The Physical Side of the Precious Metals Investment Boom
I will start with a bit of history. Do not worry, I am not going to go back 2,600 years to King Croesus. I will speak about the typical investor and what is driving him. I will talk a little bit about the products – there are some quite heavy ones around – about distribution and also product innovation.
A Small History of Physical Investment Products
Until 1914, there was obviously no need for additional investment products. The gold standard was in place and you could exchange your bill, if you had one, for a gold coin. Modern investment bars were first made in the period prior to the Second World War and the first minted bars came onto the market in 1952, produced by Argor, which is Argor- Heraeus today, based in Chiasso. That was followed by the invention of the gold monetary coin or, as we call it today, the bullion coin, which started its life in the 1960s with the Krugerrand, which became a mass product in the 1970s after the gold market was liberalised.
You cannot speak about physical investment history without looking at stocks. In 1950, a total of 10,900 tonnes of gold were owned by private investors, 65% in Europe, 25% in the US and the rest in other countries around the globe. At that time, most of the holdings were in the form of coins. Fifty years later, in 2000, private investor stocks had risen to 22,000 tonnes, with the composition changed to 75% in the form of bars and only a quarter left in the form of coins. In the year 2000, the French, who bought large quantities of gold in the 1950s and 1960s, and who had been among the first to buy kilo bars in the 1930s, were the biggest holders of gold, owning around 3,600 tonnes. Indeed, the majority is still held by families in France.
The French were followed by the US, by Japanese gold holders, and then Swiss and German investors.
A Look at the Numbers
So much for history, what is the situation today? Has everything changed or are the traditional holders of gold in the market today still those who were there in the past? Well, some countries have disappeared from the top 10 list, but others are still there, such as the traditional market of Germany. You may have heard that Germany was the biggest market for small investment bars in 2009 and that will probably be true for 2010. Why that is the case I will tell you in a couple of minutes. Germany now consumes between 115 and 135 tonnes of small bars a year. It is followed by countries such as Switzerland, the US, India, China, Southeast Asia and a number of other countries obviously much smaller in size. It is important to mention though that these numbers are consumption numbers and not production ones, and if you look at the total numbers, between 260 and 570 tonnes have been bought in the last couple of years. The production of the small investment bars though is still dominated by the various refineries in Switzerland.
The situation looks different when we come to the international bullion coin market. Coin producers are spread all over the world and no country dominates the global market. In 2009 and probably again in 2010, the largest quantity of bullion coins came from the US, in the form of the eagle and the buffalo. They were followed by the Canadian maple leaf and by other coins, for example, from Austria, Turkey, obviously the Krugerrand, which is the most traditional of these, and then Australia. There are a large number of other producers around the world, but they all produce small quantities of coins.
Finally, let us have a look at the total numbers. They are a bit smaller than those for the bars, but the estimate for this year is between 135 and 229 tonnes, and so they are still quite large and play a substantial role in the international gold market.
Investors and Their Motives
Why are people buying so much gold? More than US$70 billion of physical gold in the form of coins, bars and so-called imitation coins have been bought in the last four years alone. Although demand was distributed widely over the globe, a handful of countries have dominated the buying.
Let us have a look first at Germany, where there is a great desire for security. Germans are probably the most over-insured people in the world and so it fits that they started buying a lot of gold in the 1970s when there was high inflation, and they did the same in 2008 and again this year. The new buying started with Lehman Brothers, after a number of Germans lost double-digit millions of Euros in certificates that were issued by Lehman’s.
Amongst these were gold certificates. Hence, buyers lost money on something that was seen as a secure investment in a very secure underlying asset. After that experience, the German investors turned physical, and you will see in a moment what the impact was for a company like Heraeus.
In 2010, news spread across Europe that there were more and more doubts about the future of the Euro. It did not turn out to be that bad, luckily, but Germans nonetheless started buying gold again, and they bought large amounts. Suddenly, all Germans seemed to remember personally 1924, when there was a 100 trillion Mark bank note and so they bought gold again.
If this is what has been happening in Germany, why is Switzerland also buying so much gold? There has been no war in the last 200 years, no inflation apart from perhaps housing, and of course no potentially endangered Euro. Is there a reason to buy gold in Switzerland? There are probably two explanations here for that and one is the neighbours: a large amount of the Swiss buying came from Germany and perhaps ended up in Swiss vaults, which were seen as even more secure. The second, more local reason is that gold is seen by Swiss people as a means of portfolio diversification, so they were locking away some of the gold themselves.
Heraeus Investment Bar Sales in Germany
On figure 1, you can see, for example, how the sale of Heraeus bars in Germany has developed over time. You can clearly see that there were two peaks: in 2008, right after the Lehman crisis and then again this year after the problems in Greece arose and bar sales exploded. What type of bars I will speak about in a minute.
The Asian market is changing; investment is not only in jewellery any more, but also in banks and buildings. Gold is seen in Asia as a means of portfolio diversification.
I should mention that one of the most important gold consumer markets now is Vietnam. Homes and land, for example, are still evaluated in gold and traded in gold, which is why Vietnam is still one of the major markets for physical gold.
Finally, there is Thailand, the fifth-largest market in the second quarter of 2010.Why is so much gold sold in Thailand? Here, we have probably the same thing as the relationship between the Swiss and the German markets, in that much of the gold bought in Thailand ultimately finds its way to Vietnam.
In Turkey, gold is a very popular gift, traditionally for weddings and other celebrations. There is no tradition of buying gold bars in Turkey. Prior to 1989, individuals were not allowed to buy gold bars and this still is the case for investment in gold for gifts. However, importantly, from 2000 until 2008,Turkey was the biggest market in the world for gold coins. The two most popular gold coins are produced locally by the Turkish Mint.
Last but not least, the United States. I am not going to say that 15.2% of all Americans are of German ancestry and that typical German angst is driving gold demand, but some of the reasons might be the same there. There is potential inflation, there is fear of dollar devaluation and that leads to physical demand, not only in the form of ETFs. Again, it is a means of portfolio diversification.
What perhaps drives Americans even more than anybody else in the world is what must have been a traumatic experience for the older generation: private gold possession was forbidden from 1933 until 1975. Today, the US invests in the form of coins; it is not a bar market. The market in the US is mostly in the hands of coin shops and internet dealers, and is not so much a bank-driven market as it is, for example, in Germany.
What products are the most popular in the international markets? Let us start with minted gold bars. In some markets, they are also called ‘ingots’ or ‘wafers’, and they are produced by cutting cast bars that have been rolled to a uniform thickness and the markings are then applied with a minting press. Usually, those bars are rectangular but there are a variety of other shapes and they are of very different sizes, ranging from 1/100th of an ounce to 1kg, but the most usual ones, at least in Germany and in surrounding areas, range from 5g to 100g.
At first glimpse, it looks like the precious metal bar market is easy to understand – it comprises minted bars. However, if you look at it more closely, there are cast bars and if you look at it closer still, you discover that there are 55 different bar types. Some bars are pretty exotic, such as boat, doughnut and fillet bars. In Western countries, the usual sizes for the classic cast bars range from 100g to 1kg. The second group of bars which is popular are the tael bars. Their market was Greater China and still is Vietnam. Tola bars were once popular in India, but their importance has diminished since 2003, when a new import tax was introduced.
Bullion coins are available from 1/20th of an ounce to 1kg and are made not only out of gold and silver, but also out of other precious metals, in many different sizes. 230 tonnes of gold and 2,450 tonnes of silver were minted in 2009. If you compare these numbers to the annual off-take in ETFs, there is no reason to give up on the physical investment products. That was the highest number since 1980, with the exception of 1986 when Japan minted a high number of gold coins. Additionally, in the last two years, gold sales were repeatedly restricted by limited production capacities. We would have sold more if had been possible to produce more of those coins and the same is true for bars.
Silver Eagle Sales
Figure 2 shows silver eagle sales over the last 20 years. The most important things to notice are the two bars on the right-hand side, showing how the business exploded in the last two years after the Lehman crisis started.
Other Investment Coins
There are other classic investment coins, for example Austrian Dukaten, Swiss Vreneli, German Goldmarks and British Sovereigns. They all remain traded products in the investment market. Of course, the very rare ones have a numismatic value on top of the bullion. There are also historic bullion silver coins. You can see here the Maria Theresial Thaler, which is the most common bullion coin in the world. Some 389 million of these coins were minted from 1741 to the year 2000.
Another example is the former circulation silver coins in the US, which are still traded in the form of so-called ‘silver bags’ in the US. Last, and in this case least important, are the commemorative coins which are minted in many countries. They are often legal tender, but they lack one important characteristic of a classic bullion coin and that is the unlimited number of pieces minted. One example is the€100 coin.
Product Innovation – an Unusual Expression in an Old Business
What is the next step? Well, recently we have seen a great deal of innovation in the investment banking area, but there have also been innovations in the physical market in the last few years. One is the silver coin bar – whoever has heard of it? However, it has been very popular here in Germany. Since it is a bar with a face value – in this case, 30 Cook Island Dollars – it is treated as a coin. The European Commission likes to regulate a lot of things, but apparently, it is nowhere said that a coin has to be round. Also, in Germany, for a silver legal tender coin, only 7% and not 19% VAT applies. The Germans like a product that saves them 12% of VAT.
There are also smaller coins, which perhaps make gold more affordable. The 0.5g ‘Mini- Roo’ is a good example. There may be additional products, for example, made out of rhodium. Is it worth buying rhodium? I leave that decision to you.
After small coins, what about bigger coins? The 1kg silver coin and even a 10kg silver coin have been extremely popular. As far as product innovation is concerned, a golden jigsaw might not be the solution, but if somebody wants it, it is available.
As you will know, it is a long journey from the furnace to the vault. There are now direct sales by mints and refineries, banks are in the business, and so are precious metal dealers. You have internet-based shops of precious metals dealers, outlets even in department stores – we all know the Harrods story – and there are now gold vending machines, like the one we can see in the Adlon at this Conference.
Has physical precious metal investment a future? Others have outlined the problems, so I will not repeat them. How far can this go in the end? Well, global wealth stands at €82 trillion. If people would only put 5% of that into the form of gold, it would be equal to 130,000 tonnes of gold, which is quite a large number. Today, physical holdings stand at roughly 30,000 tonnes. Add a few thousand tonnes in the form of ETFs and that leaves a lot of room for growth.
Do physical metals have a future? Would you like to have just an account statement or would you prefer something very shiny and also worth a lot, like some nice bars or coins?
The LBMA is delighted to congratulate the winning analysts in the 2010 precious metals Forecast. The aim of the LBMA Forecast is to predict the average, high and low for each metal as accurately as possible. The prediction closest to the average price and range at the end of the year wins. Many thanks to all the Forecast contributors for another excellent year. The average predictions for both gold and platinum were within 3% of the actual averages and the direction of the price move for all four metals was correctly forecast.
The LBMA is grateful to PAMP SA for its generous donation of prizes for the Forecast. The winners for gold and silver will each receive a 1oz PAMP gold bar and the winners for platinum and palladium will receive a 1oz PAMP platinum bar.
Forecast 2011 will be available on the LBMA website in January. If you would like a hard copy, please contact email@example.com.
Wolfgang Wrzesniok- Rossbach is in charge of the client relationship management and research activities of the Heraeus precious metals He joined the precious metals and technology group in 2005 after working in banking for 21 years. Wolfgang started his career in 1984 with Dresdner Bank and after working in Frankfurt, Singapore and Sydney as a precious metals and derivatives trader, he became head of its precious metals and commodities desk in Frankfurt.