In an environment of rising inflation, dynamic political developments, and increasing local and global crises, you may be wondering how to invest your money for the long term and preserve your purchasing power. While recent massive government stimulus programs may boost the economy, they also lead to long-term inflationary pressure. National and international crises also have negative effects on the economy and the stock market, contributing to rising prices and further reinforcing inflation. However, in every difficult situation, there are opportunities for those who seize them. Those well-positioned and with diversified portfolios will be successful in the long run. In the following text, we briefly discuss the advantages of precious metals and why gold, silver, and platinum remain among the best hedges against inflation and crises. Additionally, we explore some reasons why your savings could be at risk.
Gold is one of the oldest forms of currency, having maintained a stable reputation as a perfect investment in times of crisis for centuries worldwide. Precious metals, in general, are traditionally considered a 'safe haven' in times of economic uncertainty or volatile markets. Gold, in particular, is often used as a hedge against inflation and currency risks. Germans, in particular, have a strong affinity for gold. According to an article by the World Gold Council, German investors purchased over 88 tons of gold in the first half of 2022, surpassing all except the Chinese.
Unlike fiat currencies, precious metals possess intrinsic value and are also needed for industrial applications. Silver and platinum, in particular, are used in various industrial processes, supporting their demand. With the steadily increasing global production of solar panels, silver is expected to experience further appreciation. Precious metals help diversify your portfolio, with their value evolving independently of other asset classes such as stocks, ETFs, or bonds. In times when traditional assets undergo fluctuations, precious metals can serve as stability anchors.
Historically, precious metals have gained value in the long term. While short-term fluctuations may occur, precious metals tend to preserve and increase their value over time. Gold, in particular, has averaged an annual growth rate of 8% over the last 50 years. This makes precious metals particularly attractive for long-term investments. Fiat currencies like the Euro and Dollar significantly lose value within just a few years.
In 2020, the global COVID-19 pandemic led to a worldwide economic slowdown as businesses were forced to close to curb the virus's spread. This prompted central banks worldwide to support the economy by printing and distributing massive stimulus packages in the billions of dollars. The creation of huge amounts of money out of thin air, coupled with the simultaneous slowdown of economic production, resulted in a massive surge in inflation, reaching up to 22% in some Eurozone countries. Current efforts to combat this inflation with very high interest rates are putting additional pressure on the economy and banks, and this cannot be sustained over a long period. Savers holding a significant portion of their money in savings accounts were doubly punished. Before COVID, they even had to accept negative interest rates, and afterward, their savings were massively devalued due to inflation.
When you deposit money in a bank, you might think that your money is securely stored in the bank's vault and that you can access it anytime. However, in reality, this is far from the truth because there is a common banking practice known as fractional reserve banking or minimum reserve system.
In the minimum reserve system, only a fraction of bank deposits is covered by actual cash and can be withdrawn. Theoretically, this is intended to expand the economy by releasing more capital that can be lent to other parties. It is assumed that it's unlikely for all bank customers to redeem their deposits all at once. Under normal circumstances, a bank only needs to hold a fraction of all deposits in cash to cover withdrawal demands at any time. The rest of the deposits can be used to grant loans to businesses and consumers, generating profits. The amount banks must hold in reserves is typically set by central banks and is known as the minimum reserve ratio. It is generally quite low; in the Eurozone, the minimum reserve is currently only 1% (Dec 2023).
Suppose a bank has a minimum reserve ratio of 1 percent. A customer deposits 100 euros into their account. The bank keeps 1€ in reserves and lends the remaining 99€ to an industrial company, which then deposits the money back into its account. From these 99 euros, the bank keeps 99 cents in reserves and lends the remaining 98 euros. This process can be repeated until the money supply has increased from the originally deposited 100 euros to almost 10,000 euros.
As we can see from this example, fractional reserve banking has led to the money supply growing far beyond the base money created by central banks. The multiplier effect of fractional reserve banking means that private banks create more money than central banks themselves, significantly inflating the money supply. This is particularly concerning when considering the billions of euros and dollars recently created out of thin air by the ECB and the US Federal Reserve.
Winners in times of inflation are often debtors, and this can be explained by looking at the dynamics of debt and currency devaluation. Inflation essentially means an increase in the general price level of goods and services, resulting in the currency losing purchasing power. This affects debt repayment.
Suppose someone has taken a loan of 100,000 units of a currency. If inflation increases the price level, the amount these 100,000 units can buy becomes less. Therefore, it becomes easier for the debtor to repay the same amount of money, as it is worth less in terms of actual goods and services.
The world's largest debtors are usually governments, which accumulate significant debts to finance infrastructure projects, support social programs, take counter-cyclical measures in economically challenging times, finance military spending, maintain a large state apparatus, and fund bureaucratic processes. Companies and individuals can also have substantial debts, but it is nearly impossible for them to accumulate debts on the scale of states. Inflation allows states to reduce their debt burden to some extent. This is why some countries, especially in economically uncertain times, tend to pursue inflationary monetary policies.
The problem arises when inflation gets out of control. If central banks lose control of inflation, it can lead to hyperinflation, resulting in a catastrophic loss of confidence in the currency. Citizens lose their savings, pensions, and overall trust in the economic system. Hyperinflation has occurred numerous times throughout history, often as a result of excessive money printing and unsustainable debt levels.
In the past, the US dollar was backed by the gold standard, meaning that one could exchange a US dollar for a corresponding amount of gold. Those who used the currency could trust that the dollar would retain its value and that it would be accepted without question when it was time to spend it.
By tying the dollar to gold, the US government could not endlessly print money, as it had to ensure it held a corresponding amount of gold in its reserves. Government spending was therefore limited to what it could collect in taxes or borrow against its reserves. However, this is no longer the case since the link between the US dollar and the gold standard was lifted in 1971 by then-President Richard Nixon. The US had become financially strained due to the wars in Korea and Vietnam, leading to an excessive circulation of dollars for war financing. It had become impossible to have the necessary gold reserves in hand.
President Richard Nixon announced the end of the gold standard in 1971
The abolition of the gold backing of the US dollar had far-reaching consequences that extended beyond the USD. As the global reserve currency, virtually any other currency that could be exchanged for USD was also indirectly linked to gold. Abolishing the gold standard allowed central banks worldwide to increase the money supply of their respective currencies at will. The decision on August 15, 1971, laid the foundation for today's economic and financial system. The 2008 financial crisis can also be seen as an indirect consequence of this decision.
Without being tied to the gold standard (or anything else of real value), trust in the US dollar relies solely on people's confidence in the stability of the dollar. However, excessive debt can undermine the status of the US dollar as the world's reserve currency, as international demand for the dollar is based on its perceived financial strength.
The loss of confidence in the US dollar leads to states and major investors seeking a new safe haven for storing significant financial values in the medium to long term. It is expected that many will choose gold. Many countries are already increasing their gold reserves today.
Currently, we can't even afford a copper standard. The required copper for 1 cent coins already exceeds the value of 1 cent, depending on the copper price, and production costs need to be added. Therefore, cent coins consist of a steel core coated with copper. In this context, it's hard to imagine that in the USA, there were 'Half Dollar' coins until 1964 that were made up of 90% pure silver. From 1965, the silver content per coin was reduced to 40%, and from 1971, silver was completely abandoned.
We use the global financial system almost daily when making payments with debit or credit cards, paying online, or using online banking. We rely on the stability and security of this system, considering it a matter of course. However, the fragility of our financial system was revealed in 2008 when the US investment bank Lehman Brothers collapsed in September 2008. Lehman Brothers was heavily invested in risky securities and could no longer meet its obligations. This triggered a chain reaction as trust among banks collapsed. Banks hesitated to lend money to each other, fearing possible defaults. For the processing of everyday payment transactions, it is essential for banks to trust each other and grant each other loans, temporarily or long-term. Therefore, payment transactions and thus the financial system almost came to a standstill. Only the quick and very generous intervention of governments, who saved the failing banks with many tax billions, could prevent a complete financial collapse.
It can be problematic to tie all your assets to a specific region, as this is associated with various risks caused by unforeseen disasters, wars, political, or economic changes. These risks can affect various asset classes such as real estate, stocks, and ETFs.
For example, if you have invested only in German stocks and companies, keep your money in German financial institutions, and own one or more properties in Germany, you may appear financially well-positioned. However, your entire wealth is linked to Germany. If a local crisis occurs, the political situation/direction changes significantly, or there are natural disasters, war, or other unforeseen events, all your investments could lose value overnight.
Diversifying across different regions and asset classes allows investors to minimize the risk of such unforeseen events. Broadly spreading wealth across different geographical areas and financial instruments enables potential losses in one region to be offset by positive developments in other areas. This allows investors to make their portfolios more resilient to regional fluctuations and risks.
Therefore, we recommend storing precious metals not in the same country or region where you reside. In the event of a crisis, you could leave the country and still have corresponding precious metals in another safe region. We are not talking about huge wealth here; even a few thousand euros can make a difference if you are forced to leave the country. Of course, this scenario is quite unlikely, but your portfolio should be set up so that you always have a Plan B.
In Germany, precious metals such as gold, silver, and platinum offer tax advantages, making them attractive investment options. A crucial aspect is the value-added tax exemption for physical investment gold, acquired in the form of bars or coins. This exemption allows investors to bypass the standard value-added tax when purchasing physical gold, resulting in cost savings. Similarly, silver or platinum can also be exempt from value-added tax if stored in a customs-free warehouse and not taken out. This is also the case with the precious metals offered by Spargold. Therefore, you can purchase silver and platinum from us without value-added tax and get more precious metal for your money.
Another tax advantage lies in the taxation of gains from the sale of precious metals. After a holding period of one year, no taxes are payable on profits from the sale of precious metals, including gold, silver, and platinum. Therefore, precious metals enjoy significant tax benefits compared to stocks, ETFs, or other investment products where gains are subject to taxation.
It is important to note that these tax regulations apply to physical precious metals. For exchange-traded securities, such as gold ETFs, different tax regulations may apply. Therefore, it is advisable to familiarize yourself with the currently applicable tax provisions before investing and seek professional advice if necessary. Overall, precious metals in Germany offer attractive tax conditions that can encourage investors to consider them for long-term portfolio hedging and diversification.
The purchase of gold and other precious metals carries certain risks, as with any investment. One central aspect is the risk of counterfeiting in the market. Counterfeits, particularly in gold, cannot be ruled out due to alloys or coatings. Therefore, it is advisable to acquire precious metals only from trustworthy sources, such as established dealers or banks. Counterfeit precious metals can be offered on online platforms like eBay or in forums and Facebook, making it difficult for laypeople to distinguish them from genuine products. Even experts can sometimes be deceived by high-quality forgeries if they lack the proper equipment to conduct precise tests with the precious metal. Counterfeit precious metals can be optimized to pass specific tests, just like real precious metals, and detecting the forgery may require conducting 2-3 different tests. With Spargold, you can be confident that all precious metals have been carefully tested by experts and come from reliable sources.
Another risk lies in price fluctuations in the precious metals market. Prices of gold and other precious metals can undergo significant fluctuations influenced by various factors such as economic developments, geopolitical events, or interest rate changes. Investors should be aware of this volatility and weigh their investment decisions accordingly. Therefore, it is advisable to use the cost-average-effect and invest a small amount each month rather than buying a large bar at once. Spargold provides you with this opportunity to invest in physical precious metals with small amounts.
Furthermore, transaction fees for buying and selling precious metals can be substantial and impact the returns. It is important to keep an eye on costs and ensure they are proportionate to the investment. There is also the risk that investors, due to hype or inadequate research, may buy at inflated prices. It is advisable to thoroughly research the current market value of precious metals and avoid impulsive actions. Especially gold and silver coins can have a high price, significantly above the current material cost. Additionally, as a rule of thumb, the smaller the purchased quantity of physical precious metal, the more premium you pay. Someone buying a 1g gold bar, for instance, may pay double the price compared to the material value. With large bars, you pay very little premium per gram. For Spargold's stainless steel inserts, we only purchase large bars and then enable the cost-effective acquisition of a small portion of these bars, which would not be possible otherwise.
Storing gold, silver, or platinum at home can entail additional risks and costs. Special conditions of your household insurance apply; usually, only €3,000 is covered if the precious metals are not stored in an expensive and securely anchored wall safe. However, even with such a safe, the coverage is usually limited to a maximum of €20,000 to €30,000, which already includes jewelry, watches, and rings. During a break-in, your precious metals can be stolen, and in the worst case, you might be threatened to show and open the safe for the burglars. For precious metals purchased from Spargold, you do not need insurance or a new safe. They are already insured and stored in one of the most modern high-security vaults globally. All costs for storage, surveillance, and insurance are included in our low annual storage fee, which you can see here.
Overall, acquiring gold and other precious metals is a complex matter that requires careful consideration. Potential investors should thoroughly inform themselves, use reputable sources, and, if necessary, seek professional advice to minimize risks and make informed decisions. By choosing our product, you can minimize complexity. That's precisely our mission: to make investments in precious metals as simple as possible and accessible to everyone.
Investing in precious metals like gold, silver, and platinum offers many advantages to secure a portion of your savings 'outside' the financial system, especially during crises or high inflation periods. Particularly, if saving is intended over a very long period, such as for a grandchild or to have more for your own retirement, it is worth considering investing a portion in precious metals. Simply saving money in the bank leads to a loss of purchasing power of 40-50% over a 20-year period due to inflation.
Our financial system is less stable than we assume and can go awry, as seen in 2008. If your entire savings are in stocks and ETFs, you become 100% dependent on this system. Experienced financial advisors recommend allocating at least 5 to 10% of your savings to precious metals.
Acquiring precious metals may come with some risks and hurdles, and not everyone wants to walk the streets with a gold bar worth several thousand euros to sell it again. Therefore, we offer you a very simple, secure, and transparent product that makes it easy to invest in precious metals.
