This article is meant to be a guide on what you may want to consider when selecting a storage facility or precious metals program to hold, safeguard, custody, or manage your physical precious metals holdings. Understanding these key points is critical to properly managing your risk exposure surrounding your precious metals.
The relationship you have with your metals is critical. This sounds simple, however, it can become very complicated. First and foremost, do you have a direct relationship with the facility where your metal is being held? In other words, are you contracting with the actual storage facility or a company representing to be a depository? It is very common for a gold dealer to set up a subsidiary or affiliated company to offer storage services. In some cases, the subsidiary or affiliated company enters into a master agreement with the actual storage facility whereby the facility only takes direction from the subsidiary or affiliated company. You have no relationship with the actual storage facility but rather only with the dealer’s subsidiary or affiliated company. In short, the subsidiary or affiliated company is simply a middleman. In this instance, you have become a part of an affiliated program rather than having a direct storage account. There are additional risks with such programs because more hands are involved between you and your metals.
When selecting a storage facility, how do you know if a facility properly and accurately represents everything they say they are in their marketing? In addition to reading the storage agreement carefully, be sure to ASK QUESTIONS! Although storage facilities are not always forthcoming with information, and with good reason due to security concerns for their clients’ assets, allowing prospective clients to assess the risk associated with a storage facility can be done without adding risk to the facility or its existing clients’ assets. For example, a storage company can provide full or relevant disclosures about its principals, organization, and affiliates. If the storage company is tangled with various affiliates, these disclosures should allow individuals to decipher how each affiliate is structured and related to the storage company, which company or affiliate is actually profitable or contributing to the support of the storage operation, and which affiliates are simply companies used to insulate the principals from liability.
Please remember, when you sign the storage agreement, you are only entering into an agreement with the storage company and not with any affiliates. Signing a contract with a storage company that has very little capitalization or needs the support of its affiliates or parent company to stay in business increases the risk to your assets stored at such a facility as these facilities may present substantial going concern risks (meaning, their ability to stay in business). When faced with a complicated or multi-affiliate company structure, consider: Did the principals, who own the storage facility along with the other affiliates, create the structure to maximize the benefits to themselves (tax structure, avoidance of responsibilities or personal liabilities, etc.) at the expense of the clients? Does this create a conflict of interest that contrasts directly with the client’s interests and add additional risk? What happens if the affiliates or parent company stop making money and can no longer support or subsidize the storage facility operation? What would this mean for the storage facility and ultimately your metal?
In today’s environment, precious metal transactions have seen an enormous drop in volume and profitability. Properly capitalized storage facilities with clear structures are important now more than ever.
Do not be afraid to ask tough questions. Is the facility willing to provide detailed information about how it is structured and supported and the relationships among affiliated entities? Is the facility willing to provide you with a copy of its balance sheet showing its assets and capitalization, its debts and overall financial position? In the past, many dealers entering the storage business offered lower storage fees to attract clients. These dealers were making most of their profits from the transaction portion of the trade, which was then needed to subsidize the storage business and its low rates. Now that trading revenue has collapsed, how realistic or sustainable are the storage fees being charged and how viable are the storage facilities being supported by such dealers? While some storage programs have already begun to raise storage fees, in this challenging environment, other storage programs and depositories have continued to lower fees to attract new clients. Lower fees have to be supported somehow. Storage facilities have many fixed costs that require a certain amount of cash flow. Cutting corners on security features or other items or increasing deductibles on insurance to lower costs and sustain lower rates may not always be in your best interest. Remember, you get what you pay for!
You should understand the difference between allocated and segregated storage. Fully insured, segregated storage is the most secure method of storage. With allocated storage, your metal can be commingled with the metal of other clients or leveraged with multiple other clients into one bar. Fully segregated storage, on the other hand, requires that your holdings be kept physically separate from other client holdings. Subsidiary or affiliated storage companies may offer segregated storage, but in reality the actual depository only recognizes the master account holder. In this instance, ask how your metal will be separated and not commingled with that of other clients. What happens if you want your metals and the depository cannot communicate with the master account holder, the only one authorized to provide instructions to the depository? This is one form of counterparty risk.
Many storage providers are lightly regulated or not regulated at all. This lack of oversight may allow storage companies, their principals or employees, or any affiliated parties to use puffery or exaggerated advertising claims that may overstate the truth or even mislead potential customers to lure them as clients. It’s important to not rely on marketing or advertising claims but rather to read the actual storage agreement and any disclosures provided to avoid miscommunications or outright client frustration. For example, it’s common for storage providers to advertise “we cover and insure all risks” or “we have an all-risk insurance policy”. In reality, despite such claims, the actual storage agreement may include exclusions to certain coverages or even “hold harmless” clauses that may serve to remove the storage company from any responsibility or liability. Remember, “advertising claims” may not provide the same level of information as “disclosures” within a storage agreement. No matter what you hear or read from an advertisement, make sure you read the fine print within the storage agreement. These disclosures will define the relationship you have with your storage facility or program.
In addition to little or no regulation, many storage facilities or programs have discriminatory fee schedules between certain types of segregated or allocated accounts. In addition to common breakpoint pricing schedules that provide lower fees to higher value accounts, many storage facilities or programs provide unusually low rates to certain types of accounts such as an Individual Retirement Account (IRA). The rates an IRA account holder pays may be a fifth of what a regular or non-IRA account holder would pay.
Please keep in mind, gold is gold whether it is in an IRA or not. The security and insurance needed is identical. At the very least, this selective or discriminatory pricing schedule forces regular accounts to supplement or subsidize these greatly reduced fee schedules for other accounts. This type of practice should raise potential questions about the storage program’s business practices and ability to generate a well-capitalized and strong balance sheet. For example, if a regular account is paying .70% a year in storage fees, why does it make sense to charge an IRA account only .12% a year for the same value of assets? Either the storage fees for the regular account are being overcharged or the IRA account is being severely undercharged. Again, look at the motive for the storage operation charging these enormously different rates. In many cases, the storage program or facility is making most of its money from the initial purchase transaction and not from the long term storage.
How does that benefit all storage clients over the long term? If the storage operation is storing $100 million in assets and most of it was from underpriced IRA accounts, at .12% a year, the annual revenue may only be $120,000. This may be just enough money to pay 3 employees and their health insurance, let alone a full all-risk insurance policy, security equipment and services, lease, monthly building expenses, etc. At this point you may ask, how can I find this information out? In most cases, ask the storage operation for a schedule of rates for regular and IRA accounts or search for self-directed IRA custodians online and look at the rate schedules of depositories listed. Everyone likes lower fees, however, at what point may that begin to add risk and jeopardize the storage facility’s ability to meet its obligations and responsibilities.
In the age of the internet, some facilities may have in their storage agreement that a simple posting on their website may be all that is needed to make changes to the terms of the storage contract. Rather than the facility communicating directly with you to alert you to any changes, such provisions in the storage agreement would require that you check the facility’s website regularly to try to decipher if any changes have been made. Also, some programs may charge transaction fees for services that may be paid by deducting a portion of your metal from your account rather than invoicing you for payment in cash. These a just a couple of additional reasons why it is so important to actually read and understand a facility’s storage agreement.
This article was designed to shed some light on an industry that may be hard for prospective clients to research. Please keep in mind, this article only scratches the surface of the many risks and facts you should consider when choosing a storage facility or program for your metal. I know the industry very well and have created a depository for clients that addresses these and many more issues. We at GoldSilverVault have been in the armored storage industry for 10 years and understand that our business is to protect your interests, whether through physical structure or intelligent guidance. Our goal is to provide you the proper information so you can make the right decision the first time.
Simply put, look for a storage facility that best represents your interests. In the end, that is what matters the most.