Research & Blogs

7 Ways to Preserve Your Family Office Wealth With Gold

Five Thousand 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.  This remains true today, with central banks across the globe holding gold as a significant portion of their reserves.^[1]  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, making it a reliable asset class for your family office to preserve wealth in a down economy.

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

You have several vehicles to preserve your family office wealth by investing in gold, and we have broken down the most popular, outlining the pros and cons of each.

Gold ETFs and Mutual Funds

Gold ETFs and mutual funds offer exposure to the price of gold while offering more liquidity than physical gold. Gold price movements are generally uncorrelated to stocks and bonds, so this holding can also diversify your portfolio and help mitigate risk while preserving wealth.

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 with modest tracking error over time.

Some funds (First Eagle Gold Fund) are actively managed by institutional investors, and both gold and non-gold securities are regularly added and removed to optimize returns. 

Keep in mind that investing in ETFs and funds is like 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 and your investment is subject to the management team capabilities and soundness of the financial firm.

Gold Futures and Options

Futures and options are by far the riskiest method of preserve your family office wealth when investing in gold because they are leveraged. 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 with a higher level of inherent risk.

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 can be used for 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.  

Increased exposure through 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.  Your family office can experience significant profit and loss based on how much of your investment is achieved through leverage.

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. So it is important to keep that in mind when considering gold options as your family office’s investment strategy.

Gold Miners

Another way to invest in gold to preserve your family office wealth 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 gold prices, they can, and often do, still report profits.  This can be done by downsizing, reducing production costs, increasing production volume, buybacks, and operating leverage. And without effective management, they can report losses even as the price of gold rises.  

A significant benefit to consider when you look to preserve your family office wealth by investing in gold through all securities is liquidity. Whether it is futures, options, ETFs, or stocks, when the markets are open, you can sell securities in seconds. It is not as fluid to sell physical gold. 

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. This means gold jewelry is a great strategy to preserving family office wealth, right?

Not necessarily. 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 includes a markup; however, you have an opportunity cost of the time expended to find and verify 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, and not a reliable way to preserve your family office wealth, but it is quite exquisite and enjoyable to own and wear. 

Gold Coins

Gold coins, which come in a wide variety of weights and sizes, are another popular way family offices are investing in gold. 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 and considered trustworthy. 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, creating a reliable vehicle to preserve your family office wealth.

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 can comprise of 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. The theft of a 400oz gold bar is obvious. The theft of 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 basis. And regardless of where you store the gold, insurance premiums add to the ongoing cost. 

Gold Bullion (Gold Bars)

When family offices consider investing in gold to preserve wealth, it is usually bullion. Bullion bars are the most popular way to invest in physical gold, uniquely suited for direct ownership in large investment amounts. 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 writing, 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. These factors built a strong case for bullion as an investment play when looking to preserve your family office wealth.

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. 

Digital Gold

Digital gold is a new kid on the block that offers the best advantages of both physical gold and securities. This provides a unique investment strategy for you to preserve your family office wealth.

With digital gold, you own the gold outright as a physical asset.

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 maintains diversification and tail risk protection in extreme market stress by monetizing your gold, and arguably the most sound investment to preserve your family office wealth.