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What To Do With A "Forever" Gold Inheritance?

Adrian Ash, 6 March 2019

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Gold's timeless stability isn't an excuse for investors not to re-jig portfolios across the board, a figure in the precious metals market argues.

However hard some commentators might dismiss gold as part of a portfolio, its durability as a store of value over thousands of years is not an accident. A decade after the massive quantitative easing programmes were undertaken by central banks, there’s still plenty of debate about the role of such hard assets in underpinning monetary systems. The ascent (and high volatility) of bitcoin plays to a hunger for money that is not controlled by government “fiat” currency. And it is worth noting that the huge price swings of bitcoin have tended to leave gold somewhat in the shade. About seven years ago, gold prices soared amid fears that the eurozone could split asunder as Greek debt problems mounted. And even as gold has subsequently come off the boil as the US gingerly returned to more “normal” rates, gold arguably still has a place. 

Besides the asset allocation considerations, wealth advisors should consider how to treat gold in inter-generational wealth transfer – one of the most important issues for the industry as Baby Boomers retire and pass away. How to address that issue? To answer that question is Adrian Ash, who is director of research for BullionVault, a precious metals trading and investment management business. We hope readers find these comments useful. 

The editors are grateful to BullionVault for this by-lined contribution; they don’t necessarily endorse all views of guest writers and readers can respond by emailing tom.burroughes@wealthbriefing.com


Whatever its merits for hedging inflation or spreading portfolio risk, one reason gold repeatedly attracts investors is its longevity. Rare, desirable and finite, gold stands apart from currency, debt and equities because - like diamonds in the world's best-ever marketing line - it really is forever.

Created when neutron stars collide, gold does so little it can't even rust. Only a mix of hydrochloric with nitric acid will dissolve it. Although this singular chemical element will never change, however, its owners sadly must, and while gold's purchasing power has been impervious to long-term change according to several historical studies, that only held true if you could wait a few hundred years or more.

Reconstructing a consumer price index back to the mid-1500s, Roy Jastram's book The Golden Constant found the metal held little changed four centuries later in terms of what it could buy in 1977. Economist Stephen Harmston saw the same pattern in a 1998 report, while one common claim on the “bug-o-sphere” today says that, back in Ancient Rome, it took around a Troy ounce of gold to buy a good toga, belt and sandals, and you could look pretty natty for the £1,000 ($1,316) which gold has commanded so far in 2019. But that same ounce raised only £150 twenty years ago, putting you in Burton's for your Millennium's Eve outfit instead of on Jermyn Street.

To resolve this volatility across time, and perhaps to glimpse a little of gold's eternity, many of today's gold owners will now be wondering whether to bequeath their holdings to their heirs. Whether in the form of coin, bars or metal-backed ETF shares, gold should present no problems to executors needing to disburse it as an asset, rather than sharing funds from a sale. (For vaulted bullion, the benefactor may also wish to set aside a small sum of cash in their will to cover their heirs' future storage and insurance fees.) But on receiving it, how should the beneficiary be advised to view this legacy?

The West's so-called “Baby Boomer” generation has built sizeable gold holdings during and since the global financial crisis, replacing much of the same period's massive "cash-for-gold" jewellery sales from Western households. Some of today's owners will be actively managing their gold position, taking profit to buy the dips or rebalancing alongside their broader portfolio. Others will still be underwater, with the top of 2011 still 20 per cent above current levels.

Starting twenty years sooner, Japan saw private investors build large gold holdings during their domestic stock and real-estate crash of the early 1990s. That metal now continues to come back to market as the now more-elderly owners either get out at break-even or take profit at today's higher prices or pass away, leaving their bars and coins to children and grandchildren. In this, Japan's private household bullion flows have come to resemble France, now a net dis-hoarder of gold pretty much without pause since the 1980s, when the post-war generation began digging up and selling the Napoleon coins hidden by the parents against invasion.

Like most Western states, France levies inheritance tax on its residents, albeit with a smaller tax-free allowance and then potentially higher rates than the UK. Here in Britain, capital gains tax may then apply on any future sales which take the beneficiary above their annual capital gains tax allowance. This makes the question of whether to sell immediately look simple enough. Gold after all will never pay a yield, and arranging storage (unless already vaulted securely) can be costly and time-consuming.

Like any other inherited asset however, gold should be assessed on its own merits, starting with its repeated diversification of equity risk. On five-year horizons, gold since 1968 has risen every time that the FTSE All-Share has fallen. Owned as bullion, the metal carries no counterparty or default risk, but uniquely among physical assets it also tends to enjoy deep and growing liquidity during times of investment stress.

These three characteristics of gold – its diversification, security and liquidity – are the reason it remains a core asset among central banks, perhaps the longest of long-term asset managers. Central banks as a group last year raised their net gold demand to its highest level since the late 1960s, apparently driven by concerns over geopolitics and spreading risk. For younger private investors, as well as for advisors and managers of cross-generational portfolios, there is an equally strong case for considering a little gold in any long-term strategy. In US dollar terms, gold has risen in all but one of the 11 years since 1965 that shares in Warren Buffett's Berkshire Hathaway fell. Switching 5 per cent into gold from a simple 60:40 portfolio of shares and Gilts would have cut total losses from 13.1 per cent to 10.4 per cent in 2008, the worst year for UK investors of the last four decades.

The biggest risk? Don't confuse gold's timeless stability for an excuse to neglect acting when the time comes, taking profit or rebalancing when the metal rises to offset losses on other, usually more profitable investments.

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