The Real Estate Espresso Podcast AMA - Gold As Collateral
Today is another AMA Episode (Ask Me Anything).
Paul asks:
"I have been acquiring gold/silver since December of last year. Outside of a small physical holdings possession what do you recommend for storage for a larger portion of your holdings? I have heard Russel Gray talk about holding gold/silver and then borrowing against it to buy real estate. I love the idea but my search hasn’t found a trusted institution to do this? I believe you have mentioned in your Podcast you have bought from your bank. Would you be open to sharing your thought on how to find a custodian to store and borrow from your own precious collateral?"
Paul, this is a great question. In fact there are a couple of questions wrapped up in this question.
Let’s take a step back and talk about the purpose of holding physical gold. Of course, the amount of gold that you hold will ultimately influence your decision on where to store it. Gold is a store of wealth. It’s money, one of the only true forms of money. Although the government would like to have you believe that it’s not. It used to be of course.
When you buy gold, there are many forms you can buy gold.
Most people buy gold certificates. We don’t recommend it. Just because most people do it, doesn’t mean it’s the best thing to do. When you buy gold certificates, you’re buying a futures contract on gold at the spot price for gold. But the biggest problem with certificates is that you’re only holding a piece of paper. The piece of paper is essentially an IOU. This is not different than holding US dollars which are an IOU. It is subject to counterparty risk. The IOU is only as good as the company providing the IOU. The 2008 financial crisis showed us how even a legendary name like Lehman Brothers with over 150 years of history could leave an investor exposed.
I’m personally a fan of holding the real metal.
So when you buy gold, the question is where to buy it from? There have been a few isolated cases of counterfeit gold being sold on the open market. So you need to buy from a reputable dealer. Generally, these dealers buy directly from the mint, or from a distributor who buys from the mint.
I like holding gold at private security companies where the records of who holds the safe deposit box is kept private.
Your second question is where to store gold that his being held as collateral? You have a few choices.
- You can allow the lender to hold your collateral if you trust them.
- It’s more common to have collateral held by a third party who is in a fiduciary role where the functioning of that trustee is documented in a trust agreement. There are trust companies that can act as the trustee for precisely that purpose. They charge a fee for that custodial role and you need to decide if that fee is worth the additional security of having the collateral being held by the trustee. Sometimes the trustee can be an individual like a lawyer, if you are confident in that person fulfilling their role as trustee. After all, lawyers do have trust accounts where they hold money on behalf of their clients. This is conceptually no different.
Let’s say that you want to invest in real estate. You might have some gold and you don’t want to sell the gold. Clearly you’re going to pay a higher interest rate to borrow funds with no security. You can use the real estate as collateral for a portion of the loan. But the remainder, the equity is the more expensive money to find. What if you could borrow money against your gold to fund the equity portion of the purchase?