Commodities, Inventory & Collectibles

How to Underwrite Precious Metals and Bullion

Underwrite precious metals by verifying that specific bars or coins exist, are genuine and are held in allocated custody under lender control, then lending at an LTV that absorbs price volatility. The metrics that matter most are allocated holdings by bar and refiner, LTV against spot price, margin call thresholds and custodian quality.

What makes precious metals underwriting different

Gold, silver, platinum and palladium are among the most liquid physical commodities, priced continuously in global markets, so valuation is simple and liquidation can be fast. The underwriting work lies elsewhere: proving the metal exists, that it is genuine and that the borrower actually owns specific bars rather than a claim on a dealer. Allocated holdings are identified bars recorded on a bar list, while unallocated accounts are general claims that expose the holder to the dealer's credit. Bars from accredited refiners meeting good delivery standards trade easily; non-standard bars, coins and scrap may need assay. Metals generate no income, and storage and insurance create carrying cost.

Lenders treat allocated bullion in an independent vault as high-quality collateral, often lending a large share of spot value with daily price monitoring and margin calls. Their focus is verification, custody control and the speed at which they can sell. Investors and holders underwrite price appreciation, portfolio diversification and inflation protection, and may accept unallocated or dealer storage for lower cost. Dealers and refiners use metal as working inventory and are underwritten on turnover, hedging and controls. Lenders typically refuse unallocated metal as collateral or haircut it like an unsecured claim on the dealer.

Key metrics

Loan-to-value against spot

Price volatility, especially in silver and platinum group metals, requires a cushion between the loan and metal value.

Bullion lenders often advance a majority of spot value on gold, with lower advances on more volatile metals and tight margin call triggers.

Bar list and good delivery status

Bars from accredited refiners with serial numbers reduce authenticity and resale risk.

Allocated vs unallocated holdings

Allocated metal is owned outright; unallocated metal is a claim on the custodian or dealer.

Custodian quality and audit frequency

The vault operator's reliability and independent audits determine whether collateral actually exists.

Margin call threshold and cure period

Defines when the borrower must post collateral or repay and how long the lender is exposed to further price moves.

Storage and insurance cost

Carrying costs reduce holder returns and must be paid to keep collateral secure.

How to underwrite it, step by step

Obtain bar lists or coin inventories with refiner, serial number, gross weight, fineness and fine weight.
Confirm the metal is held in allocated accounts with an independent, reputable custodian.
Verify existence through direct custodian confirmation and independent vault audits.
Assay or authenticate non-standard bars, coins and any metal from unaccredited refiners.
Set LTV and margin call thresholds based on each metal's volatility and liquidity.
Execute a control agreement giving the lender the right to instruct sale or delivery.
Monitor prices daily and enforce margin calls within the agreed cure period.

Due diligence checklist

Bar lists or coin inventories
Custody and storage agreements
Custodian confirmations and vault audit reports
Assay certificates
Purchase invoices and chain of custody records
Insurance certificates naming the lender
Lender control agreement
Transport and delivery documents
Pricing source and valuation methodology

Key risks and mitigants

Sharp price decline

Use conservative LTV, daily marks and short margin call cure periods.

Counterfeit or tungsten-filled bars

Accept bars from accredited refiners with chain of custody and assay non-standard bars.

Custodian failure or fraud

Use established independent vaults with insurance and periodic third-party audits.

Unallocated exposure mistaken for ownership

Require allocated holdings and bar lists as a condition of eligibility.

Delay in liquidation

Ensure the control agreement lets the lender sell or move metal without borrower cooperation.

Typical financing and deal structure

Precious metals are financed through secured loans against allocated bullion held in custody, metal leases where refiners and fabricators borrow physical metal rather than cash, consignment arrangements for jewelers and inventory facilities for dealers and refiners. Collateral loans are typically short-term or revolving with daily pricing, margin calls and liquidation rights under a tri-party control agreement with the vault. Metal leases charge a lease rate and require the borrower to return equivalent metal, so the lender's exposure is to the borrower's credit and hedging. Dealer facilities rely on borrowing bases, hedge requirements and inventory audits. Insurance and custody costs are usually borne by the borrower.

Red flags

Metal held only in unallocated accounts or at the borrower's own premises.
No independent custodian confirmation or recent vault audit.
Non-standard bars or coins with no assay or chain of custody.
Custodian unwilling to sign a control agreement.
Requested LTV too high for the metal's volatility and margin call timeline.

Frequently asked questions

Can you borrow against gold?

Yes. Banks, private lenders and some bullion dealers offer loans secured by gold held in allocated custody. They lend a portion of spot value, require a control agreement with the vault and set margin call thresholds. The borrower must maintain collateral coverage as prices move, posting more metal or cash when values fall.

What is the difference between allocated and unallocated gold?

Allocated gold is specific bars held in custody for a named owner and identified by serial number on a bar list, so the owner has title to those bars. Unallocated gold is a general claim against a bank or dealer's metal pool, which exposes the holder to that institution's credit. Lenders generally require allocated metal as collateral.

What does good delivery mean for gold bars?

Good delivery refers to market standards for large gold and silver bars, covering weight, purity, markings and accredited refiners. Bars meeting the standard are widely accepted between dealers and vaults without re-assay, which makes them easier to sell. Lenders prefer good delivery bars because liquidation is faster and authenticity risk is lower.

How do lenders protect against falling metal prices?

Lenders set an LTV cushion below spot value, mark collateral to market daily and require additional collateral or repayment when the ratio crosses a margin call threshold. If the borrower does not cure within the agreed period, the lender instructs the custodian to sell metal under the control agreement and applies proceeds to the loan.

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Educational content, not investment, credit, legal or tax advice. Benchmarks are common practitioner rules of thumb and vary by lender, market and cycle.