View from the Vault: A wry smile for jewellers?


View from the Vault: A wry smile for jewellers?

By Adrian Ash/ Oct 2009

YOU CAN’T have missed the headlines, even if you tried to ignore them. Gold rising above $1000 an ounce has sparked a fresh “gold rush” says the press, with private investors piling into gold coins and bars so fast, Harrods just opened a Gold Department at its flagship store in London.

You could do much worse (Harrods is charging 11% mark-ups on Krugers). But don’t expect a long queue when next you’re in Knightsbridge. Because what the press doesn’t know – and what few investment-gold dealers will tell them – is that, to date, this autumn’s gold rush has come almost solely in paper, not metal.

How come? Hedge funds and bank trading desks have been buying gold futures and options, rather than physical gold, at a truly furious rate. And why not? Using virtually free credit priced at 1% or below for finance houses in the leading economies, these large speculative players have also bid up stock markets, bonds and commodities, led of course by crude oil. And the surge in gold prices denting India’s Diwali demand – and already knocking a hole in your Christmas sales forecasts – has only come in these credit-fed derivative contracts.

Open interest in US gold futures has swollen by more than one third since the start of September, the fastest jump since late 2007, back when the US Fed began slashing its interest rates and the run on the banks got started. Yes, the doctors and dentists are in once again (“Fill ’em…drill ’em” as too many brokers believe), but it’s the large speculators who are sitting on a record bullish position, holding well over nine “buy” bets on gold for every “sell” contract they’ve got.

Retail investment in physical metal, in contrast, has weakened sharply from the record demand of Q4 ’08 and Q1 ’09. London’s GFMS consultancy says physical investment off-take in the second quarter was down by two-thirds from Q1, and everything points to another sharp drop in Q3. Coin-dealer mark ups have meantime halved on average to 5% above spot, and no one’s saying they’re sold out today. Big-name dealers were offering 3-week delays and worse in Oct. last year. The best that coin-promoters can now say is “Plenty of stock available…”

Amongst the exchange-traded gold funds – source of huge investment demand since 2004 and now holding more gold than all but the top 5 central banks – it’s the same story. New York’s SPDR gold trust swelled the volume of gold bars backing its stock-market shares by 60% in the six months to end-March. It’s added barely 8% since then. London’s largest gold trust, GBS, has shrunk from its April peak. New and minor ETFs are growing, but only slowly, and that’s more to do perhaps with institutional switching than strong inflows from new investors.

Might all this raise a wry smile from jewelers facing price-shy shoppers this Christmas, also whacked by the global collapse in consumer credit? Beware what you wish for, not least if you’ve taken to buying old scrap to sell onto refiners. Value and service will out, which is why (if I may say so myself) BullionVault continues to grow, and with very strong user-to-user dealing online as well. But private investors, en masse, just don’t feel the same fear they did this time last year.

Until 0% paid on bank savings and quantitative easing make headlines once more – or a major derivatives dealer goes bust – it’s paper gold, not metal, that looks set to keep making the running in prices.

Adrian Ash
Adrian Ash

The opinions expressed in Adrian’s Blog are his own.

Head of research at BullionVault – the world’s fastest growing gold ownership service – Adrian Ash has been analyzing and investing in gold for more than 8 years.
A respected contributor to leading gold investment sites and services, Adrian’s views have been sought by the Financial Times, PBS radio in the United States, Der Stern in Germany, and the BBC in London.