BLOOMBERG BUSINESSWEEK – As Investors Bought Gold, a New Question: Where to Put It?
By Matthew Philips
September 12, 2013
As Investors Bought Gold, a New Question: Where to Put It?
Sept. 5, 2011: Gold prices peak at $1,900 an ounce
Beneath the streets of Midtown Manhattan, in the heart of the city’s diamond district, there’s a vault filled with gold. To see it, you have to be on a list to get inside the office building above it. Once past the security desk, approved visitors are escorted by a guard to an elevator that slowly descends, exactly how far no one will say. Then come two pat-downs and passes with metal-detecting wands. No phones, keys, pens, watches, bracelets, or wallets are allowed. And certainly no cameras.
Inside the vault, the gold is neatly stacked on plain metal shelves. A 100-ounce bar the size of an iPhone is worth about $140,000. A 400-oz. bar—that’s 25 pounds of at least 99.5 percent pure gold—is worth more than half a million. Although the vault’s been in operation for years, its shelves had room to spare until the financial crisis. As people saw their wealth collapse, they sought security in something tangible. Gold was an obvious choice. Not paper gold—exchange-traded funds or futures contracts—but the real thing. Investors wanted coins and bars they could touch and hide away someplace safe, surrounded by concrete and steel and guarded by men with guns.
Gold mania peaked in 2011, when the price hit $1,900 an ounce. “We Buy Gold!” operations popped up in strip malls, and late-night TV ads promised easy riches for buyers and sellers of unwanted bracelets and lockets. Ron Paul, running for president, pushed to put the dollar back on the gold standard. And a new company called Gold Bullion International (GBI) made it easy for investors to stockpile as many gold bars as they desired.
Before 2011 the only way most people could get their hands on gold was to buy jewelry or order commemorative coins from one of those companies selling to the public at marked-up prices. The rich could call their banks. That’s what Dan Tapiero did. He’s managed money for hedge fund billionaires, including Steve Cohen and Stan Druckenmiller, and in the fall of 2008 he wanted to add some physical gold to his personal portfolio. His banker told him that under normal circumstances he couldn’t sell him anything less than $20 million, but because Tapiero was a big, longtime client, the bank was willing to sell him $2 million worth. Even then the gold wouldn’t really be his. The best the bank could offer was a claim on a certain amount already in its vault, the precious metal it stored as collateral against its own trades. “I wanted it to be my bar, with my name on it,” Tapiero says.
Tapiero called his friend Steven Feldman, a partner at Goldman Sachs (GS), who in turn enlisted Savneet Singh at Chilton Investment, a hedge fund with a large position in gold. Singh, 29, drew up a business plan for a concierge service for gold bugs. It would not only match buyers with sellers but pick up the gold, transport it in an armored truck, insure it, audit it, and park it on a shelf in a vault—with the customer’s name on it. Tapiero and Feldman invested an undisclosed amount of money in the business; Singh became the third co-founder.
For the business to work, the trio had to form partnerships with dozens of different players: precious-metals dealers and refiners, vault owners, insurance companies, accounting firms, and, most important, wealth-management advisers who would pitch GBI to their clients. Their goal was to get on Merrill Lynch’s (BAC) massive Global Wealth & Investment Management platform, which catered to affluent investors. Some of GBI’s first hires were former Merrill employees. “It was scary for a while,” Singh says. “I bought GMAT books in case I needed to cram right away and apply to business school.” Finally, in February 2011, Merrill Lynch signed on as GBI’s first client, bringing along its “thundering herd” of 10,000 advisers.
Their timing couldn’t have been better. In the summer of 2011 fear cascaded through the financial markets when the debt-ceiling negotiations in Washington fell apart and Standard & Poor’s (MHFI) lowered the U.S. credit rating. From July to early September the price of gold jumped by $400 an ounce. Orders flooded in. “Everyone was buying. It was like nothing we’d ever seen,” Singh says. “Suddenly people saw the value of what we’d created.”
GBI makes money two ways. First, it charges a transaction fee on every buy or sell order. According to Singh, that’s typically between 0.4 percent and 1 percent for retail investors. For hedge funds it’s far lower. Then it charges a storage fee, which covers the cost of insurance and shelf space at a privately owned vault, like the one under Manhattan, whose owner did not want to be named. Singh wouldn’t divulge the fee but says it’s much less than individuals would pay to store gold in a vault on their own. Clients can choose to skip the vault; for about $100, GBI will deliver the gold wherever they’d like. One of GBI’s wealthiest customers wanted it sent to his house outside New York, where he buried it in his massive yard. Singh won’t say who it is, but teases that “you’d know him.”
As fears have cooled, gold fever has subsided. The price bottomed at $1,200 an ounce at the end of June 2013 before rebounding to about $1,400. Many businesses that bought people’s used gold at the height of the boom have closed. The price decline, though, hasn’t slowed GBI’s business. Singh says trading volume is up as much as 70 percent over the last year. He’s not worried about other companies moving in on his turf just yet, mostly because any rival startup would have to duplicate the legwork it took to put all the pieces together. “We’ve built a significant moat around the business,” he says—wide enough to keep the competition’s hands off its gold.
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