Physical precious metals held in bank custody account

I'm considering investing in physical gold/silver bars and coins. I've asked my bank and they also offer the option of having the precious metals kept in the custody account. In this way I would not need to take physical delivery of the precious metals and therefore would not have to worry about how to store them. But I will still have the option to take physical delivery in the future, if I want to. When I buy silver bars or coins I will need to also pay VAT. Naturally as the precious metals bars and coins are held in the custody account I would need to pay the respective custody account fees.

Is this method of investing in precious metals a sound and safe one? What are the risks?
The main thing I am worried about is counter-party risk: what would happen if one day the bank gets into financial problems and becomes bankrupt? Will the precious metals I hold in the custody account be also at risk somehow, i.e. become part of the bankruptcy estate?

Hi mirto,

The best way to invest in precious metals depends on what you are trying to achieve.

Bullion

Holding physical bullion in a secure storage yourself lets you avoid paying service and investment costs. It also eliminates third-party risk. But there are two issues to consider:

1. Spreads and markups used by bullion dealers when you buy and sell physical precious metal are often very unfavorable compared to those used for book transactions. You should account for these one-time costs when calculating potential returns.
2. If you do not have secure storage, then you have to rent a bank safe deposit box or non-bank safe deposit box, which results in an investment cost. However, depending on the value of your precious metal and the rent you pay for your safe deposit box, this option can still work out cheaper than other gold investment options. You retain full ownership of assets held in safe deposit boxes, so there is no counterparty risk. Rents vary broadly between banks. You can use the bank safe deposit box comparison available here to compare prices.
3. With the exception of gold bullion, you pay VAT on precious metal bullion. This adds a one-off cost which you should account for.

Precious Metal Accounts

Precious metal accounts from Swiss banks are bank accounts denominated by precious metals. Some banks give you the option of depositing or withdrawing bullion to and from your account. An advantage of precious metal accounts for silver, platinum or palladium investments is that you do not pay VAT. But there are two major considerations:

1. Account balances are book assets, meaning they are a debt claim against the bank by you. Assets are not covered by depositor protection, so you are exposed to high counterparty risk.
2. You pay account fees. These are charged as a percentage of your account balance per annum and represent an ongoing investment cost. You can use the precious metal account comparison to compare account fees.

Bank custody

Some Swiss banks offer custody services for physical bullion. You pay a custody fee (typically a percentage of the value of your metal), which represents an ongoing investment cost. Depending on the value of your metal, this can be more expensive than using a bank safe deposit box. The advantages are: you retain ownership of the assets placed in custody; the bank is liable for losses (which is not normally the case with bank safe deposit boxes).

Precious Metal Certificates

Precious metal certificates let you participate in possible precious metal value gains. Allocated certificates are title deeds showing ownership of specific precious metal stored in a pool by the certificate issuer. You buy precious metal and legally own it, but you do not take possession of it (though this is possible for a fee). Counterparty risk is minimal (at least theoretically), as you are the legal owner of specific bullion. You pay storage fees for the safekeeping of your bullion, which represents an ongoing investment cost. The advantage over buying storing bullion yourself is that buy and sell spreads may be much more favorable than those used by precious metal dealers.

Unallocated precious metal certificates are an option if you simply want to participate in price developments. These are issued by bullion pools and track the value of the metal in the pool. You do not own specific precious but simply own a share of the pool. Storage fees are either minimal or non-existent, so investment costs are low. However, counterparty risk is high because you do not own specific bullion.

Bonded Warehouses

Some Swiss bonded warehouses maintain bullion pools in duty-free storage and let you buy allocated bullion. The advantage is that you have full legal ownership over your metal without having to pay VAT on silver, palladium or platinum bullion. The disadvantage is that you pay relatively high storage fees, which represent an ongoing investment cost. Read the guide to Swiss bonded warehouses for more information.

Precious Metal ETFs

If you simply want to participate in price developments, buying shares in ETFs which physically hold precious metals (as opposed to synthetic ETFs) is a good option for short- to mid-term investments. There is some counterparty risk because you own shares in the fund and not actual bullion. Costs to pay attention to are:

1. TERs. The annual total expense ratios of precious metal ETFs are relatively low. However, cumulative TERs can represent a significant cost over long-terms.
2. Front-end and back-end loads. ETFs may have sales charged which apply when you buy and/or sell ETF shares.

Precious Metal Forex and CFDs

It is possible to invest in precious metals using forex or contracts for difference (CFDs) using a cheap online broker. But this only makes sense for very short-term investments. Because these are leveraged investment vehicles, you pay interest on financing, and this cost is too high for these vehicles to be suitable for mid- or long-term investments.

Precious Metal Futures

Futures provide an option for mid-term precious metal investment, but involve a high level of investment risk. This form of investing is only recommended for experienced traders with knowledge of commodities markets.

Best regards from Moneyguru

More on this topic:
Tips for Buying Gold in Switzerland

@ moneyguru - Thank you for your very informative reply and the useful links.

I'm still not clear about a couple of points, related to Bank custody.

1) What do you mean exactly when you say "the bank is liable for losses" ? Do you mean that the bank will be liable if, for example, the bullion is stolen from their vault ? What types of losses / risks are we referring to here ?

2) What would happen if one day the bank gets into financial problems and becomes bankrupt? Will the bullion held in the custody account be also at risk somehow, i.e. become part of the bankruptcy estate? I sense some counterparty risk here, unless I've understood wrong.

Renting a safe deposit box to safely store physical bullion seems like a reasonable choice. In terms of security (i.e. protection against possible theft, burglary, etc.) would you say the higher the safe deposit box rent, the safer it should be?

For precious metals held in custody by a custodian bank, the same rules apply as apply to shares, bonds and other securities held in custody accounts. These assets are legally your property and you can claim their return in the event of a bank failure. Refer to the point "Securities are segregated assets" in the guide to depositor protection in Switzerland for more information.

However, in actual practice counterparty risk can vary depending on the terms and conditions of custody accounts. For example, if the terms and conditions allow for securities lending or if securities are held in street name, recovering your assets after a bank failure may be a lengthy process. It is important to understand the terms and conditions of custody when entrusting securities to a custodian bank.

A possible advantage of placing precious metals in custody is that the bank is responsible for assets held in custody, so theft and other hazards are not an issue. Some banks offer affordable Lombard loans secured by precious metal held in custody. If Lombard loans are a service which you need and these are offered by the bank in question, then this is something to consider.

As mentioned in the first answer, the primary disadvantage is that custody fees are typically levied as a percentage of the value of your precious metal. This means that if/when precious metal prices go up, you pay higher fees.

Safe deposit boxes are much more straightforward. You pay rent for the safe deposit box, and retain full ownership over the contents of your safe. You pay the same rent regardless of the value of your precious metal. This is particularly advantageous when the value of precious metal goes up, as your investment cost remains the same.

Rents and security are not necessarily correlated. The vast majority of safe deposit boxes provide a similar level of protection with regards to theft, fire and other hazards. However, there are exceptions. Some banks maintain exceptionally high-security vaults at specific branch offices. It is worth noting that bank safe deposit boxes generally do not include insurance, so depending on the value of your bullion investment, security and/or taking out third-party insurance are considerations.

In the case of non-bank safe deposit boxes, there are major differences in security between different service providers. These are generally reflected in rental fees. Some providers maintain high-security vaults (in former military bunkers, for example). Some providers include partial or full insurance in their pricing.

An advantage of non-bank safe deposit boxes is that access to these is not affected by bank branch office closures (in the event of a bank failure, for example). Also, Swiss banks typically will only let you rent a safe deposit box if you open a private account with them. When you use a non-bank safe deposit box, you do not have to hold a private account at a specific bank (with the account fee that may apply), and you can retain your safe deposit box if you leave Switzerland.

However, the rents are typically substantially higher than those of bank safe deposit boxes.

Thanks, very detailed and useful information.

Some further questions and observations regarding precious metals held in custody by a custodian bank:

• How can one know if the terms and conditions of custody allow for securities lending or if the securities are held in street name? Will these be clearly mentioned in some kind of bank document, or should one ask the bank?
• Do you know which banks have terms and conditions of custody which do not allow for securities lending and where the securities are not held in street name?
• I guess that another aspect which adds uncertainty is that the bank could always change the terms and conditions of custody at any time, if I understand right.