Gold; investment insurance


As long-standing clients of Gould Financial Planning will know, we have for some time now believed in the inclusion of physical gold within our investment portfolios. The reasons for this are fairly simple and can primarily be summarised as;

 

  1. When mainstream equity markets are falling, investors tend to flock to “safe haven” assets. Gold prices therefore tend to increase when equity and bond markets are struggling.
  2. As asset allocators who firmly believe in risk-measured diversification, this enables us to control volatility to some extent.

 

So far, so good; the next question is – how do we obtain a gold investment? There are a few options;

 

  1. Buy the physical asset and store it. This sounds great in principle, but storage costs can be prohibitive, and storing it in the basement brings about its own set of problems such as insurance and liquidity if you ever wished to sell.
  2. Invest into gold mining shares. There are plenty of funds out there which could do this job for an investor, but the correlation with physical gold tends to be less obvious and volatility is certainly far higher. Furthermore, the investments here are into equities – the nightmare situation would be for the “hedge bet” to fall in line with the markets at large!
  3. Invest into an Exchange Traded Commodity (ETC) fund. These funds provide exposure to the movement of physical gold’s spot price via an investment bank, and if the investment bank were to fail, the investment is secured with physical gold, held in a vault. Storage and insurance costs can be controlled in this sort of structure, due to the positive effects of pooling investors’ funds together.

 

In our opinion, the most efficient means of obtaining a physical gold exposure is via option 3. However, as with any investment, holding an ETC does not come without risks – and in this case, there are risks present which would not necessarily be present in mainstream, retail investment funds. The examples below relate specifically to the iShares Physical Gold ETC but would apply equally to ETF Securities or any other physical gold ETC provider;

 

  1. The exposure to gold price movements is obtained via investments into a range of debt securities, issued by iShares Physical Metals plc.
  2. These debt securities are collateralised by physical gold, held in a vault by JPMorgan, in the event that iShares Physical Metals plc were to renege on their repayment obligation.
  3. In the event that the investment were to fail, and the collateralised physical gold were to not be forthcoming (i.e. fraud), the ETC would not be covered by the UK Financial Services Compensation Scheme.
  4. The Financial Conduct Authority does not recognise these funds as being “Retail Investment Products” due to the complexity of the structure of the investment highlighted above.

 

Notwithstanding these points, we continue to feel that a proportional exposure to physical gold, in these current markets in particular, represents an eminently sensible investment decision. To some extent the hope is that the investment does not perform; if physical gold is struggling, it may well be the case that other mainstream markets are performing well!

 

One thing we do know is that what goes up will eventually come back down, and holding some form of investment insurance within a diversified portfolio is something we will continue to be recommending. However, as an investor, if you are uncomfortable with any of the risks stated above please contact us as soon as possible.






Article published: 18/04/2018

<< Return to news summary