All that glitters is gold? About physical gold and paper gold and my strategy in this asset class

I have been working in the field of precious metals and foreign exchange trading for 10 years now and trade here for our company with refiners, banks and third party partners (HV for these transactions).

So my background and perspective let me look at different scenarios and explore my decision for physical OR/AND so called paper money in a bit more detail.

In this text, I am explicitly addressing all investors. No one has found the wisdom to one asset class alone, we act according to our beliefs and ideas, should be objectively open to other forms of asset classes. If you don't know what to do with precious metals, great... then at least you got to know my view on things around the precious metals market. And in the end you can profit from that... so, have fun with this tl;dr text.

𝑾𝒂𝒔 𝒊𝒔𝒕 𝑮𝒐𝒍𝒅? 𝑾𝒆𝒍𝒄𝒉𝒆 "𝑭𝒐𝒓𝒎𝒆𝒏" 𝒗𝒐𝒏 𝑮𝒐𝒍𝒅 𝒈𝒊𝒃𝒕 𝒆𝒔? 👨‍🏫

Gold, [lat. Aurum] chemical element symbol Au with atomic number 79, specific gravity of 19.3g/cm3.

Funfact: A 24km long thread can be produced from one gram of gold. 🧵

Gold in the form of bars, coins or even jewelry has been a constant companion in the history of mankind for centuries. Whether a medium of exchange, a means of payment, a production good or, in recent decades, increasingly in demand as a metal for technological progress and development - gold can always be found in these areas.💰

From the long history of gold, supporters of the heavy metal derive security, value stability, but also prosperity and wealth. From these assumptions derive various scenarios and pros and cons to physical or exchange-traded so-called paper gold investments. For several decades, in addition to physical gold, there is also trading on the stock exchange in the form of forward transactions (options, futures, etc.), index funds and ETCs. 📈

𝑷𝒉𝒚𝒔𝒊𝒔𝒄𝒉𝒆𝒔 𝑮𝒐𝒍𝒅 🥇

Physical gold is offered as an investment primarily in the form of bars and coins. While bars today are generally subject to one standard (e.g. LBMA, London Bullion Market Association), there is a greater variety of different countries and mints for coins.

Fine gold bars (999.99/1000) are generally offered in denominations of 1g; 2g; 2.5g; 5g; 10g; 20g; 31.1g (1 ounce); 50g; 100g; 250g; 500g; 1000g for private investors. For institutional investors there is also the so-called standard bar with a proud weight of 400 ounces (12440g) of gold (995.00/1000).

There are various refiners and thus manufacturers of gold bars. The best known are probably Agosi, Heraeus, C.Hafner, Heimerle + Meule, Umicore and Valcambi. The aforementioned manufacturers are all LBMA-certified and therefore best suited for international trade and tradability itself. Degussa, contrary to popular belief, is no longer a bar manufacturer of its own, but issues bars from other manufacturers under license with the well-known Sun Moon logo.

In addition to the well-known LBMA-certified bars, there are other manufacturers such as ESG or Geiger-Edelmetalle. Here the inclined investors should be careful, because these bars can be cheaper on average, but are not LBMA certified and therefore in the (international) trade (so also outside the EU) often only with discounts to trade.

The LBMA certification is therefore a crucial (marketing) certification for bars and their manufacturers, which guarantee the production conditions, fineness of the bars and weight.

Bullion coins, also bullion coins, are minted and issued in high volumes by various countries' mints. Bullion coins are minted with a high fineness and usually the minting motif does not change annually, but remains consistent for a while (see Maple Leaf, Krugerrand, Philharmonic, Britiania, American Eagle, etc.). Again, however, there are exceptions such as the Chinese Panda coins, the Australian Kangaroo, or the Australian Luna series bullion coins. The changing motifs of the latter coins enjoy a growing following even among collectors due to their annually changing motifs.

One advantage that bullion coins usually have over bars is the fact that bars are traded in so-called blisters or outer packaging. Thus, the gold can only be admired in the packaging, but not directly touched. In recent years, you could admire the idiosyncrasy of the Germans, who just put value on flawless goods (banking customary here, by the way, in the past also meant unpacked, naked bars) and also put value on damage-free packaging (similar to standardized vegetables in the supermarket 🍌 🙄). Precious metal dealers who are active in buying and selling will therefore only buy goods that are resalable and can thus achieve a good margin. The purchase at a bank or the refinery is comparatively expensive, which is why the business with the purchase and sale as a margin business is an important mainstay of many gold dealers.

𝑾𝒂𝒓𝒖𝒎 𝒔𝒐𝒍𝒍𝒕𝒆 𝒎𝒂𝒏 𝒊𝒏 𝑷𝒉𝒚𝒔𝒊𝒔𝒄𝒉𝒆𝒔 𝑮𝒐𝒍𝒅 𝒊𝒏𝒗𝒆𝒔𝒕𝒊𝒆𝒓𝒆𝒏?😳

The clientele for physical investment gold can be divided into three groups: Collectors, doomsday believers, and investors interested in value preservation. While the former find no room in my reasoning (I mean, I could write about the sense or nonsense of collecting - what do I know with my ABSOLUT collection? 😉), the reasons of the other groups (whether objectively realistic (?!) or purely subjectively considered) can already be better described.

Doom-believing people buy gold because they either distrust the state and thus society, recognize dangers of war, see the collapse of the economic system we know coming... of course, other scenarios can also be constructed, these are to be taken more or less seriously depending on the character type or not. Example: This type of people usually also believe that they will exchange a loaf of bread for 1g of gold at the baker someday...

Investors interested in value preservation are objectively seen people who have learned from the historical past of their ancestors or from social experiences (world wars etc.), who see gold as a means to preserve value (often also as an instrument to preserve inflation) and who take the intrinsic value of gold seriously from a historical point of view. The assumption: Gold does not have to create a return, but is supposed to be a nest egg outside the monetary system in times of inflation or other times of need (gladly also personal, financial reasons).

Example: The broken car must be repaired, "I" sell an ounce of gold and can thus pay the service of the workshop with fiat money.

When buying and selling gold, the following is factually always true: The gold always has exactly the value for which you bought it. Until you sell it either higher or lower.

Advantages of investing in physical gold:

- Anonymous (up to 2.000€ in Germany anonymously tradable; so called Tafelgeschäft).

- Physical good, therefore further advantages like mobile, secured ownership

- Tradable at times independent of the stock exchange

- Quickly and easily tradable (liquid)

- Tax-free when sold after a holding period of one year (Attention: NO TAX ADVISORY!)

Disadvantages of an investment in physical gold:

- Storage and associated financial expenditure for security by safes or safe deposit box (whereby the sense of safe deposit boxes in connection with gold can be doubted, at least if one is doom believer...)

- Risk of theft or robbery

- Gold usually has to be in perfect condition (even packaging!) to get the full purchase price from the dealer

- No active return, assets are tied up

𝑷𝒂𝒑𝒊𝒆𝒓𝒈𝒐𝒍𝒅: 📜

Paper gold refers to exchange-traded gold, i.e. investment forms without physical gold that have a reference to gold. Thus, investors do not receive a claim to a specific gold bar, but only to a certain amount of the corresponding precious metal.

Classic forms of paper gold are derivatives (options and futures, certificates), ETC or gold accounts.

For reasons of time and space, I will not consider gold accounts here and will only briefly discuss futures or options, which also belong to the group of certificates.

If you trade certificates on gold, you should be aware that you do not acquire a piece of gold in the actual sense. Legally, all certificates are only bearer bonds. This means that the holder of the bond holds a securitized claim (see bonds) against the issuer, which is linked to the gold price or the purchase of gold (often at a ratio of 1:10). The risk: If the issuer becomes insolvent, the bond is also worthless. There is the threat of a total loss. Such trading is therefore only suitable for short-term trades and does not correspond to the ideas that one might associate with gold.

Investing in so-called ETCs might be much more interesting and sensible. Exchange Traded Commodities on gold are close relatives of gold certificates and are also based on the gold price, so from a legal point of view they are just like debt securities vis-à-vis the issuer. Nevertheless, there is the crucial difference here:

Physical hedging and deposit of gold on the shares of the ETC.

As a rule, ETCs have a gram-precise deposit in gold. This means that with the purchase of ETCs one has the right to a delivery of the deposited gold. In the event of insolvency, this means that the deposited gold can be sold and the proceeds paid out pro rata to the bondholders. So we have a kind of double bottom here, an anchor.

And that is what makes the ETC so interesting. Holders of such ETCs can have the deposited gold delivered to them at any time (in some cases from one gram). This usually incurs form costs (manufacturer's costs, minting costs) and shipping costs, which is why delivery only makes sense above a certain quantity.

In other cases, one can simply sell one's share in the ETC on the stock exchange like any other financial market vehicle.

The best known ETCs are probably EUWAX, EUWAX Gold II and Xetra Gold. However, there are also ETCs from Wisdom, Invesco or even iShares.

𝑾𝒂𝒓𝒖𝒎 𝒔𝒐𝒍𝒍𝒕𝒆 𝒎𝒂𝒏 𝒊𝒏 𝑷𝒂𝒑𝒊𝒆𝒓𝒈𝒐𝒍𝒅 𝒊𝒏𝒗𝒆𝒔𝒕𝒊𝒆𝒓𝒆𝒏?😳

Contrary to my previous view, buying so-called paper gold makes sense if you tend not to fall into the top three groups of physical gold buyers. Those who buy paper gold use this investment opportunity rather to calm down their own securities portfolio in its fluctuation, i.e. volatility, and to add another asset class with the precious metal. Those who invest in paper gold usually do not believe in the imminent end of the world, but rather in the fact that gold plays a supporting role in the economic cycle of the industry or that gold correlates rather slightly with tangible assets in the form of shares.

Advantages of an investment in gold ETCs (paper gold):

- Easy trading on the stock exchange

- No storage to in the own four walls or bank safe deposit box

- Often physical deposit with the issuer or a depository with optional delivery option

- Same tax advantage as physical gold if ETC is backed by gold

Disadvantages of an investment in gold ETCs (paper gold):

- Issuer risk

- No immediate physical control over the gold

- Not anonymous

- Tradable only during stock exchange hours

- Partly expensive delivery costs

𝑰𝒏 𝒘𝒂𝒔 𝒔𝒐𝒍𝒍𝒕𝒆𝒔𝒕 "𝑫𝑼" 𝒏𝒖𝒏 𝒊𝒏𝒗𝒆𝒔𝒕𝒊𝒆𝒓𝒆𝒏?☝️

On the question of whether physical gold or paper gold, everyone must listen to their own inner voice. I am not writing here about investors who have a fundamental aversion to gold or precious metals and consider this asset class to be senseless or unreasonable due to a lack of active returns. There is no right or the only true way. Neither for stocks nor for ETFs, cryptocurrencies, real estate... and certainly not for the decision whether to invest in precious metals or to do without this asset class.

For every pot there is a lid and why shouldn't this apply to entire asset classes?

So whether you choose paper gold or physical gold is up to your investment case. The advantages and disadvantages are almost the same for both products according to their own merits and should be considered accordingly. Basically, a decision can be derived from the preceding characteristics and investment cases. If "you" believe in an imminent end of our economic cycle or if you want to hold a "physical store of value" outside the fiat money system, your decision should be in favor of physical gold. If, on the other hand, you want to add diversification and a low correlation asset to your equity portfolio, paper gold is worth its weight in gold for you. Another scenario for paper gold would also be a savings plan on gold, and then after a t-period, have a physical bar delivered. At the end there is an average price for e.g. a 100g gold bar, which is possibly below the future selling price.

If you want to invest in physical gold, I definitely recommend bars from a size of 10g, but better 1 ounce (31.1g). With gold bars, you usually benefit from a lower premium to the mid price of gold than with bullion coins. You should buy coins from half an ounce (15.55g). Below that, the premiums usually become unattractive.

Important point about "anonymous table trading". I regularly observe the most absurd situations in my everyday life. There are people who think that we as precious metal dealers report every transaction to the local tax office or that the state will confiscate the gold from "you" tomorrow.

I can say here and now: All this does not correspond to reality and if we would be so far, we would surely have completely different problems in this country.

Neither an unfounded report is made to the tax office, customs, BaFin or FIU, nor is the state necessarily interested in you right now. Just let yourself be registered according to the regulations of the GWG and that's it. If "you" press around at the counter, obviously want to stay under the 1.999,99 Euro or even more often try to buy under this limit - then you make yourself conspicuous and suspicious. The Money Laundering Act is designed to combat terrorist financing and uncover sources of black money. Exactly then the notification chain is set in motion. All this concerns surely the fewest of us... from therefore a pure recording obligation after GWG should and should be absolutely irrelevant and negligible for most people. Last but not least: Have a look at the regulations of your bank. They already identify you when you create a savings account or your current account, without any Euro having been deposited into your account. Likewise according to the money laundering law. So everything is not so bad.

𝑾𝒊𝒆 𝒊𝒏𝒗𝒆𝒔𝒕𝒊𝒆𝒓𝒆 𝒊𝒄𝒉 𝒑𝒆𝒓𝒔ö𝒏𝒍𝒊𝒄𝒉 𝒊𝒏 𝑮𝒐𝒍𝒅?🙄

I have a natural attachment to physical gold through my profession and also hold this myself in my own overall portfolio. The share is currently about 2%, which is rather underrepresented. This was definitely different in the past, where I sometimes had an allocation of up to 30%. That is definitely too much for me as well. I hold physical gold because I see this as a "metal piggy bank". Just the famous case of "a broken washing machine", just when the ATM or the online banking of my bank fails. Also in my wallet I always carry around a 5g bar of gold. Somehow such a quirk of us precious metal dealers.

In the course of my research and my considerations to expand my share of precious metals in the overall portfolio, I looked into the product EUWAX Gold II and Xetra Gold.

I decided to invest a small monthly savings plan in the product EUWAX Gold II.

The following arguments were decisive for me:

1. I do not believe in the collapse of our economic system and would like to use the gold ETC as a means of diversification, as well as an anchor in the portfolio. If I would believe in a collapse, I would have to liquidate my entire portfolio immediately...

2. my share of precious metals in the total portfolio should again be about 5-10%. Storing this amount of gold somewhere seems to me too expensive and above all unsafe.

3. i plan to hold about 30% of my precious metals portfolio in physical metal, the rest should be covered by ETC.

4. EUWAX Gold II offers a gram-precise securitization of gold, as well as delivery options.

5. issuer of the ETC is the Stuttgart stock exchange with its company Stuttgart Securities GmbH, thus for me very trustworthy and liquid

6. in contrast to XETRA Gold there is NO FEE for the custody of the gold! With XETRA Gold you pay storage costs of 0.36% of the deposited gold value... a rogue who thinks evil.

7. EUWAX GOLD II is treated tax free by my broker on sale. So, as with physical gold, there is no tax deduction on sale or redemption if the shares held are held for more than one year. (ATTENTION: NO TAX ADVICE!)

@Fazit: 🧐

Many roads lead to Rome. Anyone who thinks or at least believes in precious metals and their function as a raw material for the economy, inflation protection or store of value should choose one of the two options for an investment. When considering, in addition to the assumptions or reasons mentioned in the text, one's own risk tolerance and investment horizon (precious metals should also consider at least a 10-year investment period) as well as one's own return expectations should be considered. In a well diversified portfolio precious metals should not take more than 10% share.

As always, I wish you good luck. 🍀 And a golden hand.🤌

Link collection:

Portal to compare sale and purchase prices at gold dealers:

http://www.gold.de

Savings Plan Eligible Gold ETCs: https://www.justetf.com/de/find-etf.html?query=Gold&assetClass=class-preciousMetals&resetPage=true&spc=all

EUWAX Gold II: https://www.euwax-gold.de/ewg2ld/

In a nutshell, Finanzen.de on gold certificates: https://www.finanzen.net/ratgeber/wertpapiere/gold-zertifikate

Summary on the current money laundering law: https://www.financescout24.de/wissen/ratgeber/geldwaeschegesetz

Tax information on gold: https://blog.handelsblatt.com/steuerboard/2021/09/07/besteuerung-von-investitionen-in-gold/

#gold

[The foregoing is my own opinion and experience. I do not give tax tips, nor can I assess the individual risk tolerance and available capital of the reader. "YOU" are trading with "YOUR OWN" money and therefore also assume "SOLE RESPONSIBILITY" for loss or profit]. yes