Last week we reported that according to a new analysis by UBS Wealth Management, the wealthiest investors around the world are preparing for a "significant" market crash by the end of next year.
And while that may be fine and good - after all, virtually no finance professional thinks the current, longest bull market on record, will continue beyond next year's election - one question quickly emerged: if the world's 0.001% are indeed liquidating in anticipation of a generational crash, just what are they converting their assets into? After all, if the crash is great enough, not a single risk asset will retain its value, while a DM sovereign collapse could promptly render paper money is worthless, as for gold retaining its value, yes maybe, but only if one owns far more lead to defend it.
The answer is to be found at 46 Park Lane, a few blocks from Grosvenor Square in Mayfair, which initially resembles a private club with wood-paneled walls and an ornate fireplace dating back to Britain’s Victorian era. But down a flight of stairs is one of the most secure rooms in London.
Built by IBV International Vaults, the steel-walled vault is scheduled to open next month and will cater almost exclusively to those billionaires looking for a place to stash their most prized possessions now that they have liquidated most of their assets.
“We’re getting calls every week about a room available for 2.5 million pounds ($3.2 million) a year,” Sean Hoey, managing director of IBV London, told Bloomberg referring to an apartment-size vault space. Ironically, the firm which also has 550 safe-deposit boxes on site and room for about 450 more, is betting on London’s reputation as a “safe haven,” even with Brexit... even if London turns into a socialist paradise under Labour's Corbyn.
Socialist UK or not, there is an unprecedented scramble by the ultra-rich to park their hard assets in a safe room in a safe city somewhere in the world. From London to Switzerland to the U.S., the rich are looking to store precious metals, cash and cryptocurrency. It has allowed IBV to open 6 locations already, with many more likely coming. For some, it’s the threat of a global recession. Others are avoiding bank deposits as negative interest rates force lenders to charge for holding cash. Many are concerned about natural disasters.
“We’ve seen extraordinary demand for safe-deposit boxes ever since we started offering them in 2015, and that demand has really gone up since the late summer,” said Ludwig Karl, a spokesman for Swiss Gold Safe Ltd., which operates high-security alpine vaults. “Most people say they are planning for difficult economic circumstances.”
The common denominator? Nobody wants to be connected to the system - or have their "net worth" represented by 1s and 0s in some cloud server - when the financial system comes crashing down at some point in the not too distant future; instead billionaires want to store their hard assets in a some place that nobody else can reach.
Sure enough, as we noted last week, a majority of wealthy investors are stockpiling cash in anticipation of a sharp market drop before the end of next year, with the founder of the world's biggest hedge fund, Ray Dalio, not helping the global mood when he captured the prevailing anxiety last month after he warned the global economy is under threat from an explosive mix of ineffective monetary policy, a widening wealth gap and climate change.
There is a similar scramble for the services offered by Sincona Trading AG, a precious-metals dealer with more than 1,000 safe-deposit boxes for rent in central Zurich. Three years ago, it had scores of empty boxes but now it’s renting about five a day, said Benoit Schoeni, a managing director. "There has been an extreme demand,” he said. “It won’t take too long until we’re full up."
While it is hardly a surprise that the ultra rich are seeking places they can park their hard assets, what is bizarre is that the continued demand for providers of the service suggest that much of the existing safe-base is already taken. Consider that there are more than 25 million safe-deposit boxes by some estimates in the U.S. alone, and while they can be used for the mundane to the exotic, it is safe to assume that most hold some combination of cash and precious metals. A private collector held the Crown of the Andes, made with 5.3 pounds of gold and more than 400 emeralds, in a Citibank box before its sale four years ago to the Metropolitan Museum of Art.
Even more curiously, for many banks - the same banks who complain they can't turn a profit any more - safes are no longer a core offering. One deterrent is the amount of space they require. That’s especially the case in London, home to the world’s largest population of wealthy individuals, according to real estate broker Knight Frank. In the city center, few places have secure storage facilities as large as IBV’s on Park Lane, where customers can also purchase gold coins from across the globe.
In the U.S., safe-deposit boxes had also fallen out of favor in recent years as banks closed off branches and opt not to install them in new ones; coupled with collapsing faith in banks by ordinary individuals. Demand has waned in recent years, according to JPMorgan Chase and Bank of America the nation’s two largest lenders.
"Much of the decline can be attributed to clients opting to store documents online, especially younger clients," said Bank of America spokesman Don Vecchiarello.
But as the system teeters on the edge of collapse, and even a 5% drop in the S&P is now sufficient for the Fed to cuts rates and/or launch QE, there’s revived interest for people to secure their valuables, said Jerry Pluard, founder of Safe Deposit Box Insurance Coverage.
Last but not least, a big source of demand for safes and vaults are central banks themselves, and nowhere more so thatn in Switzerland, where firms have seen a surge in demand driven by central bank policy. Negative interest rates have left Switzerland’s banks caught between the prospect of losing money to hold client deposits and imposing fees that could chase customers away. Most clients pick the safe options, no pun intended.
“The storage cost for cash is cheaper than negative interest rates,” said Swiss Gold Safe’s Karl. The firm offers six box sizes, with the largest renting for 4,039 Swiss francs ($4,079) a year. "Cash storage has become a strong business for us."
Central banks may be putting commercial banks out of business, but they are certainly a boon for safe box providers.
They are also a present for law enforcement and regulators who enjoy asking safe users just what it is they have to hide from the banking system. Indeed, as Bloomberg notes, the proliferation of nonbanks providing safe-deposit boxes has prompted some Swiss lawmakers to question whether they’re providing a safe haven for wrongdoing such as money laundering, noting they don’t face the same level of scrutiny and regulatory oversight as traditional banks.
Storing large sums of cash in safe-deposit boxes demands a checklist of tasks. Those include arranging transport of the money and keeping detailed records of its location to avoid raising suspicions over money laundering if the cash ever returns to a bank account. Moreover, failing to strictly adhere to a safe-deposit firm’s protocols may result in being rejected as a customer.
“The even bigger issue is getting the cash back into your account,” said Felix Brill, chief investment officer of Liechtenstein-based VP Bank, which manages about $50 billion of assets and offers some safe-deposit boxes. Still, “no one likes to pay negative interest rates. Everyone looks for alternatives.”
There is another risk, perhaps the oldest risk in the book: safes aren’t always a fail-safe. In 2015, burglars drilled through the wall of an underground vault in London’s Hatton Garden diamond district, making off with $20 million of jewelry. A year earlier, a customer of a Wells Fargo & Co. branch in Highland Park, New Jersey, lost millions of dollars of rare watches that had been stored in a safe-deposit box, the New York Times reported in July.
The irony is that high-profile heists and scandals tend to boost other firms offering safe-deposit boxes as the rich hunt even more secure places to stash their prized possessions.
Christopher Barrow, chief executive officer of London-based Metropolitan Safe Deposits, said his company spent more than $3 million to build a facility that opened this year in southwest London.
“Hatton Garden was a classic case,” said Barrow, whose firm has more than 15,000 safe-deposit boxes in central London alone. “There was a flight to quality on the back of it.”
There is a simpler reason why demand for safe deposit boxes will only grow: we now live in a world in which assets only have value because of constant central bank intervention. If one day an apparatchik forgets to push the correct button, or if we have another Lehman moment and faith in the monetary system evaporates, the value of hundreds of trillions in assets could evaporate in an instant. It's a risk the world's ultra rich no longer want to live with.