Nightmare vision sparks rush for gold

Sales of gold coins and gold bars to the public have rocketed. Photo / Getty Images

Goldfinger, the villain of the eponymous James Bond film, hatched a plot to increase the value of his bullion by detonating a nuclear device inside Fort Knox, making America's gold supply radioactive for 60 years.

No less exciting, though rather more unsettling, is the real-life drama taking place on the world's financial markets, where investors have piled into gold on fears that capitalism is about to crumble.

As a result, the gold price has soared to record levels, rising 9 per cent this year to reach a peak of US$1264.90 ($1778.54) an ounce, with influential names in the world of finance predicting it could top US$2000. Among them is Jim Rogers, the investment guru who called the start of the commodities rally in 1999.

Having narrowly averted a financial Armageddon in 2008, investors are worried the authorities have transferred western indebtedness from banks and consumers to national governments.

In their worst moments, panicky investors and savers visualise a world that has been turned upside down by a sovereign debt crisis that breaks the euro and flattens the once mighty dollar. As the West sinks into a quagmire of its own making, demand plummets and the world is dragged into another Great Depression.

Even the emerging markets of China, India and Brazil are affected as export markets shrivel. Political instability follows, with riots on the streets and unemployment at levels not seen since the 1930s.

This nightmare vision has rattled investors around the word, driving the gold price ever higher. Of all the precious metals, it is the most popular as an investment.

Since the earliest times, it has been seen as both a symbol of prosperity and a store of wealth. In the modern era, it has been bought as a hedge against economic, political or social crises, and as protection against the plummeting value of currencies.

"Debt on government balance sheets and worries that the world could be heading towards a double-dip recession are behind the gold surge," says Charles Cooper at Oriel Securities.

Cooper says there is concern we could be heading towards a second leg of the financial crisis and governments "could be tempted to print more money to dig us out of a hole".

"That could precipitate inflation, making gold even more popular as a safe haven."

Hundreds of kilometres away from Cooper's offices in London, Kerry Tattersall, marketing director of Austrian Mint, is in ebullient mood.

Sales of gold coins and gold bars to the public rocketed in May to a record for a single month at 485,000 ounces. At the same time last year, the comparable figure was just 83,000 ounces.

Tattersall says: "This is an incredible time. We have had people coming into the mint and asking for advice on how to convert all their savings to gold. Not that we think that's a good idea. We recommend customers have a diversified portfolio."

The mint's most popular product is its 1 ounce gold coin, which retails for about €1000 ($1770). Also on offer are 1 kilo gold bars that sell for €31,300. Silver is also growing in popularity, with Tattersall saying that sales have soared from 1 million ounces in May 2009 to 1.85 million now.

In Britain, Adrian Ash, head of research at BullionVault.com, says the company is looking after US$800 million worth of gold for its international clientele, up about 20 per cent on a year ago. "We are the beneficiaries of uncertainty which has grown since the Greek crisis," he says.

The World Gold Council says shareholders are deepening their exposure to gold-mining companies and central banks are buying bullion on the open market. Marcus Grubb, WGC managing director, says: "The backdrop is the continuing financial crisis and people's desire to protect their wealth in uncertain times."

The Bank of England recently published figures that showed the value of gold in its vaults had risen from £72 billion ($152 billion) in early 2008 to £125 billion in February 2010. Much of the rise in value can be accounted for by the increase in the price, but analysts say there is evidence of central banks either stocking up on gold or deferring sales.

Britain would have far more in gold if former finance minister Gordon Brown had not taken the decision in 1999 to sell 415 tonnes of UK bullion, the equivalent of 60 per cent of the country's gold reserves.

Philip Newman, research director of precious metals consultancy GFMS, says central banks sold 365 tonnes of gold in 2006, but just 41 tonnes in 2009.

In Bristol, in the west of England, Mark Dampier of stockbroker Hargreaves Lansdown says retail investors are seeking greater exposure to gold by investing in commodities funds.

"Another option is to invest in gold-backed exchange-traded funds that have become increasingly popular since they were introduced in 2003."

Diversified mining companies such as Anglo American and Rio Tinto have seen a two-way pull on their stock prices. That's because the value of many commodities they produce has been pulled down by worries about the fragility of economic recovery. But specialist gold miners such as Randgold Resources have seen their shares rise strongly.

Dampier believes gold will continue its upward trajectory because "governments have printed money like there is no tomorrow, debasing their currencies. I wouldn't be surprised if they print even more before the crisis is over," he says.

Not everyone is bullish about gold, however. Julian Jessop of Capital Economics says some of the fears about a double-dip recession are overdone and inflationary pressures will remain subdued for several years. But one support for gold could be continuing uncertainty about the euro.

Suki Cooper, commodities analyst at Barclays Capital, says in the short term gold will be supported by demand for jewellery from the Far East; at the same time there is "a re-evaluation of how gold is perceived in the market".

Cooper reckons the floor for gold in the long term is US$850 an ounce against an average price of US$310 in 2002. But in real terms the price of gold is still a long way off the inflation-adjusted US$1600 that it reached in 1980 when inflation was rampant and the economic downturn was at its worst. Read into that what you will.

There's real bullion in those hills

Deep beneath the Swiss Alps, nervous Germans are storing gold in military bunkers that have been sold off by the Swiss state.

Mindful of the hyperinflation that wreaked havoc in Germany during the 1920s, German investors have been at the forefront of gold purchases in Europe.

A growing number are keen to store the precious metal outside the banks, which have been distrusted since the onset of the credit crunch. And, with the future of the euro in doubt, investors are seeking a refuge against the threat of monetary depreciation.

Switzerland is cashing in on those concerns. Old military bunkers in the Bernese Oberland now serve as maximum security vaults for nervous Europeans.

Meanwhile, egged on by commercials trumpeting the virtues of special-issue gold coins, investors in the US have been moving into precious metals. But there, storage is becoming a headache.

One of the biggest banking vaults in New York lies beneath HSBC's US headquarters in Manhattan. With demand on the up, HSBC last year decided to restrict access to the vault, telling small investors to go elsewhere.

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