In a recent article titled “How to benefit from the perfect storm ahead”, posted on January 29th on the Global Gold blog, I discussed the overall economic context and the state of global financial markets. The article received quite a bit of attention, not so much because of the outlook for 2019, but mainly because of a story I shared in it, that of a client and his idea to set up a “personal Swiss Gold Credit Line”.
After publishing the article, I received quite a few questions on the topic. Some of them were practical, as a few readers are now actually interested in the process of setting up their own “personal Swiss Gold Credit Line”. However, there were also some questions that reflected the fact that my explanation of the concept was perhaps not entirely clear. I apologize for any confusion and to rectify this, I intend to clarify things in this article. I also discussed the topic in a YouTube video interview.
First and foremost, before getting into the practicalities and the nuts and bolts of this concept, I want to clarify that the “Swiss Gold Credit Line” is not a pre-packaged off-the-shelf service and it is not for everyone.
I mentioned it as an example of the creative solutions that may exist and that we can help our clients with. However, it’s not a packaged product. It is generally not available without a minimum investment – or stock of gold – of at least USD 2 million, but it might be suitable for a client’s overall financial situation and investment strategy.
The Backdrop – gold is coming out of a multi-year bear market
In the original article on this topic I alluded to the fact that, while other assets have benefitted from the “money-printing” frenzy of the past decade, gold (and silver) could be considered a distressed asset.
In this context, I was intrigued by a recent article I read on Bloomberg, describing how billionaire Sam Zell is buying gold for the first time. In it, Zell, a real estate mogul, explains how supply and demand is a basic price model to determine the value of assets. Nicknamed "The Grave Dancer," Zell attributes his $5.5 billion net worth to investing in distressed assets... like buying up crushed properties after the real estate crash in the early '70s.
I would probably not go as far as to describe gold as a “distressed asset”. However, the price of gold, for many reasons, has indeed been suppressed over the last years. It is only now bottoming and reentering its next bull market. Smart money, including central banks around the world and investors like Sam Zell, are confirming that expectation by putting their money on the table.
The basic idea of a Swiss Gold Credit Line
The basic concept is quite straight-forward: You buy gold and store it in Switzerland in safe custody. Next, you arrange a loan agreement with a Swiss bank, whereby the gold is pledged by the bank and used as collateral for a Lombard credit.
While the concept is simple, its practical implementation and the arrangements required to set it up are not to be underestimated. As in any loan agreement, the details are important. Also, traditional Swiss private banks are generally not looking for these kinds of arrangements. Therefore, it would not be possible to simply walk into a Swiss bank and ask for this set up unless you have a long-standing relationship.
The terms depend on multiple factors. In brief, gold generally comes with a lending limit of around 60%, meaning that you can achieve a line of liquidity that is limited to 60% of the market value of the gold. The cost is based on the LIBOR, the London Interbank Offered Rate, plus a margin the bank charges, generally around 1% per annum.
The LIBOR fluctuates and is different from currency to currency. Currently, the three-month LIBOR in USD is around 2.7%, while the Euro LIBOR is negative (!), which means you can get credit at VERY low rates in Euro.
LIBOR, Rates shown effective as of January 31, 2019
Source: Wall Street Journal, Market Data Center
As stated above, this is not for everyone. This is a loan and as such, it has to be financed and repaid. So, this is not some magic wand for profit and liquidity. However, the overall context does present an interesting opportunity. Using gold as collateral at a time when you can expect the price to rise and when interest rates are still very low, could allow you to benefit from capital gains in the gold price, while at the same time using the liquidity from the credit line to take advantage of investment opportunities as they crystallize in the upcoming “perfect storm”.