As we enter the second quarter of 2021, the year during which so many mainstream analysts and politicians have predicted we’ll see a miraculous recovery from the covid crisis, it is becoming increasingly clear that the damage inflicted by the lockdowns and the shutdowns is really very extensive an persistent. Of course, I’m referring to the damage to the real economy, that is, to actual businesses, households and the countless citizens that were rendered unemployed. Because if one decides to look at the stock market to gauge the health of the global economy, they couldn’t be blamed for thinking we living a repeat of the roaring 20s.
In this highly volatile and obviously unsustainable environment, it might be challenging for conservative investors to separate the signal from the noise and to see a clear path forward. However, this task is a lot easier for those investors and savers who understand monetary history and plainly recognize the crucial role of precious metals in uncertain times like these. Robert Hartmann, one of the founders of pro aurum, is such a man and he graciously agreed to share some of his insights and his outlook for the coming months and years. His professional experience in the investment world and in precious metals in particular is extensive, while he also has a very deep understanding of past crises, of the physical precious metals market and of the current monetary and financial system and its vulnerabilities.
Claudio Grass (CG): It’s been a wild ride for precious metals since the start of the pandemic. Apart from the price rally, over the last year we also saw a lot of interest from first-time gold and silver investors. Given the general mania gripping stock markets and the rise of amateur traders, did this new demand for physical precious metals surprise you at all or is it yet another sign that physical gold is the safest of safe havens?
Robert Hartmann (RH): To be honest, the strong demand we saw over the last 12 months from first-time investors didn’t really surprise me. We know from our annual Forsa survey that currently only 10-15% of German investors have considered adding precious metals as an asset class in general, and gold and silver in particular, to their portfolios. Conversely, this means that around 85% of Germans do not own any precious metals. So it was just a question of what the trigger would be that would set off the next wave of purchases.
As was the case with past bubbles too, such as the dot com bubble of the late nineties, we only buy – or want to buy – the right quantities at a late stage. Given this expected rush of investor interest, the availability of coins and bars will be severely limited. Physical gold and silver will then only be obtained at horrendous premiums on the pure metal value – if at all.
CG: During the global economic freeze last year, we also witnessed unprecedented disruptions in the physical precious metals market, as sudden border closures and forced refinery shutdowns dealt a severe blow to logistics operations and interfered with normal supply. How did pro aurum handle these extraordinary challenges?
RH: I’ve been in this business for more than 35 years now and I have never seen anything like it. Of course, there have also been times in the past when demand was exorbitantly high and supply was limited – for example, at the height of the previous financial crisis in 2008 and 2009. But what we faced last March and April was a real, truly unprecedented challenge. The most important producers of coins and bars were either forced into a sudden and full lockdown, or they faced logistical paralysis and were unable to organize air freight. And even if they did manage it, they had to do so at freight rates that were ten times higher than normal times.
To be honest, at pro aurum we were a little lucky, because we were faced with this situation at a time when our vaults were full. In addition, our dealers were very quick to react and showed great foresight. They reserved quotas with the producers just a few days after the first corona cases emerged. That was also the reason why pro aurum was one of the last bastions where even larger quantities of precious metals could be obtained in April. Many colleagues at other precious metal dealers had already closed their shops and suspended their online trading.
CG: Given the scale of the monetary and fiscal interventions we saw over the last year, as well as the historic economic distortions they have caused, do you expect the aftermath of this crisis to be different from the last? A lot of mainstream analysts have dismissed inflation concerns, but what is your own outlook?
RH: By definition, inflation is an expansion of the money supply and the associated reduction in the purchasing power of the respective currency. If you look at the changes in the monetary aggregates over the past few months, they have expanded at a rate never before seen in history. And even if most of the money has not yet reached the real economy and there is also a comparatively low velocity of circulation, the effects can already be clearly seen.
All you have to do is look at developments on the global stock exchanges or real estate markets. Even alternative investments have been heating up. Anyone who wants to invest in rare wines or whiskeys has to pay significantly more today than they did a few months ago. We are currently experiencing a renaissance in the raw material markets too. This will fuel consumer prices and this time, inflation will inevitably hit the real economy – albeit with a delay.
For me, inflation is a possibility of creeping expropriation of the citizens and essentially helps the debtor. Many ordinary people wonder why you can afford less and less even though you earn the same or even more than you did 5 years ago. This is the best way to understand how the decline in purchasing power really works.
CG: Looking ahead, apart from inflation concerns, do you also see risks arising from government overreach, over-regulation or further restrictions to individual financial sovereignty? Do you expect such considerations to become a driver of physical precious metal demand?
RH: Precious metals are and always have been the ultimate insurance. They provide protection both against state failures and against mistakes in the monetary policy of the central banks. Every investor who looks into the history books sees that both have happened over and over again in the past centuries. From that perspective, investing in physical gold and silver is a common-sense precaution and a necessary part of any wealth preservation plan. Investors and ordinary savers ignore this at their peril and the failure to include precious metals in one’s portfolio is pure negligence.
In addition, gold also plays a crucial role in protecting savings from a loss of purchasing power due to inflation, which is a very real and imminent risk, as mentioned before. And that’s what it has been doing since the turn of the millennium. If you look over a period of 20 years, there is no asset class (apart from cryptocurrencies) that has performed better than precious metals.
CG: In this context, of protecting one’s savings from government whim and from systemic risks, what are the main advantages of a jurisdiction like Switzerland for precious metals storage? What makes it unique in your view?
RH: I was born and raised in Germany. In contrast to the seventies and eighties, the integration into the EU was of course much more apparent after the introduction of the euro. Many of the rules that the member states made when they introduced the euro were successively broken, softened or ignored. Look no further than the Maastricht Treaty itself, where the member states determined and agreed upon the conditions and the criteria that a country must meet in order to be able to join the euro area.
The criterion of budgetary stability (with a deficit ratio below 3% and a debt ratio below 60% of GDP) was interpreted as a permanent criterion. And yet for years, practically no member state of the EU has met these requirements, without any real consequences. Instead, politicians never tire of focusing attention on the fact that the euro crisis or the corona pandemic were external shocks that could not have been foreseen when the rules were drawn up. That may be correct – but what is a currency worth if it has had to be “rescued” almost non-stop for 12 years now?
Of course, Switzerland did not make it through the last crises entirely unscathed. However, in the end, the sovereign power here lies with the people. The Swiss system of direct democracy and the frequent referendums over important decisions ensure that the reach of the state and the follies of politicians are kept in check. This is why the various power abuses we commonly see elsewhere are very rare phenomena in Switzerland. In this light, Switzerland is one of the very few places in the world where you can safely and confidently store parts of your wealth outside the EU. Many German customers of pro aurum’s bonded warehouse solution also see it that way.
CG: Over the last months, we’ve been witnessing a progressively absurd rally in stocks, with the rise of amateur trading and with rampant speculation driving valuations to levels that make no sense. This frenzy increasingly bears the marks of a bubble, while it seems to have reached all corners of the market, making it extremely dangerous. Gold appears to have escaped this mania and indeed, the price has somewhat retreated at the moment. Do you see this as a buying opportunity and do you expect more responsible and conservative investors to flock to gold as a result of the frothy valuations everywhere else?
RH: This is all part of the wider investment crisis that’s been prevalent in the markets for quite some time. It is mainly due to the intervention of the central banks in the interest rate market. Interest is the price of money. But if money doesn’t cost anything anymore, then what is it worth? Today, instead of getting interest without risk in the interest rate markets, you only get risk without interest.
As for equity markets, I honestly see no imminent risk of a serious crash. Many analysts were raising the alarm over a severe correction when the DAX and CO were a half as expensive as they are today. And they’re still issuing the same dire warnings, louder and louder, yet stock prices keep climbing. My view is that stock markets can keep scaling this ”wall of worry” and they can keep defying gravity for much longer than people imagine. Meanwhile, the gold price has now corrected around 20% from its high in August 2020. Investors with a long-term perspective could definitely take advantage of this pullback. I don’t think there will be another significant downward trend from here on out.
CG: For quite some time, silver has been seen as the “little brother” of gold, and generally failed to attract mainstream investor interest. This year, however, the precious metal really shone. Why do you think that is and what are your expectations going forward?
RH: Silver is pretty much the only form of investment that has not yet topped its 1980 high. I see great opportunities here that this will change in the medium- to long term. It’s important to bear in mind that the demand for silver doesn’t only come from its investment appeal or its uses in jewelry, but the metal also has extensive industrial applications, especially in the rapidly growing solar energy sector and in other “green” technologies. That will give the silver price a tailwind and considerably boost its upside potential.
CG: As more and more amateur investors enter the stock market, we’re seeing a lot of examples of “rookie mistakes” and the consequences of getting into this arena without first understanding even basic investment principles. What would you advise someone who is thinking about investing in physical gold? Where should he start from and what should he look out for?
RH: At pro aurum, we look at the financial situation of each investor individually and we analyse their specific goals and needs. In addition to all the numbers and the data, there are also some very human, emotional factors that need to be considered. What is the individual’s risk tolerance? What is the investment horizon? What other asset classes is he invested in and in what proportions?
With this knowledge, you can make specific suggestions for setting up a precious metals portfolio. In general, we recommend our clients invest 5 – 20% of their assets in precious metals, of which 80% is allocated in gold and 20% in silver. When investing larger amounts, it is always advisable to carry out several transactions and not to buy everything at once. This so-called cost-average principle usually ensures lower entry prices.
CG: What are the most important qualities to look for when selecting a precious metals partner? What are the key elements that you find most important, especially from a long-term investment perspective?
RH: At the very core of the reputation and the brand of every precious metal dealer can only ever be one thing: trust. After all, in many cases our business is about protecting the life savings of our customers. This kind of responsibility is very serious and you can’t make any mistakes! We at pro aurum have earned the trust of our customers for almost 20 years. And the stronger the trust of our customers grows, the harder we try to justify and keep it. That is also the philosophy that has propelled the company forward throughout the decades and how we got to where we are today, the largest independent precious metal dealer in Germany and Switzerland.