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INVESTMENT NEWS – There’s gold in them thar fields

By Andrew Osterland
August 26, 2012

InvestmentNews.com

On the outskirts of Austin, Texas, ranch owners have been driving their pickups out to obscure corners of their properties in the middle of the night. They’re not tending to their animals, and they’re not fixing fences.

They’re burying gold.

“We call it midnight ranching,” said Jennifer Failla, a registered investment adviser in Austin. “Clients are investing larger percentages of their portfolios in gold and silver and burying it on their ranches. I tell them to make sure they can find it later.”

Men are usually the ones who want actual gold bars and coins to stash in a hiding place, said Ms. Failla, but growing numbers of both sexes want to purchase physical gold these days.

“Since 2008, I’ve been having the conversation a lot more often with clients,” she said. “They say they want to touch it and feel it.”

 

CASE FOR GOLD

Call it fallout from the financial crisis. But the desire to invest in physical gold, as opposed to exchange-traded funds and other financial instruments tied to the price of gold, is on the rise.

Rafael Pardeiro, a client of Ms. Failla’s, has several safes and “other storage locations” for gold and other precious metals he’s purchased.

“If you’re dealing in paper and futures contracts, it comes down to trust, and I don’t trust the powers that be to handle all my assets,” he said. “I’m not wholly opposed to paper gold investing, but it makes sense to me to have the tangible assets too.”

A strong case can be made for investing in gold in general. After all, the price of the world’s favorite precious metal has roughly doubled since the beginning of 2009 — as has the S&P 500. Since the beginning of 2000, however, gold is up about 400%, versus a flat market in stocks and a 17.3% rise of the Barclays Capital U.S. Aggregate Bond Index.

Gold also is weakly correlated with the returns of stocks, bonds and virtually all other asset classes. It remains one of the best inflation hedges, should central bankers’ loose monetary policies rekindle inflation.

And in an investment world characterized more by fear than greed, it still is a favorite safe haven for investors in turbulent times.

But even gold bugs have different views on how to invest in the metal.

“I believe gold has a place in everyone’s portfolio, but unless you’re ultra-affluent, it’s a lot easier to get exposure to it through ETFs rather than by buying gold coins,” said Paul Lee, an adviser with UBS Financial Services Inc. “Personally, I don’t need to buy a couple of bars of gold. But if you think the world is going to implode, then you should consider an allocation to bullion.”

Steven Feldman, a former partner at The Goldman Sachs Group Inc., isn’t worried about a financial Armageddon, but he does see a lot of demand on the part of retail investors for physical gold, even though it is not easy to buy gold bars or coins. Securities regulators regularly warn investors about scams involving precious metals.

In 2009, Mr. Feldman and his partner, Savneet Singh, launched Gold Bullion International LLC to give advisers and retail investors the opportunity to buy physical gold.

“ETFs can give you a reference to the price of gold, but what happens if stress in the banking sector causes counterparties to go bankrupt?” Mr. Feldman asked. His firm auctions customer orders to gold refiners and dealers associated with the London Bullion Market Association.

ustomers can take delivery of the gold themselves — he doesn’t recommend it — or store it with GBI in five vaults located around the world. The gold is insured and regularly audited, and Mr. Feldman said the cost of the transaction is similar to the fees on ETFs like the SPDR Gold Trust (GLD) and the iShares COMEX Gold Trust (IAU).

“Gold is a safe-haven asset,” he said. “Why not buy it in the safest form possible?”

GBI has about $500 million in customer gold parked in its vaults.

A big selling point with advisers is that GBI’s technology can work with wealth management platforms and produce monthly performance reports on customers’ gold holdings. The firm has had a relationship with Merrill Lynch Wealth Management since 2010 and hope to sign deals with two other wirehouses shortly.

“Enabling investors to own physical precious metals offers them a transparent way to gain exposure to this space,” said Deann Morgan, a managing director of alternative investments at Bank of America Merrill Lynch. “Our clients own specific, discrete bars or coins, delivered to our vaults in their names.”

Asset managers are also looking to cater to physical-gold bugs.

Merk Investments LLC, which manages currency mutual funds, has filed to launch a gold fund offering investors the option of redeeming their shares in gold bullion. “Financial advisers may not be as concerned about this, but some of their clients may only be comfortable with having the physical gold alternative,” said Axel Merk, founder of the company.

David John Marotta, a registered investment adviser in Charlottes-ville, Va., cautions investors that physical gold is considered a collectible by the IRS and as such is subject to a 28% capital gains tax, which may explain why some clients want to buy gold with cash and hide it in their basement.

“I talk them out of it by asking them if they want to be charged with tax evasion,” said Mr. Marotta.

Nevertheless, he doesn’t discount their concerns.

“I have clients who want nothing to do with gold ETFs,” he said. “For them, gold is not an investment, it’s a hedge against the end of the world. I just ask them to limit their purchases to 3% to 5% of their portfolio.”

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