BULLIONROCK managing director Robin Newbould examines whether habits of old may obscure new bullion investment opportunities for both corporate and private clients.

Trustees and investment managers have been advising clients on investing in gold, silver, platinum and palladium for a very long time. Unallocated ounces and exchange traded commodities, the most common gold investments made on behalf of clients, come with risk profiles that are often misunderstood. BULLIONROCK managing director Robin Newbould examines whether habits of old may be clouding new bullion investment opportunities for both corporate and private clients and urges advisors to check that their investments are fit for purpose and as good as gold. The views expressed here are his own and not necessarily shared by the editors of this news service although we are delighted to share these views and invite readers to respond.

For a long time, and certainly at the turn of this century, the only way to invest in gold for clients was to trade in unallocated ounces with a big bank. This should have seemed odd even in 2000. Why should a wealth manager or trustee accept a fax confirmation assuring that his clients held some gold he would never see with a bank he would never visit? What if the gold that had been sold (if it really did exist in the bank’s vaults) to someone else or to lots of other people? Unallocated ounces work in exactly this fashion - they are a promise made to the buyer that they are exposed to some gold that the counterparty they are dealing with says it has stashed away somewhere but that the buyer will never see or take delivery of. Why should wealth managers hold such an investment for their clients now that other options exist?  Unallocated ounces are about risk, reward and choice and there are two reasons why they remain available.

They are extremely cost-effective (as no product is made or scrapped, the premium and discount to the spot gold price is tight) and they can be converted into physical bullion (but only when the counterparty is a refinery and not a bank).

Perhaps it is right to say that unallocated ounces might be suitable for short-term exposure to the gold price for clients who have no need for physical product and who don’t lie awake at night wondering if the counterparty, they are exposed to as a creditor, might go bust. They can also be used, if the counterparty permits, to convert into physical bullion later – allowing the investor to ‘wait and see’ if his decision was well timed.

Exchange traded commodities

Regular, physically-backed, Exchange Traded Commodities are designed to be simple and transparent open-ended securities that trade on a well-regulated exchange. ETCs exist to allow the buyer to gain exposure to gold without having to trade in futures or take physical delivery. Formally they are most often secured, undated, limited recourse debt securities designed to track the underlying gold price movement. Some ETCs use derivatives, most typically swaps, to replicate this price movement (or multiples of it or the inverse of it)… which is all clever stuff, provided that’s what the buyer wants and understands.

Even when looking at the simplest, physically backed, 1:1 gold ETC, it is important to establish where the gold is held and by whom and who is auditing the bars and how often. Execution and custody charges, above the ETC’s annual management fee of, typically, 0.6 per cent per annum will need to be considered when investing. Most importantly if the investor ever wants to take delivery of his/her gold within the ETC then the costs, minimum redemption levels and mechanics of such a process (if it exists at all) should be examined - they are often prohibitively high and complex.

Fractional ownership schemes

Fractional ownership schemes offer exposure to precious metals held, on a collective basis, for the clients of the scheme. Investors should ensure that the scheme is backed, in full, by physical bullion of an appropriate standard (to carry “investment status” gold must be a minimum of 995 parts pure per 1,000, although most bars are 999.9 parts pure) and that the bullion is independently audited.

While headline purchase, sale and storage costs may look attractive investors should be aware that, should they wish to withdraw physical bullion from the scheme, costs can be nothing short of exorbitant: it is not unknown to see 7.5 per cent for a 1 kg gold bar or 10 per cent for silver in the small print of one of the world’s leading .com scheme providers.

Physical bullion

Some investors will always consider vault-held, investment status, physical bullion that can be collected on demand as the ultimate exposure to gold. Even so, it is understandable why trustees and wealth managers have become accustomed to defaulting to something that seems easier than physical gold. The perceived high costs of manufacture and scrappage for bars and coins, along with questions over liquidity, logistics, storage, insurance, reporting and valuation, may seem like more hassle than they are worth.

It is just not the case anymore. Now physical holdings, in the exact form, purity and weight required, can be held securely offshore. They are fully-insured from refinery to vault with online dealing instructions, contract notes, valuations linked to London Bullion Market Association prices, reporting, reconciliation and independent audit reports. With intra-day trading at prices linked to the spot, no liquidity issues and annual fees lower than ETC management expense ratios and allocated holdings that can be withdrawn by investors at any time, there has never been a better time to ask clients if they might feel happier invested in physical gold. There may also be financial reasons to switch: some physical assets are tax-free for UK investors – both from a value added tax and capital gains tax perspective.

Trustees and wealth managers should review their current investments to make sure they are fit for purpose and as good as gold.

BULLIONROCK is a regulated financial service business based in Guernsey that allows clients, in one portfolio, the choice of investing in physical, unallocated and exchange-traded. The business is not more 'for or against' any of them in any way whatsoever. As briefly described, there are merits and restrictions offered by each that, as tends to be the case in the investment world, make the risk and reward equation seem reasonable and justifiable.