Some investors see the value of investing in gold, but simply don’t want to bother with the handling and storage requirements of investing in physical gold. In the past, many would move on to other investments or be pushed towards paper gold as a solution. Today, however, investors can have many of the features of both physical and paper with a bullion vault.
What is a bullion vault?
Bullion vaults are companies that specialize in providing their clients with remote, allocated gold storage coupled with access to professional markets. In the past this sort of turnkey service was only available to major institutions such as banks, mutual fund and ETF management firms, and metals dealers. Starting around the turn of the century, however, firms began to appear that brought this part of the market to individual investors.
Individuals always had options for storage itself, usually through the banks that would in turn deal with institutional bullion vaults, however that service was simply storage for the gold you brought to the bank or purchased through them in certificate form at a markup. Not only were they a middle-man but they didn’t provide the easy online trading and access to professional gold markets that you get with modern services.
How does a bullion vault work?
The major markets in gold are the professional exchanges in major financial centers, such as the London Bullion Market (not to be confused with the London Metal Exchange, which deals in metals futures). The size and market concentration in these exchanges provides buyers and sellers with high liquidity and low spreads in exactly the same way that large stock exchanges provide the same advantages to stock investors. The trouble individuals have in utilizing these exchanges is one of purchasing power.
Gold is traded in 400oz “Good Delivery” bars on these exchanges. These bars are produced according to strict specifications detailed by the London Bullion Market Association (LBMA) or a similar organization for other good delivery networks. All of the bars are cast in approved refineries that are monitored and regularly audited to ensure that the bars contain the precise amount of gold claimed. To maintain its good delivery status, a bar must then be stored in an LBMA-approved warehouse and never leave the LBMA system. Once a bar leaves the system it will need to be re-assayed before it can enter the system again.
The advantage of this system is that the bars can change ownership many times without having to be go through a very expensive full-melt assay (a complete recasting of the bar) to verify authenticity each time. With the assay costs minimized, the exchange can operate with very low transaction costs – basically only the cost of storage.
Individuals are largely unable to access these markets directly due to the extremely high values of the bars stored in the LBMA system. Unless you have hundreds of thousands of dollars dedicated to investing in gold you won’t be able to purchase a good delivery bar. A bullion vault fills this gap by acting as a middleman between the professional exchanges and individuals. In exchange for a small commission, the bullion vaults pool your investment with that of their other clients so that, on the back end, they can trade only in large, good delivery bars.
Advantages of bullion vaults
Bullion vaults have compelling advantages when compared to holding and storing your own physical gold. First and foremost is that you don’t hold and store your own physical gold. For some investors, especially those that already have a large enough emergency cache or have no good way to do so, this is a big draw. While we don’t recommend that you keep all of your gold in other locations, we likewise don’t recommend that you keep all of your gold in your home for security reasons. Bullion vaults make an excellent second or third storage location.
An additional draw, and definitely our favorite at Wise Gold Investing, is that the premiums are very low. The specifics vary depending on the bullion vault, but in most cases you are looking at a purchase premium of less than 1.5% over spot including the vault’s commission and a sale premium of less than 1% under spot including the vault’s commission. One thing to look out for is additional transaction costs. If a bank wire is required to deposit money into the vault system you may be paying $30-$50 per deposit, which is as much as 3% of the purchase price of a single ounce. If you think you will be depositing in smaller amounts you should look for a vault that has a no-fee way to get money into the system.
The last advantage of note is that it is real, physical allocated gold. It isn’t prone to the issues of paper gold. As a bailment contract with the bullion vault, the gold belongs to you and your investment will be protected even in the event of the dissolution of the vault company. As an added protection, most bullion vaults have your investment insured.
Disadvantages of bullion vaults
Our biggest complaint with bullion vaults is the difficulty or, in some cases, outright inability to take physical delivery of your gold. As these companies deal exclusively in large bars it is difficult for them to provide conversion services for. Fortunately, some vaults are taking note of this issue and allowing clients to convert to good delivery silver for physical delivery. This will incur an additional fee, so before using bullion vaults with the plan of eventually taking physical delivery you should add up the fees to see if you wouldn’t be better off just purchasing physical in the first place.
Another issue for some looking at investing in gold is the lack of immediate access to your bullion. If security in the event of disaster is an issue then you will want to make sure you are happy with the amount of physical gold you hold locally before taking advantage of the benefits bullion vaults provide. After all, in an emergency a pile of gold sitting in Zurich isn’t of much value.
Bullion Vault: Wise Gold Investing or Not?
Wise Gold Investing is all about maximizing your returns while still investing in gold through means that meet your ultimate goals. Properly used, bullion vaults provide excellent value to the gold investor. As long as you don’t plan on taking personal delivery of the product they can provide the lowest transaction fees of all forms of physical gold while maintaining a phenomenal level of security. Utilizing a bullion vault is definitely something that should be seriously considered by anyone investing in gold.