As an asset class, gold just isn't what it used to be. For millennia, well-to-do individuals have relied on bullion as an instrument for storing wealth. The practice made great financial sense—if a political or economic crisis reared, the bars of gold could be sold off to weather the storms or held onto for tomorrow's greener pastures.
Gold is still the most precious of precious metals, but as an asset class it has slowly made room for two other emergent asset classes—fine art and exclusive residences in the world's greatest (and economically safest) cities. As Laurence Fink, chairman of the world's biggest asset management firm, BlackRock Inc., stated at a Credit Suisse Megatrends conference in April, the "two greatest stores of wealth internationally" are "contemporary art" and expensive "apartments" and homes in New York, London and Vancouver, Canada. With apologies to Croesus, gold has slipped to third place.
There is financial risk in this slippage, however. Unlike gold as an asset class, homes and art can be damaged or destroyed by fire, terrorist acts and Mother Nature at her worst. Most bullion today trades as ETF-backed gold—not gold bars stored in a fortress bank. Investors basically own gold like shares of stock, without actual physical ownership. Thus, the owners can rest assured that the only risk to this asset class is the price of gold, which, alas, has plummeted in the past three years.
This is not the case with the top two asset classes, a point of interest that I discussed recently with Paul Funk, executive managing director at the New York-based national insurance brokerage Crystal & Company. Paul's high-net-wealth clients are plowing money into both fine homes and fine art at a fast clip, as well as in related asset classes like vintage automobiles and rare jewelry.
Such holdings aren't a new passion for his clients, who simply like to own beautiful things. What is new is the skyrocketing value of these assets in relation to inferior insurance protection. He provided the example of a client who owns several fine cars, including a rare Mercedes Gull Wing, vintage Jaguars and more than a couple Ferraris.
"We started our relationship with this client about a year ago," Paul said. "We appraised the value of the cars and then compared this to the insurance limits. The fleet was insured just a few years back in the $4.5 million range. The problem was that they were now worth twice that amount and the insurance was inadequate."
Were the cars to be destroyed by fire or flooding, the owner would confront the stark possibility that he was as much as 100% underinsured. Sure, this possibility is remote, but Paul noted other problems buried within the prior insurance policy, including no provision to replace vintage parts with parts of like quality, reducing the overall value of the vehicles in the aftermath of an accident—obviously not the most prudent investment management strategy.
Home, Sweet Asset
Owning a home is the American dream for all of us, one of the best investments we can make in our futures. For high-net-wealth individuals and families, owning a truly spectacular residence in cities where real estate values are ascending is that and more—a relatively assured means of protecting their wealth.
In London's posh Chelsea neighborhood, for instance, many multi-million dollar homes are owned by Russian, Iranian and Chinese billionaires, who frequently leave the residences unoccupied. In such cases, a house is not a home; its purpose is not for socializing or sleeping. Such residences are the equivalent of gold bullion in a bank vault, purchased by the owners as a way to store wealth outside the home country.
