Would You Like Gold With That?
By Tom Burroughes, Group Editor in London
February 9, 2012
View from the Top
The price of gold may be below record highs but there remains plenty of interest in how to secure the wealth preservation qualities of the metal through physical ownership. The question, though, is what is the most efficient and convenient way to do this?
For some investors, while gold proxies such as exchange-traded products may appear convenient, nothing short of physical ownership of gold suffices. A new breed of business is therefore developing in this space, such as the UK’s Real Asset Company, for example, or the olderBullionVault business.
In the case of Gold Bullion International, a New York-based company established about three years ago, it has its own stand-alone gold platform for clients and also places its platform into the existing systems of wealth managers. GBI recently inked a deal to integrate its platform at one of the world’s largest wealth managers, although it declined to identify the firm by name. GBI, formed by people with a background in investment banking and wealth management rather than the gold market, aims to put convenient gold ownership in reach of wealth management clients the world over.
“A big reason why real assets are not in wealth management accounts is that the market is opaque. As a result, it has never been a scaleable product. Our company was created to see real assets put into the wealth community,” Savneet Singh, chief executive of GBI, told this publication in a recent interview.
Singh, a previous investment banking veteran at Morgan Stanley, said his colleagues had seen the frustrating process of trying to put physical gold into a wealth management account. That frustration gave them an idea of how to put gold ownership in reach of a broad audience.
“We just wanted to order physical gold (in any size), but financial advisors at all firms said it was not available unless we were to order double-digit millions,” said Singh, warming to his theme. “Advisors don’t say this, but this is more of the rationale of firms. Because this market is opaque and over the counter firms didn’t make this product available to clients because it was too cumbersome. Additionally, a bank can’t service firms like we can, because this is all we do,” he said.
“We are integrated into the existing platforms that are already built so wealth management firms do not need to build a new solution,” said Singh.
How do the margins fare in this business, given that there have been competing dealers in gold bars, coins and other objects for decades, if not for longer?
“It is true that our business model is lower margin than the traditional retail websites and coin dealers. But we believe in the long run the transparent vendor with the highest quality product will win and hence have far bigger volumes,” he said.
Besides Singh, other management leaders at the firm include Peter Custer, chief technology officer; Marc Scher, senior vice president, head of operations and services, and Ed McCarthy, senior vice president of sales. GBI’s advisory board has some very big names: Arthur Levitt, former chairman of the Securities & Exchange Commission, Richard Gephardt, the former majority leader of the US House of Representatives, General Wesley Clark, a former four star General of the US Army and former NATO Supreme Allied Commander, and Dan Tapiero, a global macro investor and a co-founder of AgCoa, the US farmland REIT.
How it works
First of all, to avoid any conflicts of interest, GBI does not have proprietary positions in the gold market itself, Singh said, an important consideration for wary investors. In addition to putting platforms into existing wealth management systems, GBI has its own stand-alone platform for smaller wealth management and financial planning firms. Investors must hold at least $10,000 of gold, so it is open to both the mass affluent and high net worth spaces.
A gold-holder can choose where to hold the gold; an outside “Big Four” auditing firm will verify holdings quarterly and all metals are insured for full replacement value. GBI provides statement data to an existing wealth management provider or sends a client direct statements.
The GBI technology integrates directly into a wealth management platform’s existing order entry system. A wealth manager will drop a ticket using the same existing order entry platform by selecting a specific ticker and quantity. The tickers vary based on metal type (gold, silver, platinum and palladium), bar sizes and storage location. Once the order is placed, GBI executes the order on the back-end by getting the best price through its network of dealers. The wealth manager will receive a confirmation after the trade is executed and the holdings will be integrated onto the client’s existing statements and records.
Alternatively, a wealth management firm can opt for a web-based white-labelled order management solution. As explained on GBI’s corporate website, gold and silver can be held in an Individual Retirement Account (IRA).
State of the market
“For most people, the market isn’t necessarily off-limits. Gold comes in various sizes and people with modest incomes can choose to buy smaller coins. The bigger issue is transparency, liquidity, storage and insurance in the physical gold market. Most people can buy gold at their local stores or online, but they have no transparency on the price, minimal liquidity, and limited storage/insurance options. Due to the lack of transparency, clients often end up paying far in excess of fair prices,” Singh continued.
“The value-added services were historically reserved for the ultra high net worth individuals with private banking/wealth management relationships. GBI, by leveraging its technology and logistics platform, has been able to make these value-added services accessible for the retail market,” he said.
One problem, Singh and his colleagues say, is that there is a lack of knowledge in the market about the possible risks of investing/holding gold via paper proxies – a point that has been made by other commentators. The failures of some financial institutions, and the recent bankruptcy of investment firm MF Global, have put a fresh spotlight on counterparty risk.
GBI intends to integrate with more wealth management firms. The firm’s core wealth management business is in the US over the next 12 to 18 months. Its market scope is global, examining potential markets in Europe, Asia and Latin America.
“We are making a pretty big push into Asia,” said Singh. The firm has clients in Singapore, Switzerland and London, among other locations.
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