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Inside the global yellow metal frenzy

Inside the global yellow metal frenzy
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First Published: Sun, Nov 08 2009. 09 16 PM IST

Precious: Gold pieces of 100g being made at Argor-Heraeus. The gold refiner processes roughly 400 tonnes of gold a year and makes sure that even the tiniest amount of it doesn’t disappear during refin
Precious: Gold pieces of 100g being made at Argor-Heraeus. The gold refiner processes roughly 400 tonnes of gold a year and makes sure that even the tiniest amount of it doesn’t disappear during refin
Updated: Sun, Nov 08 2009. 09 16 PM IST
Mendrisio, Switzerland: Here, in a corner of Switzerland where Italian is spoken and roughly one-third of the world’s gold is refined into bars and ingots, business is booming. Every day, bangles, bracelets and necklaces arrive in plastic bags—from souks in West Asia, from pawn shops in South Asia and from corner jewellers in Europe and North America.
“It could be your grandmother’s gold or the gift of an ex-boyfriend,” said Erhard Oberli, the chief executive of Argor-Heraeus SA, a big refiner here that processes roughly 400 tonnes of gold a year. “Gold doesn’t disappear.”
Amid a global frenzy fed by multibillion-dollar hedge funds, wealthy speculators and governments all rushing to stock up on the precious yellow metal, the price of gold briefly surpassed $1,100 (Rs51,480) an ounce on Friday, a record high.
Precious: Gold pieces of 100g being made at Argor-Heraeus. The gold refiner processes roughly 400 tonnes of gold a year and makes sure that even the tiniest amount of it doesn’t disappear during refining. Christoph Bangert / The New York Times
Long considered the ultimate refuge for nervous investors, gold has climbed as the dollar has steadily weakened, budget deficits have expanded in the US and Europe, and central banks have continued to pump trillions of dollars into weak economies, creating fears of another asset bubble that will ultimately pop.
“It’s not that gold has changed, but gold buyers have changed,” said Suki Cooper, a precious-metals strategist for Barclays Capital. “It’s a structural shift we’re seeing on the investing side, from Asian central banks right down to individual investors buying ingots and coins.”
“Gold’s appeal has broadened,” added Cooper, who predicts that it will hit $1,140 an ounce by the second quarter of next year.
Indeed, last month, Harrods, the 160-year-old London department store, began selling coins as well as gold bullion ranging from tiny 1g ingots to the hefty, 12.5kg, 400-Troy-ounce bricks that are so often featured in movies and stocked inside the vaults of Fort Knox. Harrods’s lower ground floor, where the gold is peddled, has been packed with interested shoppers.
“The response has been astounding,” said Chris Hall, head of Harrods Gold Bullion. “Bars are definitely more popular than coins. The 100g is the most popular.”
In the US, advertisements promising high prices for gold are regular fodder for late-night television spots, while buyers are setting up tables at shopping malls or hosting gold-buying gatherings at private homes—like recession-era Tupperware parties.
“Everyone and their grandmother has a sign out saying, ‘We buy gold,’” said Ron Lieberman, the owner of Palisade Jewellers in Englewood, New Jersey. He estimates that 10 times as many people come into his store to sell gold now as when the metal was selling for $300 an ounce at the beginning of the decade. “I hear people come in and say gold is going to $2,000.”
Jewellery store shoppers aren’t the only ones forecasting lofty prices. Jim Rogers, an investor who has made his name investing overseas and in commodities, predicted to Bloomberg Television last week that gold might reach $2,000 an ounce—prompting a rebuke from Nouriel Roubini, an economist who gained attention for his early warnings about the global economic crisis. At a conference in New York on Wednesday, Roubini described Rogers’s forecast as “utter nonsense”, saying that there aren’t any inflationary or economic pressures that would drive the price of gold to $2,000 an ounce.
Even the most bullish of gold lovers were surprised last week when the Reserve Bank of India stepped in and bought 220 tonnes of gold from the International Monetary Fund for $6.7 billion, a sign that other central banks might move away from dollar-denominated assets such as treasury bonds in favour of the precious metal. India’s huge purchase means that gold will now account for about 6% of India’s $285.5 billion of foreign exchange reserves—up from the previous level of about 4%.
“We have money to buy gold,” said Pranab Mukherjee, India’s finance minister. “We have enough foreign exchange reserves.”
On Thursday, Sri Lanka’s central bank disclosed that it, too, was buying gold, in a trend that could hurt the US over time because it needs foreign bond buyers, especially central banks, to finance its growing debt. Gold closed at $1,095.10 an ounce on Friday, down from its intra-day high but up nearly 5% for the week.
Adjusting for inflation, gold would have to top $1,885 to set an all-time record.
China has already doubled its gold reserves over the last six years, but the Indian move underscored how even the most traditional investors are shifting a portion of their assets into bullion.
“I have never been a gold bug,” Paul Tudor Jones, the prominent hedge fund manager, told his investors last month. “It is just an asset that, like everything else in life, has its time and place. And now is that time.”
Over all, in the second quarter of 2009, consumption of gold for jewellery plunged 20%, while investor demand for gold increased 51%, according to the World Gold Council.
The Harrods gold line is made by PAMP, a rival Swiss refiner down the road here from Argor-Heraeus, in the nearby town of Castel San Pietro. And demand for bars weighing 100 ounces or less for individual investors is up 80%, said Marwan Shakarchi, the chairman of MKS Finance, a Geneva company that owns PAMP.
Inflows of old gold jewellery and individual investor sales are especially strong in the US and Western Europe, a new phenomenon for MKS, Shakarchi said. In the past, hoarding gold as an investment was much more popular in West and South Asia. “Europe and the United States are our emerging markets,” Shakarchi said.
In addition to high anxiety about the future, recent political trends may also be playing a part in the global gold fever. With a crackdown on tax havens worldwide and Swiss bankers handing over the names of wealthy American clients to authorities, some experts say rich people now prefer an investment that can easily be hidden from the prying eyes of tax collectors.
“In Europe, people want physical gold to store themselves, with no documents,” said Bernhard Schnellmann, director for precious-metal services at Argor-Heraeus. Often, the company doesn’t know the ultimate destination of the bars it makes, only the identity of the bank in Zurich or London that is handling the order.
The region surrounding Mendrisio has dominated gold refining for decades, profiting from its close proximity to northern Italy—which has a long tradition of jewellery-making and cheap labour—as well as from Switzerland’s own reputation for financial stability and discretion. The Swiss government has also nurtured the business, guaranteeing gold assays for purity and carefully regulating the industry.
One of the 100g bars that is produced here just about fits in the palm of your hand, with a satisfying metallic coldness that belies its $3,500 price tag. The standard 12.5kg, 400-ounce brick, on the other hand, is a monster, straining the wrist as well as the imagination: just one of these thick bars commands a higher price than a studio apartment in Manhattan.
Although India is now a far bigger consumer than Italy of gold for jewellery, the region around here has retained its distinctive status as the gold workshop of the world, with ore arriving from South Africa along with the old bracelets and necklaces destined for the crucible.
“If you give somebody a tonne of gold, you don’t have to worry about it in Switzerland,” said Oberli, the Argor-Heraeus chief executive. Efficiency, another Swiss virtue, and speed are of the essence in the gold business, because prices change quickly and buyer and seller want to lock in their order quickly, Oberli explained.
“Everything that comes in has to go out,” he said. “It’s not our material.”
Perhaps as a result, the gold-refining fraternity is secretive, with verbal discretion as much a part of the culture as the high concrete walls that surround Argor-Heraeus and the metal detectors workers pass through when they go home for the day.
“Everybody is afraid someone else is chasing their customers,” said Oberli. “The banks don’t want us to know.”
Oberli is wary of walk-in clients and accepts orders from mines only when he can vouch for the origin of the ore, fearing “conflict gold” from rebel-held areas in Africa and elsewhere.
Argor-Heraeus makes sure that even the tiniest amount of the precious metal doesn’t disappear during refining. Gold dust from the soles of workers’ and visitors’ shoes is scooped up on special mats when they leave. And, annually, the overalls that employees wear during manufacturing are burned to recover the smallest fleck.
At the airport in Zurich, where there are special vaults to hold gold, shipments of jewellery arrive daily on early morning flights before making their way here via a twisty, three-hour journey through the mountains on tightly guarded trucks. After the jewellery is unloaded, gold ingots, bars and other forms of bullion—already stacked like cordwood along the sooty corridors of Argor-Heraeus—are sent back to Zurich in the same trucks.
“The truck never drives back empty,” said Oberli. “Time is so important because the value of the material is so high.”
Oberli is also confident that he is running a business that, even in the middle of one of the worst economic downturns of the last century, is relatively recession-proof and always of interest to investors.
“Gold has been around as an investment for 6,000 years,” Oberli said. “When there is no alternative, it’s there.”
©2009/The New York Times
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First Published: Sun, Nov 08 2009. 09 16 PM IST
More Topics: Gold | Bullion | Commodity | Dollar | US |