Ten years ago few trustees would have questioned the logic of holding a major part, or even all, of a charity’s wealth in the form of bank deposits. Back then there weren’t many experts predicting that multinational banking institutions would collapse leading to huge losses for depositors, and even fewer who saw ‘quantitative easing’ (which is simply governments printing new money) looming on the financial horizon.
Today the picture is very different after a succession of economic crises have severely eroded confidence in banks and currencies. Right now, many larger charities hold bank deposits not entirely covered by the Financial Services Compensation Scheme (FSCS). The qualifying criteria for protection by the FSCS are that a charity must hold deposits within the European Economic Area; have a maximum of 50 employees; a turnover no greater than £6.5 million; and a balance sheet total of not more than £3.26 million. Many larger charities fall outside of these criteria which means they are not protected from the risk of bank failure.
For trustees of charities which do not fit within the above parameters, several incidents in recent years have provided a stark warning of the risks involved in placing too much faith in the long-term security of banks. The Icelandic banking collapse in 2008 put at risk around £1billion of deposits held by UK charities and local authorities. Much of the losses incurred by UK charities have since been recovered, but it has placed a great strain on all the charities involved.
The collapse of the economy in Cyprus prompted a bailout by the EU and IMF in 2013 and also added a new and worrying twist from a third sector perspective as billions of Euros were seized from all depositors who had more than €100,000 in their accounts. In short, customers had 40% of their deposits confiscated to fund the bailout. The message for customers is clear – if governments aren’t able to bail out the banks when they collapse then action will be taken to make depositors pay instead.
In this scenario, a charity owning gold instead of funds in bank deposits would be in a much stronger position. While the price of gold naturally fluctuates, it has a long record of holding its value and there is no likelihood of the price collapsing to the extent that would be required for a charity to incur the type of losses suffered by many depositors in Cyprus.
It’s no surprise, therefore, that interest in owning gold bullion as a form of wealth protection has been increasing. The rarity of the precious metal is the cornerstone of its enduring value. Thomson Reuters GFMS, a leader in precious and industrial metals markets research, estimates that all the gold in the world which has so far been mined amounts to 171,300 tonnes – as a comparison the same amount of steel is produced every few hours in the USA alone. At the time of writing it costs around $1,300 to mine and refine an ounce of gold, which is a few dollars more than its market value – so it’s unlikely that we will see a significant increase in gold production in the foreseeable future. For any trustee of a charity with significant wealth to protect, it’s worth pondering the fact that it’s a lot harder and more expensive to mine gold than it is for governments to print money.
Of course, apart from the enduring value of gold, there are other factors to consider before a charity decides to buy bullion: how do you keep it secure; how much will it cost to store; and how quickly can you turn that gold back into cash when necessary? There are specialist businesses now that sell and store physical gold. The gold can be easily sold and converted back into bank deposits for spending. Generally, it takes just four days from receiving the sale order for the money to be in the charity’s bank account. Any decision a charity makes between holding funds in bank deposits, or in the form of owning gold bullion, will depend on the relative costs and returns. If a bank goes broke many charities will suffer significant financial losses, while those holding physical gold own the bullion outright and so will not lose out.
One final point to consider. If you owned an ounce of gold in the 1960s it would have been worth around £30 – about the same as a Savile Row suit back then. Today the price of that same ounce of gold – around £1,250 at the time of writing – would still buy a suit of equal quality. What could you buy today for £30? A pair of cufflinks perhaps? Think of all the financial crises and resultant political upheavals which have happened in the last 50 years. The fact that gold has retained its relative value throughout that time is a powerful reason behind the increased interest in owning bullion.
About the authors:
John Graham is Deputy Director General and Director of Finance of the Royal British Legion (www.britishlegion.org.uk)
Ed Pearce is Managing Director of Isle of Man-based bullion depository and trading company IMGold (www.imgold.com)