Store Silver Right, Sleep Tight

Store Silver Right, Sleep Tight

I expect that both gold and silver prices will rise far above current levels over the next couple of years. You can read my other writings on why I anticipate such developments. Beyond that, I expect the price of silver to outperform gold on a percentage basis by a wide margin.

At current price levels, gold is worth more than 50 times that of silver. In line with my expectation that silver will rise by a greater percentage than gold, that means the long-term equilibrium ratio will be much lower than it is today. I don’t have a crystal ball telling me what the ratio “should be,” but I would not be surprised to see it end somewhere in the 35-40 range.

Obviously, a lot of purchasers of physical precious metals like silver’s prospects more than gold because the total dollar volume of silver being purchased exceeds that of gold. By ounces that means that far more than 50 times as many ounces of physical silver are being sold than of gold.

However, there is a significant logistical problem facing anyone who wants to invest a significant amount in physical silver – where to store it?

A thousand ounces of pure silver weighs over 68 pounds. It takes up roughly 165 cubic inches. That would fill most of a small safe deposit box. You can purchase the 1,000 ounces of silver for a bit over $30,000 right now. But, my company has helped customers purchasing 100,000 ounces or more at one time. What do such buyers do then?

Over the years, customers have asked me how to safely store large quantities of physical silver. Unfortunately, I don’t have any perfect answers for them that combine quick access, low cost and strong safety.

The fastest access you can have to your physical silver is for it to be in your direct custody. That also would likely be the lowest cost alternative. However, safety is not the best. You can be burglarized where you live or work. You could bury it and forget where it is or die without sharing the knowledge of its location. You could put it in a safe or vault at home or work. However, most residential safes are mainly for fire protection. Professional burglars can break into them faster than you would expect. Or, if a safe only weighed a couple hundred pounds, criminals have been known to steal the whole unit to be cracked open elsewhere.

If you have direct custody of physical silver, the more people who know you own it or know where you are hiding it, the greater your risk that you become a target. Many secrets have been innocently exposed in ways that people would not anticipate. It also happens that the ones who are trusted with knowledge of where the silver is stashed have themselves taken it without permission. Insurance for physical silver in your direct custody is difficult to obtain and expensive if you can get it.

You could have a high caliber safe or hidden vault installed where you work or live. However, costs will be in the thousands of dollars, at a minimum. There is a good chance that the delivery or installation of a safe or vault will be detected by your neighbors, thus creating the risk that the existence of your secure storage becomes public knowledge. The insurance premiums would be lower than for silver not stored in a good quality safe or vault, but it would still cost something.

The next option would be a bank safe deposit box. If you accumulate large quantities of physical silver, the costs could add up to hundreds of dollars (or more) per year. Banks are safer against theft, but you run several risks from storing your silver there. First, if you own the safe deposit box personally and die, the box is supposed to be sealed by the bank until an inventory of the contents can be made for estate purposes. Banks are also not open 24 hours a day to provide instance access. If you remember the huge power failure in the Northeast United States that spread as far as Michigan several years ago, there were some banks in my area that were closed for five days, preventing access during normal business hours.

Bank safe deposit boxes are sometimes broken into, but banks do not insure the contents. Insurance is much more affordable that for physical silver stored at home, but you do have the cost of the annual appraisal on top of the insurance premium.

Last, for large quantities, you can consider using private storage facilities either within or outside the United States. Fees usually include insurance coverage, which can be lower than for goods stored in safe deposit boxes. Overall, as a percentage of value, storage facilities can be lower than safe deposit boxes.

There are levels of secured storage. Unallocated storage means that you theoretically own some part of a large pile of physical silver. You don’t have title to specifically identified merchandise. The silver is owned by the storage facility and their customers’ holdings are unsecured creditors of the storage facility. If the storage company goes bankrupt, owners of unallocated silver get in line with the utility companies, tax authorities, employees and other creditors of the storage company to get the crumbs left over after secured creditors are paid off.

Allocated or segregated storage is safer, but costs more. The fees usually run about double that of unallocated storage. With allocated or segregated storage, specific merchandise is set aside with the owner’s name attached to it. The owners are told the serial numbers of the items they own. When taking delivery, the customer should receive that exact merchandise. Legally, the physical silver would be an asset of the customer and not of the storage company. In theory, if the storage company went bankrupt, those assets would not be subject to claims by creditors of the storage company.

However, there are several disadvantages to physical silver stored in private storage facilities. Typically, such vaults are at a greater distance than banks that people might use for safe deposit box storage. In a crisis, access is virtually non-existent.

Second, and perhaps most important, is the risk that there might be multiple claims of ownership to the same physical silver. It has occurred multiple times that storage firms have used assets they were storing as collateral for debt or that the assets were leased and delivered to other parties. Although this should never happen with allocated or segregated accounts, there is a growing number of reports of owners never receiving such assets at all or only receiving equivalent assets but not the exact ones they were told they owned. The MF Global Holdings bankruptcy debacle should make any investor nervous who has physical silver in storage facilities.

Even worse is the possibility that physical silver that you theoretically have in a storage facility may have never been placed there in the first instance. Several years ago, Morgan Stanley paid substantial damages to settle a class action suit where it was accused of selling physical silver to customers and charging them storage fees, but the firm never purchased the product at all. There is a current class case action against UBS, the huge Swiss bank, for the same practice.

It is the lack of any practical safe and low cost means of owning physical silver that persuaded many investors to opt for paper investments such as shares of silver exchange-traded funds or certificates of metal stored in such places as the Perth or Royal Canadian Mint. Unfortunately, there are potential problems with these paper investments where the investor may end up holding only pieces of paper and no physical silver. But that is a discussion for another column.

So, what should someone do who wants to own a significant quantity of physical silver? The best suggestion I have is to use two or three options. I consider it important to have some amount of physical silver in your direct custody for emergencies. You may split up the total into different locations so that you only tell someone you trust about one location and someone else another location, and so forth. You might hide some and place some in a safe.

I know of one person who put a tall safe in his garage. The safe was on wheels. He cut into the concrete floor to make holes spaced for his safe, then rolled the safe until it sank into the holes. The location was deliberately out of the way, but not hidden. To a burglar, it would appear that the measures taken would indicate that there must be valuable contents within. This person went so far as to have fake silver ingots made and placed into this safe, but no actual physical silver was stored inside. The idea was that crooks would waste all their time going after this decoy and never get around to finding the well-disguised vault he had elsewhere.

Beyond what is in direct custody, consider having some stored in a safe deposit box for the greater safety. If you have a huge quantity of physical silver, that is where you might also use a storage facility, but I would try to avoid using one owned by a bank or a brokerage firm.

By spreading your physical silver into multiple locations, you increase the risk that you might lose some of it. At the same time, you have reduced the risk that you will lose all of it at once. In the process you would have immediate access to physical silver in your direct custody, yet some of it will also be in physically more secure locations.

If anyone has other suggestions how to safely hold large quantities of physical silver with a minimum of cost, please share them.

Patrick A. Heller is the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at www.libertycoinservice.com. Other commentaries are available at Coin Week (www.coinweek.com and www.coininfo.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (www.lansingbusinessmonthly.com/articles/department-columns). His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at www.1320wils.com).