Table of Contents
- What are the best ways to invest in precious metals?
- Investing in precious metals via certificates
- Investment in precious metals via Exchange Traded Funds (ETFs)
- Investment in precious metals via Exchange Traded Commodities (ETCs)
- Investment in precious metals via jewellery
- Investment in precious metals via mine stocks
- Investment in precious metals via direct physical acquisition
The current state of the financial markets is causing great concern not only to the billionaires of this world. For private investors, too, the desire to protect their investment portfolio by buying gold is increasingly coming to the fore. The reasons for the search for suitable asset protection lie above all in the steady expansion of the money supply by central banks worldwide as well as the artificially low-interest rates. The result of this zero or even negative interest rate policy is the formation of immense bubbles in real estate, equity and bond markets.
More and more investors are becoming aware that the increasing national debt is not sustainable and that a reduction of this debt will not be possible through repayment but – as so often in history – only through large-scale debt cuts and/or inflation at the expense of the money owners. The loss in value of our uncovered paper money, caused by the combination of meagre interest rates and exploding national debt, reinforces the need for a hedge against unexpected financial crises. This can be done in the form of an investment in precious metals that have been valuable and value-preserving for thousands of years. Historically, precious metals have provided adequate protection against the ongoing depreciation of paper money currencies.
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Other decisive factors influencing the monetary precious metals gold and silver, in addition to monetary policy, include the increasing geopolitical uncertainties, the increasingly visible signs of disintegration in the EU, doubts about the continued existence of the single currency, the euro, and, last but not least, the vote of the citizens of the United Kingdom in favour of leaving the EU (Brexit).
The demand for gold and silver as “safe havens” for investment purposes is driven by current events and the prominent demand for a medium for real asset protection. The shift from uncovered currencies to physical assets is accelerating.
Gold is regarded as the most stable currency. It has proven its function as money of the highest quality time and again over several thousand years across all religious, cultural and epochal borders and has received the purchasing power of its owners. In contrast to the uncovered paper money currencies of our time, gold cannot be multiplied at will. So it is not surprising that gold has been in a secular bull market since 2001, measured in all currencies.
What are the best ways to invest in precious metals?
There are a variety of ways to invest in gold, silver, platinum and palladium. In the following, we would like to introduce you to some known investment opportunities and examine their suitability for the purpose of asset protection.
For an investment in gold, silver, platinum and palladium to be used as secure asset protection, some criteria must be met.
Investing in precious metals via certificates
Certificates represent an unsecured, certificated claim against the issuer. Often there is no physical deposit with precious metals. Depending on the structure, the performance of precious metals is represented by derivatives in the form of a certificate. In the event of the issuer’s insolvency, investors run the risk of a total loss, as the securitised rights become worthless in such a case. This prevents the guarantee of asset protection through certificates. Certificates are therefore completely unsuitable as asset protection.
Investment in precious metals via Exchange Traded Funds (ETFs)
Exchange Traded Funds are considered to be precious metal-backed, exchange-traded, open-ended investment funds whose units can be easily acquired and whose day-to-day management is subject to low management fees. Besides, the storage and insurance of the physical metal are taken over by the funds, which greatly facilitates investment by investors. The aim of this investment alternative is not primarily to physically own gold but to track the evolution of the gold price.
ETFs work by buying gold bars at favourable prices, e.g. from Wall Street companies, which exchange the gold for fund units at the fund provider’s net asset value (NAV). These, in turn, are traded at the share value to market participants.
Stockbrokers, so-called market makers, therefore lend assets at very low cost to exchange them for fund units. The proceeds from the sale of these shares between buyers and sellers on the open market can be fully retained and then invested in assets whose income exceeds the cost of borrowing the assets.
However, the gold to which the ETFs refer is often held by third parties (such as central banks) and is therefore included in the assets of the monetary authorities. ETFs, therefore, serve only as placeholders for physical gold and are simply a claim against a bank or bullion trader.
Nearly all ETF providers have extensive restrictions on the physical delivery of fund units in their terms and conditions. Furthermore, physical distribution is usually only possible in bars of 12.5 kg gold, which generally exceeds the budget of private investors.
ETFs do not provide independence from the financial system and thus adequate protection against its inherent risks. Furthermore, Exchange Traded Funds are not necessarily covered by sufficient gold, and the limited physical access hinders the investor’s right of ownership to “his” precious metals at all times. ETFs, therefore, carry the same risks as other financial assets and are unsuitable as asset protection. In addition, income from the appreciation of precious metals in the context of ETFs falls within the scope of investment income and is therefore taxable.
Investment in precious metals via Exchange Traded Commodities (ETCs)
As unlimited, physically covered bearer bonds of an issuer, Exchange Traded Commodities, which can be bought or sold daily via exchange trading, offer a further investment solution. The creditworthiness of the issuer is particularly relevant here.
ETCs thus offer investors the opportunity to invest in commodities via exchange-traded securities linked to the performance of one or more precious metals.
In individual cases, the actual logistics within the framework of exchange-traded commodities can also be realised by banks via precious metal accounts. This means that purchasing logistics and the effort to find a storage location do not require any personal commitment. A major disadvantage of this method, however, is the possibility for banks to lend a significant portion of the stored precious metals. This, again, results in a conversion of the real physical investments desired by investors into receivables, which makes a decisive difference in the case of the investors’ delivery request.
Also, the terms and conditions of the individual ETCs must be examined in detail. They often contain regulations that substantially restrict or complicate the physical delivery claim.
Precious metal ETCs are to be assessed similarly to precious metal ETFs. However, the potential issuer risk must also be taken into account for ETCs. For this reason, investments in precious metal ETCs are also unsuitable as a primary investment with the function of asset protection but can take on a component within the framework of a securities deposit to profit indirectly from the performance of precious metal prices in a convenient and fungible manner.
Investment in precious metals via jewellery
Gold and silver jewellery – such as bracelets, brooches, necklaces or rings – as well as gold and silver goods in the form of picture frames, paperweights, chandeliers or silverware are enjoying increasing popularity. However, due to the cost of labour and capital, prices are often significantly higher than for investments in gold and silver. This means that the actual intrinsic value is usually significantly lower than the acquisition costs for such products. In addition, their real material value can only be determined by connoisseurs such as jewellers. Thus frequently a high personal idealistic value, for example with heirlooms, is present for the owner. However, this is not enforceable on the market vis-à-vis third parties in the event of a sale, since, for a buyer, only the material value is decisive.
Investment in precious metals via mine stocks
In the case of a direct investment in silver or gold mining shares, the investor becomes a co-owner of the company in question via shares of listed, precious metal mining companies that are traded on the stock exchange. By issuing shares, these companies finance their substantial investments in capital-intensive mining activities. An investment in listed mining companies is therefore similar to the purchase of shares, which is why fluctuating prices are also present here, which are particularly influenced by derivatives or empty purchases. Besides, the prices are determined in the long term by the fundamental data of the respective companies. This includes, for example, the amount and development of corporate profits and their expected relation to returns as well as other forms of investment such as bonds or real estate. When evaluating mining companies, factors such as current development status, company size, geographical location, management, financial data and resources are of great importance.
In principle, the price development of mining stocks follows the trend of gold and silver prices – often with higher leverage. Depending on the stage of exploration, however, a mining investor must be able to withstand high price fluctuations and also take political risks into account, as not all gold producing countries offer comparable legal certainty. Furthermore, the temptation of governments struggling for financial survival to access raw material resources, including expropriation measures for foreign investors, must be considered as risk factors. Thus, a mining investment should be sufficiently spread over several companies.
Investment in precious metals via direct physical acquisition
An investment in the form of coins, medals or bars is also conceivable, especially in times of economic crisis. Investment coins are minted annually in large quantities, whereby their market and material values are close to each other. The prices are higher than the corresponding gold or silver price due to the minting costs and the trading margin at purchase, whereby the premium is correspondingly higher the smaller the respective trading unit is. Famous examples of investment coins are the gold or silver Eagle, Maple Leaf, Philharmonic, Krugerrand or Britannia.
Collector coins, on the other hand, have a different motif for each coin. Their number is strictly limited, which is why high premiums and increases in value are not uncommon. However, as with jewellery, in the event of a crisis or other emergency sale, only the material value can be redeemed, as the collector’s value is not of interest from the buyer’s point of view.
Coins are not subject to withholding tax and VAT is also not levied on the purchase of gold coins and gold bars. Silver bars, on the other hand, are subject to 19% VAT.
Steff has been actively researching the financial services, trading and Forex industries for several years.
While putting numerous brokers and providers to the test, he understood that the markets and offers can be very different, complex and often confusing. This lead him to do exhaustive research and provide the best information for the average Joe trader.