How three family offices handle gold in their clients’ portfolios
Nearing an all-time high, gold again reigns supreme as a store of value, though clients see and value it differently
Article content
When it comes to gold, there is no one golden rule for family offices. Rather, the approaches are likely to be as diverse as the ultra-high-net-worth clients they represent.
Still, as an investable asset, gold has certainly garnered a lot of attention in recent months, as it hovers near an all-time-high price per ounce. Driving that interest is concern over inflation amid even larger worries that it could persist as economic conditions deteriorate, resulting in stagflation.
“That tends to be the ultimate period where gold does very well because it combines its defensive characteristics with its inflation-hedging characteristics,” says Athas Kouvaras, portfolio manager and client relationship and development manager at Richter Family Office in Toronto.
The preferred investment strategy at Richter is allocating capital in the portfolio to gold via a liquid, low-fee exchange-traded fund (ETF) such as the SPDR Gold Shares ETF (GLD), which is backed by the physical asset.
But some clients are more “gold bugs” than others, he says.
“A few prefer to own physical gold,” he says, noting this strategy involves storage costs, which can be particularly high when allocations exceed $1 million.
“But for them, there is psychological comfort knowing that if the whole world goes to hell in a handbasket, they have this few million dollars in real gold, whereas most wealth is really nothing more than ones and zeroes on a line of code at the bank, right?”
Gold bugs or not, most clients recognize that gold’s relative scarcity compared with other commodities — combined with the widespread belief that it’s a store of value, as well as being an alternative reserve currency to the U.S. dollar — makes it important to own, Kouvaras says.
Typically, the allocation in a portfolio does not exceed 3 per cent of total assets, he adds.
Yet the challenge for a family office adviser is getting a full picture of clients’ wealth in gold because many also own physical gold — often jewellery — in a safe in their home or safety deposit box at a financial institution.
“There is a cultural aspect for many clients when it comes to gold,” says Victor Godinho, managing partner and advisor with Kismet Wealth Group, a Toronto-based multi-family office.
“We have some clients who have as much as 7 to 10 per cent exposure when you account for jewellery, other precious metals, watches and gemstones.”
Godinho adds that gold is a common gift at Indian weddings, including his own. “It’s tradition when the groom is introduced, that every woman in the bride’s family gives you a piece of gold.” Brides often receive gold jewellery from the groom’s family.
Driving tradition is the notion that gold is a long-term store of wealth. “After real estate, gold is like the next best thing for generational wealth,” Godinho says. “Your mom would pass down to her son’s wife the same jewellery set that was given to her from her mother-in-law.”
For some clients, it’s not just gold; it’s investment-grade diamonds and high-end wristwatches, all of which are increasingly viewed as assets uncorrelated with stocks and bonds, Godinho says. “Especially during COVID, there was a lot of talk with clients about the need to hold uncorrelated or off-book assets.”
Yet gold reigns supreme as a store of value for many families.
One challenge, particularly in an environment of higher interest rates, is that gold doesn’t pay a yield, Kouvaras says. “That’s one knock on gold that was less so when interest rates were near zero.”
All the same, gold can be a good hedge against specific inflation risks. That’s one reason Calgary-based single-family office Viewpoint Group holds it as part of a diversified sleeve of commodities in its investment portfolio.
“The fact is, you don’t know where and how inflation will rear its head,” says Keith McLean, executive vice-president at Viewpoint Investment Partners, an arm of the family office providing investment strategies for other ultra-high-net-worth clients.
“If inflation is consumer-driven, for example, you see that turn up in higher prices for coffee and sugar. And if it’s inflation as a result of our fiat currency being debased, eventually you’ll see that reflected in the rising price of gold, bitcoin and silver.”
The latter risk proved gold’s value in the 2008-2009 financial crisis, with its price per ounce more than doubling from 2008 to 2012.
Even more compelling, however, was gold’s performance during the stagflation of the 1970s and early 1980s, when it surged from US$100 an ounce to more than $650 when inflation peaked at 14 per cent. “That’s really the only time that gold has provided significant outperformance in the last 50-odd years,” McLean says.
Today, gold’s price is bolstered by similar fears, though stagflation has yet to materialize.
That said, it’s critical for advisers to ensure their clients make rational decisions about investing in the asset, Kouvaras says. “What you don’t want is people getting caught up in emotions driven by a concern about the state of the world and making a snap decision to sell everything and go to gold and cash.”
Still, he understands the affinity for some clients, for whom “owning gold bars or jewellery helps them sleep at night.”
In some instances, family histories inform how they value gold, especially if it helped them during times of upheaval and financial stress. Some families may have sold gold jewellery, for example, to help establish themselves in Canada upon arrival, Godinho says.
Yet even among these clients, now increasingly led by second-generation Canadians, gold is losing some lustre. “It is still important, but younger generations are more interested in other alternative assets,” he says.
These clients are typically younger than 50 and are increasingly interested in the potential non-correlated returns and defensive characteristics of private equity, fixed income and real estate, he says.
And then, of course, there is bitcoin — sometimes referred to as digital gold because of its scarcity — and other cryptocurrencies, Godinho adds.
“In fact, these younger clients are not having FOMO [fear of missing out] about gold as much as they are about crypto.”
More from CanadianFamilyOffices.com:
- How high-net-worth investors are handling higher interest rates
- Federal budget measures that HNW taxpayers are watching
- Where to invest $1 million right now
- How Canada’s new luxury tax works
Please visit here to see information about our standards of journalistic excellence.