David Kuo talks to Adrian Ash of BullionVault.
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David:
This is Money Talk, the weekly podcast from the Motley Fool. I'm David Kuo, and today I am joined by Adrian Ash, Head of Research at bullionvault.com. Welcome, Adrian.
Adrian:
Afternoon, David.
David:
Good afternoon to you. Now, there is no denying that gold has outperformed most other investments during the credit crunch, on 1 January 2007 gold was around $640 an ounce, today it is $953 an ounce, having breached $1,000 an ounce not that long ago – a rise of almost 50%. Now, the FTSE, on the other hand, has slumped from 6,240 points to 4,117 points – that's a fall of 30%, so it seems like gold has won hands down, but has it? – gold was over $800 an ounce in the 1980s, so it's taken 30 years for gold to recover its former lustre. Nevertheless, some investors, worried about the state of global economies, have flocked to gold for a touch of solace, and Adrian is here to explain why gold is a good investment, and how we can buy gold. But before we start, Adrian, can we talk a little bit about your company – bullionvault.com, what exactly do they do? – what do you do?
Adrian:
Bullion Vault is an online gold exchange, basically what we've done is we've immobilised a large stock of gold in three locations, in Zurich, London and New York, just the same way as large institutions trade gold which doesn't move physically, it stays where it is, but ownership changes hands, to make it more efficient for private investors, who are normally locked out of that market, you can now buy and sell portions of large 400 ounce gold bars, these are the big gold bars that, in popular imagination, they're the Italian Job, Goldfinger.
David:
Wonderful, aren't they?
Adrian:
Absolutely beautiful things.
David:
Have you seen one?
Adrian:
Oh yes, I've seen one.
David:
Have you touched one?
Adrian:
Yes I have actually, and they are very heavy, 12.5 kilos, and the current price is, they're worth around a quarter of a million pounds.
David:
A bar?
Adrian:
Yes.
David:
Good grief!
Adrian:
And we've got a pretty big stock now, we've got more gold that most of the world's central banks in the three locations, New York, London and Zurich.
David:
That is impressive!
Adrian:
Absolutely, what we always like to say is, there's more gold than in Canada, Mexico and Ireland put together. It sounds like a lot of gold, doesn't it?
David:
It does, yes.
Adrian:
It does, well it's about 17 tonnes, most of it is in Zurich, which is where our customers tend to want to keep it; New York is pretty quiet, most of our investors have decided they don't want to buy and sell gold in New York.
David:
That's pretty bad news for you, isn't it?
Adrian:
Well no, New York, it's interesting, when the business was being established, New York was actually the most difficult vault to set up, because everybody said, "Who wants physical gold in New York? – you just trade the futures?" And we said, "No, we believe there's an opportunity in the market, and that private investors are going to want to own gold, physical gold, they're going to want to own it outright, as their own property, without any credit risk, counter-party risk, default risk, it belongs to them."
David:
So if somebody comes and buys a bit of the gold from you, can they take it away if they so wish?
Adrian:
Absolutely, they can take possession if they wish, but it's not what we're established for, it's not what the business is efficient at.
David:
You don't really want people to take away the gold?
Adrian:
We'd rather not, we tend to suggest that...
David:
You hoard gold, don't you?
Adrian:
We hoard gold, we are gold hoarders, that's right! The evil people from the '30s are back! The bottom line with gold is, that if you take it into your possession, there's two big problems: first of all, it loses what's known as the integrity. If I have a large 400 ounce bar (which would be nice), if I had a large 400 ounce bar, and I've got it in my private possession, the only person who's going to buy that from me is a large dealer. Well, he's not going to want to buy a 400 ounce bar from a private individual, he goes to the wholesale market, where the integrity of the bars is guaranteed, is warrantied by the procedures that the London Bullion Market Association have in place, so as a private investor, if you take one of these large bars out of secure storage, out of approved storage, you're probably going to lose about 7 or 8% of its value straight away, a bit like driving a new car off the forecourt.
You've then got the problem as well of storage – where exactly are you planning on keeping this? Well, if you keep it at the bank, fine, but you're going to be paying bank storage fees, which is pretty expensive. If you keep it at home, use it as a doorstop, you're going to have to get it insured, right? So you've got all of these problems. Now, the vaults that we use, market approved, they are deemed by the actuaries to be so secure that our customers can hold their gold with insurance included for one-eighth of a percent per year, which is pretty low on insurance fees …
David:
It is very good, yes.
Adrian:
… because these vaults are very very secure, so basically the whole point of bullion vault is to get you out of the retail market, where mark ups on things like gold coins currently run to about 10% above the spot price the actual wholesale valuation of the gold content, so you're trading at much much tighter spreads, you're trading on much much lower fees, and then your storage costs are that much lower, because you're not dealing with the hassles of possession, but you can take possession, the gold is all fully there, it's fully allocated, so it's there in full, and that's the big issue in gold storage, obviously, is knowing that your gold is there.
David:
Now the thing is, you touched on a couple of things there, which are quite interesting to people like myself. The first one is, you talked about gold futures, about how difficult it was to try and do something over in New York. The other thing you touched on was coins, so how does buying your gold differ from things like exchange-traded funds, certificates, gold coins, Krugerrands, Maple Leaf – all of that thing?
Adrian:
Think of it as a spectrum in the gold market, running from simplicity to cost efficiency, and typically, previously, what happened in the gold market was, to keep things nice and simple, ie, you get a lump of physical gold in your palm, you'd have to pay a lot of money for that, because the mark ups, which a coin dealer on the high street would have to charge you, are going to have to cover their insurance costs in the shop, they're going to have to cover their expertise in all the different kinds of gold coins that there are in the world, their ability to grade them when they buy them in from a customer, so there's various costs and expenses, which of course turn up in the cost for the customer.
At the other end of that, you've then got more efficient with the ETFs, for instance, the exchange-traded funds, which are a big innovation in the gold market, they were the first real innovation in gold since the big bang, if you think about it, because obviously during the '80s and '90s, when you had deregulation on Wall Street and in the City, gold was in a bear market, so there was very little new development, product development, in the gold market. ETFs, earlier this decade, were launched, primarily targeted at institutions, US mutual funds, by dint of their charters often, cannot own physical property – this is why you have real estate investment trusts in the States, so that they can actually gain an exposure to real estate; similarly the exchange-traded funds do not give you ownership of gold, you don't own any gold when you own an ETF, you own shares in a trust, a non-dissolving trust, and that trust then happens to have some gold.
David:
But doesn't that go back to the argument about why you are buying gold in the first place? Are you buying gold as something to put in your portfolio, to try and damp down the volatility, or are you buying gold because you believe that you may need to use that gold at some point to leave the country, and you're going to use that gold to pay some ship's captain, so you can actually leave? – I mean, what exactly are you buying the gold for?
Adrian:
Sure, if you take it to that extreme, and a lot of our customers do have those kinds of concerns about, "the evil day", what happens when the world falls apart? – and it's a big concern for a lot of gold investors, which is why our business is established in such a way that there are failsafes in terms of, you don't have to rely on our financial solvency for your gold ownership, in the event of our failure (very unlikely, you'd probably imagine at the moment), but in the event of our failure, the administrators would be under an obligation to get you either your gold, or more likely they'd offer to get you the full cash value of that, but why not have it in your possession? Well, if you look at history, if you look at those moments of true social meltdown – French Revolution, Nazi Germany – having a lot of wealth in your possession was not a good idea; having wealth overseas, in a safe jurisdiction where property rights were respected, such as Switzerland for instance, where you could get yourself to, you and your family, and then release your wealth when you were there – that was a much better idea. If you try and cross borders with gold today, governments don't like it. You try and cross borders in a social collapse, having that wealth on your person, is going to actually be a big physical risk.
David:
Well, I know of some people over in Asia who have had their teeth removed, and replaced with gold teeth, so that if they did need passage out of the country, they would be able to remove one of their teeth and gain passage out of anywhere that was dangerous. It would mean that they wouldn't be able to eat anything on the journey.
Adrian:
Sure, but when they get there, they can have the gold put back in, absolutely! Yeah, it's useful to have a little store of liquid …
David:
By the way, I went to the dentist yesterday.
Adrian:
Oh right, OK, but it's not gold, right?
David:
I'm not telling you anything, I'm not saying anything! – so anyway.
Adrian:
But have a little bit of high value stored, fine – I've got a couple of coins at home, certainly most of our customers have also got a little bit of gold squirreled away, because with gold, what you're trying to do is to mitigate against the unknown risks that might be lurking out there. It's like Ian Fleming in Goldfinger, writes: "Fear, Mr Bond, is what takes gold out of circulation and hoards it against the evil day", and that's what people are buying gold for, they're trying to mitigate against the unknown events that might come to get them. So sure, you would feel really stupid in the event of a social collapse, and if you didn't have any on you, but you wouldn't want to have all of your wealth tied up in your physical possession.
David:
That's very interesting, Mr Ash, but the point is – what about investing in real assets, such as gold miners? – wouldn't that be a better way to go, because at least you were investing in something that is producing a profit for you?
Adrian:
Sure, the idea of a gold miner producing gold, and if you think that gold is a good investment to have, then obviously equities would make, a productive asset would be better than that. The problem is that you are introducing, when you buy the gold mining stocks, you're introducing equity risk, you're introducing management risk, you're introducing production cost risk, so if you go back to say 2006, 2005 even, and you look at the performance of the gold price against say the GDX ETF in the States, gold mining ETF, you'll see that it tracked gold, didn't offer any leverage going into 2008, and then massively underperformed the gold price during the credit crunch, because gold mining stocks, along with all other equities, got sold off horribly, so whilst gold rose against the pound, rose against the euro very strongly last year, held flat against the dollar overall, which was a pretty strong performance when you consider the strength of the dollar, the mining stocks massively under-performed. You've got extra risk, it's not the same asset class.
If you want to buy gold, buy gold; if you want to buy a productive commodity-producing asset, then maybe look at the gold miners.
David:
So are you saying that most of the gold that's around has already been mined? – or is there still plenty in the ground for me?
Adrian:
It's difficult to know how much there is still in the ground, I mean obviously proven and probable reserves are kind of a moveable feast, depending on where you look for the data. The big producer used to be South Africa, so really coming into the 20th century, after the big finds in the States and then in Australia, really South African production was the big leviathan. For the past ten years, annual output from South Africa has now halved, and when you consider that there are mines now being dug four kilometres down in South Africa, which is a hell of a way underground to try and get a little bit of gold out, because the relatively easy gold has gone, so now you're stuck with the gold miners and gold fields, AngloGold Ashanti and so on, looking to try and work their deposits ever harder, and that does come at a much much higher cost.
David:
So which country is holding the most amount of gold then?
Adrian:
In central banks?
David:
In central banks.
Adrian:
In central banks, well the United States basically has the largest hoard, about 8,500 tonnes, the next is Germany, then comes France. China has just moved into fourth position.
David:
Where is Britain in all this?
Adrian:
You know, I don't know if we're even on the charts any more!
David:
Why is that, do you think?
Adrian:
Well, I think everybody knows what happened to our gold.
David:
What did happen to our gold, Adrian?
Adrian:
There was a chap called Gordon, and he decided he didn't like it too much, he had some friends from Goldman Sachs I understand, who advised him in the late 1990s that gold was a non-yielding, non-productive asset, it had been in a bear market for 20 years, there were much much better places to put money, and so he decided he would sell 415 tonnes of it.
He thought he would give the market a couple of months' notice, so it could get itself nicely short. What's interesting in fact is that, looking at the data from the Bank of England, the Bank of England actually had an awful lot of gold out on loan, on lease, to the bullion banks going into that announcement, thereby enabling the market to get nice and short. I don't think the Bank of England was willingly, was party to the decision, as I understand it there was quite a hoo-haa over on Threadneedle Street about the whole idea of getting rid of, what, 60% of our reserves.
It's interesting, because the newspapers make a lot about that now, but the net loss to the Treasury is about £4 billion, compared to what they could have sold it for today.
David:
What – compared to the national debt at the moment?
Adrian:
And compared to the national debt, it's a drop in the bucket, right? This is the thing with gold, people talk about gold as being a high value asset – sure, 165,000 tonnes, $4 trillion or so, but $4 trillion, that's all the gold ever mined, so that's not only all the central bank gold, well over half the world's gold is in the form of jewellery, bracelets, like yours, David.
David:
Yes – nice of you to notice, and this chain.
Adrian:
And that chain, and the ring as well?
David:
And the ring, and the teeth!
Adrian:
There we are, you see – it's funny, because I'm wearing platinum.
David:
But why do countries keep gold? – what is the point? You've already pointed out that it is a non-productive asset, so why do countries like America, France, Germany, and now China, keep that much gold? What is it there for?
Adrian:
Well, the phrase that they use now when they talk about it is "legacy", basically these reserves were built up when gold was money in the late 19th, early 20th century, the big hoard, which the States has got, was really accumulated going into the First and Second World Wars, this is when, at the turn of the 20th century, most of the gold in the UK was not actually in government possession, and it was really as you go into the First World War, you start seeing governments all across Europe looking to take monetary gold, gold coins, gold bars, into government vaults, and then issuing notes against that, so what you're effectively looking at, alongside the rise of the welfare state, the nation state, the warfare state really going into the First World War, is they're also looking to basically nationalise the gold stock.
You then had, the United States did that again in the middle of the Depression, Roosevelt issued an order to basically confiscate gold on pain of a $10,000 fine, you couldn't hold gold privately. A lot of people still did, they just didn't do anything with it, because they couldn't sell it.
David:
Sure, yeah.
Adrian:
And then going through the Second World War, the Americans continued to take gold off the rest of Europe, because under lend lease we effectively paid for a lot of trucks and tanks and so on with gold. Russia then did the same, even during the Cold War, and so you've ended up with this, as I say they call it a legacy asset, but there are good reasons for why they continue to hold gold, and there are good reasons for why China might want to buy some more, it's just grown its holdings by about 50% over the last five years or so, up over 1,000 tonnes now. Security is one, basically because physical gold as a property, you look at the moment – what have we got? – we've got a debt crisis, what's the opposite of debt? – and it's not credit, the opposite of debt is property, if you own something outright, it belongs to you, you're not on the hook for somebody else's solvency, you're not on the hook for somebody else's ability to pay, so that's certainly one thing. Liquidity, even Alan Greenspan, former Fed Chairman in the States, says, "Gold, in times of extreme crisis, is the ultimate means of payment", so governments know that, if they have a large stock of gold, they can settle payments with each other in a form which doesn't rely on any particular country or sovereign state's government's solvency.
David:
Something though the UK can't do at the moment?
Adrian:
Something we're a bit strapped for now, absolutely! And then the third one is diversification, I mean the obvious thing is, what is gold? – it is an asset class, it does stand apart from other things.
David:
You see, some people might disagree with you.
Adrian:
Because it doesn't earn interest?
David:
Because it doesn't actually pay you anything, yeah. So you buy that lump of gold, you might as well buy a lump of Plasticine, because you are just having it sitting there, and it really is up to the next person that comes along to say, "I will buy that off you at a certain price."
Adrian:
Which probably isn't going to happen with Plasticine, but is very likely to happen with gold. Again, you've go to consider, what does gold offer to central banks, just as it offers to private investors, institutions: security, liquidity and diversification. Now, the price of that, the price for getting an option on those three attributes, is the fact that you don't earn a yield in the meantime, so it's your opportunity cost. What's your opportunity cost of holding gold rather than cash in the bank, or more equities? It's the fact that you're not going to get a yield on that, so that's the cost of your option premium, effectively.
David:
But right at the top of this podcast, I pointed out that, back in 1970, 1980, gold was around $800 an ounce, it's taken 30 years for gold to actually return to $800 an ounce, that's a long time for gold to do absolutely nothing, isn't it? – or for any investment to do absolutely nothing.
Adrian:
Absolutely, but then if you look at the '80s and '90s, no investment is forever, take stocks – you wouldn't want to be in over the last ten years.
David:
I don't want to be in them now.
Adrian:
Well, there we are. It might be a good time, who knows? The bottom line is, no investment is forever, and the '80s and '90s were a very bad time to own gold, because they were a good time to own other things. Interest rates were very very high, and falling; equity investments were picking up from the floor in 1982, so you had a very long bull market in debt investments, US government bonds, we're pretty much in a 30 year bull market with the yield offered by US treasuries coming down and down and down. At the same time, you've then had a 20 year bull market in stocks – who needs gold, when you've got other investments, are performing very very strongly.
The bottom line with gold is, people tend to turn to gold when they get sick of miserable returns elsewhere, and as I say, the cost of getting the security and the liquidity and the diversification which gold can offer you is your opportunity cost and making anything anywhere else, but if you're not being paid anything anywhere else, if you look at cash, the UK savers, if you're a higher-rate taxpayer in the UK, you've basically been at break-even at best so far this decade, after tax and inflation. Interest rates have been so low, they've barely kept ahead of inflation, and now we're way below inflation at the moment. Is inflation falling, are we heading for deflation? – who knows, but certainly the Bank of England holding interest rates at 0.5% means cash savers are being asked to recapitalise the banks, so where's your opportunity cost of owning gold gone? – because there isn't one now, you're not making anything on anything else either.
David:
So you're almost saying that it's the least worst option at the moment?
Adrian:
In a way, I mean as you say, gold doesn't do anything, it's a non-productive asset, but what it does offer you is stepping outside of other asset classes.
David:
So, if you have a look at gold at the moment, and it is round about $1,000 an ounce?
Adrian:
$950, yes.
David:
$950, yeah, give or take $50 here or there, so we're looking at gold at $950 an ounce, and you're saying that interest rates are low at the moment, and there is a possibility we might get some inflation and we might get some interest rate hikes as a result of that. So, where do you see gold going in the next six to nine months, say?
Adrian:
Six to nine months? – it's difficult to know, there tends to be a cyclical pattern in the gold market anyway, that may or may not apply this year, it's not guaranteed.
David:
But that's a cop out, isn't it, Adrian?
Adrian:
No no, let me come back to it then, you want a price, David?
David:
I do want a price, yes – pick a number!
Adrian:
You want a price, OK. I don't like making forecasts, but let me give you one.
David:
Sure.
Adrian:
What have we seen? – we've seen an all-time high in the sterling gold price, which is important, I think, for, not for all listeners and readers to understand, is that the dollar price is an irrelevance to you, I don't care what the dollar price is for my own gold, because I'm not exposed to the dollar gold price. If you want exposure to the dollar gold price, you want to go and take a spread bet, where you're basically betting against a number, and then you can be exposed, £10 per tick, or whatever it might be, to the dollar gold price. The sterling gold price is what basically is your exposure, that's where you can get yourself protection, perhaps, from inflation of the UK money supply, quantitative easing, £125 billion being created, from record low interest rates, well below zero after inflation. So looking at the sterling gold price, we had an all-time peak of £700 an ounce back in February, I wouldn't be surprised to see that double in the longer term.
David:
You think the price of gold will double?
Adrian:
In sterling – absolutely. But this is it, the sterling investors have got to consider what do they think the outlook for the pound is, given the size of government deficits now.
David:
So why not just buy US dollars then?
Adrian:
Because you've also got to worry about the dollar. Look, if you look at gold over the last five, six years, a lot of people assume it's just the inverse of the dollar.
David:
Correct, yes.
Adrian:
But it's not, because if you look at it in sterling, euros, Japanese yen, Chinese yuan, renminbi, look at it in Indian rupees, South African rand, gold has been going higher against all currencies, so you've basically seen the world's money, government official currency, devaluing against gold over the last five, six years, it's not just a dollar story, it's much more than that.
David:
That's worrying, isn't it?
Adrian:
It is worrying, I mean gold is not a fun asset, this is the problem. Gold is not about good times, gold is about those times when it's very difficult to make money in productive assets, it's very difficult to rely on people to repay their debts, it's very difficult to know how much the cost of living is going to be in the future, and that's why people look to put a little piece away in their portfolio.
David:
Now, what you actually gave me earlier on was the gold price. Now, the other thing that investors will be saying is, "How much gold should I have in my portfolio?", so can you give me a percentage there as well?
Adrian:
Well, I can't really advise you on that, because I'm far overweight myself. We've got customers, I know one customer, for instance, who sold his house and put it all into gold, and he did that four years ago. He's done phenomenally well. I wouldn't recommend that as a policy to anybody, but if you think gold is the way forward, that's what some people have done.
Advisors, which I'm not, tend to say, maybe 5, 10% at most. The problem is, it's difficult to know how to weight that, because the diversification, which gold gives you, particularly in an investment crisis or a bear market in other asset classes, what are you expecting gold to do to outweigh your losses elsewhere? I think one thing investors need to understand about gold is that it's not a magic bullet, it's not going to make you whole, if everything else collapses. It might at least preserve some, but if you have 5% of your portfolio in gold and it doubles, whilst everything else halves, you're still not going to be anywhere near whole on that.
David:
So are you saying that 5% should be deposited with you at bullion?
Adrian:
I'd say 100%, to be honest with you!
David:
Or can people just sort of play around with some of these ETFs and things?
Adrian:
Gold really is about preservation of value, preservation of wealth, so it tends to be chosen by investors who have got something to lose, and who are concerned about losing it through no fault of their own, be it inflation, insolvency by a financial provider, whatever it might be, so by having a chunk of physical property which belongs to you, it's very liquid, it trades in an international market, having that security, it is a backstop, it's a fearful investment, it's something which you tuck away and you hope you don't need to rely on it, so how much do you want to put in that? – 5%, as I say, is something which some advisors might recommend, bit more than that if you fancy a bit.
David:
But not sell your house and just put it all into gold bars, yeah?
Adrian:
Not unless you really want to!
David:
That's absolutely wonderful, Adrian! Well, thank you very much for coming in today.
Adrian:
Thank you, David.
David:
That is a fascinating podcast. I know I said I don't invest in gold, but I have to admit I do have a few gold coins tucked away somewhere. Now, I end each podcast with a quote, and today's quote comes from a man called Buzzy Baz Vassey, now he was a general manager of the Brooklyn Dodgers, and he said, "We live by the golden rule: those who have the gold, make the rules" – would you agree with that?
Adrian:
Absolutely right!
David:
Thank you very much Adrian Ash, for coming in today. Adrian is Head of Research at Bullion Vault. Now, if you have a comment about today's show, you can blog it on www.fool.co.uk/podcast, or you can actually find them on the front page, or you can email me at moneytalk@fool.co.uk.
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