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I consider
gold and silver to be the bedrock asset of an investment portfolio. In other
words, it is the foundation stone upon which the rest of a portfolio is
built. Given this important role in which I hold the precious metals, it is
essential to keep them safe.
Safety can
mean different things to different people. Until recently, for example, many
investors believed that Switzerland was isolated from the world’s monetary
turmoil. They therefore thought that the Swiss franc was a safe place to keep
their money, but the illusion of safety vanished instantly when the Swiss
National Bank announced that it would not let the Swiss franc strengthen
beyond 1.2 Swiss francs per euro.
US
government debt instruments are another asset class that in reality offer only the illusion of safety. Scottish author and
historian Niall Ferguson has warned that T-bonds and T-bills are a safe haven
like Pearl Harbor in 1941.
Gold and
silver are safe havens because they are tangible assets. Therefore, they do
not have counterparty risk. In other words, there is no risk of default, but
only if you own physical metal. Paper-gold and paper-silver are financial
assets and therefore have counterparty risk. They only offer the illusion of
gold and silver ownership.
So how does
one keep their physical metals safe?
Diversification
of one’s metal is probably the most important objective, to mitigate
the risks of government confiscation, loss from war and similar extraordinary
events. Store your physical gold and silver in different geographic
locations, namely, in different cities in different countries. Even though
you do not have your metal at hand, this disadvantage is outweighed by the
benefit of protecting your metal with global diversification.
To achieve
this objective conveniently and safely you will need to use professionally
managed vaults. So vaulting is an important factor to consider when buying
gold and silver.
Always use
non-bank vaults. Because banks are in the business of lending, one is never
certain whether your gold is there or not. In contrast, non-bank vaults are
in the business of storing, so everything they do is aimed at enhancing their
storage business. Safeguarding their customers’ assets is therefore an
essential building block of their business model.
Safe
deposit boxes are safer than placing your precious metals directly with a
bank, but they too have risks. They may be difficult to access when you need
your metal, and may not be practical or cost effective for storing large
amounts of silver. Also, it is inconvenient and risky to take your gold and
silver to safe deposit boxes in different countries to meet the objective of
obtaining geographic diversification.
Regardless
where and how you choose to store your precious metals, insurance is
recommended. Professional vault operators will provide proof of insurance,
thus protecting your metal from normal commercial risks. If the vault
doesn’t insure your metal, don’t use it. In conclusion, there are
advantages as well as disadvantages to using vaults for storage.
Nevertheless, they should always be considered because they offer the most
practical way to attain the important objective of keeping your precious
metals safe, namely, storing them in different countries.
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