We have written here before about the financial authorities giving gold a helping hand, sometimes with their shortsighted policy actions. Freezing Iran out of the payments system so it settles exchange in other forms with its trading partners, and allowing gold to move back to the heart of the banking system are two good examples.
Instances such as these usually surprise us given that gold is the antithesis of the financial authorities who manage our national currencies. Humans are prone to err and the Feds are not different, something that as gold investors we celebrate on these occasions.
In the U.K., the Financial Services Authority's (FSA) long-awaited Retail Distribution Review (RDR) has been growing in form prior to coming into force on Jan. 1, 2013. The implications of RDR on investment markets have been debated for some time.
Has the FSA boosted demand in the gold market?
Recent research from the World Gold Council (WGC) argues that RDR should be seen as a game changer for gold. Like others, the WGC argue that previous regulations limited investment and product choices for retail money managers, limiting advisers' abilities to provide clients with wide-ranging asset allocation and truly balanced and diversified portfolios.
Investment options considered mainstream in today's contemporary financial era of "too big to fail," bailouts, and QE have been found wanting, leading to a search for alternatives. Savers and money managers have been looking for other options prompting a widely noted growth in the alternative investment sector.
RDR will shortly enable advisers' to direct retail funds to a wider range of investments and products. This could be good for gold, and other apparently "alternative" investments. Many might see this as the regulators once more following the ball, and reacting after a phenomenon has occurred.
RDR looks set to increase the chances of retail funds finding their way into the gold investment market. This would offer further support to the gold price, and help clients of the fund management industry achieve their needs of wealth preservation, portfolio diversification, and finally some decent and varied asset allocation.
What does RDR mean for gold investment products?
If RDR really causes the above, it will be very interesting to observe the fund management industry's choice and recommendations of gold investment products. We would assert that because the gold market has been such a backwater for managed retail money, we may witness advisers significantly improve their knowledge of ways to invest in gold. Currently, few IFAs would be able to tell you the differences between a gold ETF and an allocated gold account, between gold liquidity (gold bullion investment) and gold investments (gold mining shares, gold royalty companies, gold explorers, etc.) -- let alone the difference between allocated and unallocated gold.
This increased attention on the product landscape within the gold market will be a good thing.
Which products will benefit from new money investing in gold?
We would extend the argument of the WGC here and suggest that as levels of education about the subtle differences between ways to invest in gold increase, certain products stand better placed to benefit than others. This managed retail money will have certain needs when it comes to being deployed as gold liquidity, and other needs when deployed in gold investments.
When we are talking about the liquidity part of your allocation to gold, it might be that physical gold products stand to benefit over securities for gold investment. When capital is allocated to gold in this way, the primary motivation is typically wealth preservation; the return of your money before the return on your money.
With this is mind we see allocated gold products, where the investor owns physical gold bullion that is their legal property, being favored over gold securities like ETFs, where the investor does not enjoy direct ownership and merely owns a share in a trust structure involving a range of financial counterparties. If you can buy physical gold that you own as securely and efficiently as an ETF, why would you not opt for the real thing over a derivative?
Educated gold investors have always placed great importance on owning allocated gold; how many gold investment heavyweights do you find recommending paper gold and gold securities over the real thing?
We think the benefits of unregulated products, which transparently and securely provide allocated physical gold ownership, make them well placed to receive relatively greater new capital flows than their regulated competitors with their limitations and structural flaws. With this in mind it is possible internationally accessible allocated bullion platforms will be prefered over vehicles such as GLD, DGL, SGLN and other paper claims.
And what about gold investments?
When moving on to the investment part of your allocation to gold, it will also be interesting to see some further natural selection at work in the gold investment market.
Will managed gold funds be relative beneficiaries to new money flows? Will the mining shares recover their attraction, after their difficult last 18 months and their previously seen new competition from new types of gold securities?
Although we are relatively less well-qualified to comment on this part of the gold market, it would appear that gold funds and gold shares stand better placed to receive client funds than gold derivatives like futures and options. Even within this we would hazard a guess that retail managers have not the time and/or inclination to become experts in gold explorers, miners, and royalty firms. With this in mind, perhaps managed funds will attract more of this retail money. You can have all the usual debates about alpha and value for money, but actively managed gold funds might be thankful for RDR. The likes of the Tocqueville Gold Fund might benefit in the U.S., while the likes of Blackrock Gold and General, Sprott Gold Fund, and Hinde Capital might do well in the U.K.
RDR could ultimately benefit investors
While we generally feel that regulation beyond just creating the environment for a market to operate freely and efficiently creates more problematic distortions than benefits, RDR might do some good for investors. Even bad golfers (read: the regulators) score a hole in one every now and again.
If RDR really does allow managed retail money to at least consider a wider range of investment markets and products, this could help facilitate improved diversification, wider asset allocation, and ultimately greater wealth preservation and risk adjusted returns being achieved by those using financial advisers. Every cloud...
The reason gold bullion investment specifically within the alternative asset class will benefit investors is due to gold's historically proven role as a diversifier in portfolios. Research just out from the WGC once more shows what gold can add to your portfolio during the good times, but especially the bad times.
Disclosure: I am long gold, silver, and the miners. I am an executive of a precious metals investment service.