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Apr 12, 2009
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Refiner reaps investors' return to solid gold

Apr 12, 2009

MENDRISIO, Switzerland, April 12, 2009 (AFP) - 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 has slumped as Swiss and Italian watchmakers trim production.

Meanwhile, investors are hoarding gold bars, an age-old insurance in times of war or calamities, sending demand for the group's bullion production soaring.

"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 manpower 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.

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 this week, employees were embossing five gramme ingots (0.176 ounce) ordered by Germany's Commerzbank, as well as packing boxes of 100g (3.527 ounce) pieces for Switzerland's UBS.

Such smaller bars are particularly popular because they are more accessible to small investors, said Oberli. At current market prices, a 100g bar is worth approximately 3,100 dollars.

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

In Europe, demand surged to 113.7 tonnes in the fourth quarter of last year compared to just nine tonnes in the same period in 2007. Germany accounted for 40 tonnes and Switzerland for 42.3 tonnes.

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

Bar hoarding by non-western markets jumped 318 percent in the fourth quarter compared to a year earlier, said the council.

Analysts say investors are dominating the market rather than speculators, a trend mirrored by the shift in trading methods.

Gold was typically traded through 'paper' bullion 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 go bust, 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 dropping off.

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.

Meanwhile, demand appears unabated 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 propel prices to the 1,100-dollar mark.

GFMS chairman Philip Klapwijk said prices may have pulled back 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.by Hui Min Neo

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