SWM AG has an expert knowledge of the interaction of interests and claims.

Inflation protection – protection against what?

One might be surprised that SWM AG puts inflation protection first in its recommendation to acquire precious metals. Although the current rates of price increases in Europe are still low, experts think this might change. In particular, the unrestrained printing of money by the European Central Bank (ECB) may lead to rates of price increases getting out of hand.

Risk of expropriation with government bonds

Since 1 January 2013, all bonds that are issued by states in the Eurozone have a CAC clause (Collective Action Clause) in their bond terms. This states that the issuer of the loan does not necessarily have to repay it 100 percent, if they are not in a position to do so. To put this in plain language: it is an expropriation clause. If the state cannot (or does not want to) redeem the bond fully, no court will accept a complaint by a disappointed investor due to the existence of the CAC clause.

Capital controls

“bank run” when masses of bank customers empty their accounts. The problem here is that only a small portion of the quantity of money, perhaps 3 percent, is cash, which is to say real money. The majority of the rest of the money is book money. These are claims to the bank for the issuing of cash.

So, if only 20 percent of the population wanted to empty their accounts, the banks would face an insoluble problem and the financial trickery would be obvious: the banks would not be able to fulfil their obligation, the issuing of cash, still the statutory means of payment. Because of this, there are increasing calls from banks and politicians to gradually abolish cash.

When capital controls are ordered, the banks are temporarily completely closed and even online transfers are not possible during this time. When the banks open again, foreign transfers are prevented and withdrawals are limited to small amounts.

Capital controls are not only possible in Cyprus or Greece but are also already legally regulated in Germany in paragraph 46 of the Banking Act (Kreditwesengesetz). According to this, the Federal Government can “in the event of danger” decree the temporary closing of the banks, restrictions on money withdrawals and bans on transfers.

Fungibility

Even if the possession of gold were to be forbidden in Germany – as it once was in the USA – one could continue to have access to it if it were purchased and stored via SWM in a Swiss bonded warehouse.

The gold ban of 1933 teaches us the following:

* Despite the ban, only 30 percent of the gold was handed over to state authorities in 1933 in the USA.

* Five ounces of gold per head were still permitted. For a family with three children, this was nevertheless still 25 ounces of gold.

* SWM invests only around a fifth of the precious metal portfolio in gold. The majority of around 80 percent consists of the white precious metals such as silver, platinum and palladium. For these, there has never been an obligation of compulsory sale to the state.

* Also interesting: all the safes and lockers of customers were sealed in the banks in 1933. They were then opened under the supervision of a government representative. If they found gold bars or coins inside, these were seized. One should therefore not keep ones precious metal in a bank locker.

Keeping precious metals in one’s own home is too risky. It is much safer to store them in a Swiss bonded warehouse – a high-security safe facility.

Tax advantages

The purchase of silver, platinum and palladium is subject to value added tax in Germany. You will therefore pay a surcharge of currently 19 percent in value added tax on the purchase price in Germany. When you buy precious metals with SWM you get silver, platinum, palladium and gold free of value added tax. You thus save 19 percent right away on your purchase. Currently, gold can also be purchased in Germany free of value added tax.

Profits that you generate when selling a financial investment are normally to be taxed in Germany. For a few years, there has been a uniform tax rate of 25 percent for this for the flat rate withholding tax. On top of this there is the “solidarity surcharge”. The “profit tax” therefore amounts to 26.375 percent in total. Profits from physical precious metals are exempt from this tax if more than 365 days have passed between the purchase and the sale.

Advantages of a purchase of precious metals compared with the acquisition of certificates, ETFs and ETCs

Big-name asset management companies point out the following, sometimes hidden costs of the purchasing of certificates:

• Trading fees
• Spread
• Initial sales charge and purchase fee
• Ongoing “management” fee
• Trading fees for regrouping. Here, as opposed to giving a loyalty rebate, additional incomes arising are not passed on to the investor.

Gold certificates are contractual agreements linked to the development of the gold price. These do not represent physically deposited gold but are only debt securities vis-à-vis a counterparty (investment firm, broker, bank). This claim is dependent on the solvency of the debtor. In the event of insolvency, a total loss is to be expected. Gold certificates are therefore not suitable for holding gold as a long-term investment.

Advantages of a purchase of precious metals compared with a real estate acquisition

In a realistic cost comparison, the purchaser of real estate very quickly racks up additional costs of 14 to 15 percent (broker 5 %, notary 2 %, real estate transfer tax on average 5 to 6 %, trust order of the notary 0.5 %, priority notice of conveyance at land registry 0.5 %, registration of ownership 1 %; then afterwards ongoing costs for housing management, problem of rent limit, risk of a rental nomad and ongoing renovation reserves with simultaneous risk of surprise renovation requirements).

The costs with SWM AG are roughly the same for sales, logistics, insurance, storage, auditors for the inventory check, security and management.

Gold ETFs
ETF stands for Exchange Traded Fund and is a tracker fund. The minimum delivery quantity is often a 12.5-kg standard bar. In addition, ETFs that invest 100 percent in physical gold are not permitted in Germany and the gold is only delivered within the respective country. The flat rate withholding tax that arises is not automatically retained in the foreign country, which means that the ETF owner has to see to a lot of paperwork.

Gold ETCs
ETCs stands for Exchange Traded Commodities. This form of investment is similar to ETFs. Here too, the development of the gold price is meant to be tracked. However, the issuer can cover the capital not only with physical gold, but also partly with claims to delivery for gold. Unlike ETFs, these are collateralised, fixed-term bonds and not special assets. If the issuer goes broke, the investment belongs to the insolvency estate and in case of doubt the ETC-owner comes away empty-handed. Because of the collateralisation with claims to book gold it can happen that a delivery of gold is not possible in the event of a crisis-induced gold shortage.