5000 Tons in One Year.. Where Do Investors Hide Gold and What Are the Insurance Costs?

SadaNews Economy - You might bet on a drop in gold prices to seize a buying opportunity, but the more important question is: Have you calculated the cost of storing it? As prices rise, so does the bill for storage and insurance.

Last year, global demand for gold reached its highest historical levels at 5002 tons, according to World Gold Council data, driven by a strong increase in investment demand. At the heart of this shift, consumer interest in gold bars and coins reached its highest level since 2013, accounting for about 47% of global consumer purchases, indicating a rising demand for physical gold as a hedge amid economic fluctuations and geopolitical risks.

This interest is not just a short-term trend, as Michael Brown, multi-asset market analyst at Pepperstone, noted in an interview with "Asharq", indicating a structural shift in individual investor behavior, with gold's increasing role as a long-term portfolio diversification tool. Although gold allocations remain low compared to historical benchmarks, recent interest has been bolstered by some investors exploiting price declines to rebuild their positions, he stated.

Beyond Gold's Shine.. A Hidden Industry Moves

Behind this rising demand, a complete business ecosystem is quietly forming and growing with every ounce purchased. Private vaults outside the banking system, advanced security systems, and specialized insurance markets against theft or loss are all moving in parallel with the rise of gold, even if they remain out of the spotlight that follows prices.

Andrew Naylor, head of the Middle East division at the World Gold Council, tells "Asharq" that storage and preservation have become critical components of the gold investment experience, with investors increasingly aware of the risks of theft, loss, and counterfeiting, compared to the importance of protection, documentation, and chains of custody.

As gold prices have risen significantly in recent years, not only has the potential investment value increased, but so has the cost of holding it, reflecting a clear shift in demand nature, now driven by hedging considerations and long-term holding rather than traditional consumption, according to data from the World Gold Council.

In this context, most professional storage providers in major financial centers base their service pricing on a percentage of the market value of the stored gold, given that costs are tied to insurance risks and price fluctuations.

Naylor states that rising gold prices directly translate into higher holding costs, adding that market estimates suggest storage fees typically range between 0.10% to 0.30% annually of the value of the gold, while insurance premiums usually range between 0.10% and 0.20%.

As a result, Naylor asserts that "a 50% increase in gold prices leads to a similar 50% increase in the absolute dollar cost of storing and insuring it, even if the fee percentages remain unchanged."

In contrast, other vaults, particularly those servicing individuals and storing various physical assets like bars and jewelry, depend on different pricing models, either based on the size of the space or a combination of area and value.

In traditional bank safe deposit boxes, fees are typically calculated based on the size of the safe, generally ranging in markets such as Dubai from a few hundred to several thousand dollars annually depending on size and location, while in European financial centers like London, they range from hundreds of dollars to around 1500 dollars or more for larger safes annually.

In private vaults outside the banking system, pricing is sometimes calculated based on volume or leased area, with fees starting from a few hundred dollars annually for small spaces and reaching thousands of dollars for larger spaces or private rooms, with insurance fees based on the declared value of the assets in some cases.

The Declining Role of Banks in Storage

This shift coincided with a marked decline in banks' roles themselves in storing valuable possessions. In recent years, several banking institutions have reduced safe deposit services, either due to operational costs or limited commercial viability, prompting individual and institutional investors to seek alternatives outside the banking system. In fact, many banks no longer allow new customers to rent safe deposit boxes, limiting this service to existing customers.

According to Naylor, the record demand for physical gold last year began to impose clear pressures on storage capacity, with vaults in major financial centers, including the Middle East, operating at or near their maximum capacity, with waiting lists emerging in some markets, contributing to rising storage costs in high-demand areas.

The Middle East stands out in this transformation due to its deeply rooted culture of savings linked to gold, which transcends its mere role as an investment tool, being passed down through generations. However, the rising value of holdings and increasing security considerations are pushing a growing segment of investors in the region towards professional storage, seeking higher levels of protection, insurance, and authenticity verification, according to Naylor.

This shift is also evident in London, where the "Spears" magazine, specialized in wealth management, reported that demand for private vaults jumped by over 100% last year, prompting some companies to expand their capacity this year amid rising gold prices and increasing fears about storing gold at home.

Conversely, this decline does not mean that banks are fully withdrawing from the gold storage arena. According to a report by "Bloomberg", major global banks have begun exploring expanding their presence in bullion storage services in London, driven by rising gold prices and increasing business viability for vaults.

At the same time, this transformation has not been limited to professional vaults. With rising gold prices, its attractiveness as a target for theft has increased, prompting some investors to reevaluate their home security, making advanced home safes and high-cost alarm and security systems part of a broader landscape reflecting the transition of gold from a silent savings asset to an asset requiring actual protection.

Insurance.. When Gold Becomes a Burden

As gold prices soar to record levels, the total value of insured assets within vaults has risen, placing unprecedented pressures on the insurance system itself.

According to a report by the "Financial Times", the maximum coverage limits per site have increased from about $3 billion a few years ago to as much as $5 billion currently, as the rapid rise in prices has caused some vaults to approach or exceed these limits.

As a result, some vault operators have resorted to distributing gold across multiple locations, while others have begun adopting what is known as "self-insurance," by taking on part of the risks on their balance sheets, a method that bullion banks have followed for years. The newspaper notes that this shift is no longer confined to major players, as it is also appearing among mid-sized custodians who previously insured their entire holdings.

This pressure does not stop at storage and insurance companies alone, but broadens during periods of tension to encompass the entire global storage system. During such times, vaults in major financial centers play a crucial role in absorbing shocks to precious metals markets, whether due to demand disruptions or sharp movements in physical flows between markets.

This pressure has also begun to be reflected in the policies of the financial centers themselves, as some Asian financial cities seek to expand their gold storage capacities in an attempt to capture a larger role in a market where storage infrastructure has become a critical factor with rising demand for physical metal, according to a report by "Bloomberg".

The Danger of Counterfeit Bullion

With the increasing demand for physical gold, the risks do not only relate to theft or storage and insurance costs, but also extend to the risks of counterfeiting and fraud.

Andrew Naylor warns that the growing demand for gold bars and coins increases the chances of counterfeit products entering the market, prompting investors to increasingly rely on professional storage solutions to mitigate these risks, appreciating the peace of mind provided by documented and insured holdings.

As the value and volume of gold holdings rise, the risks of sophisticated counterfeiting operations increase, making professional storage and preservation more critical than ever, not only for protection and insurance but also for authenticity verification and documentation of the chain of custody, he said.