U.K. FIRM PROFITS FROM GOLD’S RISE
Holding bullion still alluring and London remains place to get it
At Baird & Co’s gold refinery, boss Nick Hammond is sorting through a tray of scrap jewellery. Bracelets, necklaces, a horse pendant (called a “banger” because it is hollow, and could explode under high heat) and a military medallion dated 1895 are all destined for the furnace.
“It’s sad, but we can’t hold them back — they all go in the pot,” Hammond says, pointing out that Baird would have paid around £30,000 ($50,000) to pawn brokers and other dealers for the contents of the tray. Baird’s high-security factory, on an industrial estate in east London, is home to the U.K.’s only gold refinery.
The family-held business, which celebrates its 50th anniversary this year, is a supplier of gold bars to the Royal Mint and one of the U.K.’s biggest producers of gold wedding bands. It has just opened a showroom and vault in the Hatton Garden area of London, hoping to lure new customers into the world of gold. “If you want long-term exposure to gold, you have to make the case for physical gold,” said Hammond.
The yellow metal is famed for its status as a safe haven and a store of wealth in times of uncertainty, but is there really a growing demand for physical gold? And how are companies exploiting the opportunity?
Global demand for gold bars and coins rose 9 per cent in the first quarter of the year, according to the World Gold Council, despite a relatively flat market. London remains at the heart of the trade: in May alone, it cleared 20.8 million ounces of gold in transactions worth $32 billion. The exact amount of gold in the City’s vaults has always been a mystery, but next month the London Bullion Market Association will publish data on the gold its members hold for the first time.
With revenues of £665 million ($1.1 billion), Baird is accustomed to turning out gold bars, coins, jewellery, bespoke items and industrial products for a range of suppliers. Its new shop is an attempt to “build the brand” and take some of the complexity out of holding gold, Hammond explained. The product itself is not “over complicated”, he said, and the market is highly liquid — Baird, for example, will always buy back gold from its customers at a small discount. But finding a trusted supplier and knowing where to store it has been a problem.
“Armoured couriers won’t go to private residences,” Hammond said. “A lot of insurers won’t touch it. If they do, you’ll have to spend a lot on security.” Baird offers vaulting services and imposes stringent checks on its suppliers and buyers to comply with anti-money laundering rules. “Gold is very portable and unidentifiable — there’s no central depositary and it can be melted down,” Hammond said, explaining why the metal has always been prized by the criminal fraternity. “We are very, very cautious about our supply chain. [Buyers] have to show evidence of where their wealth came from or be prepared to discuss it.”
The fact that gold can be endlessly recycled is to the benefit of Baird, which buys primarily scrap gold. This is boiled up in vats of chemicals in the centre of its refinery — a Willy Wonka-type glasshouse of tubes and funnels that turns rough grain (or “cornflakes”) into sand and then into fine grain, which resembles tiny nuggets.
For the first time Baird is also looking at primary sources, such as miners in Africa, to supply gold.
Hammond described his firm as a “just in time” business; storing the metal is expensive, so it turns over product as quickly as possible.
“It’s a volume game,” he said. With margins so thin, Baird has to minimize wastage: “The last time we changed the doormat, we recovered £6,000 ($10,000) worth of gold,” Hammond claimed.
In investing terms, gold has no “yield”, as it does not generate interest. When the U.S. Federal Reserve puts up rates, as it has done recently, it often knocks the price of gold, because bonds and savings accounts become more attractive. Gold has slipped in the past month, though it is still up 6.5 per cent this year.
Joni Teves, an analyst at UBS, believes that U.S. rate rises will remain the “strongest driver” of the gold price for the foreseeable future, but that the metal is “trying to form a bottom around this level” of US$1,220 an ounce. Political uncertainty remains an important factor: “For those who are long [-term investors] in gold, it strengthens the argument for having it in their portfolio.”