Sunil Annapareddy, vice president of marketing and business development for Gold Bullion International (GBI), is focused on the physical side of the gold market. GBI is an institutional precious metals provider that merges its technology with existing systems in the wealth management industry. Investors buy the physical and then can store and insure it through commercial vaulting providers.
Annapareddy spoke with JLN Metals editor Nicole V. Rohr about what investors should consider when buying physical, and how new technology has helped buying, storing and insuring physical metals.
Q: How did GBI get started?
A: Two of our founders – this was back in mid-2009 – kind of lost confidence in the paper market and were really looking to diversify their holding in gold assets, and specifically gold, silver, palladium, and platinum. They wanted to buy a decent amount of gold, and really found the process very cumbersome and with very little transparency. They reached out to their private bankers, and basically the bankers said, “You need to have an order up to $20 million or we really can’t service you.” So, there was really no one servicing the high-net-worth individual, allowing them to basically buy, sell and safely store physical metals. And that’s kind of how we got started. The only other options you had were online retail websites where you had to wire money through an account, and there’s really not much comfort in that.
Q: How does the technology work with physical buying?
A: In terms of our technology operations platform, we integrate onto wealth management platforms where the advisors on that wealth management platform are able to drop in a ticker and have a bar of gold stored in Zurich or have a bar of silver stored in Salt Lake City. We have four different storage locations: New York, Salt Lake City, London, Zurich.
When an order comes in, we put it out to our network. We partnered with 14 dealers and refiners. We created a proprietary exchange where the order gets sent out to our network of dealers and refiners. Previously, it was an over-the-counter market and whatever price [the dealer] told you was the price you got, or you ended up calling 10 different dealers to find out what the best price was. We’ve partnered with commercial vaulting providers outside of the banking system. So, when someone buys and wants to store with us, we move the metal dealer to the vaulting provider, and essentially they provide the insurance.
If the client ever wants to take delivery, then they can opt to do that as well. We don’t recommend it because as long as it stays with these partners… as long as you keep it within this chain of custody, you keep liquidity. Knowing that the authenticity of the bar is intact, you can go out and sell it right away.
Q: What trends are you seeing in metals?
A: I think increasingly people are realizing the importance of holding the physical. As we’ve seen with the MF Global debacle, customers who had accounts there were exposed to risk, but there’s a couple of layers of risk there, right? You have the counterparty risk of the broker-dealer, you have the counterparty risk of the exchange, and then what are the costs associated with all of this? So, you have a receipt that you have a claim on a specific bar with a specific serial number, but due to the bankruptcy process, they threw you into the general creditor pool and you ended up getting 70 cents on the dollar.
We are trying to do as much as we can to provide you options to store outside the banking system. We don’t store our gold with a bank. We store it outside with a commercial vaulting provider that doesn’t have another business. They’re in the business of vaulting and that’s all they do. They don’t lend out the gold because gold is a negative-yielding asset. Banks tend to lend against it or lend it out to generate extra income on the side. In light of that, and considering the issue of counterparty risk and the issue of credit risk, I think it’s really at the forefront of investors’ minds and they’re slowly realizing the difference between owning gold and having exposure to the price of gold, and the fundamental difference between the two. And so, we are seeing slowly a shift away from paper to gold.
You don’t necessarily own gold when you buy GLD, you have exposure to the price of gold. You own shares in a trust that is backed by gold, but you as an investor can never actually take delivery unless it’s $17 million or something like that. You have to be an authorized participant and insured. Those issues make you question whether or not the gold is there.
I think investors acknowledge the risks, and if anything, recent events have made that even more of an issue. So much so that investors are thinking even if it’s less convenient to buy the physical, that it’s worth it.