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What are Bank Gold Accounts, and how do they work?
Since a very few years, banks all over the world reacted on the increasing demand in physical gold by small and medium sized bank customers. The banks’ answer is offering so-called Gold Current Accounts or Gold Saving Accounts, which became very popular in many countries.
Gold Accounts with banks offer clients the opportunity to invest in gold by the gram.
The increasing demand in gold as an alternative to keeping cash on account is mainly based on fading confidence and trust of people in the major currencies Euro and US Dollar, and on very low or even negative interest rates in the Eurozone and interest rates below the inflation rate in other countries.
Wealth advisors and managers advise their well-off clients to keep 5 to 20% of their asset portfolio in physical gold for hedging risks and to balance the overall performance of a portfolio.
Not so well-off people who wish to keep a part of their savings in form of physical gold either do not have any access to physical gold, or they take some cash from their bank account and buy small amounts of physical gold from coin shops. Many of them do that frequently, whenever there is some leftover from their salaries or other income.
Banks have manifold motivations to offer their clients Gold Accounts
Many banks did notice this development and were and are keen to participate in the trend of gold savings. The banks’ answer is to offer their clients so-called Gold Current Accounts or Gold Saving Accounts, the latter offering interest as well.
There are several reasons triggering banks to offer Gold Accounts, such as:
- Diversifying their product range;
- Offering existing bank clients an interesting alternative saving product, at times when banks are not able to offer interesting interest rates on saving deposits or even fixed time deposits;
- Keeping those client funds in the bank that would otherwise leave the bank for the purchase of gold from other sources;
- Attracting new clients to the bank, in competition with other banks that do not offer Gold Accounts,
- Hedging a part of the bank’s assets against currency risks and impairment.
Banks that decided to set up the infrastructure necessary for Gold Accounts were always surprised about the overwhelming interest of their customers in this new product.
An example: A “Sparkasse” in a smaller town in Germany (“Sparkasse”s are individual saving banks that are organised as a cooperation under the DS Bank in Berlin) uses to promote each new product with a public event to which they invite both their existing clients and the public. Participation in these events requires registering prior to the event. Those promotion events of this Sparkasse were typically attended by around 400 interested clients and members of the public. When they promoted their new Gold Accounts, they had to stop registrations when the crowd reached 1.000 persons, because the local event venue can take only 1.000 persons.
Statistical data about savings on Gold Accounts from banks’ short financial statements typically published are unfortunately not available. The reason is that the BIS (the Bank for International Settlements in Basel, being a kind of Central Banks of national Central Banks) published a decision in 2014 that allows banks to enter physical gold at a purity of minimum 995,0 (= 99,50%) in their books as cash position, thus forming a part of Liquid Assets in their balance sheets.
How do Gold Accounts work?
Gold Accounts are like normal currency accounts, with the difference that the currency of Gold Accounts is physical gold, which is kept by the bank. Instead of having a currency balance, Gold Accounts have a gold balance, expressed in the weight of gold that a bank client bought. The weight is typically expressed in grams. The monetary value of the gold balance on accounts is calculated based on the daily gold price, either linked to the global spot market price or to the morning or afternoon price fixing of the London Metal Exchange (LME).
The code for Gold Accounts is typically XAU, where 1 XAU is equal to 1 gram of physical gold.
Bank clients typically buy gold by transferring funds from their current account to their Gold Account with their bank. The funds transferred are automatically recalculated as a weight of gold, based on the daily gold price and a small mark-up (premium) that is typical for the gold market. The calculated weight of gold is then credited, as grams, to the client’s Gold Account.
Most banks require an initial minimum gold amount to be bought, varying from EUR 100 to EUR 5.000, depending on the bank’s strategy and the segment of clients they want to attract for this product.
The gold bought by bank clients is of course not virtual. Gold credited to clients’ Gold Accounts is physically in the possession of the bank. Banks store this gold physically either in their own vaults or in high-security storage facilities of accredited companies which are specialised on storage and custody of physical precious metals. The vaults of such high-security storage facilities are often safer and more sophisticated than a bank’s own vaults. Whether stored at a bank’s own vaults or at the high-security storage facilities of a specialised third party, the gold of the bank is in the bank’s legal possession, it is not leased from a third party.
Gold Accounts are typically current accounts, also named Gold Current Accounts, that do not offer any interest on their balance. Some banks do also offer Gold Saving Accounts, where an interest is paid by the bank in form of gold.
Additionally, some banks offer Fixed Gold Time Deposits, offering a higher interest rate than on the Gold Saving Accounts. As most Gold Account Holders aim to protect their wealth on the long term, Fixed Gold Time Deposits are in high demand. Depending on a bank’s strategy and policy, Fixed Gold Time Deposits require a minimum investment of typically 200 to 500 grams (approx. EUR 8.231,50 to EUR 20.578,75, based on the gold price of today, 01/08/2019 at 18:40 EET, being EUR 41,1575 per gram. Fixed Gold Time Deposits do also require a minimum maturity, and they do have a maximum maturity.
Before a bank’s gold stock is entirely sold to clients, the bank buys additional gold in order to meeting serving their clients’ demands.
Clients may transfer gold amounts from their own Gold Account to the Gold Account of another client of the same bank.
Withdrawals from a Gold Account can be made by transfer to a client’s current currency account, at the counter at a bank’s branch or even through ATMs.
Some banks do also offer the right of physical gold withdrawal from the Gold Account, charging an additional service fee for the required logistics. Should clients wish to withdraw physical gold, they need to notify their bank a few days in advance.
Unallocated and allocated gold
The above text describes the operation of Gold Accounts where the bank stores the gold in unallocated form. That means that no specific gold bars are allocated to a specific client and the clients have the advantage of buying gold for any amount of money, which means clients can buy any amount of gold. Physical gold bars are typically available at the weight of 1 g, 10 g, 50 g, 10 g, 250 g, 500 g and 1.000 g. However, to avoid unnecessary logistics and handling many different bar sizes, banks do typically hold only a few gold bars sizes.
Allocated gold means that specific gold bars stored by the bank are allocated to a specific client, providing the client with the producer name and the serial numbers of his/her gold bars. In case a client wishes to buy allocated gold bars, payment at specific amounts are required, in contrast to the purchase of gold for any amount. The reason is simple; the purchase price is determined by the size of the gold bar, purchasing gold by the gram is generally not possible. Additional fees apply for the allocation service.