Refiner meets demand for solid gold

Refiner meets demand for solid gold

27th April 2009, Comments 0 comments

Ticino’s gold refiner Argor-Heraeus shifts production from jewellery to gold bars.

MENDRISIO- Tucked away in the Swiss canton of Ticino, the discreet and highly secure gold refiner and producer Argor-Heraeus illustrates the two ends of a scale in current market trends.

While the world grapples with the biggest economic crisis since the Great Depression of the 1930s, demand for the firm's watch and jewellery components fell as Swiss and Italian watchmakers cut production.

Meanwhile, investors are storing gold bars, a longstanding insurance in times of war or crisis, sharply increasing demand for the group's gold production.

"I have never seen anything like that since I came to work in Ticino about 20 years ago," chief executive officer Erhard Oberli told AFP.

To cope with the new balance of demand, Argor is shifting efforts from its semi-finished products division to gold production and is running day and night.

With orders for gold bars piling up, delivery times now stretch to two months instead of 10 days.
AFP PHOTO / Sebastian Derungs
An employee handles a 12.5 kilo gold bar on 6 April 2009 at a plant of gold refiner and producer Argor-Heraeus in Mendrisio, in the southern Swiss canton of Ticino.

Switzerland is a barometer of trends in the industry as a large proportion of gold is refined or transformed by the four refiners based here.

"We know a lot is going to Germany, Austria and Switzerland, which was not the case in the last years because gold was out of fashion in Europe," Oberli said.

"That has changed totally. Gold bars are seen as a safe haven. It is because of the lack of confidence in the financial system," he added.

When AFP visited the production facility earlier in April, employees were embossing 5-gramme bars (0.176 ounce) ordered by Germany's Commerzbank, as well as packing boxes of 100-gramme (3.527 ounce) pieces for Switzerland's UBS.

Smaller bars are popular because they are more accessible to small investors, said Oberli. At current market prices, a 100 gramme bar is worth approximately USD 3,100 (CHF 3,600).

According to the World Gold Council, investors in Germany and Switzerland are collecting gold at "levels not previously recorded."

In Europe, demand rose to 113.7 tonnes in the fourth quarter of 2008 compared to 9 tonnes in the same period in 2007. Germany accounted for 40 tonnes and Switzerland for 42.3 tonnes.

Asian and Middle Eastern countries including Japan, Thailand, Egypt, Saudi Arabia and China also posted "significant" increases.

Bar hoarding by non-western markets grew 318 percent in the fourth quarter compared to 2007, said the council.

Analysts say investors are dominating the market rather than speculators, a trend mirrored by the shift in trading methods.
AFP PHOTO / Sebastian Derungs
An employee places a gold bar in a furnace on 6 April 2009 at a plant of gold refiner and producer Argor-Heraeus in Mendrisio, in the southern Swiss canton of Ticino.

Gold was typically traded through 'paper' accounts in recent years.

"With the possibility that banks would go bankrupt, people now want to have the gold physically to put it under their bed, in their vault or whatever," said Oberli.

"At least they will still have it in the worst case scenario," he added.

Some of these metal account holders are also moving their holdings into exchange-traded funds (ETFs), or securities which are backed by physical stocks of gold, said Julius Baer analyst Stefan Wieler.

While holdings in metal accounts are booked on bank balance sheets, and therefore are vulnerable if a bank were to shut down, gold ETFs offer the added security of actual gold stocks, he explained.

That accounted for the "exponential" growth of such ETFs, said Wieler.

Yet, despite the boom, the gold market in India, traditionally the biggest, is slowing. It primarily uses gold in jewellery and is very price-sensitive, explained Oberli.

"When prices move up you have no orders. When the prices come down you have 10 telephone calls a day," he said.

Argor-Heraeus's business suggests that demand for gold watches and jewellery is falling.

The firm produces semi-finished parts such as gold casings and segments of watch straps for Switzerland's biggest luxury watchmakers.

"We have not had to cut any jobs because our workers were flexible enough to move into gold bar production," said Marco Quadri who heads the industrial products division.
AFP PHOTO / Sebastian Derungs
Gold samples for chemical analysis are seen on 6 April 2009 at a plant of gold refiner and producer Argor-Heraeus in Mendrisio, in the southern Swiss canton of Ticino.

Meanwhile, demand remains high for gold bars.

A 2009 survey by precious metal consultancy GFMS forecast that the "positive investor sentiment" would "drive the bull market into a ninth consecutive year" and could push prices up to USD 1,100.

GFMS chairman Philip Klapwijk said prices decreased from February highs, but could still regain momentum.

"It's far from game over for investors and it will be that crowd which sets the price alight."

Analyst Wieler predicted that since gold was regarded as an "insurance policy," people were unlikely to drop their holdings even if prices fell by 30 percent from the peak.

"I think we will still see inflows even if the growth slows down a bit this year. And the fact is that, if gold prices weaken, buyers from emerging markets are likely to come back," said Wieler.

Text: AFP / Hui Min Neo / Expatica 2009

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