Deep in the Swiss Alps, close to the town of Amsteg, is an old army airstrip suitable for landing long-range jets. It is owned by a company that offers gold-storage services in the army tunnels, which are dug into the rocks. The tunnels were put up for sale after the Cold War ended and a few private companies turned them into vaults: a place for rich people to hide money. The nearby landing strip can take Gulfstream and Falcon jets from all over the world, and the service here is all cash. The Swiss gold-storage operations are independent from the banking system and don’t have the same obligation to report transactions to federal authorities. That makes them extremely attractive to the wealthy. But few of the locations match the opulence of this airstrip setup. Near the runway is a VIP lounge and a pair of luxurious apartments for clients. The lounge offers a place to sleep and eat if the clients don’t want to leave a paper trail of credit cards and passports at a hotel in town. The entrance to the office, which is protected by a guard in a bulletproof vest, is a small metal door set into a granite mountain face at the end of a narrow country lane. Behind two farther doors is a 3.5-ton metal portal and a maze of tunnels once used by the army.
Swiss gold storage operations in the Alps, like the one close to Amsteg, are prime locations for capital that wants to get off the grid. The other one is Singapore.
Most of the gold produced in the world transits physically through Switzerland. On an average year, the country refines about 70 per cent of the world’s gold, and with all the yellow metal coming and going, it’s close to impossible to say how much of it disappears during the process in these fine storage facilities in the Alps. The privacy is aided by the fact that trading in the Swiss gold market is exclusively over-the-counter, and there are no central exchanges or trading venues.
And so capital moves constantly around the world and it is driven by human nature either running into something (boom) or fleeing it (bust). No market would move without capital flows domestically or internationally.
The Swiss wisely kept their currency when the EU came about and are not exposed to the euro debacle, which is an interesting example of capital moves. The euro hit the all-time high shortly after its launch at the start of 1999, which marked the euphoria how it would crush the dollar. It began to slide shortly thereafter, falling to a record low of 82.3 US cents in October 2000. This is when the capital inflows to the USA began over fears of the euro. The capital fled Europe, and this was one of the reasons why the dot com bubble was so big.
Interestingly, history seems to repeat itself. The Eurozone is currently the number one place in the world with the greatest amount of capital fleeing than any other region worldwide. Externally, there is still a flight to the dollar-based assets globally.
The question is, why this is happening. To start with, the euro is a flawed creation with limited shelf life. And obviously capital knows that.
There is an important difference between how the EU and the US function. In the US, government bonds are the only financial instruments that bank can use as reserves (to borrow against and issue loans). The paper issued by member states doesn’t qualify. As result, Washington doesn’t really care about their finances.
In a striking contrast, there is no unified debt in Europe and so the EU in Brussels will stick its nose into budget of every country, like Italy lately. All EU members can print their own euros all right, they do not get them from the European Central Bank. It’s a local affair, limited to the credit worthiness of the particular country – and this is a crucial point to understand how the EU is different. Within Europe the capital is clearly flowing into Germany, and ultra-low yields on Bunds are the proof of that. Part of it is capital preservation – the big money knows that they will end up with deutsche marks, should the euro fold.
Maybe this is a good time to go back to gold - it is considered insurance with no credit risk attached. There is not another like it in the world. And it feels good when you hold it in your hand. You can print money as much as you like, but you can’t print gold.