For Gold Investors Who Want It ‘To Go’ – Wall Street Journal
By Liam Pleven and Carolyn Cui
June 26, 2010
The bull market in gold has sparked a new growth industry: providing a venue for investors to buy and store their personal stash.
Individual investors are increasingly demanding to take possession of their gold holdings, rather than just owning shares in a mining company or a gold-related fund.
That has garnered the attention of major players in the gold industry and start-up firms, which see an opportunity catering to this breed of gold enthusiast. Banks and others are scrambling to find vault space to meet mounting demand.
The firms typically let clients buy gold through them and squirrel it away in the U.S. or abroad, while also allowing investors to demand actual delivery.
The developments reflect the years-long gold rally, which has pushed prices to record highs. On Thursday, gold for June delivery settled at $1,245.50 per troy ounce in New York trading, up $11.40, or 0.92%. This year, gold has risen 13.72% and reached a record $1,257.20 an ounce on June 18.
Traders in the futures market are also increasingly opting to take delivery of the metal, rather than simply buying and selling contracts for paper profits. At CME Group‘s Comex, the largest precious-metals exchange, investors took delivery of 39% more gold so far this year, compared with a year ago. At the same time, the exchange says its vaults now are holding a record 10.9 million troy ounces, up 11% this year.
But many investors don’t trade in the futures market, and have traditionally kept their gold coins and bars in safe-deposit boxes or private vaults, or even stashed under mattresses. Some are skeptical of storing gold with major banks in the wake of the global financial crisis, presenting a business opportunity for smaller investment firms.
The World Gold Council, a trade group backed by gold miners, has joined the throng. This week, the council announced an investment of more than $9 million in BullionVault, a five-year-old, London-based firm that stores about $800 million of gold on behalf of clients.
The council already runs the largest gold exchange-traded fund, SPDR Gold Shares, which is backed by bullion but doesn’t let average investors take physical possession of their share.
Another firm, Gold Bullion International, is officially launching Friday with the aim of selling gold and vaulting services through financial advisers. Among the main financial backers is a major player in the gold market: Tocqueville Asset Management, which managed about $1.6 billion in gold-focused investments as of March 31.
Funds that give investors direct ownership of gold also are flourishing. Sprott Physical Gold Trust, run by Sprott Asset Management in Toronto, recently added about 250,000 ounces to its holdings at the Royal Canadian Mint. The fund allows investors to redeem shares and take possession of bullion.
Firms serving this niche often offer to keep the gold in so-called allocated accounts, which means that investors own a specific chunk of gold.
In concept, it is similar to having money in a safety-deposit box at a bank, rather than a checking account.
Vaulting firms, such as Via Mat International of Switzerland and Argentina-based Ocasa, are considering expansion. Ocasa is planning to open a 165,000 square-foot vault in New York this summer, one of the largest in the country.
Big banks also are beefing up their gold storage space, with J.P. Morgan Chase & Co. saying it will open a new vault in Singapore and Barclays Capital seeking to expand its space in London.
“There’s much more demand from gold investors for allocated gold,” said Jonathan Spall, product manager of precious metals at Barclays. “People are attracted to hard assets outside the banking system which do not represent a credit risk to anyone.”
Nonbanks have arrangements with vault operators, such as Via Mat and FideliTrade Inc., of Wilmington, Del., to store gold in various places. The choices can include countries such as Switzerland and Canada, seen by some as posing fewer geopolitical risks.
The option appeals to some investors who fear their holdings would be at risk if a bank encounters financial troubles.
“They want it in a vault somewhere,” said John Hathaway, senior managing director of New York-based Tocqueville. “That’s just a sign of the level of distrust that people have with the banking system.”
The ownership of gold stored in regulated banks also can be subject to disclosure between governments, which makes some people uncomfortable, even if their holdings are legitimate, said Jeffrey Christian, founder of CPM Group, a gold consultant.
Other storage options also carry risks. In the early 1980s, investors with a firm called International Gold Bullion Exchange lost tens of millions of dollars after it was discovered that the company’s vault contained wood bars painted gold.
Firms try to contend with those fears by having their gold audited by outside monitors. Gold Bullion International, for instance, says its holdings will be checked quarterly.
But owning a personal piece of gold can come at a cost.
Colbert Narcisse, a Merrill Lynch veteran who heads Gold Bullion International, says the gold it sells will cost “nominally more” than shares in SPDR Gold Shares.
And, while investors can take delivery of their gold, Mr. Narcisse doesn’t recommend it. He says it’s “most prudent” to keep it with the company because private insurance could cost more and investors would have to have the gold reauthenticated if they wanted to sell it later.
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