GoldCore enables family offices in the U.S. to allocate to physical gold as an asset class.
Family offices identify four key reasons for adding gold to their investment portfolios: as a portfolio diversifier, a hedge against inflation, a safe haven asset, and a hedge against currency risk.
1. Many family offices maintain a strategic asset allocation to gold
A recent Financial Times and World Gold Council survey of the investment strategies of 120 single and multi-family offices highlighted that the main concerns of family offices are capital preservation, portfolio concentration and portfolio volatility. The survey found that most offices employed a strategic asset allocation framework and nearly 50% had a specific allocation to gold, and overall, gold comprised 3.1% of portfolio assets.
Amongst those surveyed, the investment rationales given by family offices for holding gold was as a portfolio diversifier, a hedge against inflation, a safe haven asset, and a hedge against currency risk. This diversity of motivations indicates that gold can play a number of different roles in a portfolio simultaneously.
2. Why gold acts a safe haven, an inflation hedge, a portfolio diversifier and a currency hedge
Gold is less affected by economic cycles than other financial assets and so has a low to negative correlation with other portfolio assets. Therefore, an allocation to gold by U.S.-based family offices can help portfolio diversification since the favourable correlation relationship helps reduce portfolio risk and enhance portfolio returns.
Because of its use as a currency, its rarity, large above ground stocks and traditional use as a store of value, gold’s purchasing power is not easily eroded and the gold price has been shown to rise as inflation rises. Gold is therefore a useful portfolio hedge against inflation.
In times of crisis there is a flight to quality assets and gold benefits because it’s perceived as a safe haven. The gold price therefore performs well in times of financial crisis and extreme market events and its correlation benefits become even more important, so it can provide portfolio insurance since it minimises portfolio losses.
Gold has also recently been found to be beneficial for managing currency risk in multi-asset portfolios that have an emerging market equity allocation. This is in addition to gold’s well accepted role as a hedge against the U.S. dollar, a relationship that has been shown to exist over long periods of time.
3. Gold helps preserve multi-generational family wealth
Real assets have been a part of family wealth preservation strategies for generations. These assets include land holdings, artworks, antiques and precious metals. Multi-generational investment strategies take a very long term view, and contain real assets, since over the long-term, the true value of real assets is recognised.
This is particularly true of gold with its proven history as the ultimate store of value over the long term and also during periods of market crisis. Professor Roy Jastram termed this the Golden Constant in his well-known book of the same title. Taking hundreds of years of gold price data and general price level data for England (1560-1976) and the US (1800-1976), Jastram calculated an index of gold’s purchasing power and found that it was constant over long periods of time and was maintained throughout periods of monetary upheaval. In contrast paper currencies became essentially valueless over the same time periods.
4. Prominent families invest in gold, now and throughout history
Some well-known family offices have recently allocated to gold as part of their investment strategies. Fleming Family & Partners recently stating that gold represented the best hedge against currency debasement, given that in its view, governments were willing to accept higher inflation, and that gold has a long history of tracking inflation. RIT Capital Partners, the investment trust chaired by Lord Rothschild, recently described gold as a key portfolio holding due to its role as a hedge against the prospect of currency wars and the risk of heightened inflationary pressures. Many wealthy families throughout history and into the modern era have used gold as a store of wealth and as a method of inter-generational wealth transfer by accumulating and holding gold over long periods of time.
Gold is known to have occupied a central position in the investment portfolios of the Sultans of Brunei. In the 1980s the former Sultan Omar Ali Saifuddien III had a gold bullion fund valued at “many hundreds of millions of dollars”, managed on his behalf by Sir Peter Tapsell of London stockbrokers James Capel. The current Sultan Hassanal Bolkiah is also known for his fascination with gold.
The ruling monarchs of Saudi Arabia are notable for the emphasis that they place on gold as an enduring wealth preserver and store of value. In the 1970s, the significant oil price increases underpinned the gold price appreciation due to recycled Saudi oil wealth, and a lot of IMF auctioned gold was also said to have been purchased by wealthy Saudi royalty via German and Swiss banks who bid at the auctions on the Saudis’ behalf.
The dynastic House of Rothschild has been synonymous with the gold trade in London for nearly 200 years, and although NM Rothschild officially departed the gold trading business in 2004, it is true to say that the family understand the value of gold as a store of wealth in an inter-generational wealth portfolio, having been closely involved in all aspects of the gold trade for hundreds of years.
“A must read for family offices seeking wealth preservation”
Essential Family Office Guide to Investing In Gold