Merrill Lynch has revealed that some of its richest clients are so alarmed by the state of the financial system and signs of political instability around the world that they are now insisting on the purchase of gold bars, shunning derivatives or “paper” proxies.

Rich investors are spurning gold exchange traded funds in favour of krugerrands.

Gary Dugan, the chief investment officer for the US bank, said there has been a remarkable change in sentiment. “People are genuinely worried about what the world is going to look like in 2009. It is amazing how many clients want physical gold, not ETFs,” he said, referring to exchange trade funds listed in London, New York, and other bourses.

“They are so worried they want a portable asset in their house. I never thought I would be getting calls from clients saying they want a box of krugerrands,” he said.  

Gold is in the news a lot these days.  Occasionally someone asks me if they should buy gold.  The response that I inevitably have, as with all such questions, is what are your goals?  If their goal is a quick trade because they think gold is going to increase in value, I tell them not to do it.  If their goal is protection against the dollar collapsing, that is a different story. 

Gold is not an investment.  Please repeat this three times and right it down so that you do not forget it.  Gold is insurance.  It is insurance against a financial apocalypse in your home country.  Ask people in Zimbabwe if they would prefer having their savings in Zimbabwean dollars or gold.  Or, if history is your thing, look at the history of the German mark during the, newly fashionable to talk about, Weimar Republic.  Sometimes governments lose control of their currencies and all hell brakes loose. 

There is increasing concern about that possibility amongst the savers in the world given the ongoing currency brinksmanship we are witnessing.  The savers of the world see the increasing loads of debt that countries across the globe are issuing and see the increasing amount of paper currency being created.  The odds of a major currency collapsing have risen and the idea of having all your money in rubles, euros or dollars suddenly seems less appealing.

Which gets us back to gold.  Owning gold is about possessing a store of wealth that is recognized and tradable all over the world.  If economic disaster or war ravages your home country, gold is a handy tool for bribing corrupt officials to get an exit visa, paying the fare for you and your family to catch the last boat or flight to some relatively safe nation and using the remainder as seed money to start a new life.

If you decide that you would like to buy a little insurance for your family, make sure you do it the right way: take physical possession of the gold you purchase.  In times of great financial strain, some genius in the government inevitably decides that it is the people’s patriotic duty to donate their gold to the government followed by the outlawing of private ownership of gold.  In that scenario the mandarin’s fondest hope must be that all the private owners of gold have conveniently stored their gold in a single place under the stewardship of some ETF.  I do not envy the head of a family who thinks he has protected his family against a collapse in the dollar only to receive a statement in the mail saying, “Due to unprecedented circumstances, the US government has taken ownership of all the gold in the GLD vault and has replaced it with 30 year US Treasury notes.  GLD will let all investors know the conversion rate of gold to Treasuries as soon as that information is shared with us.  We apologize for any inconvenience this may cause you.”