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Independent Wealth

Physical Gold – A Bright and Solid Element in Wealth Management Portfolios

David Fergusson, Chairman of Global Precious Metals spoke at the Hubbis Indonesia Wealth Management Forum, telling Hubbis founder and CEO Michael Stanhope why Asia’s wealthy investors should hold physical gold for investment purposes and to offset volatility in their mainstream financial investments. And he also told the audience briefly how to buy and hold the gold.

Ferguson leapt straight into his summary of the world of gold when prompted to brief the audience of wealth management experts on why they should be directing their clients towards holding physical gold.

Gold’s lack of correlation to mainstream markets

“Gold is a non-correlated asset,” he began. “When markets are volatile, gold gives investors some degree of safety within their portfolio that they would not obtain from any other asset class; there have, by the way, been countless economic studies that confirm this view. We believe between 5% and 15% of a portfolio for any serious wealthy investor is appropriate. As the word of finance stands now, a sensible level is somewhere around 8%. That might feel like a very aggressive portfolio position, but we firmly believe that it is both viable and advisable.”

How should investors buy, move, store and trade gold? “There several ways to hold gold exposure, but first let us distinguish between what is gold exposure and what is gold,” Ferguson reported. “In the paper form, people often buy gold through ETFs, derivatives, and other instruments that give exposure to gold, but that is not our area of expertise and nor do we advise that route as it always injects a counterparty risk into the equation. We believe physical gold is the best option.”

He explained that to do so a client will either open up an account with a bullion trader or a private bank. “Some private banks still allow people to buy gold, but it is becoming rarer these days as the banks don’t want to get so involved and prefer the derivate routes such as ETFs. Accordingly, go through a bullion trader, of which we are one, as the best route. You go through the account opening process, a typical KYC process, and then you fund the account and trade.”

What you see is what you get…

Physical gold, he elucidated, is gold that an investor owns. “It is in your name,” he noted, “it could be at home or held in a vault, but it is always your gold, just like a car parked in a garage belongs to you, although in the case of a vault there is custody involved and insurance and so forth. On the paper side of things, if you own an ETF you do not own gold, you own equity in a fund that also owns gold. And if you own a derivative, you don’t own gold, you own exposure to a contract which may or may not be settled sometime in the future.”

Accordingly, the principal difference between paper and physical is that physical is owned directly and wholly while paper gold belongs to another entity that has a form of relationship with the investor through shares or a contract.  

The Black Swan event

“Gold in its pure form is far better should there be a ‘Black Swan’ event,” he added. “Should the mainstream financial markets collapse, potentially risking the foundations of the global financial system, gold is a safe haven. Paper gold in whatever form, is exposed to all that global financial risk.”

Ferguson explained that the storage of gold in a secure vault is most advisable. "We store our gold at a secure LBMA vault. The London Bullion Market Association has approved vaults around the globe and our company, Global Precious Metals, always advises clients to hold gold through those facilities.”

A precarious world

Ferguson concluded his talk by offering some personal views on the state of the world’s financial system. “I might seem like the doom-laden ghost at the banquet,” he said, “but I have serious concerns about the levels of debt in the world. The global financial crisis was around a decade ago, but since that time global debt has increased and we wonder frankly if the precarious nature of the financial system has in fact only worsened in the past ten years. I like assets that are safe, that cannot be taken away from you, that governments cannot expropriate. And clearly, I have a strong preference for gold."