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Erscheinung:29.01.2021 | Topic Consumer protection Precious metal investments: all that glitters is not gold
Four in ten investors have either already invested in gold or other precious metals or could imagine doing so in future. However, investments in precious metals are risky and speculative.
Gold glitters, and its reputation as a secure capital investment is equally dazzling. There are two reasons for this: in a survey conducted on behalf of BaFin (see info box “Precious metals survey”), 83% of those who had purchased or are considering purchasing precious metals believed this to be a secure investment. And in the current low interest rate environment, investments in gold, silver or platinum seem not only safe, but also lucrative. The risks and the costs of such investments are evidently being underestimated.
At a glance:Precious metals survey
In August 2020, on behalf of BaFin, the company OmniQuest Gesellschaft für Beratungsprojekte mbH surveyed 1,000 consumers over the age of 18 that are resident in Germany about their attitudes towards physical precious metals as a capital investment.
The answers to the 18 questions included in the representative survey provided BaFin with insights into the form of investment favoured by investors, the sources of information they use most, their motivations for investing, and their views regarding the costs of purchasing precious metals.
The detailed results are available on the BaFin website.
Certain credit institutions and other providers use the positive properties customers associate with gold to advertise investments. The websites BaFin analysed alongside the precious metal study often claim that gold is timeless, crisis-proof and that its value is stable.
Where investors purchase precious metals
Of the 1,000 respondents, 259 had already purchased precious metals and 124 could imagine doing so in future. 47% of investors purchased their precious metals from banks, whilst 53% used other providers.
63% of respondents who had purchased precious metals from a bank reported that their bank advisor had recommended the investment. For 26%, information obtained from the bank was the most important factor in their decision to purchase precious metals. 32% of respondents who had not yet invested in precious metals but were interested in doing so in future believed information they received from their bank would influence their investment decision the most.
For investors, only other websites (32%) were reported as a more important source of information than banks. Those interested in investing in future stated that information from friends, family and acquaintances would be most important (36%) (see Figure 1).
Figure 1: Which sources of information influenced, or do you think will influence, your decision the most?
© BaFin / OmniQuest Gesellschaft für Beratungsprojekte GmbH
Of around 383 investors, 78% believed precious metals to be more secure than bank deposits. This corresponds to the basic assumption held by 83% of respondents that investing in precious metals is secure.
This is in spite of the fact that, in Germany, deposits held in a savings account are protected by the statutory deposit guarantee up to an amount of €100,000 per customer and credit institution. For gold and other precious metals, in contrast, there is no statutory guarantee.
Physical delivery preferred
Credit institutions and other providers offer their customers various options for purchasing precious metals. One option is sole ownership of bullion or coins. Investors can store them in a safe or make use of a precious metal depository operated by a third party. It is also possible to acquire joint ownership rights in a precious metal collective holding stored by a central depository.
Banks also offer precious metal accounts that grant customers the right to physical delivery. But here, too, the statutory deposit guarantee does not apply.
In the survey, 61% of investors and 57% of potential investors stated they would favour physical delivery. Precious metal depositories that grant investors the right to obtain physical possession (19% and 25%) and precious metal accounts that grant investors the right to physical delivery (31% and 25%) were less popular forms of investments.
Protected against loss and inflation?
The price of gold depends on the relationship between supply and demand, but it can inflate and fall unexpectedly in times of crisis. On the global market, gold is traded in US dollars, which means its price is also determined by the exchange rate between the US dollar and the euro. As trite as it may sound: if the price you sell at is lower than the purchase price, you will make a loss. 58% of investors and potential investors were fully aware of this risk of loss. However, 33% falsely believed that there is no risk of loss (see Figure 2).
Figure 2: In your opinion, which of the following statements apply to investments in precious metals?
© BaFin / OmniQuest Gesellschaft für Beratungsprojekte GmbH
The belief held by 79% of investors and potential investors that precious metals offer protection against inflation may be derived from the hope that gold could be used as a second currency in the event of a rapid acceleration in monetary depreciation. This has not always worked: an analysis has shown that gold offered no protection when inflation rates were relatively high between 1980 and 2000.
The majority invested no more than 10%
Through its survey, BaFin discovered what share of their assets investors invested in precious metals: 60% invested up to 10% of their assets. 34% of investors surveyed calculated that the share of their assets invested in precious metals fell between 11% and 25%.
Not all respondents expect additional costs
Purchasing gold is often associated with additional costs. 29% of investors and potential investors did not believe this to be the case, 22% were not sure (see Figure 3). The 49% who were aware of the costs gave as examples a premium upon purchase (56%), transaction costs in the case of physical delivery (60%), or ongoing storage costs (68%).1 In reality, all of these costs might be incurred.
Figure 3: Can costs in addition to the purchase price be incurred in connection with the purchase of precious metals? If yes, what are these costs?
© BaFin / OmniQuest Gesellschaft für Beratungsprojekte GmbH
Conclusion
The price of gold and other precious metals may never fall to zero. But consumers should not allow themselves to be dazzled by this fact. The risk of total loss may be virtually non-existent, but the risk of considerable loss is not. Precious metal prices are subject to strong fluctuations. And a further risk comes from the fact that not all providers and investment opportunities are trustworthy. Investors should therefore carefully consider what share of their assets to invest in precious metals.
Footnote:
- 1 Total over 100% since respondents could give multiple answers.
Interview with Christian Bock, Director-General for Consumer Protection, on the risks of investing in precious metals
“Investors caught in a trap”
Mr Bock: Precious metals have a good image. Is this justified?
It is said that, in times of low interest rates, gold and other precious metals can offer a safe haven, and even a lucrative investment opportunity. As someone who specialises in consumer protection, my advice is: be careful! When you invest in gold and other precious metals, you are putting your money into an investment that provides no ongoing income whatsoever. If the price stagnates or suddenly falls, investors are caught in a trap. In this situation, you need to be able to sit it out. You can’t be dependent upon getting the money you invested back, or on generating a profit. And that’s without even mentioning the costs and other expenses.
I don’t mean to say that, as an asset class, precious metals are all bad. But, as with all types of investment: if you invest all or most of your assets in gold and other precious metals, you will expose yourself to a serious concentration risk. An investment in precious metals must fit in to a wider investment plan, and of course, it must also correspond to the investor’s objectives, including their risk appetite.
What does BaFin have to do with precious metal investments?
BaFin does not supervise the purchase and sale of precious metals. However, certain products may be subject to the prospectus requirement under the German Capital Investment Act (Vermögensanlagengesetz – VermAnlG). Such products include, for example, investment models that promise the investor their money will be invested in gold and that interest will be paid, or that their funds will be repaid or otherwise reimbursed in cash. It is BaFin’s responsibility to approve these prospectuses, provided they meet the statutory requirements, and to step in when companies violate the prospectus requirement. It is not our responsibility, however, to review the integrity of a provider or whether their investment offer is likely to yield a profit.
If the investor is promised unconditional repayment of the purchase price, this is deemed to be deposit business, which is subject to an authorisation requirement under the German Banking Act (Kreditwesengesetz – KWG); the provider would thus require a banking licence. In such cases, investors should check the BaFin website to find out whether providers are subject to BaFin’s supervision.
In general, I would advise anyone who is considering investing in precious metals to take a critical look at the providers and the investment opportunities on offer. That applies to both the purchase and the storage of precious metals.
Are there currently any regulatory developments?
Things are indeed changing. The draft bill for an Act to Strengthen the Integrity of the Financial Markets (Finanzmarktintegritätsstärkungsgesetz) includes stipulations that certain business models offered by providers of precious metals and precious metal depositories be classified as investment products and subject to the prospectus requirement. Specifically, this relates to arrangements where, following the end of the investment term, precious metal investments, together with interest payments, are paid out in cash or precious metals. This would at least address the disparity of information between providers and investors, since providers would have to publish the approved prospectus, which would also be filed with BaFin. The prospectus thus provides an assurance of both transparency and liability for the investor.
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