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The golden business of gold vaults

Mark Garrison Jan 10, 2013

The golden business of gold vaults

Mark Garrison Jan 10, 2013

Gold prices are down from their 2011 peak, but still more than quadruple the value a decade ago. Investors skittish about currency values or other uncertainty have flocked to gold in recent years, meaning demand for high-security gold storage is soaring. The growing hunger for gold is driving a shift in where it’s stored, with growth happening outside established centers in Zurich, New York and London. This is proving to be good news for high-security transport and storage companies.

A beneficiary of these trends is housed in a simple brick building in Wilmington, Del. On a fairly busy road near an auto parts store and pharmacy, the Delaware Depository Service Company’s offices are as unremarkable as its facade.

It’s not until one reaches the vault that it becomes evident that billions of dollars in gold from investors around the world are stored there. As one would expect, visiting the vault is quite a production. Six bulletproof doors lead into the vault. For added security, each must close before the next can open, creating a sort of airlock effect. Metal detectors sensitive enough to detect dental fillings keep watch over the treasure.

Inside, there’s gold in every form: coins, plates and bars of all sizes. The 70-pound bars make a satisfying clink when stacked. The metal is everywhere, but it’s not strewn about like in a dragon’s lair. It feels more like a Costco, but with shelves piled high with bullion instead of family-size groceries.

The company says its holdings have grown tenfold in the last decade. The Delaware location is a factor.

“People choose Delaware Depository because we are not in New York City,” says managing director Jon Potts. “Especially since 9/11, that’s become a more important issue.”

Fear of terror attacks and natural disasters aren’t the only reason investors are choosing other cities for storage. Many vaults in established gold storage areas are full. It’s less a problem of physical space than of insurance coverage. Insurers will only cover a certain dollar amount per location. The growth in gold’s price is pushing policies to their limits, meaning new facilities have to open elsewhere.

Investors tend to want their gold stored close to home. That means much of the growth in gold storage is happening in Asia.

“The economic development of Asia is just creating wealth at a sometimes astonishing rate,” says Richard Sylla, an economics professor at New York University’s Stern School of Business.

Investors aren’t the only customers for gold storage. With more wealthy Asians able to afford luxury goods, jewelry makers now store more of their raw material in the region. Keeping gold there cuts transport costs and allows products to come to market more quickly.

Malca-Amit is one of the companies catering to Asia’s new rich. It transports and protects valuables for clients worldwide, including billions in gold. It has a new lockup in Hong Kong and is expanding its facility in Singapore.

“As far as we can see, this is going to be a growing business,” says Hong Kong-based CEO Nigel Paxman. “We see the demand for gold increasing, so the requirements for vaults will increase.”

He spoke during a visit to New York, where growing business has Malca-Amit’s offices overflowing until it can get more office space.

New Asian wealth isn’t the only driver of storage growth in new locations. At its core, a precious metal investment is a bet on political and economic instability. Many gold investors expect the worst, so they value diversity in storing their bullion.

“The best way to do that is to locate your gold in different geographic locations and different political systems,” says James Turk, founder of the popular online marketplace GoldMoney.

Turk’s firm just started storage in Singapore, a country with ambitions as a gold hub. He says clients put $16 million in assets there in less than four weeks.

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