The Super-Rich Are Buying Gold

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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Alex Dumortier does not own any shares of the companies and ETFs mentioned. Try any of our Foolish newsletter services free for 30 days.

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Read/Post Comments (12) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 06, 2010, at 1:42 PM, PeyDaFool wrote:

    The super rich were buying up real estate left and right just before the housing bubble burst, too. I'm just as cautious with anything the super rich do as I am with the used car salesman down the street...

  • Report this Comment On October 06, 2010, at 2:20 PM, BillyTG wrote:

    Good general writeup on gold's bullishness.

    One reason why gold is more attractive than other rare items such as palladium is that gold has a history of thousands of years of being a currency.

  • Report this Comment On October 06, 2010, at 4:44 PM, plange01 wrote:

    being already october the big hedge(trash) funds with billions invested in gold will have to sell and lock in profits for the end of the year.this will of course cause gold prices to collapse....

  • Report this Comment On October 06, 2010, at 4:54 PM, ryanalexanderson wrote:

    I doubt that about hedge funds. Could have made the same argument the year before.

    Besides, they're just holding paper gold. Eric Sprott still bemoans how difficult it is to get his hands on the real stuff. Asian central banks, too, are still buying the real stuff.

    Furthermore, this week has been all about the "competitive devaluing" as everyone attempts to debase their currency more than everyone else. Japan throwing down the latest challenge in this arena.

  • Report this Comment On October 06, 2010, at 5:12 PM, bigkansasfool wrote:

    Gold is essentially a fiat asset. Besides it's uses in electronics (very little compared to current demand) it has no intrinsic value. It doesn't do anything, it doesn't pay a dividend, etc. It's only increase in value comes from finding a bigger fool that's willing to pay more and even then you're taxed at the collectibles rate of 28%. The worst part is that gold has a long history of sharp crashes where it's the little guy holding the bag when everyone realizes the emperor has no clothes.

  • Report this Comment On October 06, 2010, at 5:26 PM, BillyTG wrote:

    @bigkansasfool,

    gold is not a commodity. It is a currency, universally valued for thousands of years. As Buffett says of "buying dollars for fifty cents," some people get it and some don't.

    There are other ways to make money in this market besides gold if it doesn't make sense. Also, keep in mind that the fools buying gold are China, India, the US, JP Morgan, hedge funds, ETFs, and regular people. The dollar cannot be trusted and gold is and always has been seen as a "hedge against political instability and government default" as one market genius says. Check out the CAPS blogs for regular information about gold.

  • Report this Comment On October 07, 2010, at 3:28 AM, ryanalexanderson wrote:

    > The worst part is that gold has a long history of sharp crashes where it's the little guy holding the bag when everyone realizes the emperor has no clothes.

    Replace "gold" with "fiat currency" and you've got a much longer history and a lot bigger crashes.

  • Report this Comment On October 07, 2010, at 4:26 AM, DiceMagic wrote:

    As long as Central banks are buying gold, talking about QE2..3...4..5.etc and keep interest rates low then the price of gold will have a positive up trend. The rise from 1160 to 1360 since the end of July has finally woken up the big money. We are in a buble, but just the second phase, the smart money moved in (phase 1) the institutional investors are on their way in (phase 2) but the parabolic phase is yet come where every man and his dog are buying gold (phase 3) . When all those shops that have been offering to buy your gold start offering to sell you gold is the time to get out. My target is $3200 oz, but we could easily see gold higer and there will be some serious bumps along the way.

  • Report this Comment On October 07, 2010, at 5:02 AM, dream77 wrote:

    "being already october the big hedge(trash) funds with billions invested in gold will have to sell and lock in profits for the end of the year.this will of course cause gold prices to collapse...."

    lock in? HAHAHAHAA

    Sure they will sell. Ok. More like buy on dips. This is going as high as Bernanke can print. Just like the stock market, up with the QE.

  • Report this Comment On October 07, 2010, at 7:53 AM, nickolassc wrote:

    Bubble! Bubble! Bubble! When will people learn? Gold vending machines are coming to the USA, if that's not a bubble indicator then what will it take?. Look at the 10 year gold chart, based on bubbles we will most likely have one more correction downwards, one meteoric rise upwards to near 2,000, then Boom! It will fall to 500. Don't get caught holding the bag and keep an eye on DZZ so you can make money when it goes pop.

  • Report this Comment On October 07, 2010, at 3:22 PM, foolishsyrup wrote:

    Please listen everybody: DO NOT BUY GOLD NOW! I have some good knowledge about gold, gold stocks, and gold bonds. They are up ONLY if the economy is down for the most part. So, to be better safe than sorry, best to WAIT until the economy is excellent and gold is (mostly) dirt cheap. At that point, buy away. Then, you'll have a fairly good nest egg for when the next bad economy hits (and it will, history shows us that).

  • Report this Comment On October 07, 2010, at 9:01 PM, TMFAleph1 wrote:

    Gold bonds?

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