BARRON’S – Gold Rush

By Christiana Cefalu
September 7, 2012


You don’t have to be a gold freak to invest in gold. Ray Dalio, the hedge-fund star running Bridgewater Associates, told Penta magazine, last May that “most people should have in the vicinity of 10% of their assets in gold.” Last month, meanwhile, John Paulson and George Soros boosted their gold holdings to record levels, shining yet another spotlight on the sector.

There’s more. As currencies are debased in this cheap-paper era, the State of Utah has passed a bill that makes it easier to use gold and silver as legal tender; other states are heading down the same path. So no surprise that the price of gold is up 8% year-to-date to a current $1,703.30 per troy ounce (31 grams).

For all this bullishness, however, there is some evidence that more pedestrian investors are still light the stuff that glitters. One market player, Gold Bullion International, recently released results from a national survey of investors that revealed 63% would rather own physical assets like gold than nonphysical assets like stocks and mutual funds. When it came down to it, however, only 2% of the surveyed actually own investment-grade, institutional-quality gold.

Gold is, of course, not just a well-known hedge against the reemergence of inflation, but also a fall-back in times of general terror. In calmer periods of history, owning gold stocks has been the favored play, allowing investors to not just benefit from the value of the underlying gold, but also to pick up a dividend in the process. But hysteria breeds its own logic and physically owning gold and keeping it somewhere safe for some unforeseen crisis is today’s plat du jour.

It is into this space that the 2009-founded GBI has moved. “Our business is really the first and only precious metals business and wealth management business,” says Steven Feldman, co-founder and CEO of GBI, and a former Goldman Sachs partner.

Traditionally the method of buying physical precious metals is through dealers, who buy it and hold it for you. “They’re market makers,” he says, meaning they hold the inventory which they in turn sell to buyers (or buy from sellers). “By definition you are getting one vendor’s pricing.”

GBI provides instead a platform that allows financial advisors to punch in an order for bars or coins of gold, silver, platinum, or palladium, the same way they do for a stock or bond. “We have an electronic system which can handle thousands of orders and a dealer typically has a few people answering the phone.” Then the order goes up for bid by GBI’s network of 14 dealers and refiners so the client gets a competitive price. Customers can also choose where they want to store their metal. GBI’s vaults are in New York City, Salt Lake City, London, Zurich, Melbourne, and, as of this week, Singapore. The asset is held in the client’s name, unlike if you were to go through a bank or other dealer.

Costs? According to Blake Estes, GBI’s Internal Investment Consultant, a transaction fee ranges from 0.25% to 2% depending on the size of the transaction. The minimum transaction of $5,000 would run you 2%; the fee drops to 0.25% for orders of $10 million or more. This covers the dealer network and the transport of metal from dealer to vault. A storage fee, which covers insurance and audit, costs between 0.25% and 0.6% depending on the amount of metal. And should you opt for delivery, the moving fees range from 2 to 30 basis points, according to the size of delivery. (The larger the gold heap, the lower the rate, of course.)

So far GBI doesn’t appear to have a direct competitor. A close counterpart, BullionVault, lacks the competitive auction model and charges more to remove gold from the vaults. BullionVault charges 2.5% of the gold’s value to remove gold bars, and a 5% surcharge for withdrawals below 400 troy ounces.

ETFs like SPDR Gold Shares (GLD) are the largest and lowest-cost way to maintain a gold allocation. But of course you own then a share in a trust invested in gold, and that means the holding comes with a credit risk. Furthermore, ETFs do not offer the option of gold delivery or storage. There are closed-end gold funds that offer gold delivery, but often have costly minimums attached. Sprott Physical Gold Trust (PHYS) for instance requires clients redeem a minimum amount equivalent to the value of one “London Good Delivery bar” which weighs between 350 and 430 troy ounces, which, at $1,700 a troy ounce, means at the least you have to place an almost $600,000 order.

All these market developments suggest, it’s OK to be a little hungry for the yellow stuff. “I’m not a gold bug in a classic way,” Feldman says. “When you read a lot of the stuff that’s written in papers and blogs, a lot of it is a little bit extreme. We’re not extreme.”

What he means is, owning gold these days is less about preparing for the end of the world scenario, and more about prudently diversifying a portfolio through a highly liquid asset that’s also free of credit risk. As Feldman says, “Lots of central bank intervention makes markets dangerous and unpredictable.” How true.

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