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  • 2023-03-06

    Golden rules: what to know when buying investment products

     

    Even in the digital age, the familiar image of glittering jewels and gold bars piled up in a home safe is a symbol of financial independence that surpasses money, stocks, securities, or savings in one’s bank e-account. While precious metal products remain one of the most popular types of investment, and are particularly important in times of economic instability, the popular saying ‘all that glitters is not gold’ makes one wonder: what is important to know before buying investment products?

    Historical impact of metals on the economy

    The use of various precious metals as means of payment dates back to Babylon more than 4,000 years ago, but this economic model was not standardised till the era of Ancient Greeks. The philosopher Aristotle, who lived in the 4th century BC, aptly pointed out that not all areas of life can be valued by barter, and that it is better to use something that can be readily used for other purposes, such as iron, copper, silver, gold, etc.

    Initially, the value of such base metals was measured only by weight, but this created additional problems, such as the need to weigh everything carefully beforehand and then to assess the purity of the metal used, as more and more people were seeking to use alloys with many impurities. To reduce the time involved in this complex process, the authorities began stamping the ingots with primitive markings to certify both weight and purity. This greatly accelerated trade, so the standardised model of payment began to spread, and the stamping of metal ingots has survived to the present day.

    Main properties of alloys

    To accurately determine the quality (purity) of precious metals used in investment products, the fire assay method, which has been used for centuries, as well as modern spectroscopic instruments can be used. Requirements for precious metal products (bars, coins, etc.) are usually laid down by market regulators or by legislation, ensuring that the specifications set out for alloys are met by all stakeholders, from producers to buyers. For example, for a gold product to be considered an investment gold product in the EU, the purity of the alloy must be at least 99.5% in the case of bars, or at least 90% in the case of coins.

    It should be noted that modern investment products are labelled with the manufacturer’s name and a stamp bearing the certification number, weight and purity (percentage) or fineness / hallmark (parts per thousand) of the alloy. The market-leading and most common investment products come from the Royal Canadian Mint, the Perth Mint in Australia, and the Swiss precious metals refiner ‘Valcambi’.

    Things to consider when investing

    As already mentioned, gold (or other precious metals) investment products are worth choosing for several reasons, the main one being their long-term economic value (see the table below): they are more stable than currency, and therefore essentially provide a safeguard against the risk of inflation or changes in geopolitical situation. In addition, diversification of the investment portfolio is essential to avoid the unlikely yet possible failure of one or other type of investment: for example, if the investment is purely digital (virtual stock exchanges, cryptocurrencies, etc), it would be worthwhile to have a ‘plan B’ that is physical – investment products made from precious metals are excellent for that.

    Change Amount, € Amount, %
    1 year -22.66 -1.30
    5 years +653.83 +61.07
    20 years +1403.92 +438.11

    International performance of 1 troy ounce (31.1 g) of investment gold (source: goldprice.org)

    It is worth noting that although real estate investments are often more financially rewarding than precious metals, they have an important drawback: real estate literally cannot be taken with you when you need to leave in a hurry, and it takes much longer to encash real estate. Of course, it is not enough to buy an investment product – you also need to assess your objectives and your options in several aspects:

    WEIGHT: When deciding to buy investment products, it is worth taking into account the potential future liquidity of the asset. It is advisable to choose smaller investment ingots rather than one larger one, for example, ten 100 g bars rather than one 1 kg bar – if you ever have to sell your assets, it will be much easier and quicker to find a buyer for smaller ingots. Investors are advised to choose bars of at least 1 oz (31.1 g), while smaller bars are more suitable as gifts.

    TYPE: While all forms of precious metals have a high monetary value, they also have important differences that determine the value of an investor’s portfolio depending on what exactly the investor chooses to accrue. For example, one of the most popular products of the United States Mint, the ‘American Eagle’ gold coin with an alloy purity of 91.67% (Au 916.7), is more expensive than investment gold bars of the same weight. Despite the use of a higher purity of gold in the bars, the price of investment coins is enhanced by their numismatic value. For this reason, investors are advised to opt for bars rather than coins, as the raw material price is closest to the purchase price, i.e. the margin on production costs is the lowest.

    STORAGE: Consideration should be given to whether the purchased investment products can be stored in a safe place and out of reach of any irrelevant third parties. Although it is possible to store physical investments in a safe at home, investors often choose to entrust their assets to professional custodians, also known as deposit banks, which provide storage services for investment products. Storage and related services are often subject to a fee, but the risk of loss of accrued physical assets due to theft is significantly reduced.

    INSURANCE: For those who prefer home safes, it is essential to take out insurance for investment products – in the event of theft or other disasters, this may be the only way of recovering any lost assets. It should be stressed that if investment assets are held in storage locations that do not meet the strict requirements of deposit banks (e.g. in storage facilities), they are not insured automatically and must be taken care of additionally. Usually, the amount of such insurance fee is proportional to the value of the insured assets – the more assets, the more you will have to pay for the insurance yourself.