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ATM for the new gold rush

by Kevin Rafferty

HONG KONG — The 21st-century version of the Gold Rush is becoming so sophisticated and convenient that soon all you will have to do, if you live in the right place, is put your card in the normal slot of a special ATM machine, punch in your password, and out will tumble not boring paper currency but rather gold bars (guaranteed genuine 24 karat), or gold coins of Krugerrands, Kangaroos or Maple Leaves.

Last week a gold ATM opened in Berlin, one of more than a handful of “GOLD to Go” (registered trademark) dispensers springing up in major cities worldwide, including Frankfurt airport, Abu Dhabi, Bergamo, Madrid and Munich.

Thomas Geissler, chief executive of Ex Oriente Lux, the German company that owns GOLD to Go, says there will be 35 machines installed this year and “a couple of hundred” next year. The United States, in Florida and Las Vegas, will get machines next month. China and India have expressed interest and are on the list for next year.

Yes, it is something of a gimmick and, yes, you will pay a premium of 20 percent-plus over the spot price of gold, adjusted every 10 minutes, for the pleasure of being able to buy instant gold.

Gold ATMs should come with a warning for governments and politicians: Their arrival marks a landmark of dissatisfaction with governments and their paper money that has sent the precious metal soaring to new highs of more than $1,340 an ounce.

Gold bugs are clearly in the ascendant, claiming that the precious metal won’t rust or rot or be eroded by inflation or lose its value in currency wars. As for the U.S. dollar, it surely won’t buy what it did in 1929, but one ounce of gold, $20.64 in 1929, will. Japan’s gold reserves are 765 tons, or eighth in the world.

Gold bugs see $1,500 or $2,000 as the next stopping point on the road to the sky. Supporters of the metal got comfort when Soros Fund Management was seen as a big recent buyer of gold. George Soros’ comments in Davos in January should give rise to some caution. He described gold as “the ultimate asset bubble,” but that buying at the start of a bubble is “rational.”

The London-based GFMS metals research and consultancy concern, which publishes an authoritative review of gold trends, remains bullish on the metal. Its chairman, Philip Klapwijk, noted last month that gold had lived up to its reputation as “a safe haven in troubled times.” He added that GFMS remains bullish: “We’ll probably get a fair bit of profit-taking as we head into the new year, but I wouldn’t take that as a sign that the party’s over. Further gains in 2011 are far from out of the question.”

What is remarkable is that the rise in gold has been so fast and marks such a turnaround from a few years ago when governments were selling gold. Until 1980, gold comprised about 60 percent of global official foreign exchange reserves; by last year, gold’s share had fallen to about 10 percent.

Britain set a trend in 1999 when it declared that it would be selling half of the country’s gold reserves, which sent prices of the metal to a 23-year low of $250 an ounce for those sales.

Other countries followed, though members of the eurozone still hold 58 percent of their reserves in gold, far higher than the 15 percent target set by the European Central Bank. Having large holdings of gold does not guarantee h a strong economy. Portugal, with 80 percent of its foreign exchange reserves held in gold, stands out.

One of the factors keeping the gold price low over the past decade has been annual sales of 440 tons a year by central banks. One of the factors sustaining the gold price now is that central banks are likely to be small net buyers this year.

Even today, most gold is used not for finance or investment but for making jewelry, which accounts for about 78 percent of the world’s gold. Industries, such as electronics, and medical and dental uses account for another 12 percent.

China overtook South Africa in 2007 as the world’s largest producer of gold. Last year it produced about 314 tons of the metal or 11.8 percent of the world’s total production of 2,572 tons. South Africa, which in 1980 accounted for more than half of world production, fell to fourth place equal with Russia at 205 tons, behind Australia (227 tons) and the U.S. (216).

Official gold currency holdings also show a few countries holding large amounts of gold. The U.S. is by far the biggest holder with more than 8,130 tons. Germany is far behind with 3,407 tons, then the International Monetary Fund (2,967 tons), Italy, France and China.

China holds 1,054 tons of gold, but this comprises less than 2 percent of its total forex reserves. If China wanted to bring its gold reserves up to the world average, it would need to buy 7,000 tons of the metal or three times the annual world production. Did Beijing make an error in investing its current account surpluses in U.S. debt instruments rather than gold? That may depend on whether the world’s politicians continue to make a mess of their economies and their currency management.

Gold does not rust or rot, but it costs a lot to store, is difficult, heavy and costly to move around, and pays no interest. Annual production is so small that the total gold supply is worth less than 3 percent of global forex reserves, crimping hopes of gold becoming the main reserve in a modern economy.

On the other hand, Kenneth Rogoff, former chief economist for the IMF and a Harvard professor, pointed out recently that the U.S. dollar is still the issue: “With soaring deficits and a rudderless fiscal policy, one does wonder whether a populist administration might recklessly turn to the printing press. And if you are really worried about that, gold might indeed be the most reliable hedge.”

Some experts are already referring to the new gold machines as vending machines, suggesting it will be as easy soon to buy gold as to go out late at night for a soda or fresh packet of condoms. But it will be some time before the gold machines are as ubiquitous as that. There is the little matter of security.

The owners boast that the bulletproof machines are “backed by the security of a Swabian Fort Knox,” so you couldn’t plonk them on every other street corner or local bad lads might be tempted to winch one up and take it away, as happened in Hong Kong not so long ago with a regular ATM.

It would be best if the gold ATMs are used to buy those slightly unusual presents for relatives who have everything. If they really become part of a 2011 Gold Rush, we will all be in trouble.

Kevin Rafferty, formerly in charge of the Financial Times’ coverage of Asia, is editor in chief of PlainWords Media.