By: Mark Macias
Eighty feet below the streets of Manhattan and 50 feet beneath sea level lies the world’s largest gold depository. Buried in New York City, on the island of Lower Manhattan, the US Federal Reserve Bank Vault contains roughly $86 billion dollars worth of gold.
The US government won’t reveal who has deposits in this vault, but it says the gold belongs to sixty foreign governments and central banks, and international monetary organizations. Only a very small portion actually belongs to the US government.
Security here is tighter than at many nuclear facilities. Everywhere are armed guards, who have honed their skills on the bank’s firing range. CCTV cameras, infrared sensors and other systems monitor every person’s move, and can alert guards to seal all areas and exits within seconds
The walls of the facility are steel-reinforced structural concrete, intended to be explosive proof, while the actual gold vault sits beneath other vaults in a hardened three-story bunker. Unlike your local bank vault, there are no doors leading into this gold depository.
Instead, visitors must pass through a ten-foot entryway, running inside a 90-ton steel-and-concrete cylinder frame, which rotates 90 ̊ when the airtight, watertight vault is opened.It is secured in place after two levers insert gigantic bolts back into the cylinder. If you’re having difficulty envisioning this, imagine pushing a cork into a wine bottle with metal bolts fastening it in place.
Once through this, bank personnel must release a series of time and combination locks to open the vault. No single person knows the entire sequence; rather, several know different parts of the system that unlocks the world’s reserves. Inside the vault, gold is stored in the form of bars shaped like bricks, stacked on wooden pallets as in any warehouse. Before each pallet enters the vault, it is inspected and weighed by a control group of representatives from three different departments: auditing, vault services and protection.
A member of each must be present before any gold is stored or removed, or anyone enters the vault. Collectively, the control group checks the purity and weight of every bullion bar before it enters; if approved, it is stamped with a serial number and purity measure, recorded on an accompanying manifest.
Ten years ago, the Federal Reserve Bank protected roughly 269 million troy ounces of gold, worth approximately $11 billion dollars. (A troy ounce is ten percent heavier than the avoirdupois ounce most people refer to). Today, with the price of gold now over $640 per ounce, analysts reckon that just one bar of gold is worth over $130,000 on the open market, and together, amount to nearly $100 billion.
You may wonder why we still need gold reserves in an era of digital banking. Doesn’t it seem like a waste of time, energy and even metal? After all, nobody is going to walk into a Mercedes showroom, order a convertible, and pay with a bar of gold.
Well, one answer is that gold is inflation proof, and has generally maintained its value throughout time. If you had invested in gold in January 2006, by the end of that year you would have made a profit of 23 percent, outperforming most US stocks, bonds, and commodities like crude oil. In 2005, gold investors enjoyed gains of 46 percent, and those with the prescience to buy gold in 2001 would have turned 140 percent over five years.
Gold reached a 26-year high of $732 an ounce on May 12th, 2006, but since then prices have tumbled as much as 25 percent, touching $546.40 an ounce two months after that peak. This year so far, prices showed signs of cooling, dropping a little over 1 percent during the first weeks of 2007, pretty much in tandem with the drop in crude oil prices. In London, gold dropped in January from a seven- week high as lower oil prices reduced the need for a hedge against inflation.
Mining analyst David Coates, of Ambrian Partners Ltd. in London, sees oil prices influencing gold prices in the near future. “Gold’s performance this year is symptomatic of the whole commodity picture at the moment.”
New York gold trader Carlos Perez-Santalla, president of Hudson River Futures, puts it more bluntly.“The crude weakness is eating into gold’s profits.”
But some metal analysts believe gold is poised for a climb.
“It seems that the consolidation that began last spring is now coming to an end, and the next leg of the bull market is beginning in earnest,” says Dennis Gartman, a trader, economist and editor of a financial newsletter out of Virginia.
One factor may be gold’s strength in currencies other than the dollar. In Euros, gold closed above 500 on January 24th, 2007 for the first time since August 14th, 2006. According to London analyst John Reade, of UBS AG, this encourages investors to buy gold.
So is the road to fortune paved with gold? Is gold the safest bet in an uncertain world or too speculative for the average person? The short answer is, it depends on what kind of investor you are.
Many investors buy gold not for its luster, but as a safeguard against the collapse of currencies or the international monetary system, on the assumption that gold would still be valuable in inflationary times. The usual way of doing this is through an exchange-traded fund, or in the form of a gold certificate, where the actual bullion is stored and protected by a bank.
Gold exchange-traded funds, or GETFs, are traded on most major stock exchanges. These funds are traded just like stocks, and assigned a ticker symbol, just like all other equities.The Gold Bullion Securities was the first gold exchange-traded fund traded under the ticker symbol GOLD. (To buy or sell any stock on any GETF, you must first know its symbol). GOLD was launched in March 2003 on the Australian Stock exchange. Since then, other GETFs have made public offers, including Streettracks Gold Shares, which was listed on the New York Stock Exchange in late 2004 under the ticker symbol GLD.
Since then, its share value has risen from just under $45 to roughly $64 at the end of January 2007. Financial advisors say GETFs represent an easy way to speculate in gold without the hassle of buying bullion directly – though investors should bear in mind the annual storage, insurance and management fees, plus a small commission charged by the advisor for buying or selling the GETF.
For currency traders, gold serves as a surrogate currency, to be traded against others. When any currency is expected to decline against another denomination, investors can buy gold before the decline and sell it afterwards for a profit. Essentially, these speculators are predicting a future price of gold and analyzing market trends that they believe will guide the direction of future prices. This is the same strategy pursued by central banks, financial institutions and asset allocators – who all buy gold as an investment – not to mention people concealing their wealth, known as cacheurs, from the word cache.
Like all investments and commodities, supply and demand is what moves the price of gold up and down. This is largely determined by politics, economics and human psychology rather than changes in production or the demand for jewelry. Moreover, unlike other commodities which are extracted, used and eliminated, nearly all the gold ever mined still exists in the world, making hoarders and unloaders a factor in price fluctuations.
Taking a historical perspective, metal analysts say that no other form of investment has preserved its worth like gold. Most investments depend on political and economic stability to retain or appreciate their value, but gold is not only independent of such requirements but often does best in times of instability.
During wars and revolutions, citizens may fear their assets being seized or their currency becoming worthless. Gold is easy to hide and exchange for food or tangible assets that will hold their value when paper currencies are devalued.
During long periods of low or negative interest rates, when stagflation has taken hold, gold is one of the best places to preserve capital. And when national banks begin to collapse, gold has proven depression-proof. In the 1930s, a bank run happened in the United States, leading President Roosevelt to outlaw the holding of gold by American citizens. But be careful before you jump into any investment schemes.
Many high-yield gold investment programs are actually pyramid schemes of no real worth, or email scams encouraging buyers or sellers to invest in Metric Tonne gold deals, which claim to possess more gold than the US Federal Reserve. There are gold dust sellers who encourage investors to buy a trial quantity of gold that will eventually lead to more. And shares of mining companies with no gold reserves have been traded on exchanges. Many financial consultants advise clients to spread their risk by investing in gold mining mutual funds. And of course, there will always be counterfeit gold coins circulating, waiting for unsuspecting buyers.
Yet you needn’t come from an aristocratic or wealthy background to see what tens of billions of dollars worth of gold looks like. You merely need to travel to Liberty and Nassau Streets in Lower Manhattan and join a guided tour of the Federal Reserve Bank of New York, to see how the world’s wealth is stored in one location – but expect to be watched every move you make.