Allocated vs Unallocated Storage

Tuesday, Aug 01 2017 03:08 PM

There is a huge difference between allocated and unallocated gold storage, and investors need to understand this.

Allocated storage

The customer has his gold physically segregated and is given a detailed list of the weights and assays of his gold.

With allocated storage, the gold bars you purchase are held solely in the beneficiary title(s) you choose. The manager of the metal (broker) or the vault does not have any direct claim on the metal. Allocated metal does not show up on the balance sheet of the vault operator. It is an off balance sheet item, which is the property of its customers.

Clients are assured they can always take delivery and audit their metals without any risk of encountering foreign bars.

You have the assurance that your gold is protected if your broker or the storage company go bankrupt, because their creditors would have no claim to your property since it is not a financial asset of your broker or the storage company.

Investors have to pay for the storage of allocated gold. Arranging for the physical security of bullion bars requires strong vaults, wise use of technology, carefully constructed systems for security, and the monitoring and control of human factors.

Allocated vault storage is convenient for physical gold investors who want the ability to hedge against systematic, geopolitical, and economic risks while maintaining the ability to securely liquidate or take delivery of their holdings in the future.

Unallocated storage

“Unallocated” storage means you own part of a pool of gold with no title to any particular bar. It is the most convenient, cheapest and most commonly used method of holding gold. But precious metals held in this form do not entitle the holder to specific bars, and the holder only ranks as an unsecured creditor of the dealer or bank in the event of bankruptcy. This bullion can be considered part of the general pool of metal held by the dealer or bank, and may be lent out without the owner’s knowledge or consent.

Unallocated gold is always likely to be put to use by the bank in one way or another. Although it is sometimes believed that there is a non-specific pile of gold somewhere in the bank which the customer has a share of this is not reliably true. So unallocated gold’s free ‘storage’ is a bit of a misnomer because it is quite likely that there will not be anything tangible to store. This should not be surprising, after all, banks do not store the money in our bank accounts; they put it to use.

Most of the time you will be perfectly safe, but – in terms of risk – you should remember that major waves of bank failures are a regular feature of financial history.

Store your gold only in a fully segregated environment

To conclude, gold in allocated storage is physical metal, while anything unallocated is paper-gold.

Make sure that your storage arrangements are always allocated. When stored in this way, you know it is physical gold you own. You retain title to your gold.

If you are buying physical metal and want the ability to take delivery at a future date due to systemic risk, devaluation of currencies, political uncertainties or other circumstances, then one should store metal only in a fully segregated environment.