Understanding Allocated vs. Unallocated Gold: What’s the Difference?

Allocated Gold is perhaps the type of gold investment that most would think of when considering buying physical gold. Buying specific gold coins or bars for direct ownership is the primary format that we focus on at PhysicalGold.com.

What is Allocated Gold?

Allocated gold refers to physical gold that is specifically allocated to an investor. In essence, when you purchase allocated gold, you are buying a portion of gold that is held in your name, distinct from the assets of the custodian or financial institution. This means that you have legal ownership of the specific gold bars or coins, which can either be stored securely on your behalf or delivered to your address.

Main Characteristic of Allocated Gold

One of the defining features of allocated gold is its tangible nature and direct ownership. Unlike other forms of gold investment, where you may simply hold a paper claim to the metal, allocated gold provides you with direct title of the physical assets. These assets can be stored in secure vaults, ensuring their safety and integrity, or delivered direct to the purchaser.

Allocated Gold: Investors have clear legal ownership of specific gold assets, providing a transparent and secure ownership structure. Even allocated gold held within vaults is fully segregated from 3^rd party creditors.

Unallocated Gold: Ownership is based on claims against a pool of gold held by financial institutions, which may raise questions about legal ownership and recourse in certain situations. If the institution becomes financially troubled or many holders wish to sell simultaneously, problems in realizing funds may arise.

Allocated Gold: Dealers tend to charge a storage fee which includes insurance cover, based on a percentage of the value of the holding. This rate tends to be higher than that of unallocated gold, which benefits from simplicity and critical mass. House insurance policies may need to be increased if investors choose to hold gold at home.

Unallocated Gold: Insurance costs are typically included in the fees charged by financial institutions for holding gold accounts or gold ETFs. This reduces the ongoing burden of insurance costs.

Allocated Gold: Offers protection against counterparty risk, as investors have direct ownership of specific assets and are not reliant on the financial stability or integrity of intermediaries. Exposure to market risk only is one of the prime appeals of owning allocated gold, especially held in person.

Unallocated Gold: Exposes investors to counterparty risk, as their investment is dependent on the financial health and integrity of the institutions holding the gold. The use of leverage on some unallocated gold such as ETFs, can pose a particular risk to investors.

When deciding to invest into physical gold, the choice between allocated and unallocated gold is crucial. It can not only impact your profit but also vary greatly in which objectives the investment achieves. The decision-making process should always start with asking yourself exactly why you want to invest in gold?

One of the major obstacles sited with physical gold investment is the perceived high margins. Buying gold as a physical asset will always be less cost-effective than buying an asset electronically.

Evaluate the costs involved in purchasing, storing, and selling allocated and unallocated gold. Undoubtedly, if you want physical gold exposure at the lowest possible cost then an unallocated account achieves this. Both buy and sell fees will be less than allocated gold charges, which in theory should increase profit margins.

This cost difference becomes even more significant when comparing small purchases. Even modest trades of unallocated gold will benefit from the cost-effectiveness of pooling resources with others. But buying a single gold wafer or coin for direct ownership will come at a far higher premium as prices are based on that single transaction. If the coin has a numismatic value, then premiums increase again.

On the flip side, buying larger quantities of allocated gold will achieve price reductions and close the cost gap significantly with unallocated investments. The wider choice of gold types available to allocated gold owners can have an indirect impact on the cost consideration.

While gold coin premiums may be higher, the potential for appreciation can also be far greater. Paying 5% more upfront will represent good value in hindsight, if your coins increase in value 30% more than general bullion prices. Not only that, but certain coins offer distinct tax advantages. British coins such as Britannias and Sovereigns for example, are completely free of Capital Gains Tax (CGT) for UK gold investors. Unallocated positions may save on fees initially, but any profits will be charged for CGT.

This balance between short and long-term priorities is important. Storage fees will be lower with unallocated gold, so the length of ownership will only increase the ongoing cost differential between the two ownership methods.

If you’re seeking to actively trade gold, then the more efficient costs of unallocated gold are far more appropriate. In fact, we never recommend a short-term view for potential allocated physical gold investors due to the premiums that need to be overcome to achieve profit. But if your investment horizon is long-term, then a buy and hold strategy can help overcome these initial cost differences.

It should be just as easy to buy allocated or unallocated gold with many online platforms catering to both. Depending on the particular intermediary, selling unallocated gold could also be as easy as clicking a button. It’s worth investigating the process before investing, as some custodians may involve additional steps, slowing down the process.

Selling gold which is in direct possession could require more effort if you need to return the gold to the dealer. This can be achieved either in person or some dealers may provide insured postal services. It can be argued that direct ownership provides the ultimate flexibility to sell whenever and to whoever you like. While unallocated gold has to be sold back to the financial institution running the position, allocated gold can be sold to any party of your choice.

Liquidity is likely to be very good for unallocated assets when markets are operating well. Fractional ownership of generic gold bars comes with transparent and explicit buy and sell prices. However, the real danger can arise during periods of market frenzy, where selling unallocated positions could prove difficult as everyone looks to trade simultaneously.

The additional control with allocated gold can provide increased liquidity, especially during periods of intense activity. Direct access to your gold and more seller choice on the open market, improves ease of selling. Conversely, the less generic your physical gold, the more you narrow your buyer market. While selling a gold bar or bullion coin may be simple, offloading historical coins can take time finding specific buyers.

Control and flexibility can be critical factors in making the choice between investment methods. With increasing concerns over the health of banks and their access to our money, a growing number of investors turn to gold for control and privacy. Unallocated gold ownership has to be registered and is traceable. However, purchasing physical bullion and coins offers greater privacy since transactions are typically conducted in person or through private dealers.

Finally, you may want to think about how your gold investment may fit in with your potential future plans and movements. Do you anticipate needing to carry gold overseas? Re-patriating funds from the sale of unallocated gold may be tricky if you expect needing to transfer assets across borders. Directly owned allocated gold may offer greater portability and ease of transfer in such scenarios.

What is the difference between allocated and unallocated gold?

Allocated gold is owned outright by investors and either stored in their name in secure vaults or delivered to their address, providing direct ownership and protection against counterparty risk. Unallocated gold, however, remains the property of the bank, representing a claim against a pool of gold without specific ownership of physical assets.

Which is safer, allocated or unallocated gold?

Allocated gold tends to be considered safer since investors have direct ownership of physical assets, reducing counterparty risk. Unallocated gold exposes investors to counterparty risk as their investment relies on the financial stability of the institution holding the gold.

How does liquidity differ between allocated and unallocated gold?

Allocated gold typically offers higher liquidity since physical assets can be easily traded or sold. Unallocated gold may involve additional steps or delays in trading since it’s held in accounts with financial institutions.

What are the costs associated with allocated and unallocated gold?

Allocated gold may have higher upfront costs due to the purchase of physical assets and storage fees. Unallocated gold may involve ongoing fees for custodial services or management.

Is allocated or unallocated gold better for short-term investment?

Allocated gold may be more suitable for long-term investment strategies due to its tangible nature and potential for capital appreciation. Unallocated gold could be more appropriate for short-term investments or for those seeking exposure to gold prices without owning physical assets.

What is pool allocated gold?

Pool allocated gold refers to a collective investment where multiple investors contribute funds to purchase and own a shared pool of gold bullion. This gold is professionally managed, stored, and vaulted by a trusted custodian, offering investors exposure to gold prices without the need for individual storage arrangements.

Is unallocated gold safe?

While unallocated gold offers flexibility, it poses higher risk compared to allocated gold. Investors hold claims against a pool of gold, exposing them to counterparty risk linked to the financial stability of the custodian. Therefore, the safety of unallocated gold depends on the reliability of the institution holding the gold reserves.

Is allocated gold safe?

Allocated gold is generally considered safe as investors have direct ownership of specific physical assets, reducing the risk of counterparty default. Unlike unallocated gold, which is tied to the financial health of the bank, allocated gold provides security against insolvency or credit risk.