Buying gold from a bullion bank and buying physical bullion from a refinery-supplied counterparty produce documents that look similar at the point of purchase and behave very differently afterwards. With a bullion bank account, what the holder owns is a balance entry on the bank’s books — a contractual claim against the bank for an amount of metal. With physical bullion under an allocated custody contract, what the holder owns is a set of specific bars, listed by serial number on a weight list and held in bailment at a third-party vault outside the counterparty’s balance sheet.
At three points, the difference becomes operational. At insolvency, allocated bars sit outside the counterparty’s estate and stay with the holder as property; an unallocated balance freezes with the bank’s assets and resolves through creditor proceedings. At audit, the allocated holding produces a bar list; the unallocated balance produces a credit entry in fine ounces. At redemption, allocated bars come out of a vault under release instruction; an unallocated balance has to be reconstructed by the bank from inventory.
1. What “gold” means under each model
Behind each model sits a distinct legal framework. A bullion bank account is a debtor-creditor relationship — the bank holds gold on its own balance sheet as inventory, and the holder’s account records what the bank owes them in metal. Allocated physical bullion is a bailment — specific bars exist as the holder’s property, and a third-party custodian holds them on the holder’s behalf without ever taking title.
2. The bullion bank model — unallocated balance, Loco London
A bullion bank account in its default form is an unallocated Loco London position. The LBMA’s own OTC guide describes the holder’s interest as a contract claim against the clearer for an amount of metal, not as ownership of any specific bar; credit exposure runs to the institution where the account is held. Mechanically the entry behaves like a currency account — a dollar amount is divided by the spot price, the resulting fine-ounce quantity is credited to the account on the spot date, and the balance moves through book entries against further trades.
This is the market default for a reason. The LBMA estimates that over 90% of precious metals traded on the interbank, wholesale, and OTC market clear over unallocated Loco London accounts. The clearing infrastructure sits inside London Precious Metals Clearing Limited (LPMCL), owned and managed by four LBMA market-maker banks — HSBC, ICBC Standard Bank, JP Morgan, and UBS — which use the unallocated metal on their books to settle trades among themselves and on behalf of clients and sub-clients. The structure of this clearer tier and the broader bullion-bank category is covered in the parent explainer on LBMA market makers.
What the holder owns, in this structure, is not metal. Under the LPMCL’s own definitions, an unallocated account does not set aside specific bars; the holder has only a general entitlement to the metal and stands as an unsecured creditor of the clearer. The metal backing the account, where it exists, is the bank’s inventory; it sits on the bank’s balance sheet, not the holder’s. The 2018 LPMCL Unallocated Account template contract carries this through — the bank reserves the right to debit the account against tax liabilities and to set off the metal value against any liability owed by the holder under the agreement or otherwise. The position is contractual, against the bank.
3. The physical bullion model — allocated metal in bailment
At the bar level, the allocated holding is documented as itself. The holder receives a weight list naming, for each bar, the unique bar number, the gross weight, the assay or fineness, and — for gold — the fine weight on that specific bar. Each line on the list points to a physical object identifiable on inspection.
Day-to-day, movements on the holding are physical movements: a bar enters the holder’s segregated position in the vault on placement, a bar leaves on release instruction, and the line on the weight list updates against the specific bar that moved. The custodian acts as bailee — holding specific property on the owner’s behalf — and the underlying contract reflects this: title remains with the holder, the custodian holds and safeguards. Allocated holdings therefore sit off the custodian’s balance sheet entirely; the metal belongs to the client. The custody-side mechanics of allocated versus unallocated holdings are covered in detail in the sibling article on allocated and unallocated gold.
If the trading counterparty or the custodian enters administration, the holder lifts the position out separately. Allocated bars remain the holder’s property under bailment and fall outside the failed firm’s distributable estate. The holder presents the bar list and the release instruction against the custodian’s vault records, and the bars come out of the segregated position. Metal leaves the vault. The administration concerns somebody else.
4. Where the two models diverge in operation
Side by side, the two structures resolve differently across the points where a holder’s position is actually tested.
| Dimension | Bullion bank account (unallocated) | Allocated physical bullion |
|---|---|---|
| Legal relationship | Debtor-creditor with the bank | Bailment with the custodian |
| What the holder owns | A contractual claim against the bank for a fine-ounce balance | Title to specific, identifiable bars |
| Bar identification | None — balance recorded in fine ounces against general inventory | Each bar identified by serial number, refiner mark, gross and fine weight, and assay |
| Balance-sheet location of the metal | On the bank’s balance sheet (any backing metal is bank inventory) | Off the counterparty’s balance sheet entirely |
| Insolvency treatment | Holder ranks with unsecured creditors of the bank | Bars fall outside the failed counterparty’s estate and remain the holder’s property |
| Redemption | Conversion from unallocated to allocated, subject to the bank’s inventory and reconciliation, followed by physical instruction | Physical removal on production of bar list and release instruction |
| Basel III NSFR treatment | 85% Required Stable Funding factor on the bank | Off balance sheet — no RSF applies |
| Typical counterparty | LBMA market-maker bank or its clearing affiliate | Refinery-supplied trading counterparty paired with an independent vault custodian |
Behind the right-hand column sits a pair of contracts specified explicitly: a supply contract with the trading counterparty and a custody contract with an independent vault operator under bailment terms. The integrity of the allocated position depends on both being written to the bar; the two halves correspond to the two anchors named in the table’s last row. Loose contracts pull the right column toward the left in practice — bars without a weight list, or custody without bailment terms, reduce in operation to a fine-ounce claim against the trading counterparty rather than ownership of identifiable metal.
5. The 2007 Morgan Stanley case — what “unallocated” looked like when tested in court
Filed in August 2005 in the Federal District Court for the Southern District of New York, the Selwyn Silberblatt class action against Morgan Stanley DW Inc. stands as the clearest documented example of that collapse in U.S. case law. The class covered investors who had purchased gold, silver, platinum, and palladium — in bullion bar or coin form — from Morgan Stanley and its predecessors between 19 February 1986 and 10 January 2007, and who had paid the firm fees for the storage of that metal.
Under the complaint, the structural integrity of the account was the issue. Morgan Stanley had told clients it was selling them precious metals they would own and the firm would store, while either making no investment specifically for those clients or making entirely different investments of lesser value and security. At issue was whether the metal the customers had been told they owned existed as their property in any form a court could recognise as ownership.
In June 2007 the parties reached a settlement, subject to approval by the District Court, in which Morgan Stanley agreed to pay $4.4 million — $1.5 million in cash and approximately $2.9 million in other benefits valued by plaintiffs’ experts. Court filings characterised the $2.9 million figure as business-practice reforms. The settlement carried no admission of liability. What it did carry was an acknowledgement that the language used to describe the account had created an exposure substantial enough to resolve through a settlement fund and through changes to how such accounts would be sold and operated going forward.
The case documents what happens when account materials create an impression the underlying contract does not support. Resolution came at a price — cash plus reforms — paid without anyone establishing whose description had been wrong; the reforms component cost roughly twice the cash. The lesson is procedural: account language carries its own exposure, separate from the legal structure of the position, and the gap between the two priced into a multi-million-dollar workout once it reached litigation.
6. Basel III NSFR — how regulators ended up pricing the same distinction
In October 2014, the Basel Committee on Banking Supervision finalised the Net Stable Funding Ratio (NSFR), assigning physical and unallocated gold an 85% Required Stable Funding factor — the same factor applied to corn or lead. The RSF determines how much long-term, stable funding a bank must hold against each asset on its balance sheet. The LBMA confirms the 85% figure and notes that gold sits outside the High-Quality Liquid Asset list under the related Liquidity Coverage Ratio.
By construction, allocated metal sits outside that calculation. The metal is the holder’s property held by a bailee, so it stays off the bank’s balance sheet from the start, and the 85% factor reaches only assets the bank itself owns. The same prudential rule that prices unallocated gold leaves allocated holdings off the perimeter, because the regulatory line follows ownership.
On 28 June 2021 the European Union implemented the NSFR; the United Kingdom followed on 1 January 2022 through the Prudential Regulation Authority. The PRA subsequently introduced “interdependent precious metals permissions” allowing clearing banks to apply a 0% RSF factor to physical stock balancing customer deposits — a narrow exemption preserving the clearing function, leaving the 85% factor on directional unallocated positions in place.
By their own regulatory submissions and client communications, several bullion banks have since encouraged or required clients to convert unallocated holdings into allocated accounts — a shift that accelerated after the UK’s implementation in early 2022. For the bank, conversion is balance-sheet relief: the metal moves from on-book inventory carrying 85% stable funding to off-book custody outside the calculation. For the holder, the same step replaces an unsecured creditor exposure to the institution with a title-and-bailment position. The driver is stable funding pricing — the operating cost of carrying gold inventory under the post-2022 regime, paid in basis points the bank now wants to avoid.
7. What this means in counterparty selection
Counterparty selection resolves to four checks that any counterparty offering “gold” should be able to answer from the contract being signed, not from the brochure.
- Title check. Two title arrangements exist under any gold purchase. In the first, the counterparty holds title and the buyer carries a contractual claim — the position is unallocated, whatever the account label states. In the second, title sits with the buyer and the counterparty (or its bailee) holds physical possession on the buyer’s behalf — the position is allocated. Reading the title clause settles which arrangement is in force.
- Balance-sheet location. Allocated metal sits off any institution’s balance sheet, held by a bailee for the buyer and off-book at every layer of the chain. An unallocated balance, by contrast, sits on the issuing institution’s balance sheet as inventory carried against a liability. The counterparty’s audited accounts will show which.
- Evidence package. The bar-level record sets the model. For an allocated position, the operative document is a weight list — each bar identified by serial number, refiner mark, gross weight, fine weight, and assay. Unallocated positions instead generate a periodic account statement showing a fine-ounce balance against the bank. Audit trails read these as fundamentally different artifacts.
- Insolvency route. Two outcomes follow at insolvency, depending on whose property the metal is when proceedings begin. Where the contract places the metal in the holder’s name under bailment with an identified custodian, the bars come out under the bar list and the release instruction, outside the administration entirely. If the metal remained the counterparty’s asset on its books, the position resolves as an unsecured creditor claim in the same proceedings as everything else on the failed firm’s balance sheet.
Operationally, the physical bullion model is two contracts paired explicitly: a supply contract with a trading counterparty sourcing refinery-origin metal — LBMA Good Delivery bars from a recognised refiner such as Heraeus or Argor-Heraeus SA — and a custody contract with an independent vault operator, written under bailment terms naming the holder as titleholder. Golden Ark Reserve operates in this configuration as its sole structure: supply contracted from Heraeus and Argor-Heraeus, custody and international delivery contracted through Brink’s, with allocation recorded at the bar. The constituent relationships and their evidentiary basis are listed on the partners and service providers page.
The decision sits with the buyer at contract stage and is hard to retrieve afterwards. Engagement on a physical position begins by requesting terms.