What’s the role of a Gold back ETF versus holding physical bullion in a Family Office’s portfolio?

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A Gold Exchange Traded Fund (ETF) is an easy way to buy and sell exposure to gold, meaning that it can be used tactically to buy price dips and sell peaks, or it can be used for short term balancing of an investment portfolio.

Gold ETF’s fall into two broad categories: ETF’s that are backed by physical gold or futures contracts and so mirror movements in the gold price; or ETF’s that invest in companies in the gold business such as mining companies.

Some interesting facts about gold ETF’s:

  • You don’t actually own any gold. It’s a fund that pools capital to own gold or gold related assets. As a result, you have counter-party risk if the fund is badly managed.
  • Many ETF’s will sell gold in the fund to pay for trust expenses. So the proportion of a gold ounce per share will reduce over time. A point to consider is that when a trust sells gold to pay expenses, a US shareholder will generally recognise a gain or loss. So this may trigger tax considerations around capital gains or losses.

The key benefits of holding gold:

  • Gold will often perform counter-cyclical to other asset classes and so provides a hedge that helps balance your portfolio in times of market or political uncertainty.
  •  Gold is an asset that has a long history of holding its value over time and so can be used as a store of wealth. 

Family Offices operate on a longer time horizon than most investors and they need to take into consideration, events and risks that will occur over the course of decades. Over 50 or 100 years, it’s reasonable to assume there will be major recessions, bad governments, the possibility of war, or family members who make bad decisions. This is where physical gold can have a role in providing protection against unforeseen events.

An additional reason for Family Offices to hold gold:

  • It’s an insurance policy that allows the Family to continue after a catastrophic event.

In 2017, New Zealand Vault sponsored the Campden Wealth North American Family Investment Conference in Chicago. As a lead into that conference, New Zealand Vault conducted a research survey to the wider Campden Wealth community. From that survey, 29.51% of families said that they held physical bullion. Of those families, the table below shows the percentage of their investment portfolio that was held in physical bullion.

In speaking to various family offices, holding physical bullion is a long term strategy. Relative to other assets it tends to be small, however the amounts held are usually large enough to provide long term insurance for the family against unforeseen events. If disaster were to strike, the gold holding provides an opportunity for the family to start again. Families may make incremental adjustments to their holdings from time to time, but it is essentially a ‘lock and hold’ asset. Well over half of the families held some or all of their bullion outside of their home country. This was to get geographic spread but also if disaster were to impact the family, it would likely be as a result of events in their home country. So holding bullion off-shore makes a lot of sense.

There is a place for gold in most Family Offices investment portfolio. Often a Family Offices Investment Manager will turn to ETF’s first, as it is perceived to be the easiest way to get exposure to gold. However, purchasing, and later liquidating physical gold bullion is a very straight forward process. It is also a simple process to have it delivered and stored in a reputable depository off-shore. The other point to note is that storing physical bullion becomes price competitive with ETF’s once you hold in excess of US$3m to US$4m.

ETF’s are suited to short term tactical purchases. But for Family Offices wanting to establish a long term wealth protection strategy, it’s hard to look beyond the real thing; gold bullion held in a reputable depository off-shore.

Article by John Mulvey

Disclaimer: This article is an opinion piece and as such it should not be taken as investment, tax or legal advice and nothing provided in any materials by New Zealand Vault should not be construed as such. Before undertaking any action, be sure to discuss your options with a qualified advisor. The information in this article is based on the best research available to date, however due to the ever changing landscape of the world economy and the growing developments in world politics, this information may become out of date relatively quickly. Please verify all facts and get in contact with us if you have any issues with our content. 

John Mulvey is the owner and CEO of New Zealand Vault. New Zealand Vault has been operating since 1931.

New Zealand Vault has safe deposit box vaults in Auckland and Wellington and has a specialist bullion depository in Wellington.