In gold we trust

“There is, of course, heightened sensitivity among investors over the longevity of the Euro,” says Graham Hawkins, Chief Underwriting Officer, Global Fine Art & Specie, at XL Insurance Co in Lloyd’s. “And that, combined with narrower mainstream investment options generally, has meant that investors are increasingly looking to diversify their investment portfolios.”

He adds that “high net worth individuals” and institutions who previously invested in art and jewellery are also looking at different assets, including gold, that will appreciate in different ways.

Michael Burle, Class Underwriter (Fine Art & Specie) at Lloyd’s insurer Liberty Syndicates, says that gold has been one the more “investable” commodities over the last 24 months and the price has continued to trend up, in comparison to other commodities and also equities.

“It is an attractive asset in these uncertain times in the financial markets – but it has been the commodity to invest in over the last 25 years,” he says. “It is relatively stable and isn’t one of those commodities that has suffered a big crash.”

Bullish on bullion

But the increase in the price of gold and growing demand for bullion has insurance implications for everyone involved.

XL’s Graham Hawkins says the Lloyd’s insurer is seeing increased demand from a range of businesses, especially from those taking custody of physical bullion or seeking cover for bullion on an allocated basis in pre-existing vaults. “But there’s also demand coming from financial institutions that provide access to precious metals through exchange traded funds (ETFs). In all cases the underlying asset has to be protected,” he says.

XL’s specie coverage is tailored to the needs of financial institutions, metals and mining companies, metals traders, refineries, transporters, storage facilities or individual investors.
Gold bullion is obviously an attractive target for robbers because it can be melted down and sold on.

But as Liberty’s Michael Burle points out, big thefts from vaults are relatively rare.

“When gold is sitting in a vault there is obviously incredible levels of security, as with any valuable commodity or precious metal, and it is well protected with the latest technology,” he says. “Few vaults are above ground, if only for the reason that the commodity is very heavy. So the risk of theft while it is being stored is relatively small.”

The Antwerp job

But gold is vulnerable to theft when it is in transit. There was a £1million bullion robbery in Antwerp in October 2011 when raiders took gold and silver from a lorry bound for London. One of the most notorious bullion robberies of all time happened in 1983 at Heathrow airport when an armed gang stole £25million worth of gold. The gold bullion was bound for the Far East but was stolen from the Brinks Mat warehouse, about a mile outside the airport perimeter.

Gold is no different to other high value assets that need protection, including fine wines and diamonds, and top security is critical, Hawkins says. “We work very hard to assess the physical and procedural security of storage locations. The level of [insurance] capacity we are willing to commit will depend on that assessment,” he stresses. “We also keep close control of potential concentrations within storage locations to avoid a big exposure to different clients from one loss event. We press clients very hard for underwriting detail.”

Specie insurance market capacity is $2billion. But buyers can choose how much cover they want, either arranging coverage on a “full value” basis or a “first loss” policy. In the latter case it means the client has say, £1billion of gold that is well protected in the Bank of England - but it believes a probable maximum loss is £250million.

Other variables to take into account include where the gold is stored and whether it will be transported.

Gold goes global

Perhaps the most important variable, however, is the gold price itself. Clients buy a set amount of cover for the ounces they have stored in a given location. The fluctuation in prices is factored into the policy as prices can move up and down in the space of 24 hours.

“Remember, gold is not only of interest to institutional investors or wealthy individual investors,” says Michal Burle. “There is an active trade in gold on the high street. So we [at Liberty] see the whole spectrum of risks: from a big bank increasing its limit from £250million to £500million for jewellers that hold say 2kg increasing their limits because of the increase in prices,” he says

“All insureds need to keep an eye on their stock levels and make sure they are not underinsured. We see jewellers for example who have a limit of £10million and yet are holding stock now worth £15million,” Burle explains.

Meanwhile, the allure of gold continues to spread. “We’ve seen growing demand globally – but a particular push into high value physical assets in the Middle East and Asia,” Graham Hawkins says. “In times of uncertainty people turn to things they can trust.”