Renewed inflation concerns, a weakening dollar and allegations of manipulation in the silver market are rendering many wealthy investors ultra-bearish and sending them hunting for physical gold rather than gold derivative investments. Others are seeking to hedge their riskier bets.

**Note, “Trader” Mark Leibovit a favorite of Moneytalks issued a sell signal for gold last week. – subscribe to his service HERE

Bearish trustees dig deep for gold and diamonds

Last week the price of gold broke records, passing $1,400 per ounce, up 25% so far this year. But, for some, investing in gold through exchange-traded funds and other products is not safe enough. They crave physical gold.

Iain Tait, partner at UK wealth adviser London & Capital, received requests from separate trustees in Jersey and Guernsey for physical diamonds and gold bars last week. He said: “There is the feeling that ETFs are the home of the speculator while bars and real diamonds are the domain of wealthy families trying to protect themselves.”

A lawsuit filed last week against global banks JP Morgan and HSBC by investors in the US, over an alleged conspiracy to manipulate the market for silver futures, was the latest news to take the shine off the gold derivatives industry, wealth managers said. JP Morgan did not return calls for comment. HSBC declined to comment.

Ned Naylor-Leyland, partner at Cheviot Asset Management, said a lack of trust in banks and the spectre of counterparty risk was a problem. “I hear Swiss banks are turning out their vaults for clients wanting to take home their gold. Trust is wearing thin.”

The suggestion of manipulation followed assertions that paper claims on gold far outweighed the physical asset. This year, Jeffrey Christian, managing director of commodities market researcher CPM Group, said a hundred times more gold and silver changes hands each year than is produced or used.

According to the World Gold Council, global demand for gold bars climbed by a third between the second quarter of 2009 and the same period this year, while demand for gold ETFs and similar products rocketed 414%.

Nicholas Brooks, head of research and strategy at ETF Securities, said concerns that many ETFs are not backed by physical assets are overblown. He said: “Our ETFs are 100% backed by physical gold in vaults in London. There are other gold investment vehicles listed globally that do not provide the same level of detail on their holdings or independent audits and this may be a factor fuelling some of the conspiracy theories.”

Some investors are put off by the idea that gold ETFs can contain other financial products, such as swaps or derivatives, even if just a small percentage of their weighting.

Angus Murray, chief executive of London-based Castlestone Management, said: “Physical gold is simply metal without any other financial product or structure. My clients want to own an unleveraged real asset.”
He added: “If the ETF doesn’t have the ability to list additional shares there can be a pricing issue. Why complicate it?”

Fearing the precious metal is in danger of over-reaching itself after its big gains this year, some warn gold is approaching bubble territory. Andrew Thompson, Kleinwort Benson’s head of advisory portfolio management, said: “In the short term, gold is looking ‘overbought’ and some sort of correction is all but inevitable. If it does form a bubble it will burst, as bubbles do.”