Allocated Gold vs Unallocated Gold

August 28, 2012

An investor in physical gold has several options for the storage of that gold. He can, of course, take actual delivery of the gold he has bought and lock it away in a safe concealed in his cellar, or perhaps pay to keep his gold in a safety deposit box at a bank or specialist provider.

The other option open to the investor is to store his gold in either an allocated or unallocated account. Both accounts offer certain benefits and disadvantages to the investor, and before making up your mind which is best for you it’s important that you understand the differences between the two types of account.

Allocated Gold Account

You own the gold outright. In an allocated account, your gold is stored under a safekeeping or custody agreement. The gold bars you own will be numbered and kept on labelled shelves. If you wanted to visit the vault, you could literally go to the shelf and point at your actual bars. It’s that simple.

Unallocated Gold Account

This is a more difficult concept but if you believe you own gold in an unallocated account then think again, because you actually don’t! The gold in the account is owned by the bank, and it merely has a financial liability toward you in regard to the value of the gold. There might not even be any gold in the bank’s vault, but this is discussed below!

Costs of Storage

If you hold gold in an allocated account you will have to pay for its storage, in much the same way that you would have to pay were you keeping it in a bank’s safety deposit box. The bank or gold dealer that is storing your gold for you has to keep it in secure vaults, and this means costs of security (technological and guards), monitoring systems, and audits, too.

In an unallocated gold account, you will not pay for the storage of your gold. This is fair, because the gold is not yours: it is the bank’s/ dealer’s. ‘Your’ gold belongs to the bank, forming part of its balance sheet and assets, and it can do what it like’s with the gold – and generally does.

Insuring your gold

Even though the theft of gold from secure vaults is extremely rare, it is not unheard of. Gold that you hold in an allocated account is your property, and so the cost of insuring it falls upon you, in exactly the same way that insuring it in your home is also your responsibility. However, the cost of insurance is relatively little because of the track record of vaulted gold.

In an unallocated account, because the gold belongs to the bank, all costs of insuring it against theft are the responsibility of the bank.

What happens to your gold?

In an allocated account, because the gold is yours the bank cannot touch it. It must be there at all times and held directly for your benefit. You can even take physical delivery of the gold yourself, should you wish to. This is an important point about allocated accounts: because the gold is yours and does not belong to the bank, it cannot be taken as part of the bank’s assets in the case of insolvency.

With an unallocated account, the gold is bank’s to do with as it pleases. It could lend the gold out, buy and sell it for trading purposes, or any one of a number of other things. It may not even have the gold in its vaults. This ability for the bank to do with the gold what it wishes belies the ‘free storage’ that you benefit from. The bank will seek to profit from your gold – if it owns it – with the bank keeping any ‘trading’ profits while you profit from a rise in the gold price. If you want physical delivery of the gold in an unallocated account you may do so, but the bank may charge you for fabrication and delivery.

It is not just banks that hold gold in unallocated form. Some of the largest unallocated accounts today are found in the form of Exchange Traded Funds, in which, in very basic terms, you buy shares of a pile of gold that is pooled.

Why do unallocated accounts exist?

You may be wondering why anyone would want to buy gold in an unallocated account. The main reason is cost. There is no cost of storage, and no cost of insurance. For the investor in gold, this takes away a chunk of costs and makes profitability greater. For the bank, the advantages are clear: the bank can, effectively, speculate with your money, buying and selling gold, lending it out, or using it as collateral, never having to come up with the original money to invest in gold. Its margins on such business can be very big.

Why do allocated accounts exist?

With allocated gold, you are assured the gold is yours. It’s there to be looked at, held, bought and sold, by you, and no one else. If the bank goes bust, that gold is yours. For this amount of security you are willing to pay the costs of storage and insurance, and in law it is the fact that you are paying these charges that makes the gold yours.

In conclusion

The type of gold account that is best for you will now be obvious. Do you want the extra costs associated with an allocated account for the extra security, knowing the gold is yours, or are you willing to forego this security for a ‘no cost’ unallocated account?

If you decide to keep your gold in an allocated account, such as that available through BullionVault, then you should ensure that the paperwork and agreements make it plain that your gold remains your property at all times. That paperwork should also tell you where your gold is stored, and the fees for its storage. And any gold you buy into your allocated account should come with a certified number, so you can pick out your gold off the shelf, should you ever want to.

Allocated or unallocated: the choice is yours.