For Vigilant Capital it is important that the general public knows the basic terminology used in the gold industry, so should they be considering investing their money into the gold market, they may do so consciously, in an informed manner with certainty that gold, when bought and stored correctly, is one of the best ways to preserve your wealth. That is why today we want to talk about allocated and unallocated gold, the differences between them and why Vigilant Capital recommends to investors diversifying their portfolios with gold, to use products offering the ability to acquire allocated gold.
Let's start with simple definitions of what unallocated and allocated gold are.
Unallocated gold, is the backbone of the PAPER gold market. It is usually owned by banks that retain legal ownership of the metal whilst building various gold derivative products around it. Investors of these products almost always sign a gold deposit and essentially become a creditor of the bank.
It is important to recognize that these investors are not acquiring physical gold and whilst unallocated positions generally have a lower carry cost, there are a number of things to be aware of before deciding if unallocated “ownership” is right for you. Disadvantages of this type of investment are that they are not covered by a deposit protection, potential shortfalls of the banks gold reserves in covering positions, bank failures and liquidity crisis and the inability to ever redeem any physical gold as you are not the legal owner.
Paper gold is the most commercialized and therefore the most common form of investing in gold, however, most of the advantages are held by the banks or product suppliers that always retain ownership of the gold itself.
Allocated gold is gold which is legally and wholly owned by a person or entity exclusively, and is stored under an escrow or custody agreement. Allocated gold is generally bought through approved refineries and stored with appropriate vaulting facilities that provide insurance and security. The key aspect to allocated gold is that the gold is owned by the investor and the investor alone and may not be used for any other purpose other than that indicated by the legal owner of the precious metal.
Unlike unallocated gold in case of financial insolvency or a liquidity crisis, the investor can be sure to be able to access their physical gold. If you are looking to truly own gold bullion, allocated gold is the only way to do it. Allocated gold provides the ultimate safe-haven investment, since its value is derived solely from the physical price of gold and not related to the performance of any other market or entity, and also allows for physical delivery of the metal if or when required.
It is important for investors interested in gold to decide if they are just looking for exposure to the gold price or if they wish to legally own the gold they invest in.
It is also important to think about whether as an investor you may require delivery of your metal at some point. The length of the planned investment, access to liquidity and the ease of buying and selling your position should all be taken into account when deciding what type of gold investment is best suited to each individual’s needs.
Vigilant Capital provides fully allocated gold and silver custody to clients around the world with fast access to liquidity and delivery. If you would like more information on the differences between allocated and non-allocated gold or any other aspect of safe precious metals investing please get in touch, we will be happy to help.