Bullion Vaults Run Out of Space on Gold Rally

By Chanyaporn Chanjaroen, Nicholas Larkin and Debarati Roy - Sep 21, 2011 8:24 AM GMT+0700

Deep in the 7.4-acre SingaporeFreePort next to Changi International Airport’s runways is the bullion vault of Swiss Precious Metals, behind seven-metric-ton steel doors built to survive a plane crash or earthquake.

The rooms are almost full after demand rose fivefold in the year since the Geneva-based company opened the facility. The firm plans an extension, and relocated Chief Executive Officer Jean-Francois Pages to Singapore last month to cope with the surge of investors willing to pay as much as 1 percent of the value of their holdings each year to keep them secure.

“The European debt crisis and its impact on the solvency of European financial players are driving European customers to find refuge in tangible values like physical gold and other precious metals,” Pages said. Demand “is totally compatible with the current financial and political global turmoil.”

Barclays Capital is building a new vault, The Brink’s Co. (BCO) and Deutsche Bank AG (DBK) may add more space, and the Perth Mint may expand for the first time since 2003, a sign they expect demand to keep increasing after the 11-year rally during which prices increased sevenfold. Investors in exchange-traded products backed by gold bought 2,198 tons of bullion since 2003, exceeding all except four countries’ official stockpiles.

Gold climbed to a record $1,921.15 an ounce on Sept. 6. Prices more than doubled since the end of 2007 as stock markets slumped, economies contracted and central banks and governments pumped more than $2 trillion into the global financial system.

Dollar Index

The metal rose 27 percent to $1,800.10 this year as the MSCI All-Country World Index of equities retreated 10 percent, led by financial stocks. Treasuries returned 8.5 percent, a Bank of America Corp. index shows. The U.S. Dollar Index, a gauge of the world’s reserve currency against six major trading partners, slumped 13 percent in the past 15 months.

Gold will exceed $2,000 this year, according to the average estimate of 16 respondents in a Bloomberg survey at the London Bullion Market Association’s conference in Montreal. The metal will peak at $2,268 next year, the survey showed.

Storage companies are responding. The 112-year-old Perth Mint, which refines more than 8 percent of all supply and is owned by the Western Australian state government, may add a new vault within the next year, according to Treasurer Nigel Moffatt. The mint sells everything from gold coins to 400-ounce (12.4- kilogram) bars.

Bullion Carrier

Brink’s, the largest bullion carrier in the U.K., is considering adding more storage after opening a new London vault earlier this year. Barclays, based in London, is building a vault in the city that will open next year, the bank said in a statement last week.

Deutsche Bank, based in Frankfurt, is considering expanding existing facilities and developing new ones to meet demand, Matthew Keen, a director at the bank, said earlier this month. JPMorgan Chase & Co. (JPM) started a vault at the Singapore FreePort location last year and opened another in the financial district of New York.

“With gold prices where they are, we encourage people to keep it in safety-deposit boxes at banks or vaults, which gives that sense of security,” said Scott Carter, chief executive officer of Goldline International Inc., a Santa Monica, California-based precious-metals retailer established a half- century ago.

ETF Trust

Gold bought for investment accounted for 38 percent of total demand in 2010, compared with about 4 percent a decade before, the World Gold Council estimates. Holdings in gold- backed ETPs are equal to more than nine years of U.S. mine production. The SPDR Gold Trust, the biggest bullion ETP, exceeded the market capitalization of the SPDR S&P 500 ETF Trust in August, beating what had been the industry’s largest exchange-traded fund since 1993.

The Brink’s vault business is part of the Richmond, Virginia-based company’s value-added global services unit, which accounts for about 35 percent of total revenue, according to Bradley Safalow, chief executive officer of New York-based PAA Research. The shares will rise about 55 percent to $40 in the next 12 months, he estimates.

The company operates its storage business on long-term contracts that guarantee revenue, Chairman and Chief Executive Officer Michael T. Dan said in a conference call with investors in July. Brink’s benefits when prices appreciate, he said.

‘Ultimate Asset Bubble’

The surge in demand for bullion is a warning to some investors. George Soros called gold “the ultimate asset bubble” in 2010. Soros Fund Management LLC, founded by the 81- year-old billionaire, sold 99 percent of its stake in the SPDR Gold Trust and all shares in the iShares Gold Trust in the first quarter, a U.S. Securities and Exchange Commission filing in May showed.

“We are now in the final, overheated phase of gold’s protracted bull market,” Chris Eibl, a partner at Zug, Switzerland-based Tiberius Asset Management AG, which has $2.8 billion in assets, wrote in a report distributed Sept. 15. Gold “is already so overbought in the wake of panic selling of bank stocks that a calming of the European financial markets could well trigger a tactical pullback by about $200 to $300.”

Warren Buffett, the world’s most successful investor, says the metal has no utility.

“They take it out of the ground in South Africa, ship it to the Federal Reserve, where they put it back in the ground,” Buffett said on April 30 at Berkshire Hathaway Inc.’s annual meeting in Omaha, Nebraska. “If you were watching from Mars, you might think it’s a little peculiar.”

Private Investment

All gold ever mined totaled about 168,300 tons by 2010 and would fit inside a cube measuring about 21 meters (69 feet) in length, according to the World Gold Council. Private investment in the metal reached about 31,100 tons by the end of last year, according to the council.

The gold stored in vaults typically meets the LBMA’s so- called good delivery standard, where bars are of at least 99.5 percent purity and include a serial number, the year of manufacture and the refiner’s assay mark.

“The days where a secure vault in a basement was sufficient are long gone and in today’s operating environment, the expertise required in order to manage the substantial, and expensive, quantities of bullion are far reaching,” said Orit Eyal-Fibeesh, managing director for Brink’s in the U.K.

Brink’s, the third-biggest provider of vaults in the U.K. behind New York-based JPMorgan and HSBC Holdings Plc (HSBA), is considering building another facility in London, said Eyal- Fibeesh. The company’s clients include banks, trading houses, institutions, individuals, governments and sponsors of ETPs.

Silver Surges

As gold surged 27 percent and silver 29 percent this year, so did the cost of insurance. Fees charged by Lloyd’s of London members are pegged to the value, not volume, of the metals. Individuals preferring to hoard bullion under their own names in private vaults pay about 1 percent or more of the total value a year, compared with about 0.4 percent for investors in metal held through some ETPs.

Insurers typically set maximum values for the metals they are willing to insure.

“Many vaults are hitting the insurance limit as prices of gold have surged and even if space is available, the full replacement insurance may not be available,” said Savneet Singh, the CEO of New-York based Gold Bullion International, which offers precious-metals storage to wealthy individuals, hedge funds and financial institutions. “The smaller customers are already getting squeezed.”

Singapore Vaults

Swiss Precious Metals, whose Singapore vault will be 80 percent full by December, charges as much as 1 percent of the market value of gold and silver stored, depending on the quantity, Pages said. The charge covers storage, insurance and related documentation, he said. The company has already arranged for more space for expansion.

If insurance costs rise by more than 50 percent, then the firm may ask for higher fees, according to Pages, who predicts gold may reach $2,500 by the end of the year. Swiss Precious Metals is owned by Geneva-based Palaedino Group SA and Euroasia Investment SA. Euroasia Investment is an investor in the Singapore FreePort through affiliates, according to Pages.

Lloyd’s of London, which offers so-called specie insurance, declined to provide information on rates or demand. Brink’s declined to elaborate on storage and insurance costs. JPMorgan, which also rents space at the Singapore FreePort for its gold vault, declined to comment.

Bullion Depository

Sometimes the secrecy needed at vaults backfires. Ron Paul, a Republican congressman for Texas and three-time presidential candidate who has called for a return to linking the dollar to gold, isn’t sure there’s any metal at the U.S. Bullion Depository at Fort Knox in Kentucky.

Paul told Bloomberg Businessweek’s June 20 edition that the government “is asking the American people to trust that all the gold is there, while not allowing site visits and not publishing all the data.” Eric M. Thorson, the inspector general of the Treasury, said he has seen and accounted for it all.

The U.S. has the world’s largest gold reserves, 8,133.5 tons, according to World Gold Council data. The Kentucky vault, opened in 1937, stores more than 4,500 tons at a book value of $42.22 an ounce, according to the U.S. Mint’s website. The facility admits no visitors.

“Gold is simply a mirror of economic and political failure, of all the uncertainties that make people worry,” said Gerry Schubert, the head of precious metals at Emirates NBD in Dubai, who has traded the metal since 1979. “If you have $50 million, what would you do with that money? You buy gold. Hedge funds, central banks, sovereign funds: all are buying gold.”

To contact the reporters on this story: Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net; Nicholas Larkin in London at nlarkin1@bloomberg.net; Debarati Roy in New York at droy5@bloomberg.net.

To contact the editors responsible for this story: James Poole at jpoole4@bloomberg.net; Claudia Carpenter at ccarpenter2@bloomberg.net; Steve Stroth at +1-312-443-5931 or sstroth@bloomberg.net