Insuring Bullion, Bars and Baubles

With its price hovering around $1,665 per ounce (and even having crossed the $1,800 per ounce barrier recently), gold is a hot investment. Historically, it’s been deemed a safe investment, a good hedge against market downturns. But although gold is a very durable metal, it still needs protection. Recent spikes in global precious metals prices, in addition to increased theft of anything gold, have resulted in strong interest and demand for gold insurance.

According to the World Gold Council, gold demand totalled 919.8 tonnes in 2011 Q2, down 17% year-on-year. Improved levels of demand in the jewellery and technology sectors were more than offset by weaker investment demand, which was due primarily to a decline in exchange-traded funds (ETF) demand from the very strong levels seen in Q2 2010. On the other hand, the physical demand for bars and coins witnessed growth of 9%. The geographical distribution of this demand was widespread: a number of countries from all regions generated decent growth. Turkey and India were the two strongest markets, chalking up growth rates of 90% and 78%, respectively. China also accounted for a significant portion of the growth in global demand.

Tangible Investment

For investors, gold itself is considered a kind of insurance for their investment portfolio. In a financial crisis, many people desire to have gold close at hand. Its liquidity is appealing during a financial crisis, when other investments’ values take a nosedive or financial institutions are forced to close for a period of time. Unlike many investments, gold is tangible. People can touch it, trade it, store it or ship it.  They can also steal it.  

Although a piece of jewellery might not be considered a part of one’s investment portfolio, the high price of gold has increased the valuation of jewellery, coins and other gold trinkets found everywhere from retail stores and individual homes to museum collections and displays. Statistics show theft claims on home insurance have risen during the first half of 2011 and jewellery theft now makes up a third of all such claims. Gold jewellery appeals to criminals not only for its value, but also because of the quick turnaround time to change the stolen goods into cash. It’s easy to steal, carry and melt down from its original form, making it harder to trace than precious stones.

Thieves not only target jewellery stores or homes: those looking for quick cash are brazen enough to steal directly from individuals. College campuses everywhere are cautioning students about wearing gold based on an increase in gold necklace snatchings, with thieves grabbing jewellery directly from students’ necks.

Gold bars offer thieves an even bigger payout, which is prompting more brazen robberies like last summer’s gold bar theft at the Mel Fisher Maritime Museum in Key West, Florida. For 25 years, museum visitors had the opportunity to lift the glittery piece of treasure in a special display case. That came to an end last summer, when thieves stole an ancient bar of gold worth well over $1 million. The artifact had been in a partially open display case and patrons were allowed put their hands inside and touch the gold bar. The thieves picked it up and walked out with it.

Last February, a fraudulently obtained Toronto bank draft worth about $1.9-million was allegedly used to purchase 96 gold bars in Montreal. The haul included 75 highly distinctive, 10-ounce gold bars bearing the Australia Perth Mint symbol on the front and jumping kangaroos on the back. Only one of the bars was recovered. Also stolen were 19 one-kilogram gold bars and two 100-gram bars. In another recent incident, five Toronto-area men face fraud and conspiracy charges and at least one other person is wanted by police after $1.4-million was stolen from a major bank last month. Some of the funds were used to buy $528,000 worth of gold bars. Police were able to stop an additional attempt to use the stolen money to purchase more gold from a second precious-metals dealer. None of the stolen gold has been recovered.

With gold prices at an all-time high, businesses and individuals vested in the shiny metal are more vigilant in protecting it. Police advise the best way to protect jewellery and homes from thieves is to keep valuables out of sight, preferably locked away; fit homes with a burglar alarm and quality locks; and check home insurance policies to make sure jewellery and valuables are covered.

Insuring Gold

From mining companies and bullion dealers to private investors, more businesses are pushing the demand for insurance coverage to protect gold from physical loss or damage. As the price of gold goes up, these companies have to buy more insurance to cover the higher values beginning at the mine and carrying through to the safety deposit box. Also, due to the financial market and sovereign debt crisis, many private investors have accumulated substantial amounts of gold as a seemingly safer investment, but they risk being underinsured if their insurance coverage has not kept pace with their gold values. Fortunately, the current property market – and more directly, the specialized specie market – offers the necessary capacity and the valuation and risk management guidance to go along with it.

Available with policy limits of up to $150 million, specie coverage is tailored to the needs of financial institutions, metals and mining companies, metals traders, refineries, transporters, storage facilities or individual investors. The ‘all risk’ coverage provides physical loss or damage protection, with options to include coverage against employee theft, transit and marine cargo risks associated with the transport of gold and other precious cargo such as ore, silver, platinum and diamonds. Such precious metal coverage meets the needs of those companies that mine, refine or trade in metals. Insurers will typically cover product as soon as bullion bar is formed and a few global insurers can provide coverage in almost all countries in the world.

For mining companies and others that transport or store the precious metal, coverage options are available to cover employee theft. Again, given the high value of gold in any form, employees can be tempted to swipe even a relatively small amount during the mining, transportation or refining process. In a recent incident in Australia, two Kalgoorlie-Boulder mining company employees will be in court on charges of stealing gold worth up to $1 million. When management became suspicious, police were contacted and followed the employees to a local hiding spot. Police allege the men took the gold from the mine and hid it in nearby bushland.

Closer to home, in June 2009, Canada’s auditor general reported finding a discrepancy between the Royal Canadian Mint’s 2008 financial accounting of its precious metals holdings and the physical stockpile at the plant on Sussex Drive in Ottawa. The estimated value of the missing gold was said to be near $15 million.

However, the results of a review released on Dec. 21, 2009 fully accounted for all of the misplaced gold. A discrepancy of 9,350 ounces was attributed to estimation errors, and a further 1,500 ounces were recovered through an extensive refining of slag within the Mint.

Nonetheless, two reported gold thefts have occurred during the Mint’s 101-year history. In 1996, a Mint employee somehow slipped eight gold bars past security. According to the Toronto Sun, the gold – worth about $85,000 in today’s prices – was discovered missing when, after being sold and resold, the final buyer tried to sell it back to the Mint. Theft charges against the man were dropped, and he ended up performing 50 hours of community service. The second theft was in 1988 when a janitor stole at least $30,000 in gold.

Added Protection

Financial protection against loss is the key benefit of purchasing an all-risk specie policy, but it is not the only benefit. Today’s insurance market recogn izes the value of minimizing losses with upfront loss prevention. Many carriers will work with their clients to review transportation contracts to lessen contingent risks, advise on safety, security and storage issues and provide guidance on valuation issues. Should a loss occur, carriers will ensure claims are handled by managers and adjusters experienced in preserving the value or recovery of gold and other precious metals.