Can i invest in gold?

Investing in gold: what investors should consider in 2021

Due to the current uncertainties in the financial markets, more and more investors are choosing to invest in gold. Because: the experiences of hyperinflation of the 1920s and the financial crisis of 2007/08 have left deep marks in the DNA of German savers. The consequences of the Corona crisis 2020/2021 are hardly foreseeable.

Current calculations by the Steinbeis University show: Germany is sitting on more gold than ever before - around 8,918 tons of the precious metal are currently (2020) in the private ownership of German citizens. If you add the Bundesbank's gold reserves, around 6.5 percent of the world's gold reserves are in German ownership. What is it that makes the precious metal so exciting for investors right now?

Gold as a currency in crisis in stormy times

The US Federal Reserve recently cut interest rates again and the European Central Bank is also sticking to its low interest rate policy in order to protect the European economy from an economic downturn. The result: fixed-interest investments (government bonds) will hardly be worthwhile for the time being.

Many investors focus on gold in such phases. For decades, the precious metal has been considered a stable and safe haven for one's own assets. In view of the political risk areas in Europe, the USA and Asia, hedge with gold is becoming increasingly popular with investors. Since October 2018, the gold price per troy ounce has risen by around US $ 300 (+26.9 percent) to over US $ 1,500. For comparison: the DAX lost around 0.5 percent in the same period.

"Anyone who invests in gold does not protect themselves against crises"

Many investors make a mistake and invest more in gold in stormy times to protect their assets. However, gold is not a crisis metal, as is often claimed, but a currency at the end of the day - the currency of last resort.

“Gold will always have value,” says our chief strategist Björn Siegismund. However, its worth depends on people's trust in the global financial system. Anyone who expects inflation to gnaw at the purchasing power of their savings, that - in the (unlikely) extreme case - entire currencies go under, loses confidence and therefore invests in gold. This was also the case in the years between 2007 and 2011, when the collapse of the global financial system threatened and the euro zone had to endure its first major ordeal. Back then, the price of gold climbed to more than $ 1,900 a troy ounce. Since then, the price has fallen significantly. What happened?

Investor naivety led to the price of gold crashing

After the financial crisis, concerns of many investors about the state of the global financial system gave way to the belief that politics and central banks had stabilized the global banking system. Government bond yields have fallen dramatically and the stock market has risen sharply since then. Good stocks have been gold's biggest competitor so far. Because, unlike them, gold does not generate any additional return in the form of dividends. And, especially in the low interest rate environment, shares in fundamentally well-positioned companies are indispensable for building up wealth.

But has the financial system really become more secure? Unfortunately, we consider this assessment of many investors to be very naive.

Let's just take a look at the monetary policy of the central banks. All over the world they outbid each other in expanding their money supply in order to save numerous industrialized countries from financial collapse and to stimulate their economies. The outcome of this experiment is uncertain and the risks are constantly increasing. If the experiment fails, people's confidence in the paper money system will wane. Then gold could exercise its function as the currency of last resort, because compared to paper money, gold cannot be increased at will and is highly liquid. From our point of view, this makes the precious metal a better store of value than traditional bank money.


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Gold belongs in a broad portfolio

It is best to compare the gold content in a portfolio with insurance for your own home. No sane person will wish their house burn down just to get the insurance premium. In the same way, we think: We do not hope for the highest possible gold price in order to generate a return. Conversely, that would mean that there is a tremendous fire elsewhere in the world economy - and hopefully nobody wants that.

If you want to buy gold, you often want to invest in a crisis-proof form of financial investment that offers a certain protection against inflation and currency crises.

Björn Siegismund, chief strategist at Kapilendo AG

The value of gold as insurance can be seen very well in the example of Turkey, where inflation is eating away at the purchasing power of the lira. Calculated in lira, the gold price has risen disproportionately since the beginning of 2017 and has long since paid off from the perspective of Turkish gold investors.

Put simply, if currencies are weak, then gold is strong. And we believe that there should be no shortage of weak currencies in the coming years. That is why we believe that investors should invest some of their wealth in gold.

How you can invest in gold as an investor

There are different ways to invest in gold. Many gold lovers prefer to invest in physical gold that they can touch - coins and bars. Investors should always weigh cost and security when storing. The safe in your own house is possible, an insured bank safe can be worthwhile for larger quantities. When keeping the gold at home, it is advisable to check to what extent the gold is covered by household insurance.

Selling your own gold holdings is relatively simple. There is one more special tax issue to note here for investors. Anyone who buys the precious metal and only sells it after a year does not have to pay tax on this profit - so it can be worthwhile in individual cases.

In addition to bars and coins, investors can also invest in special financial products with a focus on gold. These can be mutual funds, stocks, certificates or ETF funds. Another option are gold savings plans.

"Regardless of the type of investment, investors should inform themselves in advance about the advantages and disadvantages of the individual forms in order not to take unwanted risks or buy overpriced products"

Björn Siegismund, Kapilendo's chief strategist.

Only then is the time ripe for a decision. Learn what a weatherproof portfolio with gold looks like.

Frequently asked questions

Can gold protect my wealth from the next crisis?

Many investors make a mistake and invest more in gold in stormy times to protect their assets. However, gold is not a crisis metal, as is often claimed, but a currency at the end of the day - the currency of last resort. Its worth depends on people's trust in the global financial system.
Gold should rather be understood as insurance for weak currencies. If things go badly in a country economically, if inflation rises and the central banks are printing money unchecked, this is often a sign of a downturn. In such scenarios, gold becomes more and more attractive to investors. This can easily be seen from the price developments over the past 20 years.

How Much Money Should I Put in Gold?

It is best to compare the gold content in a portfolio with insurance for your own home. No sane person will wish their house burn down just to get the insurance premium. In the same way we think: We do not hope for the highest possible gold price in order to generate a return. Conversely, that would mean that there is a tremendous fire elsewhere in the global economy - and hopefully nobody wants that.
The value of gold as insurance can be seen very well in the example of Turkey, where inflation is eating away at the purchasing power of the lira. Calculated in lira, the gold price has risen disproportionately since the beginning of 2017 and has long since paid off from the perspective of Turkish gold investors.
Put simply, if currencies are weak, then gold is strong. And we believe there will be no shortage of weak currencies in the coming years. That is why we believe that investors should invest some of their wealth in gold. How big this part is is difficult to determine. It should at least not make up more than 10% of your assets.

 


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