10/02/2008 03:20 PM

A Run on Precious Metals

As Crisis Grows, Investors Look to Gold

By in Frankfurt

Worried about their nest eggs in the global financial crisis, a growing number of investors are swapping cash for gold. Dealers of coins and gold bars are having trouble keeping up with demand.

Robert Hartman sounds a bit breathless as he answers his phone. "This is already a state of emergency," the CEO of the Munich-based gold dealer Pro Aurum tells SPIEGEL ONLINE. For two weeks, he has been unable to fulfil all the gold orders his company has been receiving. Customers are storming its online shop. And the banks the company usually services just keep on ordering. At the company's fulfilment center, orders are packaged seven days a week. "I'm just happy our employees have been willing to do this," he says.

Since the collapse of US investment bank Lehman Brothers led to the sudden widening of the global financial crisis, nervous savings depositors and investors have been storming the gold market. Tuesday, Hartmann says, was a day unlike any other he has ever experienced, with massive amounts of gold being sold across the globe. Roger Breitkopf, a precious metals dealer at German banking multinational Deutsche Bank adds: "Compared to August, (gold) sales have increased tenfold."

Indeed, anything that shines is selling right now -- gold coins like the Krugerrand, the American Eagle, the Maple Leaf and even the Vienna Philharmonic as well as gold bars in all sizes and weights. The phenomenon has fueled an increase in gold prices that has seen the cost of a fine ounce rise from $730 on Sept. 11 to $880 on Wednesday. "In light of the run on the market, it's going to be even higher soon," says Eugen Weinberg, an analyst at Germany's Commerzbank. Gold funds are also in high demand as well as shares in gold mining operations, whose stocks were falling dramatically before the crisis.

'People Can Always Sell a Bit of Gold'

The desire for the security of gold is now "reaching the broad masses," Weinberg believes. And it's no longer just small depositors who are fleeing to gold, says dealer Hartmann. Major investors are also shifting their assets. "You can tell because the value of total orders is climbing faster than the volume," he says. It's a clear signal that people with savings are preparing for a crisis. Breitkopf sums up the phenomenon in a few words: "Many are thinking: Who knows what's going to come next?" If worse comes to worst, "people know they can always buy something with a bit of gold."

Belief in gold investments in uncertain times isn't misplaced, either. Few other precious metals have proven as resilient to general economic crises as gold. According to Weinberg, 70 percent of all gold is used to make jewellery, so its price is less dependent on industrial developments than other precious medals. "Since July, the price of platinum has halved," Weinberg says, offering a comparison.

Gold is also tax-free in Germany. "For so-called white metals like silver and platinum, you have to pay a 19 percent value-added tax, but not for gold," explains Deutsche Bank expert Breitkopf. And that's another reason people flock to gold rather than other metals.

Pro Aurum as well as banks are having great difficulty meeting the current spike in demand. "We can't mail out more than 300 or 400 packages a day," says Hartmann. Besides, many coins and bars are already sold out. The problem isn't that there isn't enough gold available. "The gold that's recently been mined will be enough for decades," Weinberg says, reassuringly. The problem is that coins and gold bars can't be produced quickly enough.

For example, the most beloved of all gold coins, the Krugerrand, is more difficult than ever to obtain. Despite the fact that Rand Refinery -- where the coins weighing exactly one fine ounce (31.1 grams) are minted -- produces at its full capacity, seven days a week, it is still unable to meet demand. And the situation doesn't look much better with other gold coins. "Orders are no longer being taken for the American Eagle and the American Buffalo," Hartmann says. And orders from gold bar producers are sometimes backlogged for weeks, Deutsche Bank trader Breitkopf says.

Few expect demand to diminish or prices to fall -- even if the financial and stock markets recover unexpectedly quickly. Most analysts believe the contrary -- that the price per ounce will continue to rise, perhaps once again breaking the $1,000 mark. "The fourth quarter is traditionally a good one," says Weinberg. "In Western countries it's Christmas time, in India it's wedding season and there are also many Muslim holidays."

And even if gold prices fall by a few percentage points, it will still be a good investment, trader Hartmann advises. "The loss then would be like an insurance premium," he says. "In return, your money will be safe in the event of a crisis."


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