Gold was charting record highs, because investors were buying it up as a safeguard - a hedge against post-crisis uncertainty. The euro was on the ropes - some were calling the future of the currency hopeless - and at some stage the quantitative easing and near-zero interest rates governments had implemented to combat the crisis were likely to end in runaway inflation. The financial industry had recovered some of its luster from its 2008 low, but its fundamentals were still troubling. If another crisis hit, cashstrapped governments wouldn't be able to bail the banks out.
Then, towards the end of 2011, the gold price dipped. Some analysts considered it a new bubble, waiting to pop. "Gold has always attracted strong commentary from market participants," says Scott Lines, the president of LOM Offshore Financial Services, which specialises in the trading and custody of physical gold. "Just after the turn of the millennium, most of the investment community viewed gold as a 'barbaric relic', which was only going to go down in price, but it has risen consistently since then.
I suspect that the same commentators who thought it could only go down in 2002 now believe it to be a bubble." Its price has yoyoed through 2012, but it has held onto to most of its post-crisis gains, because the economic picture behind its rise has by and large remained the same. "Higher inflation is coming," explains Mr Lines. "The world's central banks will continue to print money despite the economic outlook stabilizing and in many regions there are still tremendous debts outstanding at the national level. All of these argue for investors to hold some gold."
Gold and other precious metals, especially silver, are considered a safe haven in times of crisis - as well as a barbaric relic - for a variety of reasons, most of which are tied up with their history. The metal has been a unit of exchange and store of wealth since at least 3000 BCE, when market economies first emerged in the Fertile Crescent. The first stamped coins, which appeared in Greece between 700 and 500 BCE, were made using a naturally occurring alloy of gold and silver called electrum. For most of the rest of history, these two precious metals were the basis of global trade, because they gave people across the world a way to agree on what a product was actually worth.
The other precious metals - platinum and rare metals like rhodium, palladium and bismuth, which are considered a part of "the platinum group" - were only discovered in the 18th and 19th centuries. Like gold and silver, they derive their value from scarcity at one end and demand from industry and investors at the other, but metals in the platinum group are even more scarce than gold or silver - by an order of magnitude - and their prices, which generally track gold's, have pushed above it and fallen well below it in the past.
The first government to issue money that was not directly pegged to gold and silver - called fiat currency - was the Song Dynasty, in China. The experiment failed because it led to hyperinflation, but it was tried again by the Yuan Dynasty, with the same result. In 1971, the US government under Nixon ended the direct convertibility of dollars for gold, ushering in a new era for money. All reserve currencies became fiat currencies - the last to go was Switzerland, in 2000 - and gold and silver were knocked down a level, to take their place among ordinary commodities, like cocoa and tin. They picked up the label 'barbaric relic' but in the way they rose and fell in value, gold and silver continued to behave more like currencies than commodities, with one subtle difference, which precious metal's adherents are quick to point out. Both have an objective value, established over millennia, backed up by industry, whereas fiat currency - literally "let it be" currency - does not.
To different extents, precious metals have proved to be a sound way of hedging against crises and the volatility of fiat currencies. There are a variety of ways to buy into them - gold presents investors with an especially confusing array - but according to Mr Lines, not all are created equal. "You can buy gold funds, companies that produce gold, gold exchange traded funds, gold receipts and gold futures and options," he says. "All will give you financial exposure to gold and should reflect price movements relating the price of gold, but you have counterparty risk with all of them and may find yourself unable to get hold of the gold or the value it represents because the vehicle you used is compromised."
In the opinion of Frank Suess, the CEO and chairman of BFI Capital Group, the best way to make sure an investment in gold doesn't slip through your fingertips is to buy physical gold bullion. "In the context of decades of loose monetary and fiscal policies, particularly in the West, physical gold, and to some degree silver, represent a form of 'sound money'. Worldwide, wealthy families and investors are concerned about the implications of excessive sovereign debt and the flaws of the world's fiat currency and banking system. They are looking to hard assets, including precious metals, as a means to protect their wealth against the corresponding financial risks."
"Over the past 12 years," explains Mr Suess, "the price of gold has gone from about US$ 280 per troy ounce in 2000 to almost US$ 1900 per troy ounce in 2011. Over this period, the financial industry has caught on to the fact that gold is an interesting investment, with very solid demand. That has led to a large number and variety of precious metals products being offered, generally by banks. These products are not or only fractionally backed by the actual physical metals. If you are looking for a hedge against the risks that come with a severe financial crisis, having physically allocated gold, rather than some fractionally backed solution with cash settlement clauses, will ensure that - if and when needed - you can promptly take delivery or sell at a decent price."
Mr Suess thinks that precious metals other than gold and silver have interesting investment potential, but less solid fundamentals. "Platinum and palladium have been an interesting investment, but these metals are somewhat more speculative and much more industrial in nature. There are rare metals too, such as Bismuth, Indium or Tellurium, which may be considered interesting investments and long-term capital gains plays. The caveat with these kinds of metals is that the markets are quite illiquid and opaque, so investing in this sector should be done with great caution."
Mr Seuss and Mr Lines both advise that clients hold their precious metals offshore, because what physical metals can offer in financial security, offshore financial centers can offer in legal protection. "Some take their risk management to a yet higher level," says Mr Seuss. "Conscious of history, and in consideration of the social, political and regulatory risks that frequently accompany periods of economic crisis, they keep part of their wealth outside of their home country."
One such political and regulatory risk is confiscation. In 1933, for example, when the Great Depression was at its worst, US President Franklin Delano Roosevelt issued an executive order that made it illegal to hold gold bullion and coins. Existing holdings were to be handed over to the Federal Reserve, in exchange for $20.67 per troy ounce (roughly equivalent $371.10 today), but the majority of American citizens who owned large amounts of gold transferred it to offshore financial centers, particularly Switzerland.
Investors who have decided to hold physical precious metals offshore are presented with another set of options: buying bullion bars or coins, choosing an offshore financial center and depositing the metals in safety deposit boxes or banks. "First," says Mr Seuss, "you must decide whether you want to hold bars or coins. Many of our clients prefer coins because of the flexibility in liquidating and transporting them, but for large allocations, we generally use kilo bars." For Chinese investors who would like to buy coins and hold them in Hong Kong or Singapore, Mr Seuss recommends buying the Chinese Panda or the Australian Kangaroo. "These are used quite frequently in Asia," he says, "and are more liquid as a result. Many of our Chinese clients also buy and store their metals in Switzerland. There, the choice of coins is broader and the markets are deeper, thus offering a wider choice of options. Lately, they have invested mostly in Canadian Maple Leafs and American Eagles, but in Switzerland they can also buy any other coin at excellent terms, including the Panda or the Nugget."
With that done, the investor needs to decide where to deposit the metals. "The drawback of an offshore safe deposit box," says Mr Seuss, "is primarily that you have to travel, remove the metals and then find a buyer if you want to sell." Mr Suess's company, BFI Capital, uses a program called Global Gold, which offers physically allocated ownership, combined with an efficient trading setup, allowing investors to buy and sell remotely. It is a non-bank solution that he says more and more wealthy clients and families are turning to.
Gold and other precious metals are not for everybody. Many analysts and experts says they are cold, inert lumps with no cash flows and no earnings power. They say that investors who buy them are losing out on dividend or interest income and the accumulation of intrinsic value over time, but the last word should perhaps go to Mr Seuss colleague, Dirk Steinhoff. "In a world long on potential crises and short on any sustainable solutions," he recently wrote, "we probably have to stick to our gold, and, for that matter, have to continue to buy more gold for quite some time to come."
