Worried Investors Want Gold on Hand

Printed in The Wall Street Journal, page A3

FEBRUARY 25, 2009 Worried Investors Want Gold on Hand By CAROLYN CUI and ALLEN SYKORA
Some investors are so worried about the prospect of economic
collapse that they are buying gold and having it delivered to them,
rather than holding the precious metal in the form of futures contracts
or other securities.
The global recession and worries about the stability of the
financial system have sent the price of gold to $1,000 an ounce. But
more surprising is that buyers are taking the unusual and expensive step
of taking possession of it.
"We're having some of our strongest months ever," said Scott Thomas,
president and chief executive of American Precious Metals Exchange, a
precious-metals dealer in Edmond, Okla. "The bottom line is our numbers
are probably double what they were last year, and last year was very
busy."
Bob Coleman, who runs a bullion fund out of Nampa, Idaho, has taken
multiple deliveries of gold and silver since last fall for his clients.
The fund, Dollars and Sense Growth Fund, primarily invests in precious
metals for high-net-worth individuals.
"It's more of a trust issue," says Mr. Coleman. "Given all the
turmoil in the market, people prefer to have access to the metal."
Sales of American Eagle gold bullion coins at the U.S. Mint in
Philadelphia more than doubled in the first two months of this year.
Investors are also flocking to gold coins. At the U.S. Mint, a total
of 147,500 ounces of American Eagle gold bullion coins were sold in the
first two months this year, a surge of 176% from the same period last
year.
Demand is rising at the Comex, the metals division of the New York
Mercantile Exchange, where investors increasingly are choosing to take
physical delivery of gold, rather than cash, once their futures contacts
expire.
Rising delivery orders have kept Brink's Inc., a major carrier for
the Comex, busy. The Richmond, Va., company said it saw a large spike in
clients shipping gold and silver from the exchange over the past few
months.
Tony Klancic, an account executive at Lind-Waldock, a Chicago
commodities brokerage, says he has been taking calls since September
from individual investors wanting to buy physical gold.
These are "real people in rural America with money under the
mattress, and wealthy individuals coming to the futures market strictly
intending to take delivery," Mr. Klancic said.
In December, 4.5% of gold contracts ended in delivery, compared with
3.4% a year earlier, according to the exchange. Investors also are
taking delivery of silver, with contracts ending in delivery rising to
7.3% from 4.7%. December is typically a big month for deliveries, and in
January, deliveries remained higher than the year before.
Jewelers and other users of metals are among the buyers who take
possession of gold and silver. But with sales of jewelry down and other
industrial users cutting back, it appears that investors are causing the
increase.
Gold deliveries peaked at more than 8% in the early 1980s, when
Mexico defaulted on its foreign debt and the world economy was in
recession. Deliveries dropped and have gradually fallen back to the
range of 2% in recent years.
Gold pierced the $1,000 level last Friday, the first time since
March 2008. On Tuesday, the February contract closed at $969.10 per troy
ounce. So far this year, the precious metal is up 9.7%.
Taking physical delivery of gold can be costly and complicated.
Investors typically buy gold on exchanges using futures contracts. Since
each contract represents 100 ounces of gold, an investor would have to
pay $96,910 per contract, based on Tuesday's close, in order to take
delivery. By contrast, investors need to put down only $3,999 up front
to trade such a futures contract.
"It is an expensive proposition," says Jeff Christian, managing
director at CPM Group, a New York precious-metal research firm.
Also, the logistics of buying a big lump of metal might be daunting
for smaller players. Investors who decide to take delivery of gold
contracts face high storage and insurance costs. And if buyers actually
want the gold or other precious metals in their possession, they must
arrange for delivery by armored truck. In a recent delivery of 100,000
ounces of silver, Mr. Coleman paid $3,000 to transport the metal from
New York to Idaho.
Write to Carolyn Cui at carolyn.cui@wsj.com
Printed in The Wall Street Journal, page A3
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Carolyn Cui Money & Investing The Wall Street Journal. Work: 212-416-3078 Mobile: 646-593-1152 Email: carolyn.cui@wsj.com