Secure Storage of Investment Gold - Safes, Vaults and Insurance

A detailed close-up of gold yuanbao objects, evoking the symbol of wealth and success in Chinese culture.

How does insured gold storage work at precious metals dealers, what are the advantages of custodial precious metals storage and what guarantees do we receive for gold held in custody?

Storing gold with a precious metals dealer

A number of precious metals dealers offer custodial storage services. This service is not the same as the financial custody regulated by the Hungarian Credit Institutions Act (Act CCXXXVII of 2013 on Credit Institutions and Financial Enterprises), which requires an MNB licence, nor is it the same as a safe deposit box service, which also requires an MNB licence. A precious metals dealer may not provide individual safe deposit boxes that clients can open independently at any time, as safe deposit box services are classified as financial services.

Custodial storage of precious metals is governed by the Hungarian Civil Code (Act V of 2013 on the Civil Code). Custody may be individual, where each client's assets are stored in a separate container, or pooled, where client assets are segregated from the company's own assets but not separated from one another.

The quality and security of the service depend heavily on the company providing it. The dealer must build and equip its own vault or strongroom in accordance with the requirements of the Association of Hungarian Insurers (MABISZ). There are also MABISZ ratings for safes and security cabinets. Meaningful insurance coverage for precious metals can only be obtained if the vault has been built to MABISZ standards: the precious metals are kept in MABISZ-rated safes up to the insured value limit, and appropriate security supervision is in place. As the insured value increases, the insurer will require the security level to be raised, which in turn means further capital expenditure on the part of the gold dealer. For this reason, if there is any doubt about whether a company carries insurance on its gold stock, it is worth looking on the dealer's website for a certificate of insurance issued by the insurer in the company's name, or requesting it directly from the dealer.

It is also worth assessing whether the company's business model actually contains a sufficient margin to make gold storage worthwhile. Even leaving aside the cost of building the vault itself, a service provider needs to charge a minimum annual fee of around 0.3% (3 per mille) in order to generate even a minimal profit. Dealers that charge less than this, or that promise "interest" to clients who store gold with them, should be avoided.

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High-security institutional vault storage

The most secure method of gold storage is in purpose-built precious metals warehouses. Among the members of the London Bullion Market Association (LBMA), the following companies provide precious metals storage. Four of these are cash logistics and secure transport firms: Brinks, G4S Cash Solutions, Malca-Amit and Loomis International Ltd. Three are major international banks that also provide gold clearing services: HSBC, ICBC Standard Bank and JP Morgan.

These companies operate precious metals vaults not only in London but at multiple locations around the world, with their secure logistics divisions transporting precious metals between vault facilities. Loomis, for example, serves its clients across several continents and in numerous countries.

The accounts at these vault operators are held by mines, precious metals refineries, banks with precious metals operations and larger gold dealers. These participants can trade precious metals without the metal ever leaving the vault in many cases.

Because account opening requires a substantial minimum deposit, private individuals very rarely use these vault services directly. Instead, they typically benefit from the service as clients of a gold dealer that holds an account with the vault operator.

The vault operator carries substantial insurance coverage, from which it allocates an amount proportional to the dollar-equivalent value each account holder stores with it. In this way, the insured value is fully scalable. The vault operator continuously records how many ounces of gold each client holds in custody, meaning that at any given moment it can be demonstrated how much custodial gold and other precious metals stock is held.

Any quantity, no matter how small, may be withdrawn from custody, although the applicable deposit and withdrawal fees must be paid to the vault operator.

One location or several? Storage best practices

Gold carries its value intrinsically, and this is its greatest advantage. When it comes to safekeeping, however, the same property becomes a disadvantage, because if it is lost it cannot be replaced. For this reason, it is best to store gold in multiple locations. Keep only a small amount at home, and naturally ensure that only your most trusted relatives know about it.

The remainder should be kept either in a bank safe deposit box or through the custodial storage service offered by a precious metals dealer you trust as a reliable partner.

It is advisable to prepare a written and sealed document, deposited with the family lawyer or a notary, describing which service providers hold your gold reserves. This ensures that your heirs, as with any other investment, can be made aware of these holdings.

Safe deposit box services in Hungary

Hungarian banks are not equipped to provide services specifically designed for gold storage. In most cases, it is not possible to arrange insurance for gold holdings at their full value, and there is no way to verify whether the gold is actually in the safe deposit box at any given time.

Despite these limitations, bank safe deposit box storage can still be considered secure in Hungary, as there have been very few incidents involving bank safe deposit boxes in recent years.

Storage of silver, platinum and palladium in free trade zones

For precious metals subject to VAT, free trade zone storage is the most widely used solution. London and Zurich are the largest European centres for this service. The advantage of free trade zone storage is that as long as the goods do not enter the territory of the given country or the European Union, no customs or VAT obligations arise. The precious metals dealer opens an account with a vault operator that also provides free trade zone storage. The dealer then stores its clients' VAT-liable precious metals (silver, platinum, palladium) in the free trade zone, within the vault operator's insured vault. If the goods (silver bars and coins, platinum bars and coins, palladium bars and coins) are removed from the free trade zone at the client's request, customs clearance must be completed and VAT must be paid. Using the silver bars, platinum bars and palladium bars stored in the free trade zone as backing, the precious metals dealer can operate physical silver accounts, platinum accounts or palladium accounts for its clients (in a manner similar to a gold account).

Gold account services

Physical-gold-backed gold accounts are operated by precious metals refineries and gold dealing companies for their clients.

The gold account is the most dynamically growing area of the gold trade, which is why the World Gold Council has recently introduced recommendations that an increasing number of companies are adopting as binding standards. These continuously evolving guidelines are expected to become market standards in the future.

A gold account enables clients to purchase gold cost-effectively in amounts as small as 1 gram (currently worth approximately 40 euros). Client gold is held in pooled custody (individual clients' precious metals are not stored in separate containers but are segregated within the accounting software). However, physical gold corresponding to the aggregate balance of all client gold accounts (typically in the form of larger bars) is held at the designated storage locations, ensuring 100% physical backing. Gold accumulated in the precious metals account can be withdrawn in the form of physical gold bars in various denominations, with the applicable production cost payable at the time of withdrawal. The existence of the gold is verified by the precious metals dealer's auditor at regular intervals or through random spot checks.

The operation of a precious metals account is legally classified as a sale of goods, just like the precious metals trade itself. The VAT exemption for transactions conducted through a gold account is governed by the Hungarian VAT Act.

Section 236(1): "The following shall be exempt from tax: the sale, intra-Community acquisition and import of investment gold, including:

(a) documents (certificates) representing investment gold, relating to allocated or unallocated gold, or to trading on accounts denominated in gold;"

From an IT security perspective, gold account management is subject to the same requirements as online banking, meaning that only well-capitalised companies can afford to develop such systems.

The technology, system architecture and data backup procedures all serve the cause of security. In addition, the system must be regularly tested by IT security engineers who examine the software for vulnerabilities in terms of both intrusion resistance and data protection.

The system must be available around the clock, every business day. The spread applied to gold account transactions is very often below 1%, even for purchases and sales of as little as 1 gram. The gold account service includes custodial precious metals storage as an inseparable component. The precious metals dealer passes on its insurance costs to clients in proportion to the amount of gold they hold in custody. This charge typically does not exceed 0.5% per annum for gold. For example, the annual storage and insurance cost for gold worth 10,000 euros held in custody would be approximately 50 euros. This makes the gold account service competitive with both bank safe deposit box services and the so-called paper gold investment products available through brokerage firms.

Gold held in gold accounts is in the custody of the precious metals dealer. However, the dealer is legally required to keep custodial assets segregated from its own assets (allocated gold account), because ownership of the gold remains with the clients. This ensures that in the event of the company's dissolution or liquidation, creditors cannot make claims against the precious metals stock that constitutes client property.