The week after Cyprus said in March it would impose a levy on bank deposits of more than 100,000 euros ($132,000) amid Europe’s debt crisis, Rene Buchwalder’s business boomed.
“This bar is one of the best sellers,” said the former UBS AG banker, standing in the vault of his Swiss gold and silver trading company Pro Aurum as he reached into a stone-grey safe holding neatly stacked coins and selected a 100 gram tablet. “You can break it into individual pieces and use it as money in case the European Union goes under.”
As the euro-area went through a record-long recession, and only edged back to growth last quarter, demand for storing gold bars and coins in Swiss vaults has been rising. Even as the price of the metal has declined more than 20 percent this year, some investors see gold as less risky than other assets such as bonds, where debtors may not be able to pay, or equity in a company that may go out of business.
“High-net-worth individuals are dependent on the health of the financial system,” said Ole Hansen, head of commodity strategy as Saxo Bank A/S in Copenhagen. “If you take some of your investments out and put it in the vault, then you can reduce your exposure.”
At Pro Aurum, movement and vibration detectors add protection to the former Zuercher Kantonalbank branch in Kilchberg, a lakeside suburb of Zurich. Cameras hang from the ceiling to film employees as they fulfill orders from customers who can store valuables in one of the 700 safe deposit boxes or buy up to 100,000 francs ($107,000) of gold with cash over the counter without proof of funds such as a bank statement.
About half of Buchwalder’s customers are Swiss, with Europeans making up most of the remaining clients. Pro Aurum, which also has units in Austria and Germany, trades “over a billion francs” of gold per year, Buchwalder said. The Kilchberg vault holds enough gold and silver for over-the-counter purchasing and online shipments.
Today, the spot price for gold rose as much as 0.8 percent to $1,347, bringing the gain in the last five years to 71 percent. The global MSCI World Index only gained 13 percent gain in that period.
Still, the bets on gold being a safe haven may backfire following this year’s price decline. ABN Amro Group NV analysts predict the price will average $1,000 next year and $840 in 2015 because a stronger U.S. economy will limit gold’s appeal. Net short positions, or bets on falling futures prices in New York, gained ninefold since November, U.S. Commodity Futures Trading Commission data show.
World demand for gold in the second quarter fell 12 percent from a year earlier to 856.3 tonnes, worth $39 billion, as hedge funds and investors withdrew from securities backed by pools of gold, banking on a recovery of the U.S. economy, according to a report published today by the World Gold Council.
Even so, some investors see gold as the ultimate long-term wealth protection asset. “Since the Lehman Brothers bankruptcy and the bailout of UBS, people are more careful about where they put their money,” Buchwalder said.
Demand for gold bars and coins rose 78 percent in the second quarter to 507.6 tonnes, as retail buyers took advantage of lower prices to add to their long-term holdings, the World Gold Council said.
Jacques Rall, a Frankfurt-based broker at Euro Pacific Bank, who started investing in gold and silver in 2007 because of concerns about government debt and inflation, said he’s not worried about gold’s slump this year as he predicts increasing demand for metal assets.
“I’m holding 80 percent of my portfolio in precious metals,” he said.
Gold’s assumed safe haven qualities are not new as governments once used holdings of the metal to back currencies. In 1933, the U.S. forced private owners to sell gold to the Federal Reserve, with the treasury building a depository at Fort Knox. U.S. President Richard Nixon severed the dollar’s peg to gold in 1971. Switzerland was one of the last countries to link its currency to gold until a public vote in 1999 ended it.
Today, decommissioned Swiss military bunkers are being converted into vaults to meet rising private demand, said Buchwalder. A former Swiss Air Force command and control center in Uri is now a vault owned by data storage company Deltalis. At Swissdatasafe, based in Amsteg, investors can store valuables and art in secure locations in the Swiss Alps.
Switzerland’s gold business is also spurred by its history as a nation that hasn’t fought a foreign war since its neutrality was established by the Treaty of Paris in 1815. Switzerland’s grip on gold trading, led by UBS and Credit Suisse Group AG, grew in the late 1940s when London’s gold market remained closed for some time after World War II.
“Switzerland is a neutral country and always has been,” said Allan Finn, global commodities director at logistics company Malca Amit, adding that enquiries about storing gold at its vaults in Singapore and Switzerland have picked up in the last nine months. “It’s a safe haven which is perceived to be exempt from political interference.”
Still, that status is under pressure as the U.S. and euro-area countries press for automatic exchange of information, breaking open bank secrecy.
Buchwalder will ask U.S. clients to leave from the beginning of next year, echoing a similar decision announced by transport company Via Mat in February. Gold traders have the same know-your-customer requirements as banks, and the burden of compliance means it’s not worth keeping U.S. customers.
Pro Aurum has set up a unit in Hong Kong to give investors geographic and political diversity. Singapore is also expanding its own gold market with banks from UBS to JPMorgan opening vaults in the country. Australia & New Zealand Banking Group Ltd. started a 50 metric-ton gold bullion vault in Singapore last month, adding to storage in Hong Kong, Perth and Zurich.
Despite rising global competition and recent price declines, Switzerland will continue to attract gold investors, said Egon von Greyerz, managing partner at Matterhorn Asset Management AG, an asset manager targeting high-net-worth individuals, adding that clients don’t want to evade tax and his company only deals with declared funds.
Gold’s investment qualities combined with the country’s neutrality and stable democratic system as well as the opportunity to keep assets outside the banking system allow to preserve wealth, he said.
”It’s the ultimate form of wealth protection,” he said.