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The rich may be different from you and me, but they are not immune to the charms of gold. At a time when advanced economies are in a race to devalue their currencies, private bankers are reporting booming demand from their well-heeled clients for the metal that is no government's liability. Is this surge in interest part of a considered strategy to preserve wealth, or are the rich simply responding to gold's impressive price momentum?
Buying gold ... by the tonne!
At a time when the trailing 10-year total return for the S&P 500 remains negative, it's certainly difficult to ignore an asset that has returned nearly 400% over the same period. One UBS private banking executive reported that a wealthy couple purchased a tonne of gold -- worth more than $40 million at the current market price!
Industry insiders see further price increases
The couple will no doubt be encouraged by the average 12-month gold price forecast among attendees at last week's London Bullion Market Association's annual conference: $1,450 per ounce, 8% above yesterday's price. LBMA conference participants, which include bankers, mining executives and analysts, have provided an accurate, if a lowball, indicator over the past few years. At the November 2009 conference, 140 respondents predicted that gold would reach $1,181 by last month.
If the current prediction comes to pass, the super-rich aren't the only ones who stand to gain, as the world's largest gold miners, Barrick Gold (NYSE: ABX ) , Newmont Mining (NYSE: NEM ) , and AngloGold Ashanti (NYSE: AU ) , would earn bumper profits. Barrick and Newmont have already unwound their gold hedges, while AngloGold is in the process of doing so.
Open the vaults
You want more signs of the boom in investment demand for gold? Last month, JPMorgan Chase reopened a bullion vault in New York that it had shuttered in the 1990s, and it launched its first Asian precious metals vaulting facility, based in Singapore. Both locations meet a need created by the growth in exchange-traded gold products. JPMorgan Chase is the custodian for BlackRock's iShares Gold Trust ETF (NYSE: IAU ) , which represents 100 tonnes ($4.3 billion) of bullion. But that amount pales in comparison to the $56 billion in gold owned by the blue whale of physical gold ETFs, the SPDR Gold Shares (NYSE: GLD ) .
Private investors overtake central banks
Thanks largely to these vehicles and others like them, private investors worldwide now own 30,000 tonnes of gold, according to metals consultancy GFMS -- more than central banks for the first time in modern history. That gold is attracting increasing interest -- and inflows -- is not in debate. However, I disagree with the notion floated by George Soros that gold is a bubble. If it is, it looks to me like the early stages, a period during which the term is empty because there can be no conviction that a bubble is in fact occurring.
Bubble dynamics or intelligent allocation?
Shayne McGuire, manager of gold investments at the Teacher Retirement System of Texas, believes that "we're at a unique moment in financial history -- the world as a whole has realized it doesn't own enough gold." As a variation on "this time is different," the expression "unique moment in financial history" would normally trigger my bubble-meter, but I would tend to agree with Mr. McGuire in this instance.
Exchange-traded funds provide a cheap and convenient way for individual investors to own physical gold where none existed previously. The surge in demand for gold ETFs suggests investors are simply playing catch-up to correct a historical under-allocation in gold, egged on by the highly unusual circumstances of the post-crisis financial order.
An attractive speculation
All the same, without the tether of intrinsic value, gold may be particularly vulnerable to investor manias. Furthermore, it's difficult to explain the specific attraction that the yellow metal exerts over (some) people. Why shouldn't platinum or palladium -- both of which are rarer than gold -- generate the same fascination? For these reasons, I'm forced to qualify gold as a speculative asset -- albeit an excellent speculation in the current environment.
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