Here’s How the Super-Rich Invest in Gold

This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: Investing in gold like the wealthy, reminding your portfolio that gold is there for the long-term, and finally some worthwhile jewelry?

Surprise! Wealthy gold investors don’t have any secret methods

CEO World magazine is written with a specific readership in mind: Chief Executive Officers. These individuals have climbed to the top of the corporate ladder and tend to be rewarded quite well — $1.3 million per year overall, or an average of $18.3 million per year if they’re lucky enough to run an S&P 500 corporation. These are high-net-worth individuals (HNWIs).

The magazine recently published a story about how the wealthy invest in gold that offered no real surprises but plenty of confirmation that the super-wealthy share the same economic concerns as most of us. Regardless of how many commas your net worth has, the preferred approach to gold investment is the same…

The article covers the many methods of speculating on gold’s price, then notes that high net worth individuals prefer to invest directly in physical gold bullion:

As noted above, gold acts as a buffer asset at times. It may not yield high profits during an economic slump, but it can cushion you from potentially unbearable losses. HNWIs know that very well, so they keep their hands on gold all the time, especially in times of crisis. [emphasis added]

Storage and insurance costs? Yes, those are costs associated with owning real gold bullion. Surely you don’t think these HNWIs earned their high net worth by underinsuring their assets? The super-rich choose to pay these costs. Even though they would play the paper gold game, they prefer not to. Instead, they “keep their hands on gold all the time.” I can only assume they did their own cost-benefit analysis and came to the same conclusion that I did…

That “especially in times of crisis” is way more important than saving a few dollars on storage and insurance.

Why? Because “it can cushion you from potentially unbearable losses.” Once you’ve achieved high net worth status, you know exactly how hard that milestone was to reach – and I would expect you’ve taken Warren Buffet’s famous first rule of investing to heart:

“Never lose money.”

(In case you were wondering, storage costs in a gold IRA tend to be a non-issue, usually averaging around 85 basis points, or 0.85%, even for a significant bullion investment.)

Other than building themselves a gold cushion against potentially unbearable losses, why do the super-wealthy buy gold? Three reasons:

1. Diversification, “the only free lunch in investing,” to borrow Nobel laureate Harry Markowitz’s turn of phrase is another crucial factor for the wealthy:

There is no way to predict how the market will perform. It can skyrocket or freefall even after having done meticulous research and analyses. Portfolio diversification, thus, protects you from extreme losses. Just like you need to diversify stocks by purchasing multi-sectoral shares or investing in mutual funds doing the same, you should add gold to your portfolio.

In case you missed it, I discussed gold as a top-performing “alternative” investment last year.

2. The wealthiest individuals buy gold with long-term performance in mind:

Research shows that long-term investments have shown better results. Gold is a highly resistant asset, but it takes time to yield profitable results. In its past 3000+ years of history, its value has never plummeted to zero and has only significantly improved overall. You can say that it is a safe investment but should be kept in the portfolio for a longer duration.

Speculators panic over intraday movements. Traders and novice investors might worry over a slight annual decline. But anyone with real experience knows the trend – “In its past 3000+ years of history, its value has never plummeted to zero and has only significantly improved overall.”

That’s what I call a safe haven!

3. Liquidity, because something you convert into cash quickly and easily in an emergency offers peace of mind above and beyond everything else. To quote the article once again on the virtues of owning physical gold:

in case you are in dire need of currency, you can very easily sell this tangible asset; it is a highly liquid asset, after all.

A cushion against unbearable losses, one that diversifies, that has a longer track record than any other, that’s highly liquid and whose expenses make the hedge fund standard 2-and-20 fees look rapacious?

That’s physical gold – and that’s why the super-wealthy own gold. Why shouldn’t we all?

Note: Because I discussed my first story in incredible detail today, so, to thank you for your patience, I’ll limit my comments on the next two.

Can the Federal Reserve push gold’s price down?

Analysts are already predicting the effects hawkishness from the Federal Reserve, a likely 0.5% rate hike in April, will have on gold’s price.

Does the U.S. bond market represent any kind of threat to gold? Investors who only see gold as an asset that doesn’t pay a dividend may sell paper gold to buy Treasury bonds. Keep in mind, making that exchange virtually guarantees an after-inflation loss. As of March 6th, the top-yielding Treasury, the six-month bill, yields 5.22%.

Inflation? As of January, 6.4% — and this is math, but it’s easy. If your money is growing at 5.22% and being devalued at 6.4%, are you making a profit? Or are you losing ground?

Despite this situation, the U.S. Treasury bond is the most attractive of all sovereign bonds right now.

Unless and until the yield of a Treasury bond is higher than inflation, I personally wouldn’t touch them.

On the other hand, seems like the world’s sovereign bonds yielding less than inflation is an advertisement for gold investment. After all, AAA-rated bonds and gold are both considered Tier 1 capital under the Basel III accord…

John Paulson, billionaire investor, said it best. He pointed out that central banks themselves are developing a distaste for the currencies one another are printing. Instead, they want the real thing:

There has been a significant increase in demand from central banks to replace dollars with gold, and we’re just at the beginning of that trend. Gold will go up and the dollar will go down, so you’d be better off keeping your investment reserves in gold at this point.

It’s hard to argue with that logic!

By Peter Reagan at Birch Gold Group