BullionRock Managing Director Robin Newbould looks at the precious metals' markets and the differences in the way onshore and offshore approach such investment. Focusing on Guernsey, where his firm is headquartered, he considers the primary points of note for bullion investors deciding between onshore or offshore and whether to hold the physical asset or a paper alternative.
There is a commonly-held view that offshore private client investors are comparatively better equipped and more willing to diversify their portfolios into slightly 'off the beaten track' asset classes than onshore investors. When it comes to bullion, though, the merit of the asset is its consistency: a 1kg 999.9 pure gold bar is a 1kg 999.9 pure gold bar no matter where you live, what language you speak and what fiat currency you use to buy it. Investors from literally every continent of the world hold bullion offshore – each of the shared opinion that bullion exposure should form some part of their overall investment wealth profile.
The investors' geographical location is largely irrelevant – what unites each bullion investor is his or her belief in precious metals. It is the personality of the investor that then determines how comfortable he is with the risk and reward profile of the different types of bullion investments available to him: be that unallocated ounces, exchange-traded commodities (ETCs) or physical bullion in bar or coin form. There is an army of gold bugs who believe that if they can't touch it, they don't own it, but simultaneously a huge amount of money is held on banks' balance sheets as unallocated ounces (although it is questionable whether the investors are really relaxed about this or are just unaware that this is how it is held).
In addition, a vast amount of money is also invested in ETCs. For all those involved in the bullion market, there is an acute awareness of the potential misuse of bullion; it is a highly transportable and valuable means of transferring wealth from the proceeds of crime. Onshore, gold and physical precious metal markets are unregulated and are not covered by the Financial Conduct Authority. The rules that purchasers of bullion have to comply with are, therefore, negligible. Contrast that with the position offshore, where Guernsey, Jersey and Gibraltar all require bullion-trading businesses to be registered or licensed with the local financial services commission in order to comply with the local anti-money laundering and antiterrorist-finance measures.
Investors choosing the offshore option will therefore be subject to 'due diligence' procedures prior to trading. This is seen by many as a positive step as investors can be assured of a level of independent oversight of the entity they are investing with and, in the offshore world, where reputation is of paramount importance, the process of obtaining 'due diligence' gives the business itself comfort as to the legitimacy of its investors. The main issue with trading and storing bullion offshore is the cost and time-scale of logistics and delivery.
Some days it is possible to forget these issues as every connecting plane, train and/or automobile (or more usually, an armoured vehicle) connects on time to make the process seamless and just as smooth as could be expected if the business was situated onshore. On other days, however, the unique and gloriously unpredictable weather, tides or mechanics of the Channel Islands mean that businesses are left feeling stranded in the sea.
Fully-insured 'all risks' insurance makes this nothing more than a frustration, and often goes totally unknown to the long-term investor who wants to store his bullion offshore, where length of delivery time to him is largely irrelevant. The only significant point is that the longer the journey from the refinery or supplier to the vault takes, the more expensive it is for the business. Logistics and customs paperwork are no more arduous offshore than anywhere else and, owing to the commonplace transparency between bullion businesses and their offshore border agencies, no undue delay or disruption is experienced at air and sea ports.
A unique advantage of some offshore jurisdictions – Guernsey and Gibraltar to name two – is the fact that there is no value-added or general sales tax that applies to any of the four major precious metals (gold, silver, platinum and palladium). This can save the investor up to 20% on purchases when they buy and store offshore, rather than take delivery onshore. A number of investors do prefer to "keep their assets under the mattress", and in this instance, the advantage of purchasing offshore from a cost perspective might therefore be lost, as customs paperwork requires a declaration of goods and value and therefore the relevant tax must be paid when the bullion reaches its onshore destination.
It should be noted that the same tax saving can be made by investing in ETCs that employ "bonded warehouse" custody but there is something overwhelmingly appealing to investors in physical bullion being held in a place such as Guernsey because they are able to visit and hold or collect their assets if they so wish.
It is safe to say that investors who want to maximise their investment and find a long-term solution which includes storage will prefer an offshore arrangement to an onshore one because of the savings they can make. Investors from all walks of life and from all over the world have seen the attraction of offshore bullion centres, particularly in the Channel Islands. They are English-speaking, they have a reputation for financial know-how and they have an appropriate level of regulation. Against this background they are also self-governing with a history of political stability and enjoy independence from both the United Kingdom and the European Union.
It should come as no surprise to anyone that the biggest British bullion collective is based offshore in Jersey. A regular, physically-backed, ETC with the security in question quoted on the London Stock Exchange, domiciled in Jersey (which has a stamp duty exemption) saves buyers 0.5% on consideration on purchases. When looking at the simplest, physically backed, 1:1 gold ETC managed offshore, the investor is able to gain exposure to the underlying commodity, without having to trade in futures or take physical delivery.
When investing, the investor should consider execution and custody charges, above the ETC's annual management fee of, typically, 0.6% per annum. Needless to say, it is important to establish where the gold is held and by whom and who is auditing the bars and how often. Most importantly, if the investor ever wants to take delivery of 'his' gold within the ETC, then the costs, minimum redemption levels and mechanics of such a process, if it exists at all, should be examined – they are often prohibitively high and complex.
In times past, people who wanted exposure to precious metal within their investment portfolios have purchased unallocated ounces and given them to banks to hold for them. There has been much press exposure about whether these institutions in fact hold sufficient bullion to cover off the trades they are making and this is still largely unknown. Unallocated ounces are a cost-effective way to achieve exposure to a precious metal but carry risks as the purchaser remains a creditor of the chosen provider.
There are now more options for investors choosing unallocated ounces and this includes metal accounts at a refinery, rather than at a banking institution. Here, he can be offered the opportunity to convert his unallocated ounces into physical bullion at a later stage should he choose. Although the service provider may be based onshore, and the underlying bullion into which he is buying may also be held onshore, the investor may see tax benefits in this instance by purchasing through an offshore jurisdiction. Precious metals in physical form are relatively simple investments. Free from the normal corporate actions, proxy voting, dividends and equalisation units, they are a little more nerve-racking to settle than a Delivery Versus Payment instruction down a copper wire at the stroke of midnight.
However, that really is the point: they are almost outside the normal financial system in the opinion of their biggest fans. Because there is no 'unique selling point' for the product itself (all 999.9 fine gold bars being equal), precious metals' businesses have to compete on price, security and service, the last of these including liquidity and innovation of dealing and reporting. Whether these businesses are onshore or offshore matters little in the case of gold but Guernsey does have a great advantage over its competitors – in the form of VAT and GST-free sales and storage when it comes to silver, platinum and palladium.
The overarching aim for bullion investors should be to ensure their investment is held appropriately. They must thoroughly explore what they are being offered or what they want. They should question their trustees' and investment managers' positions to ensure that they know whether they are holding physical bullion or promises in the form of ETCs or unallocated ounces. Investors are becoming increasingly sophisticated, which means that the default position of many managers (to invest in ETCs or unallocated ounces) should be challenged. The choice of jurisdiction becomes important when one considers the savings that can be made in some or charges levied in others and, for that reason, the offshore option has a unique appeal.
Originally published in Offshore Red, October 2013.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.