Editor's note: This article is part of an occasional series of how investment firms are continuing to tap demand for what are seen as "real assets" at a time of fear about the global economy.
If investors want a “real asset” such as gold or platinum then there’s no substitute for the physical substance, according to a suitably-named new industry player in London, The Real Asset Company.
A fear that lurks in some minds is that certificates or exchange-traded products linked to gold and other metals prices may, in a market disaster like the autumn of 2008, fall short in any promise to deliver on the real stuff despite the best of intentions. In a world where gold has surged to new record highs above $1,900/ounce on worries about inflation and other issues, not getting the yellow metal when one needs it is a nagging concern.
“During the 2008 banking crisis there were moments when I thought I might not be able to withdraw cash from my bank account. It turned out that this very nearly was the case. I always felt safe in the knowledge that the physical gold that I personally owned would always have some value,” Real Asset Co’s co-founder Ralph Hazell told this publication in a recent interview at his offices in the City.
“Although there are ways to have exposure to gold such as ETFs, futures and mining shares, I personally just wanted to own the actual physical allocated metal, without a counterparty or through a security. When I discovered that this was what a lot of other individuals wanted, I started looking into building a business around the concept of direct ownership,” said Hazell, who helped create the firm in 2010. Through its services, investors can buy and sell gold, silver, palladium and platinum.
It is early days, but Hazell, along with co-founder Will Bancroft, is optimistic that demand for physical precious metal ownership has plenty of upside potential, even though gold, for example, has already surged in price before retreating somewhat.
“The percentage of global capital in gold now is very small when put in a historical context. Even without further disruptions to the financial system I think that physical gold ownership is becoming more accepted by the masses,” he said.
Demand for gold remains very strong. Gold demand in the third quarter of 2011 reached 1,053.9 tonnes, an increase of 6 per cent compared to the same period of 2010. This equates to $57.7 billion, an all-time high in value terms, according to data late last year from the World Gold Council. The very existence of the WGC - a pan-industry group representing gold producers, investors and product providers - is testimony to the high profile of gold as an asset class.
Proof of ownership
For a business that stresses the benefits of holding gold bars and other metal in physical form, a vital issue for the Real Asset Company is how to prove to clients that assets are in a vault and haven’t disappeared. In short, how to build a reputation for delivering a promise?
The question of deliverability if someone wants to hold the real stuff is not straightforward and a cause of some controversy in the industry. Exactly 12 months ago, at a conference hosted by UK-based Cheviot Asset Management, a wealth management firm, delegates heard that data on central bank and other holdings of gold can be opaque. Some gold-linked instruments, such as exchange-traded funds, may not withstand scrutiny as reliable gold proxies unless they are 100 per cent backed by physical gold, some people say. Among other points to consider is that some investors may want to use exchange-traded products to obtain temporary exposure to gold as a general asset class and rapidly trade in and out of it without worrying about the chore of storing gold in a vault. But the lack of hassle may come at a price, in the form of transaction fees on exchange-traded products.
So how to prove to clients that the gold is there when they want it?
“We currently show the statements from our third party storage partners as proof that the bullion exists. We demonstrate through an internal audit that is updated daily that the customer holdings on the platform match the bullion in storage,” said Hazell.
“We plan to have a recognised external auditor do regular paper audits and an annual physical audit where even the bullion itself is checked. We hope to have this in place by the third quarter of this year,” he continued.
All this plays to the need for any such firm to establish impeccable credentials. Creating a reputation for reliability inevitably takes time, but Hazell is convinced he can do it. While he has a young man’s enthusiasm, Hazell is no ingénu: “We spent about 8-10 months from late 2010 putting the business model together and building the technology. The [firm’s] exchange trading platform was quite a big tech build as it is essentially a mini stock exchange. Once we were happy with the business infrastructure we started marketing the business in October 2011.”
“Having spent 12 years in the professional markets, and years as an independent proprietary trader, my investment philosophy is now to be a shareholder in the business that I work in, own the property that I live in, and own gold. Perhaps with a bit of cash in the bank and a few equities for old times' sake,” he said.
The firm intends to build out its online platform for buying, storing and selling gold. “You have the ownership and legal title of the gold and our exchange platform gives ultimate transparency in the pricing and efficiency that you can transact at,” he said. “The product focus is on gold and silver, but we do also offer platinum and palladium. We are essentially an online business, but we are always available on the phone and customers are welcome to visit the office by appointment,” Hazell said.
There is already some competition in this space, such as from BullionVault, a large business that provides storage and trading facilities in gold. Among dealers in physical gold, there are plenty of coin dealing firms and recognised mints such as Perth Mint, based in Australia.
Back to basics
Hazell’s remarks might prompt conventional money managers to accuse him of being a “gold bug”, a not entirely endearing term although some of the jeering has stopped in recent years as the gold price has surged. Hazell, though, is an unabashed “Austrian” in his view about the role of money and banking, arguing that recent central bank moves to revive debt-burdened economies with yet more credit is doomed to fail or end in an inflationary surge. (To view more about the “Austrian” point of view, click here.) This viewpoint is gaining traction as groups such as The Cobden Centre, a UK-based organisation, press the case in the media, business and political world for a return to "honest banking" and "hard money".
“I think that all savers should have a certain percentage of their wealth in precious metals, as a method of preserving the purchasing power of savings or even as protection against a monetary breakdown. Therefore our target market is anyone looking for a savings mechanism,” Hazell said.
“I think bank deposits are misunderstood by most people as a suitable savings mechanism. We perceive a greater amount of risk in the banking system and prefer gold and silver bullion alongside some cash as an effective way to save. You are actually lending money to the bank and they may not be able to give you back your money when you need it most, or indeed ever,” he continued.
Hazell is a bit of an evangelist, as many hungry entrepreneurs have to be. “We would like to become the "go-to" online platform for people wanting to own gold and silver, and for our section to become an information hub for people to learn about and participate in these markets,” he said.
“About 80 per cent of the shares in the company are owned by the management team (five people) combined with a few shareholders who generally started out as clients and then liked the business and became shareholders. The company is split into two parts, one company for the dealing with the physical assets, and storage agreements etc., and the main part being the technology part, as it is essentially a technology business,” he added.
Unless faith rapidly returns to “paper money” and the economies of the West, it is hard to see how this firm is not going to be getting a good deal of attention in the months ahead.