The Case For Gold In Asia’s HNW Portfolios

With regard to preservation of wealth, gold has an immensely long track record; providing a hedge against inflation, geopolitical risks, natural disasters and other crises. Currently private banks and wealth advisers might typically advise their HNW clients to hold about 3-5% gold in their investment portfolios. While an ETF provides gold exposure and is an excellent tool for short-term trading, physical gold is preferable for medium to long-term investment as it is highly liquid, lacks counterparty risk and affords investors more flexibility. Unlike property or stock funds, physical gold is a highly efficient wealth management tool for estate planning. In banks client's liquidity can also be maintained via leverage. The banks may lend up to 80% against the value of the gold holdings and will probably charge a marginally higher interest rate than for other loans backed, for example, by property assets.

Gold has an immensely long track record with regards to preservation of wealth. It provides a hedge against inflation, geopolitical risks, natural disasters and other crises. Gold is a portfolio diversifier. It is also easy to leverage, implying that liquidity can be maintained for the HNW individuals.

Currently, private banks and wealth advisers might typically advise that their HNW clients hold about 3-5% of gold in their portfolio.

Some of the more bullish advisers attending the Hubbis gold markets discussion in February 2018 and replying to the gold market survey, propose that their HNW clients put between 5% and 10% of any portfolio in gold because it has a diversifying effect on the other 90% of assets. In the long-term, it has also produced solid returns compared to other asset classes.

Using 1971 as a starting point, when the US exited the gold standard and measuring to the gold price of approximately US$35 to the price of US$1,325 per ounce as at the end of Q1 2018, a price appreciation of roughly 3,700% was returned. This compares favourably to the Dow Jones Industrial Index, which in the same period, appreciated by approximately 2,800%.

Gaining exposure to gold

There are numerous ways to gain exposure to the gold market without owning or taking physical delivery. This includes via the futures markets, unallocated over the counter (OTC) swaps, exchange-traded funds (ETFs), or through the shares of gold miners, Nevertheless, physical gold has continued to attract high demand.

For historical and cultural reasons, Asian people, as a broad generalization, like to physically store, show or wear their wealth. Underpinning this is the widespread sentiment in Asia that gold provides a hedge against uncertainty in politics, currency, finance, and can also provide security against natural and other disasters.

There is already a vast and growing retail demand for gold in Asia, where a large proportion is for investment purposes. As wealth increases, experts believe so will investment demand for gold; especially in massively populous countries such as China and India where there is a traditional inclination to own physical assets. Both countries have been critical drivers of the bar and coin physical gold market in
recent years.

The case for physical gold vs paper vs etfs

Once a decision has been made to commence or increase exposure to gold, the investor must next decide the format for that investment, whether to purchase ‘paper’ gold or the physical asset itself. The typical paper avenues are margin trading accounts, ETFs, shares in gold mining operations, or the gold futures and options markets.

Experts agree that physical gold not only affords the investor more flexibility, but it is highly liquid and lacks counterparty risk. It is high-quality collateral especially during times of extreme uncertainty and volatility. While an ETF is an excellent tool for short-term trading, as a wealth preservation tool some of the experts canvassed in the research for this report agree that physical gold is far preferable for the medium to long-term.

Also, ETFs are promises on paper and are not always backed by physical gold. And even those with gold supporting them might not have sufficient gold to match their market values, implying that there could be a shortfall if everyone ran for the exit.

Moreover, while many ETFs do have gold backing them, accessing that physical gold, if required, is not easy. This is limited to substantial investments (approximately USD12.5 million at the time of publishing for SPDR ETF) and even then, access to the physical gold remains at the discretion of the Trustee. If the physical gold is accessed, the investor may not know the details of the underlying asset, for example, the purity of the gold, the format, the brand, the location etc. Another unknown of ETFs to be considered is the inherent counterparty risk in the chain of custody.

When you buy an ETF share, you transact with an authorised seller however that share is a promise of ownership from the fund’s trustee who also further distributes the responsibility of storage to a Custodian. Paper gold is therefore viewed as more speculative, albeit accommodating for people who are looking to trade in and out of gold rapidly.

Whereas on the physical side, it is considered more of a long-term hold, with HNW individuals holding it as part of a long-term balanced portfolio.

In building the business argument for why people should pay more attention to physical gold, there is a substantial case for gold as wealth protection and wealth preservation tool, as well as for wealth accumulation.

Estate planning, leverage, and diversification

Physical gold certainly has some advantages for estate planning purposes, for example, a HNW client might open a joint ownership account with an heir, which means that they do not need to validate the wealth with any jurisdiction where the gold is stored. This can enable a smoother transfer of assets.

In a practical sense, gold bars, unlike property or stock funds, are highly efficient wealth management tools for estate planning. Gold bars are available in many sizes and as such are easily divisible, transportable, and highly durable. Many private banks that help clients buy and store physical gold recognise that the client’s liquidity can also be maintained via leverage. Many banks will also offer to lend against the bullion, whereas only a few of the private, non-bank, firms will provide such a service.

The banks will lend, for example, up to 80% against the value of the gold holdings and will probably charge a marginally higher interest rate than for other loans backed, for example, by property assets.

A few private precious metals firms are also lending against gold that their clients have bought through them and that they then hold in one of the major logistics companies’ storage facilities.