Client Question: Funding an Investment Account with Gold

One reader reminded me that I should have done a call-out for our paid premium service, the Nestmann Inner Circle, where we do indeed dive into the technicalities of many of the most popular international strategies. So I’ll do that now: if you’re interested in taking a risk-free trial of that service, you can learn more here.

Switching gears, a prospective client wrote in a few weeks ago, following up on a piece I wrote about Lombard loans in Switzerland.

(If you missed it, it’s a great idea to have a look and see whether such a thing might make sense for you. Many Americans find it attractive because Swiss banks can lend at much lower rates than American ones; in some cases, less than 1%, albeit borrowed in Swiss Francs.)

But to summarize, a Lombard loan is a bank loan secured by a specific asset.

The term “Lombard” isn’t used very much on this side of the Atlantic – but it’s popular in Europe where the concept originated (Lombardy in modern-day Italy). It’s similar to the idea of a HELOC (on home equity) or an SBLOC (on a portfolio of securities).

So back to the client. They asked:

Can physical metals (gold, silver, etc.) be used as collateral for a Lombard loan?

The answer is yes, absolutely, but how much and on what terms really comes down to the size of the holding, the form it’s in, and perceived risk. Here are a few factors that go into any responsible bank calculation:

#1: Valuation risk: A publicly traded large cap stock in a well-regulated market is going to enjoy better terms than an illiquid block of shares in a private company. The reason is simple – publicly traded shares are much easier to value.

#2: Liquidity risk: If the borrower defaults, banks will want to know they can get their money out. In many markets, real estate falls into this bucket – lower liquidity means higher rates and less generous terms. Cash (CDs, checking accounts, etc.) is as liquid as it gets; banks will often lend up to 95% of the value of such assets.

#3: Concentration risk: The more concentrated the asset, the less you’ll be able to borrow against it. Banks prefer baskets of assets (like a stock portfolio) over a single holding.

… and so on.

The creditworthiness of the borrower and the purpose of the loan also factor in. And how your case is presented — and by whom — matters a lot too.

So with all that said, in this case, we would need more information to know for sure. But assuming the metals are in good shape with clear purchase records, and the mandate is large enough to be of interest…

…we could probably be looking at somewhere around a maximum of 50-65% Loan-to-Value (LTV), with a rate in the neighborhood of 1.00-1.50%.

And one more note: this particular client is looking to reinvest the proceeds of the loan into more securities. If those securities are held at the issuing bank, they may be able to get even better terms.

Gold is often criticized for having no cash flow. This is one way to counter that objection.

Borrowing against assets to fund further investments is not to be taken lightly. But it can make sense in certain cases, especially as you can borrow in Swiss francs for less than 1% in some cases. If you’re trying to better understand how this works – the objective pros and cons – feel free to get in touch.