Overview of the costs of vaulted gold
Compared to buying physical gold in the form of bullion bars or bullion coins which are handed out or delivered to the investor, for private investors investments in vaulted gold are often more cost-effective. This is mainly, but not only due to the fact that providers of vaulted gold typically buy gold in bulk and the fact that vaulted gold can be processed more efficiently by its providers than other investments in physical gold.
When investing in vaulted gold, there are typically two blocks of costs: on the one hand the costs for buying the physical gold and on the other hand the costs for its storage.
In the following, we provide an overview of the main cost factors:
- Costs of buying physical gold
- Fees for storage and insurance of gold
- Costs of selling physical gold
- Comparison of the costs of vaulted gold and the costs of delivered investment gold
Costs of buying physical gold
The costs for purchasing physical gold can comprise a premium on the market price of the gold to be paid by the investor as well as any fees or commissions for the purchase of the gold.
Markup on market price of gold
When an investor purchases gold, the investor usually has to pay a markup on the current price of gold provided by the London Gold Fixing or quoted by other recognized authorities (e.g., the World Gold Council) or professional precious metals dealers like banks. This difference between the purchase price for the investor and the quoted market price of gold is also called ‘premium’, ‘margin’, ‘surcharge’ or ‘buy spread’.
The markup is one part of the overall ‘spread’ which means the difference between the bid and the ask price for gold quoted by gold traders. Gold traders usually quote an bid price for their purchase of gold which is below the market price. The overall spread consists of the markup on the price of gold upon purchase from the gold trader (‘buy spread’) and the discount on the sale of gold to the gold trader (‘sell spread’). This is the main way for gold traders to achieve profits, but one has to take into account that the sellers of physical gold usually bear the costs for minting the gold coins and the production of the gold bars.
Fees / commission for purchase of gold
In addition to the premium on the price of gold upon purchase and depending on the gold provider the investor often has to pay a fee that is usually calculated as a percentage of the price of gold. This fee could for example amount to 1 or 3% of the investment amount. Many providers charge their customers not only an (implicit) premium or a fee, but both.
Fees for storage and insurance of gold
In addition to the premium and / or a purchase fee, providers of centrally vaulted gold charge their customers a fee for the safe storage of the gold which regularly includes costs for insuring the gold. These fees are typically calculated as a percentage of the investment amount and become due monthly, quarterly, twice a year or annually. This fee could for example amount to 0.8% annually. Some providers also charge an absolute minimum fee for storage.
Costs of selling physical gold
Investors in physical gold should be aware that they do not only have to pay a premium or markup on the purchase of the gold, but also have to take into account a discount on the sale of their gold. If investors sell their gold, the bid price quoted by the gold trader (e.g. a bank) is generally below the market price of the gold. The difference between the bid and the the ask price which equals the sum of the premium on the purchase of the gold and the discount on the sale of the gold is called spread.
Comparison of costs of vaulted gold and delivered gold
For private investors, buying vaulted gold has several cost benefits compared with investments in physical gold which is handed out or delivered to the customer.
Low premium on purchase of gold
Investors in vaulted gold usually benefit from lower premiums / markups on the purchase of the gold. Since providers of vaulted gold typically buy gold in bulk in the form of large gold bars and in a highly industrialised way resulting in lower premiums and because vaulted gold can be processed very efficiently by its providers, buying vaulted gold is typically more cost-efficient than buying gold coins or gold bars which are handed out or delivered to the investor. As a general rule, the bigger the gold bar the investor invests his money in is, the more cost-efficient the investment is.
Low costs for safe storage of gold
Investors in physical gold have to take into account the costs for storing the gold safely and insuring it against theft and other risks. Safe deposit boxes with banks only have limited insurance cover which the customer may need to extend at additional costs. It is often more costly for investors to store their gold in a safe deposit box with a bank or in a private vault at home than paying for the storage of vaulted gold. The reason for this is that providers of vaulted gold usually have many clients which allows them to store and insure the gold in a very cost-efficient way.
Lower discount on sale of gold
In addition to the fact that it can be difficult and time-consuming for investors to sell their physical gold which was handed out or delivered to them, the discount on the sale of the gold is usually much higher than the discount which is applicable when selling vaulted gold. In case of vaulted gold which never left the professional vault, there is no need for the buyer of the gold (which may be the provider of the vaulted gold or a third party) to check the value of the gold before buying it.
No costs for delivery of the gold unless the investor opts for delivery
Buyers of vaulted gold usually have the option to demand delivery of the gold. If they do not exercise their option for delivery, the gold stays in the high-security vault. If the investor chooses delivery, he has to pay an extra fee for it. However, if and as long as the investor does not choose delivery, no fees for delivery apply.