7 Ways Your Family Office Can Preserve Wealth With Gold

Five Thousand of Years of Gold

Gold is a hardy perennial that is arguably the oldest store of value and means of payment, dating back thousands of years. In times of stress to the financial system, many family offices, as many as 47%, turn to gold as a safe haven. It makes sense considering gold is bankruptcy remote, provides diversification, is a great hedge against inflation, minimizes the risk of currency fluctuations, and typically performs well during a recession.

It has been difficult to find an asset class that has heralded the popularity of gold as a hedge throughout history.

Your family office has several vehicles to invest in gold, and we have broken down the most popular, outlining the pros and cons of each.

five thousand years of gold
gold ETFs and gold mutual funds

Gold ETFs and Mutual Funds

Gold ETFs and mutual funds offer exposure to gold’s long-term stability while offering more liquidity than physical gold. It also diversifies your investment to reduce risks.

Some ETFs are passive and track price trends. VanEck Vectors Gold Miners (GDX) is a good example. Others, like SPDR Gold Shares (GLD), hold physical gold, and price action correlates to the movement of physical bullion.

Some funds (First Eagle Gold Fund) are actively managed by institutional investors actively. Securities are regularly added and removed to optimize returns.

Keep in mind that investing in ETFs and funds is investing in stocks, futures, options, or the paper backed by gold, not actual physical gold. This means the ETF price may not be correlated to the price action of gold.

Gold Futures and Options

Futures and options are by far the riskiest gold investment in gold. But as the old saying goes, the higher the risk, the higher the reward. It is important to remember that futures and options are speculative investing in derivatives. Although it was not the same asset class, derivatives were the leading cause of the financial crisis of 2008.

Futures can be an incredibly lucrative investment strategy for gold allocation for a well-versed family office. Futures can manage and minimize the price risk associated with gold or are used as speculation without any physical backing.

Since futures are traded on exchanges, family offices have more financial leverage due to lower margin requirements than investing in stocks or physical gold. This flexibility allows your family offices to increase their exposure.

The increased exposure in futures can drive massive profits or quickly mount significant losses. For example, if gold is trading at $2,000 an ounce, with $5 million, you can invest in 2,500 ounces of gold through an ETF (or physical gold) or 25,000 ounces with e-micro gold futures. Because you are obligated to outright purchase the asset by the future’s expiration, your family office can profit and lose money based on an investment in 25,000 ounces of gold.

Options have many of the same benefits as futures (financial leverage, flexibility, lower margin requirements). You can hedge risk and speculate about the future of gold’s price. Options, like futures, have an expiration date. However, unlike futures, you are not obligated to purchase the gold by an option’s expiration. This caps your loss to the premium for the options contract. Simultaneously, that is a common complaint of options – if your options are out of the money, you lose the money invested in the option without acquiring the underlying asset.

Gold Miners

Another way to invest in gold is investing in the source: companies that mine and refine gold. There are a few miners based on market capitalization. The largest is Newmont (NEM), followed by Barrick Gold (GOLD), Franco-Nevada (FNV), Wheaton Precious Metals (WPM), and Gold Fields (GFI) to round out the top five.

Miners are just like every publicly traded company. They report to shareholders and focus on profits. And while sales and share prices are correlated to gold prices, even in times of flat or declining oil prices, they can, and often do, report profits. This can be done by downsizing, reducing production costs, increasing production volume, buybacks, and operating leverage.

One of the benefits of investing in gold through securities is liquidity. When the markets are open, you can sell securities in seconds. It is not as fluid to sell physical gold.

Watch Ray Pullaro, Chief Communication Officer of Gilded, Ed Hulina, Head of Business Development of Gilded, and Arthur Bavelas, CEO of Family Office Insights, Discuss Digitizing Gold

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Gold Jewelry

Almost 50% of the world’s gold production is used to make jewelry. With the world’s population and wealth increasing every year, in theory, jewelry production should be on the rise every year.

However, the price for gold jewelry is considered highly elastic. When the price of gold increases, jewelry prices also increase, and consumer demand decreases.

Additionally, the retail price of gold intrinsically has an incredibly high margin, sometimes as high as 400%. Alternatively, purchasing gold jewelry second-hand, i.e., in estate sales and auctions, rarely include a markup; however, you have an opportunity cost of the time expended to find valuable pieces. When it comes time to sell, gold jewelry is more illiquid than bullion and coins. Instead of simply selling pure gold, you are selling gold dependent on preferences and tastes. You need to find the right buyer at the right time to recoup your investment, let alone produce a profit.

The conclusion? Gold jewelry investment is mediocre at best unless you are a jeweler, but exquisite and enjoyable to own and wear.

luxury gold jewelry
investing in gold coins

Gold Coins

Gold coins are available in ¼, ½, 1, or 2-ounce weights. The most popular coins are collectibles issued by sovereign governments: American Gold Eagle, Canadian Maple Leaf, and South African Krugerrand.

There are a few reasons for the popularity of gold coins as an investment. Sovereign-issued gold coins are highly recognizable. As such, it is easy to buy or sell them to a reputable dealer. This, in turn, provides liquidity. Coins are also a bankruptcy-remote physical asset with stability outside of the financial system.

With this said, a few factors are working against gold coins as an investment strategy for family offices. First, gold coins typically trade at a premium, especially if they are in-demand collectibles. The Gold Eagle, Maple Leaf, and Krugerrand often trade at a 3-5% premium. Second is the quantity needed for even a nominal percentage of your total allocation.

For instance, a $5 million dollar investment is over 2,600 gold coins (based on the 1,945 price at the time of writing). It poses a challenge to manage that many pieces. Someone stealing a 400oz gold bar is obvious. Someone stealing 5 or 10 coins when you have 2,600, not so much. If you store the coins, the monthly cost for storage increases your cost of ownership. And regardless of where you store the gold, insurance premiums add to the ongoing cost.

Gold Bullion

When family offices consider investing in gold, it is usually bullion. Bullion bars and securities are the most popular ways to invest in gold, with the former the best for direct ownership for large investments. Like gold coins, bars are attractive because you own a tangible asset that is bankruptcy remote.

However, bars differ from coins because it is much easier to reach your gold allocation. At the time of this article, a 400oz bar can be purchased for about $750,000. This means you only need roughly (8) 400oz bars for a $5 million investment (instead of 2,600 coins). Plus, you pay much closer to spot price for a gold bar, reducing the premium tacked on to coins. With bars, you get the most gold for your investment dollars.

Bullion bars are recognized worldwide, serve as a source of trust, and are the most widely used reserve asset globally for governments and central banks. Because of this, although bars cannot be sold instantaneously, like securities, bars are still fairly easy to sell.

However, there is a caveat. When selling bars, you need to sell entire bars. You cannot exactly saw a 400oz bar in half and sell it if you only need $375,000.

Like coins, you have storage costs if you store your gold at a facility. Alternatively, theft is your largest concern if you store the gold yourself. Either route, there are ongoing operating costs for physical gold ownership. In both cases, insurance is indeed your best friend.

gold bullion bars
digital gold

Digital Gold

Digital gold is a new kid on the block that offers the best of both worlds by taking advantage of both physical gold and securities. This provides a unique investment strategy for your family office.

You own the gold outright as a physical asset when you invest in digital gold.

However, where it differs is that you keep your gold in the company’s network, allowing you to pledge, collateralize, and monetize your gold position.

You have a yielding, bankruptcy-remote asset that achieves tail risk protection by monetizing your gold.

About Gilded

Gilded reimagines physical gold ownership by making it digital, mobile and usable.

With the help of blockchain technology, we offer real physical gold ownership that is directly owned by your family office, stored in Brinks vaults, fully insured, and accessible 24/7 via the Gilded platform. But with Gilded you can digitize your physical gold. You can pledge, collateralize, and monetize your gold, creating a yielding physical asset with the functionality of cash.

We offer access to ethically sourced, 99.99 percent pure gold from the most reputable refiners in the world.

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