Got Vault?

by RJ Wilcox on August 9, 2013

Fort Knox

Intro

We begin this week’s recap with 3 assumptions we think are reasonable.

You construct a vault to safely store your valuables.

Additionally, if you don’t have any valuables, or are not expecting to acquire any in the near future, you don’t build a vault.

And finally, there is a strong correlation between the strength and security features built into a vault and the value of the items it is designed to hold.

Fort Knox

Fort Knox is arguably the most famous gold vault in the world. The facility was built to store gold confiscated from U.S. citizens by President Roosevelt during the Great Depression via Executive Order 6102 in April 1933.

The presidential order forbade “…the hoarding of gold coins, gold bullion, and gold certificates within the continental United States.”  Simply put, it made holding gold by any person, business or institution, except for the U.S. government, illegal

The order required gold owners to surrender all but a small portion of their gold to the Federal Reserve by May 1, 1933, in exchange for US$20.67 per ounce.  Shortly thereafter the government devalued the dollar by increasing the price of gold for international transactions to US$35.

This was a pretty shabby bit of business, but we won’t go down that road today.

More relevant to our topic is that the U.S. government collected so much gold from this operation that it necessitated the construction of a fairly large vault to store it all.  Currently, the U.S. Treasury reports that Fort Knox holds 4,578 tonnes of official U.S. gold reserves, worth roughly US$200 billion.

As the name implies, Fort Knox is literally a fortress. Its walls are made of granite with a blast-proof door weighing 22 tons.  Each door has separate combinations that have to be entered by several different depository staff.  Then there are an assortment of alarms, video cameras, razor wire, electric fences, and mine fields.

Just in case this isn’t enough of a deterrent, it was built within a U.S. Army base, protected by special U.S. Mint Police supported by unmarked Apache helicopter gunships, tanks, armored personnel carriers, and about 30,000 soldiers.

It is somewhat curious that construction of Fort Knox didn’t begin until 1936, three years after the gold confiscation.  Instead, it was completed, rather hastily, in December of the same year.  It’s curious because one would think they should have given the safe storage idea some thought beforehand!

Nevertheless, it highlights the point that large gold flows and large secure vaults are birds of a feather.

With this in mind, let’s fast forward to the present and some recent stories featured on our sites News Corner about curious happenings in the present day gold market.

If You Build It, It Will Come

The following headlines have appeared in just the past two months:

“Deutsche Bank Opens 200 Tonne Gold Storage Facility in Singapore”

“UBS Starts Gold-Vault Service in Singapore Amid Bullion Rout”

“ANZ Bank Opens 50 Tonne Gold Vault in Singapore”

“Silver Vault for 200 Tons Starts in Singapore as Wealthy Buy”

There are also these relatively recent stories from 2012:

“Hong Kong Completes Largest Gold Vault in Asia”

“Barclays’ new vault opens for gold”

The Hong Kong vault was built by its current owners, Malca-Amit Global, and has a gold capacity of 1,000 tonnes. They specialize in the storage and transport of valuables of all kinds.  To put this private vault’s size into perspective, it has the capacity to house 22% of the gold reportedly held in Fort Knox.

Malca-Amit also has five gold vaults in The Singapore Freeport (TSF). Natural Le Coultre S.A. (NLC), a company established in 1859 in Geneva Switzerland, built TSF.  Like Malca-Amit, NLC is one of the largest specialists for storage, packing, and shipping valuable items in the world.

The Singapore Freeport is located adjacent to a runway at the Changi International Airport. The facility is 270,000 square feet in size and used to store valuables such as art, wine, jewelry, and precious metals. Some refer to the facility as Singapore’s Fort Knox.

TSF has become such an attraction that there is a second phase planned that will increase the storage capacity to 538,000 square feet and coincidentally Malca-Amit has indicated that they are considering adding more vault space.

If you are a regular follower of the gold market, or a repeat offender in reading our weekly recaps, you are undoubtedly familiar with the western gold flowing east narrative. The recent construction of these massive vaults in major Asian financial centers is just one more piece of evidence in support of this notion.

It is intriguing to note as well that major western banks are leasing sizeable chunks of this new vault space to service wealthy Asian clients who appear to be amassing gold and other valuables at an accelerating rate.

We thought it would be instructive to tally up some of this reported new vault space.

Bank

Facility

Tonnes

Deutsche Bank

Malca-Amit / Singapore Freeport

200

UBS AG

Malca-Amit / Singapore Freeport

  60

ANZ Banking Group

Malca-Amit / Singapore Freeport

  50

JP Morgan Chase

Malca-Amit / Singapore Freeport

  100*

Total

 

410

* I searched extensively to find information on how much vault space JP Morgan has leased. Unfortunately I did not find a source. Therefore I hazarded an educated guess by averaging the leased space of the other three banks; I think this is probably a conservative estimate.

As mentioned earlier, Malca-Amit’s Hong Kong vault has a capacity of 1,000 tonnes.  In addition, their 5 vaults in Singapore are able to store a combined total of 1,000 tonnes.

With a total of 2,000 tonnes, these two locations alone could hold 44% of the Fort Knox gold.  Or, they could hold all of the 1,300 tonnes of gold that has allegedly disappeared from the Bank of England vaults plus all of the gold (i.e. 650 tonnes) that has been liquidated from gold ETFs since 2012.

This seems like a lot of space, and it is, yet Malca-Amit plans to expand and construct additional vault space in Beijing, Shanghai, and Bangkok.  However, it’s not just Asia that’s seeing increased demand for private vault gold storage.

As indicated in one of the articles above, Barclays has recently completed a new vault in London. It is the first new vault built, in arguably the world’s most important gold trading hub, in five years.  In addition, Deutsche Bank is reported to have a new vault under construction in the city while Brinks is considering building one as well.

This reflects the fact that private parties in the west are also increasing their physical gold holdings substantially.  Like their eastern counterparts, they are seeking a private storage solution where they can enjoy the security of having gold allocated in their name and segregated in its own separate and secure space.

 So What Gives?

This brief review of vault construction and expansion in just the last 2 years demonstrates a strong demand for physical gold storage across the globe.  It also suggests that Asian and western gold buyers alike are changing preference and choosing to take delivery and ownership of physical gold over holding paper claims (e.g. futures and ETF’s).

As we suggested earlier, you don’t build a vault unless you have something, or are planning to have something, tangible to put in it.

We have commented at length over the last several weeks that Asia is accumulating gold at an extraordinary pace and that much of this gold is originating in the west. In general, Asian cultures are big on long-term planning and thus the current wave of gold vault construction may be ‘tipping their cap’.

It is also evident that private gold ownership is on the rise in the west. The building and leasing of vaults on a large scale is just one more piece of evidence for this historic and unfolding trend.

And that’s it for now…

I hope you have enjoyed this week’s recap. As always, we include our Comparative Analysis Table below for your review.  It tracks many important metrics critical to evaluating gold mining companies.

Also, check out the News Corner on our website where we compile and summarize each day’s best news stories related to the gold market, gold mining and the share markets.

(Click the image to enlarge)

Gold Miners Comparative Analysis Table

Regards,

RJ Wilcox

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