Gold / Global
Financial markets are gripped by gold fever – it could soon hit $1,000 an ounce. Key to this secretive trade are the daily bullion flights between the world’s leading financial hubs. Welcome aboard Bullion Air.
As your SWISS plane taxis along the runway and the maître de cabine pours you a glass of something white from Canton Vaud, you might be surprised just how deep the airline’s commitment is to the best the world has to offer. Sitting just below your feet in the hold is crate after crate packed with gold bullion. Every day, vast fortunes of the precious metal are flown around the globe as part of the secretive world of gold trading. For stakeholders in the business of shifting about valuables, it’s boomtime.
Ross Norman was one of London’s biggest gold dealers, trading for the Rothschild bank and Credit Suisse. He is now director of thebulliondesk.com, a leading source of news for precious metals and gold research and data. Norman says that 80 million ounces of gold, worth $77bn (€51bn) is currently moved around the world each year. And adds that the figure will only continue to rise because of the strong demand for gold.
A simple “VAL” code on a plane’s cargo manifest is often the only thing that hints that bullion, diamonds or a Picasso are on board. “These codes are used for manifests or airway bills in lieu of detailed descriptions,” says Lufthansa spokesperson Mel Torre.
Airline carriers who fly the “Golden Triangle” of London-Zürich-Frankfurt, or from South Africa, the leading gold-producing nation, to Europe and the US, have aircraft with state of-the-art on-board vaults.
“Even if you did find out there was [gold] on board, you wouldn’t have the chance to get it out. These days there is a little bit of a James Bond atmosphere. There also is a little Fort Knox in almost every single airport, I can tell you,” says one airline insider.
Norman says British Airways, South African Airways and Swiss are the major gold-shuttlers. “London is the primary hub – in a big way. And then Johannesburg. Dubai is increasingly important. Tokyo and New York are also big but London is the primary one.”
The airline’s job does not stop at the flight’s touchdown. It will then arrange ground transportation airside to ferry the bullion to and from terra firma destinations, and work in tandem with specialist freight-forwarding and customs-brokerage companies, such as the American Samuel Shapiro & Company. Laurie Ichniowski explains: “We try to do a rush clearance so as to prevent any possibility of theft or damage.” Such clearance networks vary from airport to airport, but should you spot small, anonymous-looking cars parked around an aeroplane on an airstrip, it is likely that they will be loading on gold or other precious commodities.
Transportation volumes of diamonds and art have grown exponentially with the boom in the global luxury market. Such valuables may have “very special handling procedures” but are packed in anonymous sealed wooden crates “in a very unspectacular way. You would never know,” says one shipper.
Just how hard it is to abscond with gold from a plane is perhaps best illustrated by the incident at Johannesburg International Airport in August 2004, when five men opened fire on passengers on a KLM Asia plane while it was waiting for take- off. They fled before they could get their hands on any of the “valuable cargo” widely assumed to be diamonds and gold. And in 2006, Perth Mint and Brinks security foiled a robbery targeting 605 1kg gold bars that had been flown from Perth to Sydney. “If you were planning a heist you would not only have a hard time, but a dangerous time,” says MONOCLE’s source.
Best not to think about the potential cargo beneath your seat, then. Instead, switch it to the reclining position and enjoy that Taittinger.
Ten years ago gold had fallen out of fashion: the dotcom boom offered a plethora of other investment alternatives, while tumbling prices saw banks shutting down their gold trading desks. The yellow metal was so out of favour commentators were even forecasting “the death of gold”. But times have changed. Over the past six months tremors across the financial markets have helped send prices to record highs – increasing 40 per cent since the start of 2007.
Fuelled by the weakness of the dollar, rising inflation, fears of a banking system failure and an upswing in demand, gold now trades above $900/oz, a far cry from the 22-year low of $250/oz reached in 2001 and impressive when compared with a previous all-time high of $850/oz, reached on the first trading day of 2008. Goldman Sachs predicts that gold could pass the psychologically important $1,000/oz barrier by the third quarter of this year.
Frozen credit markets, wars in Afghanistan and Iraq, tension in Iran and fears that global inflationary pressures are hitting boiling point have put investors in mind of gold’s traditional allure as a receptacle of value. Gold is something to invest in when all else seems at risk.
“There has been a lot of concern about the level of debt and global imbalances,” says Jill Leyland, economic adviser to the World Gold Council. “But even before the onset of the financial crisis last year, at the end of the 1990s when the dotcom crash happened, a new generation of people realised that stock markets didn’t always go up.” Gold is able to retain its value when other investments flounder, hence its popularity with investors wishing to safeguard portfolios from inflation or political crises.
In fact, the Summers-Barsky theory – named after two Harvard professors – states that there is an inverse relationship between gold prices and other investment returns. When equity returns fall, gold prices tend to increase.
“When paper currencies are devalued, all of a sudden [gold] goes from looking like this wacko commodity to being the safest thing imaginable,” says Nathan Lewis, economist and author of Gold: The Once And Future Money. “There’s a mind-switch that goes on. Gold goes from something that’s kind of goofy to something that’s very safe and secure. Right now investors are realising the superiority of owning gold to anything else in the money market.”
Also helping to account for gold’s boom is the fact that supply and demand fundamentals remain healthy. Relatively few major finds of gold have been unearthed in recent years, while tighter environmental constraints, increase in mining costs – from $250/oz in 2001 to $400/oz today – and political problems in southern Africa have hampered supply.
Simultaneously there has been an increased demand for jewellery from China and India’s new rich – more than half of the world’s gold jewellery demand comes from Asia and the Middle East, and it is often said that one of the largest gold reserves in the world hangs from the ears and around the necks of Indian women. Gold bulls such as Credit Suisse even predict that reduced mine output could lead to a net deficit in the gold market as early as 2011.
Officially reported gold reserves show that the US holds the most gold in the world, with 8,134 tonnes; Germany is second (3,417 tonnes) and the International Monetary Fund (3,217 tonnes) third. Central banks conduct the majority of their gold transactions in secret. And while it is perfectly possible to buy bullion from specialists such as HDFC Bank or Monex Precious Metals – London being the centre of the physical over-the-counter bullion market with between $9bn and $15bn traded every single day – this saddles any buyer with storage and transportation issues. What’s more, when it comes to selling bullion, investors usually have to hire an independent appraiser to calculate values and pay a premium to the bank.
That is why some investors are turning to the “paper gold” market, where gold is traded like shares. It is a worldwide currency not bound to the dollar. With the level of demand from private investors at an all-time high, paper gold lets anyone buy small quantities of “gold”.
“It’s not uncommon for people to buy just one-tenth of an ounce, like being a unit trust regular saver,” says Owen Rees, principal marketing adviser at the London-based Exchange Traded Gold. But he adds, “Any paper product is backed 100 per cent by the metal itself. All the bars are stored in the HSBC [bank] in London, in the form of 400 oz London Good Delivery Bars [the World Gold Council specifies these must have a minimum gold purity of 99.5 per cent].”
Exchange Traded Gold has been dubbed the People’s Central Bank and is now one of the largest gold holders in the world, with a greater holding than most central banks. “We’ve got 0ver $23bn worth of money in the vaults held on behalf of our shareholders,” Rees says. “That would rank us seventh when compared to the world’s central banks.”
With the global gold rush showing no sign of abating, the only question remaining is just how big the yellow metal can become. “Theoretically there’s no limit to the price,” says Nathan Lewis. “The question of how far it goes is really a question of how far other currencies fall. Personally, I think it’s going to keep going to where inflation reaches a point in which there’s a political consensus that something has to be done about it.”
“The fabulous thing about gold is it doesn’t change,” Lewis says. “It’s the rest of the world that changes.”
But as the price of gold takes flight, so too will the businesss of the gold, art and diamond movers. These airlines and elite and secretive cargo companies are the true definition of high net-worth. Sky high in this case.
Depending who you talk to, either Swiss or Lufthansa is the world air cargo leader in transporting valuables. Regular Zürich passengers will be familiar with the tiny, boxy, unmarked red vans that pull up as soon as the aircraft comes to a halt and wait for the hold doors to open. Down the conveyor belt can be stacks of bullion, a Murakami from Phillips de Pury bound for a villa in Küsnacht, and diamonds transitting to Tel Aviv, and wads of cash.
Since the golden days of Swissair, Zürich has built a reputation as one of the world’s most secure hubs and boasts some of the biggest airside vaults in the world. “There are certain flights between Zürich and London that are almost exclusively filled with gold,” says a source. “It’s little surprise that this is an important area for Swiss to focus on.”
An hour’s flight north, Frankfurt is also a major hub for the storing and transit of valuables. Given Lufthansa’s status as one of the world’s major cargo players it’s not exactly news but the fact that some of the world’s most famous works of art or millions of dollars in diamonds are rattling just underneath passengers’ in-soles might come as a bit of a shock. “You still see Armenian diamond dealers flying to Los Angeles or transitting to Dubai with a briefcase hand-cuffed to their wrist and two heavies at their side,” says a lounge manager at Swiss’s Zürich hub. “Of course they fly in the main cabin.”
At the moment there’s a battle to see who will take the top prize in the valuables business but clients and cargo specialists still rank Swiss as their preferred choice. As the carrier is now a wholly owned subsidiary of Lufthansa the parent might well use the carrier’s unique positioning and exploit it as a super-niche player.
“There’s so much money in this category and as the world becomes increasingly mobile it’s only going to expand,” says a source close to Swiss. “Lufthansa might well work harder to position its Zürich based sibling as a flying private bank for the world’s most valuable assets.” Never mind streets paved in gold – how about runways?
One of the densest metals there is, gold is virtually indestructible – almost all the gold that’s ever been mined still exists in some form. A good thing, you might think, since it is comparatively hard to come by. There’s a mere 147,000 tonnes known to exist: were this melted into an equilateral cube, the cube’s length would be no longer than the length of a footall pitch.
Sixty per cent of all gold has been mined since 1950, with South Africa being the dominant producer for much of the 20th century. Its status is slowing now, with the US and Australia not far behind, and emerging markets such as Indonesia (which produced two tonnes in 1992 and almost 169 tonnes in 2005) and Peru. Ironically, many places identified by the World Bank as Heavily Indebted Poor Countries are increasingly also gold producers. Gold accounts for half of exports from Ghana and over a third from Mali.
Gold ore is dug from the surface or blasted from underground rock faces. The US, South Africa, and Australia are the largest producers. New supplies are coming from Indonesia.
Gold is then separated from the rock by flotation, smelted into doré and cast into bars. These are then refined by the Miller chlorination process to 99.5 per cent purity.
There are two types of gold bars – cast and minted. Cast bars are made by pouring molten gold into an ingot mould; minted bars are made from gold blanks.
Private and national gold reserves are stored in major banking capitals. The vault in the Federal Reserve Bank of New York is 24m below street level on the bedrock of Manhattan.
Gold trades often involve physically moving gold from one bank to another. But investors are also turning to the “paper gold” market where gold is traded like shares.
Gold is moved around the world in anonymous wooden crates. On the cargo manifest a simple “VAL” code may be the only clue as to what they contain.
Security Shipments are surrounded by secrecy. It is only when things go wrong that people realise the shipments’ scale, as with the 1983 Brinks Mat robbery, when €33m-worth of gold bullion was stolen.
Brinks, Malca Amit, G4S and Viamat are the key players when it comes to moving precious cargo around the world.
Lufthansa, Swiss and British Airways are all major transporters of gold between the golden triangle cities of London, Frankfurt and Zürich.
As one of the world’s richest banking hubs, and home to some of the world’s richest tax exiles, the Swiss city is a key centre for the shipment of gold and valuable art.
For bullion trades, gold has to be physically moved. Sometimes this can mean simply moving bars from one pile to another if both partners are clients of the same bank.
The purchase of gold jewellery is a key element of gold’s value. When there is market turmoil, people invest in gold – and not everyone can afford bars.