By Ben Baden

Posted: May 18, 2010

MENDRISIO, Switzerland

HERE, in a corner of Switzerland where Italian is spoken and roughly one-third of the world’s gold is refined into bars and ingots, business is booming. Every day, bangles, bracelets and necklaces arrive in plastic bags — from souks in the Middle East, from pawn shops in Asia and from corner jewelers in Europe and North America.

“It could be your grandmother’s gold or the gift of an ex-boyfriend,” said Erhard Oberli, the chief executive of Argor-Heraeus, a major refiner here that processes roughly 400 tons of gold a year. “Gold doesn’t disappear.”

Amid a global frenzy fed by multibillion-dollar hedge funds, wealthy speculators and governments all rushing to stock up on the precious yellow metal, the price of gold briefly surpassed $1,100 an ounce on Friday, a record high.

Long considered the ultimate refuge for nervous investors, gold has climbed as the dollar has steadily weakened, budget deficits have expanded in the United States and Europe, and central banks have continued to pump trillions of dollars into weak economies, creating fears of another asset bubble that will ultimately pop.

“It’s not that gold has changed, but gold buyers have changed,” said Suki Cooper, a precious-metals strategist for Barclays Capital. “It’s a structural shift we’re seeing on the investing side, from Asian central banks right down to individual investors buying ingots and coins.”

“Gold’s appeal has broadened,” added Ms. Cooper, who predicts that it will hit $1,140 an ounce by the second quarter of next year.

Indeed, last month, Harrods, the 160-year-old London department store, began selling coins as well as gold bullion ranging from tiny 1-gram ingots to the hefty, 12.5-kilogram, 400-Troy-ounce bricks that are so often featured in movies and stocked inside the vaults of Fort Knox. Harrods’s lower ground floor, where the gold is peddled, has been packed with interested shoppers.

“The response has been astounding,” said Chris Hall, head of Harrods Gold Bullion. “Bars are definitely more popular than coins. The 100-gram is the most popular.”

IN the United States, ads promising high prices for gold are regular fodder for late-night television spots, while buyers are setting up tables at shopping malls or hosting gold-buying gatherings at private homes — like recession-era Tupperware parties.

“Everyone and their grandmother has a sign out saying, ‘We buy gold,’ ” said Ron Lieberman, the owner of Palisade Jewelers in Englewood, N.J. He estimates that 10 times as many people come into his store to sell gold now as when the metal was selling for $300 an ounce at the beginning of the decade. “I hear people come in and say gold is going to $2,000.”

Jewelry store shoppers aren’t the only ones forecasting lofty prices. Jim Rogers, an investor who has made his name investing overseas and in commodities, predicted to Bloomberg Television last week that gold might reach $2,000 an ounce — prompting a rebuke from Nouriel Roubini, an economist who gained attention for his early warnings about the global economic crisis. At a conference in New York on Wednesday, Mr. Roubini described Mr. Rogers’s forecast as “utter nonsense,” saying that there aren’t any inflationary or economic pressures that would drive the price of gold to $2,000 an ounce.

Even the most bullish of gold lovers were surprised last week when the Reserve Bank of India stepped in and bought 220 tons of gold from the International Monetary Fund for $6.7 billion, a sign that other central banks might move away from dollar-denominated assets like Treasury bonds in favor of the precious metal. India’s huge purchase means that gold will now account for about 6 percent of India’s $285.5 billion of foreign exchange reserves — up from the previous level of about 4 percent.

“We have money to buy gold,” said Pranab Mukherjee, India’s finance minister. “We have enough foreign exchange reserves.”

On Thursday, Sri Lanka’s central bank disclosed that it, too, was buying gold, in a trend that could hurt the United States over time because it needs foreign bond buyers, especially central banks, to finance its growing debt. Gold closed at $1,095.10 an ounce on Friday, down from its intraday high but up nearly 5 percent for the week.

Adjusting for inflation, gold would have to top $1,885 to set an all-time record.

China has already doubled its gold reserves over the last six years, but the Indian move underscored how even the most traditional investors are shifting a portion of their assets into bullion.

“I have never been a gold bug,” Paul Tudor Jones, the prominent hedge fund manager, told his investors last month. “It is just an asset that, like everything else in life, has its time and place. And now is that time.”

Over all, in the second quarter of 2009, consumption of gold for jewelry plunged 20 percent, while investor demand for gold increased 51 percent, according to the World Gold Council.

THE Harrods gold line is made by PAMP, a rival Swiss refiner down the road here from Argor-Heraeus, in the nearby town of Castel San Pietro. And demand for bars weighing 100 ounces or less for individual investors is up 80 percent, said Marwan Shakarchi, the chairman of MKS Finance, a Geneva company that owns PAMP.

Inflows of old gold jewelry and individual investor sales are especially strong in the United States and Western Europe, a new phenomenon for MKS, Mr. Shakarchi said. In the past, hoarding gold as an investment was much more popular in the Middle East and Asia. “Europe and the United States are our emerging markets,” Mr. Shakarchi said.

In addition to high anxiety about the future, recent political trends may also be playing a part in the global gold fever. With a crackdown on tax havens worldwide and Swiss bankers handing over the names of wealthy American clients to authorities, some experts say rich people now prefer an investment that can easily be hidden from the prying eyes of tax collectors.

“In Europe, people want physical gold to store themselves, with no documents,” said Bernhard Schnellmann, director for precious-metal services at Argor-Heraeus. Often, the company doesn’t know the ultimate destination of the bars it makes, only the identity of the bank in Zurich or London that is handling the order.

The region surrounding Mendrisio has dominated gold refining for decades, profiting from its close proximity to northern Italy — which has a long tradition of jewelry-making and cheap labor — as well as from Switzerland’s own reputation for financial stability and discretion. The Swiss government has also nurtured the business, guaranteeing gold assays for purity and carefully regulating the industry.

One of the 100-gram bars that is produced here just about fits in the palm of your hand, with a satisfying metallic coldness that belies its $3,500 price tag. The standard 12.5-kilo, 400-ounce brick, on the other hand, is a monster, straining the wrist as well as the imagination: just one of these thick bars commands a higher price than a studio apartment in Manhattan.

Although India is now a far bigger consumer than Italy of gold for jewelry, the region around here has retained its distinctive status as the gold workshop of the world, with ore arriving from South Africa along with the old bracelets and necklaces destined for the crucible.

“If you give somebody a ton of gold, you don’t have to worry about it in Switzerland,” said Mr. Oberli, the Argor-Heraeus chief executive. Efficiency, another Swiss virtue, and speed are of the essence in the gold business, because prices change quickly and buyer and seller want to lock in their order quickly, Mr. Oberli explained.

“Everything that comes in has to go out,” he said. “It’s not our material.”

Perhaps as a result, the gold-refining fraternity is secretive, with verbal discretion as much a part of the culture as the high concrete walls that surround Argor-Heraeus and the metal detectors workers pass through when they go home for the day.

“Everybody is afraid someone else is chasing their customers,” said Mr. Oberli. “The banks don’t want us to know.”

Mr. Oberli is wary of walk-in clients and accepts orders from mines only when he can vouch for the origin of the ore, fearing “conflict gold” from rebel-held areas in Africa and elsewhere.

ARGOR-HERAEUS makes sure that even the tiniest amount of the precious metal doesn’t disappear during refining. Gold dust from the soles of workers’ and visitors’ shoes is scooped up on special mats when they leave. And, annually, the overalls that employees wear during manufacturing are burned to recover the smallest fleck.

At the airport in Zurich, where there are special vaults to hold gold, shipments of jewelry arrive daily on early morning flights before making their way here via a twisty, three-hour journey through the mountains on tightly guarded trucks. After the jewelry is unloaded, gold ingots, bars and other forms of bullion — already stacked like cordwood along the sooty corridors of Argor-Heraeus — are sent back to Zurich in the same trucks.

“The truck never drives back empty,” said Mr. Oberli. “Time is so important because the value of the material is so high.”

Mr. Oberli is also confident that he is running a business that, even in the middle of one of the worst economic downturns of the last century, is relatively recession-proof and always of interest to investors.

“Gold has been around as an investment for 6,000 years,” Mr. Oberli said. “When there is no alternative, it’s there.”

Before teaching at the American Numismatic Association Summer Seminar, at the end of June I purchased copies of Making the Grade by Beth Deisher and Grading Coins by Photographs by Q. David Bowers to use for the beginning grading class.

I wished to demonstrate to my students that the criteria for particular grades have changed with the publication of each major grading reference from Brown & Dunn, through Photograde, the ANA Grading Standards for United States Coins, Making the Grade and now the new Bowers.

Guess what? One of the best kept secrets and a source of confusion for beginning collectors regarding the way professional dealers and grading services view the uncirculated grade has finally been exposed in very clear language. While reading the introduction of Grading Coins by Photographs, I came upon these statements: “the interpretation of Uncirculated or Mint State is more liberal than it was 30 or 40 years ago” and, “Today, such coins that used to be graded About Uncirculated (AU) are now often graded as MS-60, MS-61 and MS-62.”

I couldn’t believe it.

Although this fact was nothing new to me, I was shocked to see it expressed in print. The truth is finally out in the mainstream as exposed by no less an authority than Dave Bowers in association with leading numismatic grading experts.

Has what you just read registered? Hallelujah. The gate is open, the muzzle is off and the dog is out.

Many coins that are AU by the old standards are now considered Unc.! Let’s examine this situation to see how it may affect you and your collecting habits.

The word “uncirculated” itself is problematic. For many, the word implies that a coin never circulated in commerce; yet in order to grade properly, you must forget this concept and judge each coin on its own merits.

I have personally picked a flawless $1 gold coin from a pile of assorted coins, dirt and debris dumped on my desk from a rotting black change purse.

As soon as that coin was carefully removed, it became a gem uncirculated specimen with no marks, no hairlines, and blazing full mint luster even though it had definitely circulated. How does that happen? You might be interested to know the rest of the story.

After selling it to an investor (her first gold coin purchase), the coin was returned in a week for a refund. She had showed her purchase to several dealers in order to satisfy herself of its grade. It came back to me as a hairlined AU-55.

Grading is evolving and will continue to evolve. Many reading this column remember when the grade “about uncirculated” didn’t exist.

Years ago, as soon as an uncirculated coin showed signs of wear, it was graded extremely fine. Let that sink in and visualize how attractive an extremely fine coin once was. Even coins graded very fine at the time had much of their mint luster remaining. That was in the past; but it does illustrate how much standards can change over generations.

Long ago, it was easy to determine if a coin was uncirculated. Uncirculated coins had no trace of wear. I can remember a case where a major auction house threatened to sue us for grading a $1 gold coin AU-58. The firm said they had sold the coin to the consigner as Choice Uncirculated (MS-65 at the time) and it deserved to be auctioned at the same grade when he wanted them to sell it.

The coin in question was a slider. It had nice fields and luster but there was friction wear on its high points. It possibly resides in an MS-63 or MS-64 slab today, depending on its eye appeal. Soon after, another auction firm started using the term “cabinet friction” to describe similar “uncirculated” coins with a trace of friction wear! You see, a coin was uncirculated if you missed the wear or ignored it and about uncirculated if you saw the wear and loss of luster or were a strict grader.

On Page 19 of Grading Coins by Photographs there is a photo of a $20 coin begging the question is it AU-58 or MS-64? I can remember a Federal Trade Commission court case with just such a range of grading opinions from the expert witnesses. I graded the coin technically. The knee, breast and wing had dull hairlined patches – traces of wear, therefore AU.

Other experts either didn’t see the wear or used market standards to reach grades of MS-63 or MS-64 for the same coin. This situation has not changed in all these years except that now leading numismatic grading experts finally have acknowledged as much in print.

As a matter of fact, the strict interpretation of uncirculated went by the wayside at least 25 years ago. I was there to see it happen and speak against it.

Why should “standards” change? There are many reasons, including the need by collectors to buy coins in the highest grades. Additionally, strictly uncirculated coins by the old standards are truly rare for some coin types.

I can still remember the astonishment I felt while holding the first Barber half dollar that we graded Choice Uncirculated (65) for our internal records at ANACS in Washington, D.C. The coin was a completely original, perfect gem that looked like a modern silver Eagle! I had never seen such a fully lustrous Barber coin before. It made all the halves I had previously seen at coin shows being sold as uncirculated look like dull sliders.

Thankfully, with the coming of the major grading services, today’s collectors can find coins as nice as that Barber relatively easily.

I teach my students that they must set their own standard for the uncirculated grade. They need to decide how much “rub” they will tolerate on a coin before it becomes about uncirculated to them no matter what the coin’s grade is on the holder.

Since grading is still evolving, the more conservative they are, the better. More people will wish to purchase their coins when the time comes to sell.

I use this example in class. The diamond trade has a standard of 10-power magnification to determine that a diamond gets a flawless rating. Nevertheless, when I go to buy a diamond and the dealer puts four “flawless” gems under his scope for me to view at 10X, I reach up and zoom to the highest power. Then I’ll pick the stone with the fewest defects at that power. The standard for “flawless” may change in the future; yet I’ll be covered.

It’s good to be a conservative grader when buying, but loosen up when you sell. I learned that lesson when one of the nation’s best graders and biggest dealers looked through a group of coins I offered for sale. He flipped the pages and stopped at a blazing AU-58 1917 Type 1 Standing Liberty quarter.

“How much?” he asked.

I told him he didn’t want that one because it was an AU.

“How much?” he insisted.

I gave him a price; he pulled it out and wrote a check. I’m sure that beauty became an MS-64 overnight. I was a strict grader with little knowledge of the coin market at the time.

I still maintain tight technical standards for uncirculated coins in my personal life; yet this view of coins must be relaxed in a grading service atmosphere.

Since 1986, the major grading services have strived to equate a coin’s grade with its value. A quick way to explain this rational is to compare two coins, a strictly original, fully lustrous, bag marked, truly uncirculated MS-61 with a lustrous, virtually unmarked, AU-58 slider. Everyone prefers the attractive slider in this case and it sells for more money.

Realistically, if you are patient, you can find identically graded uncirculated coins in slabs but one will have full luster and no rub while the other will have a market acceptable amount of wear. That’s what Bowers alludes to when he writes that the interpretation of uncirculated has become more liberal. Dealers accept a certain amount of friction on many of the uncirculated coins they buy and sell because there are not enough truly uncirculated coins around in some coin series to meet the demand from collectors.

A former colleague of mine once facetiously said let’s call every coin submitted for authentication genuine. That will make the counterfeiter happy, the dealer happy, and the customer happy. In much the same way, graders could call every coin with lots of luster uncirculated. This would make everyone happy.

Now, that’s a novel thought.

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