to borrow against your gold holdings is important to you, be sure to check to see if they will lend to you in your state.
All this security costs money, however. Since gold doesn't pay interest or dividends directly, you will need to pay the fees from somewhere else in your portfolio. So before you choose a high-end specialist vault company as your vendor, carefully consider the cost of carry. These are generally best for large holdings, as you will benefit from economies of scale.
Mixed Non-Bank Vaults
These are more general vault companies that hold other items of value, in addition to gold. For example, a general vault company may also hold valuable artworks, collector cars, jewels, and other high-value items, in addition to gold and precious metals.
These vault companies are available in a variety of security levels, ranging from not much higher than your local storage company to a sophisticated, multi-layered, high-end security system that is the equal of any specialist vault.
However, because they store art and other items, they have to invest in more climate control and different kinds of storage equipment. They also have more exposure to flood risk that wouldn't faze a purely gold-focused storage company. All this tends to push the cost of storage.
Secure storage for your physical #Gold investments - what you need to know:
Bank Vaults and Deposit Boxes
Many large banks provide a vault service, though not necessarily at every branch. These may have the advantage of being more convenient. But any time assets are deposited at a bank, you must consider a very substantial disadvantage: Banks have a lot of counterparty risk.
They have exposure to mortgages, business loans, car loans, credit card debt, and even derivatives, depending on the bank. If the economy goes bad, defaults in any or all of those assets could skyrocket. Or there could be a run on the bank. If the bank becomes insolvent, your gold could be confiscated, in order to save the bank.
The risk has always been there, but the public has become more aware of the risk in recent years – both since the 2008-2010 banking crisis, and the 2013 banking crisis in Cypress, where bank depositors woke up one Monday morning to find that the bank had confiscated half of their deposits in a bail-in. That’s where the depositors themselves are forced to rescue a failing bank with their own assets.
This could happen in the event of mass mortgage defaults, unmanaged speculation in derivatives, a currency crisis, or simply a public crisis of faith in any particular bank, or all banks at the same time. Depositors at Laiki Bank saw 3.4 billion euros wiped out. The bail-in destroyed a significant portion of all savings in excess of 100,000 euros per depositor.
At the Bank of Cypress, deposits over 100,000 per depositor were also liquidated. Instead, depositors got some shares of Bank of Cypress stock as compensation. Anyone who lost more than 3 million euro was eligible for Cypriot citizenship.
If you bought your gold as a hedge against economic depression or collapse, as many do, holding your physical gold in a bank means it’s still exposed to that very threat, due to the possibility of a bank bail-in.
Safety Deposit Box Considerations
Many non-bank branches offer a safety deposit box solution. This can be great for storing small quantities of gold – a few coins, rounds, bars, or bullion.
These can be a good choice if you want to store relatively small amounts of gold or other valuables, and you want it stored outside of your home where it’s vulnerable to theft and loss.
However, this option also carries the risk of exposure to bail-ins or other forms of confiscation.
Bank deposit box contents are usually insured, but only to a specific cap. It’s very easy for a good-sized gold bar or two to push you above the deposit box insurance cap. And there are scores of robbery attempts every year that specifically target bank deposit boxes, not just cash in the registers.
Be sure to check your bank’s insurance policy deductible and any exclusions. Banks own insurance to protect themselves, not you. You may consider purchasing additional insurance to cover any gaps.
You can buy various safes and vaults for use in your own home – or keep it in a shoebox in your sock drawer. But obviously, home-stored gold is vulnerable to a variety of risks, including theft.
If you have gold delivered to your home, your postal worker or delivery service driver may know what’s up. Similarly, if you post about your gold and silver collection on social media, you are also making yourself a target.
Children can also be a source of theft risk: When they’re young, they may not be able to resist telling friends and neighbors about gold stored at home.
When they’re older, they may even steal due to financial or other issues they're facing.
Insurance companies may not pay a loss or theft claim if it turns out you know the thief – especially if it’s a family member. If they do, they may cancel your policy.
You can decrease the risk of theft by not telling anyone you own the gold. But if you die or become incapacitated, and nobody knows you own it, your family may not be able to inherit the gold.
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Protect Your Retirement Savings with Physical Gold & Silver.
Many gold investors choose to diversify their holdings across multiple storage locations. This reduces the exposure to disaster, theft, fraud, or loss by negligence at any single site.
For example, you can keep a few coins on hand in your home or local safety deposit box for short-term liquidity in the event of an economic collapse. At the same time, you can keep your larger holdings, like gold bars, in a storage vault until you need them, and borrow any cash you need against your holdings there.
Some home safe companies offer insurance or guarantees up to a certain amount. So one option is to keep a few ounces of gold at home, up to the level of the safe company’s guarantee, and keep the rest in a vault company.
In the event an economic disaster involves hyperinflation, your gold holdings may help protect you because the spot price of gold will generally rise along with inflation, allowing you to borrow against your holding.
However, there is also the chance that a severe liquidity event may mean that lenders can’t lend against gold.
What About IRA Accounts?
Home storage is not a good solution for self-directed IRAs. Under IRC Section 408, IRA owners are prohibited from taking personal possession of their retirement assets. Doing so would risk having your entire IRA disallowed, and triggering taxes.
The same rules apply to other self-directed retirement accounts, too, including self-directed Solo 401(k)s, SIMPLE IRAs and SEPs.
Instead, you must hold your gold IRA holdings via an IRS-approved depository, and in the name of your IRA, not your own name, personally. Your custodian or third-party IRA administrator can help you set this up.
Top Gold IRA Depositories
- Brinks Global Services
- Delaware Depository Service Company
- International Depository Services
- HSBC Bank USA
- CNT Depository
Your preferred gold IRA company has likely built relationships with one or more of these gold IRA depositories You'll want to discuss with your company representative directly.
What's the difference between allocated and unallocated vault storage? Which storage locations are available for your gold IRA? Your account rep should be able to answer any and all gold IRA storage related questions.
Don't be afraid to ask and always request all quoted storage costs in writing.
Additionally, you cannot personally borrow money against your gold holdings, or anything else, in an IRA or other retirement accounts. This violates prohibited transaction rules and may cause the IRS to disallow the tax benefits of your account, forcing a distribution and generating immediate taxes and penalties.
You may, however, have your IRA borrow against your gold holdings. For example, if you want to buy a rental property within your IRA, you can direct your IRA custodian or third-party administrator to take out the loan against your gold, as long as you don’t personally take possession of the proceeds. Have the lender wire the cash directly to the seller, and have the deed recorded in the name of the IRA, not your own personal name.
Gold Storage: The Bottom Line
Ultimately, gold and precious metals have three main storage options:
- A specialized or mixed-use vault facility, separate from the banking system.
- A bank vault or safety deposit box
- Home storage
Gold IRA investors should rule out home storage as a solution, but it may be appropriate for small holdings where you want convenience and liquidity, you can afford to absorb the risk of loss or theft, or you simply enjoy collecting coins and bullion as a hobby.
For larger holdings, or if you can’t afford the risk of burglary or loss, you probably should consider storing your gold off site, either in a bank vault, deposit box or non-bank vault facility.
In practice, the specialized or mixed-use vault facilities may be more cost-effective than bank facilities. This is because of their economies of scale, and their direct relationship with primary insurance companies, such as Lloyd’s of London.
And those who buy large amounts of gold as a hedge against economic downturns should avoid bank storage options. Unlike specialized vault companies, Banks are just too interconnected. In the finance world, fear is incredibly contagious. One bad bank can spark a panic that drag down several good ones, if it can’t meet its obligations.
In this way, assets held at banks may be even more exposed to risk than gold in a well-concealed safe in your home.