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      19.01.2008 21:22
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      The best solution for private allocated gold investment in the UK.

      BullionVault is a London (UK) based company that permits private investors to buy, store, manage and sell gold bullion. The gold itself is stored in secure vaults managed by companies such as Via Mat. BullionVault itself provides an internet interface for private investors to manage their holdings and provides information about the subject of gold investing.

      Why invest in gold?
      -------------------

      Before continuing, any reader must accept that this article cannot be used to provide investment advice, and nothing stated here should be taken as such. Anybody thinking of investing in commodities should understand that the value of a commodity investment can go down as well as up, and you could lose any or all of the capital you originally invested.

      A 'commodity' is a tangible asset such as metals, foodstuffs or fuel. Commodities are a different class of asset from stocks, shares, cash or property and as such can be a useful method of diversifying your investments and thus spreading your risk.

      Depending on which economist you ask, gold may or may not be classed as a commodity because it isn't really consumed like the others; wheat is eaten, iron goes into ships or buildings and even silver gets used up. But gold's industrial uses are minimal and it is almost literally 'useless'. In many ways, it behaves more like an alternative currency. When the value of the US dollar or GB pound goes down, the price (but, importantly, not always the value) of gold goes up. Likewise, when the value of the stock market goes down, gold price may be unaffected. It has been posited that gold investing is a hedge against the vagaries of capitalism, although it is my opinion that gold is more like an investment of despair to be used when all alternatives are too expensive, too risky or being inflated away to nothing.

      Thus, gold investing is more a method of capital preservation than growth. It can also be argued that it is an anti-capitalist investment; the value you own in gold cannot be used anywhere else and is no-one's liability. It cannot be used to fund new businesses and no dividends can be paid from it. It cannot be floated on money markets and no interest can be paid on it. Value stored in gold bullion has been taken out of the capital system. Why would anyone want to do this?

      You could invest in property. Well, commercial and retail property values appear to be on the turn in the UK, and are well on the way down in the US. At least for the time being, property looks a busted flush.

      You could invest in stocks. If you know something that the rest of your chosen stock market doesn't know, by all means. But to us retail amateurs, the odds in the stock markets look somewhat poor at the moment. Markets seem over-priced, volatile or just plain risky. Do current prices reflect real value or are a whole heap of underlying problems being hidden by great gushes of central bank money? I don't know and I have no way of finding out.

      You could leave it in cash, supposedly the safest method of investment. One of the great achievements of modern civilisation is persuading its peoples that cash is a real measure of value. Yet, we know intuitively that this cannot be the case. The fact that central banks all over the world are actively debasing their currencies by magicking money into existence should give us all real cause for concern about what will happen when this fake money hits the real economy.

      So, if you are in the happy position of having a little capital left over after expenses, what can you do with it? In 'normal' economic times you could (and arguably should) reinvest it in businesses after paying off all your own debt. But these times are not 'normal' and an argument could be made that one's primum mobile right now should be capital preservation rather than growth. Gold has been the vehicle for doing just this for thousands of years. In many asian countries with less sophisticated banking systems - or a more realistic public - gold is still used for this purpose and probably will be for generations to come. In the event that the Western fractional reserve banking system implodes, then we'll all be using gold too. However, such an eventuality would be so appalling I doubt whether I'd care too much about gold appreciation; as they say, gold bugs get fantastically rich just before we all fry.

      Free tools on the BullionVault website
      --------------------------------------

      BullionVault provides many facilities to members of the public that do not require an account. Particularly useful are the regularly updated gold price chart and the RSS feeds on gold news. You can also view activity in their three markets with some nifty graphical tools providing market depth and spread.

      They also provide a detailed audit tool that breaks down the amount of gold and cash they hold by investor, available to the public. Investor's names are encoded in this audit tool, so you can only tell how much you own, not everybody else.

      Rather charmingly, when you open an account with BullionVault they will give you a gram of gold (conditions attached) which I found a useful tool with which to experiment how to use their system. Should you maintain an account you can keep this free gold.

      The BullionVault on-line help should be any potential customer's first port of call as it answers most questions.

      Buying and selling
      ------------------

      At first glance, BullionVault's order board and market screens can be a little overwhelming to anybody not used to using such things, but they have a comprehensive help system and there is logic built into their systems to ensure you do not do anything seriously detrimental to your financial health. It is advisable to play with small values for a while before making a leap, but after a while I found their market and order board intuitive.

      Location
      --------

      BullionVault offer to hold your gold in secure vaults in London (UK), New York (USA) and Zurich (Switzerland). There is a history of governments confiscating their citizen's privately owned gold so it would be worth considering holding your gold outside your country of residence. It's a lot more difficult for a government to get its hands on foreign-owned assets.

      Currency
      --------

      You can deal gold in British pounds, Euros or US dollars. You can hold cash in your BullionVault account until you want to buy gold with it, although you won't receive any interest on this cash.

      Tax
      ---

      In the UK, gold coin trading is VAT free, and gold coins that are legal currency within the UK (Britannias and sovereigns) are also free of capital gains tax. Foreign gold coins (such as Krugerrands) are *not* free of CGT. The UK HMRC website is singularly unhelpful about whether gold bullion traded through agents such as BullionVault is subject to CGT.

      You will need to make your own determination about the tax status of bullion gold, as its way beyond my comprehension.

      Support
      -------

      BullionVault's on-line help pages (available even if you don't open an account) are clear, concise and accurate. BullionVault team members have been helpful and friendly on the few occasions I have had to use them, usually after my one remaining brain cell has fallen out and I've forgotten a password.

      Security
      --------

      When you open an account with BullionVault you are asked to provide documentary proof of your identity. I even got a phone call from the director checking that I really existed, which is much more than any bank has ever done for me.

      You can only fund your BullionVault account from one named bank account, and proceeds from sales of your gold can only be sent back to that account. This is a safety feature that means that BullionVault is useless to money launderers (money cannot be transferred) or fraudsters (if someone gains access to your account, money cannot be siphoned anywhere other than your account). These restrictions may seem onerous, but if you are the kind of person who's thinking of investing in gold, the security of your investment will probably be an important consideration.

      BullionVault state that in exceptional circumstances and for specific cases they may relax the bank account restriction. It would be interesting to know if this situation has arisen during the on-going Northern Rock debacle.

      Access to your account is via the public internet over an encrypted HTTP link (that is 'https://'), requiring a username and password combination and selected characters from a secondary password. Email communications are sent unencrypted over the public internet which I find significantly less than ideal, but this is a difficult problem to crack and I have not yet used any financial service that has adequately dealt with it.

      When I recently forgot my secondary password, BullionVault staff questioned me over the phone for quite some time before providing it and I was reasonably satisfied that they took adequate precautions to ensure I wasn't someone else.

      You own your gold outright, so if BullionVault or the vaulting company actually holding your gold goes bust your ownership is not affected, although there would probably be difficulties getting your hands on it. The physical gold is insured and BullionVault provide a scanned image of the insurance certificate on their website. They also provide a scanned image of a regular audit of gold holdings that you can check for yourself. Cash is held in segregated accounts.

      As far as I can tell, neither BullionVault nor its parent company Galmarley (www.galmarley.com) are certified to ISO27001 (information security) or any other applicable security standard.

      Fees
      ----

      BullionVault take a maximum of 0.8% of each gold sale or purchase you make for the first $30,000. This value tapers to 0.02% if you make over $600,000 sales or purchases that year. There is an annual custody charge of 0.12% (which has a minimum US$4 per month, so this fee is actually higher than 0.12% pa for small values of gold).

      Full details of their charges are posted on the website.

      Competition
      -----------

      There are several organisations who offer to store allocated gold for retail customers. One of the best examples is the Perth Mint Certificate Program (www.perthmint.com.au) backed by the Western Australian government that deals only in multiples of US$ 5000. Another is James Turk's GoldMoney website (www.goldmoney.com) which is designed to allow you to use your gold as a form of international currency, but which you could use just to store gold should you want to. Goldmoney's physical bullion is held on the Channel Islands, and they perform identity checks on applicants before providing an account. UK customers should note that the Channel Islands are not technically in the UK, but are under British crown protection, and potential customers should consider whether the long arm of the UK government extends to the Channel islands before making a decision.

      An alternative route would be via ETFs or 'exchange traded funds' provided by companies like ETFS Securities (www.etfsecurities.com) who sell 'shares' in commodities that are designed to closely track the spot price of the commodity. ETFS Securities offer ETFs backed with physical holdings of the precious metals gold, silver, platinum and palladium as well as ETFs with no physical backing that are based on futures and contracts.

      Many banks claim they will hold gold for you. If this is physically held in their safe deposit boxes, then this gold is most likely the bank's asset (not yours) that the bank is legally obliged to use to pay off its debts should the need arise, in the same way that your cash deposited with them can be used to pay off the bank's liabilities. Banks, and other financial institutions, also offer 'unallocated' gold, which is nothing more than a promise to pay and is only as trustworthy as the organisation providing it. As unallocated gold has no physical existence, it has no associated storage charges and thus tends to be cheaper than allocated gold.

      There are several companies that offer to store gold on your behalf, and some are under investigation from law enforcement agencies because criminals use them for money laundering. To the best of my knowledge, none of the organisations I mention in this article come under this category, but potential investors are encouraged to make their own enquiries.

      Risks
      -----

      Before reading this section, it must be understood that I have not made any judgement on the likelihood of the following situations occurring. I just put them here for your consideration.

      Insolvency or closure : If BullionVault or Via Mat go out of business there is little doubt that you would have difficulty and delay in getting your hands on your gold. The important point here is that the gold you own *is* your property and that you are not a creditor to BullionVault, waiting for liquidators to work through the queue of more important creditors before getting to you. I am not au fait with how cash in segregated accounts is dealt with in these circumstances.

      Fraud : Exposure to external fraud is limited by the account's intentionally limited facilities and the use of encrypted HTTP to perform actions on your account. Your next level of protection is provided by your passwords, which are to a large extent your responsibility. I have no reason to suppose that BullionVault's staff are more prone to criminality or risk-taking that anyone else, and I can find no information about how or if the company vet or monitor their staff.

      Closed system : The BullionVault market is a closed system; you can only buy or sell to other BullionVault customers. The liquidity in such a system is thus directly proportional to the numbers of people using it (like any market, really). So far, this has posed no problems to me and its only obvious effect may be that gold prices in the BullionVault system are fractionally higher than the current spot price, reflecting the storage and processing costs of the underlying commodity. Since nothing lasts for ever, I do wonder what happens to the people using the system last.

      Tax : I have little understanding of the UK tax arrangements on investment gold, and the fact that the UK HMRC website is so unhelpful on this subject leads me to suspect that investment gold is subject to capital gains tax (CGT) like other tradeable commodities.

      UK HMRC : http://www.hmrc.gov.uk/index.htm

      Confiscation : In 1933 the US government made it illegal for US citizens to hold gold. I don't believe the UK government has ever done this, but it is always a possibility.

      Deflation : It is quite possible that the value of everything could go down if the current economic crisis gets much worse. But nothing short of the extinction of humankind will cause the value of gold to reach zero; even during major economic storms gold retains a value, even if it's a low one. Given Western governments' sheer panic at the merest hint of deflation, reducing interest rates and giving tax rebates and such to 'stimulate' the economy, the risk of deflation seems to me to be far less than that of inflation or that bastard lovechild of the two, stagflation.

      Stagnation : Gold has a history of doing absolutely nothing for decades on end - it is, after all, useless - and this pattern will probably return someday.

      Links
      -----

      If you're feeling particularly generous you could use my referrer link to BullionVault :

      http://www.bullionvault.com/from/OHINGARDAIL

      DooYoo sensibly don't allow active HTML in their reviews, so if you want to use it, you'll have to cut-n-paste it into your browser's address bar. If you don't want to use my referrer link, just use the domain name on its own. Your choice will have no effect on you, but if you decide to open a BullionVault account and you used my referrer link I may get a percentage of your BullionVault commissions.

      Information about gold investing
      www.galmarley.com

      Contrarian economics (very opinionated and often political)
      www.financialarmageddon.com , www.safehaven.com , www.dailyreckoning.co.uk

      Mainstream finance websites
      www.thisismoney.co.uk , www.fool.co.uk

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