Don’t risk losing everything at once

November 22, 2018

Pat Heller

My column two weeks ago pointed out potential risks of using a storage vault and ending up not being able to withdraw your own assets, even from “allocated storage.”

The column elicited a question from a reader asking where would be the best places, in terms of access, cost, and security, to store physical precious metals and other valuables.

Unfortunately, there is no option that is positive in all respects with no negative features. So, let’s review the options.

Storage at home or work: Storing precious metals or a numismatic collection at home or work usually would be the least costly place to store them. These could either be kept in an unsecured spot or in some kind of safe. In terms of access, this is the best alternative. For purposes of security, it is the worst. The cost of insuring such assets at home or work is also much more expensive than if they were in a safety deposit box or storage vault.

Even if an owner thinks that he or she can trust everyone living or working where valuables are stored (and we have seen too many instances over the decades where a family member stole a collection or bullion stash), they could accidentally disclose the existence of the valuables to others who may not be so honest. If a small safe is used for storage, burglars could take the entire safe away to be opened elsewhere.

Plus, homes and workplaces tend not to be as safe in natural disasters such as fires, floods, extremes of temperature or humidity, hurricanes, tornadoes, and the like as would be the safe deposit areas of banks and credit unions or dedicated vaults.

Bank or credit union safe deposit box storage: Security from theft is much better than storage at home or work. Costs tend to be affordable. Geographic accessibility is usually relatively convenient for the owner but is limited by the times that the institution is open for business. Also, if computer systems or utilities go down, access may be halted. In the massive Northeast U.S. and Eastern Canada blackout on Aug. 14, 2003, the outage extended all the way to Michigan. Some banks and credit unions in my city were closed for three or four days. In other areas, some were closed for a week.

Storage in a bank-owned vault: Dedicated vault facilities for valuables tend to have the best physical security and protection from natural disasters. However, they tend to be located remote from the owner, meaning accessibility is a huge negative. Costs are also higher than other options.

Within storage vaults, the owners can choose either unallocated or segregated (allocated) storage. In unallocated storage, the owner has their assets comingled with others. So, for instance, an owner of a sealed U.S. Mint box of 500 silver Eagles in unallocated storage may have title to one of these boxes in a vault that may have hundreds of them, but not to any particular box. Unallocated storage has the legal risk that such assets are considered to be assets of the storage vault. That means there are potential claims of ownership on the assets from third-party creditors of the storage vault.

Segregated or allocated storage, which costs more than unallocated storage, means that specific coins or bars have been physically separated from other assets in the vault and identified as property of the owner rather than the storage vault. They are not supposed to be subject to third-party creditor claims against the storage facility, but there have been exceptions.

In any circumstances where a bank may be at risk of failure and part of the rescue package includes seizure of account balances of the bank’s customers (called “bail-ins”), that would potentially put ownership of any precious metals stored at a bank at risk. This potential risk of loss applies for banks in the Eurozone, Canada, and the United States (though it looks like it would only apply to larger U.S. banks that deal in derivatives contracts).

Note: there were substantial precious metals stored in the sub-basements of the World Trade Centers in New York City when those buildings collapsed. Most of these assets, I think more than 90 percent, were eventually recovered – several months later.

Storage in a vault not owned by a bank: The pluses and minuses for storage in a vault are almost identical, whether the vault is owned by a bank or owned by an institution other than a bank. The one major difference is that a vault not owned by a bank is not subject to having some of the assets seized by the owner as part of a “bail-in” rescue of the vault operator.

Certificates for precious metals stored at a Mint: The Perth Mint in Australia, the Royal Canadian Mint, and now the British Royal Mint have programs touted as a way to “own” physical precious metals that are theoretically stored within the vaults of these mints. Most of these are pretty much a sale of securities (i.e., paper contracts) rather than ownership of actual segregated metals with the customers’ names on them. But whether you are purchasing a certificate of deposit or an allocated account for precious metals at a mint, similar to storage in a bank-owned or other vault, they all have the risk of the government seizing some or all of these assets in the event of a dire financial calamity. In “normal” times, these mints all have solid reputations for quality and integrity, but the purpose of owning physical precious metals is for protection during times that are not normal.

One of the programs offered by the Perth Mint is to own a fractional share of a large bar (1,000 ounces if it is silver). In order to withdraw any physical metal, the owner must pay a fabrication charge and wait for it to be available. To the best of my recollection, during the massive surge in purchasing of physical precious metals in late 2009, it took as long as four and a half months from the time an owner requested to withdraw his or her precious metals until they were actually ready to ship or be picked up.

In the absence of any one perfect combination of accessibility, cost, and security of precious metals storage, the optimum solution may be to store some assets in two or more different ways. You might hold some quantity in your direct custody for emergency purposes and the rest stored in a safe deposit box (where my preference would be at a credit union rather than a bank). If you have sufficient total holdings, you may consider holding some of them in a vault, where I would suggest one that is not owned by a bank. For even larger accumulations, with the judgment of how much is a small, medium, or large holding different for each person, an owner might want to use two vaults of different ownership, one domestic and one foreign.

By diversifying where assets are stored, you minimize the risk of losing everything in one instant.