Over the last couple of months, we’ve witnessed unprecedented changes in the global economy, in the markets and in our societies. The corona crisis and the governmental measures that were introduced had a dramatic and direct effect on all of us, as investors and as citizens.
That is especially true of precious metals investors. A new gold rush is now underway, with impressive price gains and elevated demand levels that are expected to persist. However, this skyrocketing demand, triggered by the panic in stock markets, coincided with a historic supply shock back in March, creating serious and widespread disruptions in the physical precious metals market. To discuss exactly what happened, what the experience was like in the “frontline” and what to expect going forward, I turned to Robert Hartmann, one of the founders of pro aurum, whose experience in the investment world and in precious metals spans decades.
Claudio Grass (CG): The corona crisis has introduced unprecedented risks and heightened levels of uncertainty, both among investors and among the general public. What is your own reaction to this extraordinary shift and your overall outlook of the global economy going forward?
Robert Hartmann (RH): I think it is important to understand that the risks in our financial system were already considerable before the corona crisis. I’m not an economist, but common sense clearly tells me that the gigantic orgy of debt on the part of governments and companies, coupled with ever lower interest rates, is not sustainable in the long run. The interest-bearing asset classes with negative real interest rates simply no longer make sense, due to the intervention of the central banks. Debtor risks have long ceased to be reflected in valuations.
The corona crisis is exacerbating and accelerating this mispricing even further. It is no longer billions of euros that are being created out of thin air, as in previous crises; this time it’s trillions. Also, in contrast to the last rescue operation in 2008-2009, this time a large part of the money is being injected directly into the real economy. This means that more money is now chasing a decreasing amount of goods. I learned at school that this will have an inflationary effect.
It looks to me as if the central banks are using more and more resources in their effort to resuscitate and reactivate the global financial system with their respective bailouts at more or less regular intervals of around 10 years. In the process, more and more anomalies are being created, which certainly would not have occurred without this interference. When I look at some key metrics and indicators, such as the gold/oil ratio, the gold/silver ratio, the gold/platinum ratio or the valuations of major stock markets in comparison to the GDP of their respective countries, the extreme deviations from the historical averages can be seen very clearly. Decisions on where to invest your capital in the medium to long term are becoming increasingly difficult for investors.
CG: The physical gold market was especially affected by the supply chain and production disruptions that governmental measures introduced. We saw very unusual premiums and widespread shortages in March, while the price for “paper” gold diverged from the physical. Can you explain what happened and why?
RH: We experienced the perfect storm in the precious metals markets in general and gold and silver in particular. Practically without warning, all major gold producers in Switzerland, that account for around 70% of global bullion production, were shut down by official channels. At the same time, there were dramatic restrictions on air travel, so the import of the most important bullion coins, such as the Krugerrand (South Africa), the Maple Leaf (Canada) or the American Eagle (USA), was simply no longer possible. As for the silver coins from Australia and Canada, we had to wait about four weeks for deliveries from the producers, for coins we had already paid for.
Amid this supply shock, demand from German and European investors rose to an all-time high. Many traders were only able to obtain goods on the secondary market (i.e. not from the producers), refinancing rates for precious metal loans multiplied, freight rates exploded by a factor of 10-20 and the bid-ask spread for an ounce of paper gold rose to a peak of almost USD100. These are all hard costs that precious metal traders had to pass on to their customers.
CG: How about now? Is the situation in physical gold normalized or do you expect there might be further disruptions and risks down the road?
RH: After the bar producers in Switzerland partially resumed their production and the volatility has abated, the premiums for physical bars and coins have already decreased.
The pressure has eased somewhat over the past 8 days and we are receiving around 30-35% fewer orders from customers than we did at the end of March. Now that the stock markets have recovered, many investors are probably relatively more optimistic about what the economy will look like after the end of the shutdown. That gives us some breathing space. We are, however, expecting a new wave and we’re prepared for it. Regardless of the rosy picture that stock markets might paint at the moment, the corona crisis is far from over. When its impact becomes even more apparent, we expect another gold rush and the higher the prices rise, the more demand there will be.
At the end of the day, gold and silver in their physical form cannot be created at will like paper money or bonds. I have repeatedly highlighted this simple fact at every opportunity over the past 20 years. So many people still seem to be oblivious to the nature of fiat money and its inherent risks. Only 10-15% of Germans are invested in physical precious metals.
CG: How is pro aurum positioned for the challenging months that follow? How have you prepared for possible risks ahead?
RH: We have done very well compared to other retailers over the last 3 months. To a large extent, we owe this to our dealers, who already ramped up our inventories to the limit in the run-up to the crisis. This enabled us to supply not only our private customers, but also our banking partners and even other precious metal traders. We also took important proactive steps internally, as we deployed our staff flexibly, so that our customers could always reach us. In our newsroom, we published an update almost daily on the situation at pro aurum.
Currently, we are in the process of replenishing our stocks as much as possible, while we are also processing all orders that are still open from the time after Easter. Overall, the corona crisis was a valuable experience that we will undoubtedly benefit from in the future, like we did from the lessons learned during the stormy times of the 2008 crisis and from the buying spree in December 2019, shortly before the lowering of the cash limit for anonymous precious metal purchases in Germany.
CG: What are your expectations for the gold price in the coming months? Do you anticipate this strong demand we’ve been seeing to persist?
RH: The price of gold is already trading near its all-time high in many currencies. Compared to the euro, gold costs more than five times as much as it did at the turn of the millennium. This means that the euro has lost around 85% of its value against gold since then. In view of the renewed glut of money, this uptrend is very unlikely to be reversed anytime soon. To the contrary, I expect an exponential rise in the gold price within the next five years, similar to that of the 1970’s. Then we should leave the party and invest in productive capital again.
CG: Silver seems to have been often overlooked lately, while everyone’s been focused on gold’s bullish ride. Do you see a buying opportunity there?
RH: The gold/silver ratio recently reached an all-time high of over 125, meaning that for the price of 1 ounce of gold you get more than 125 ounces of silver. There is about 15 times more silver than gold in the earth’s crust. The average gold/silver ratio over the last 20 years has ranged between 50 and 60. Thus, silver is clearly undervalued and should perform significantly better than gold in the next few years.
CG: For years, we’ve been talking about the importance of holding precious metals in their physical form and avoiding paper products and I think this is especially true in a crisis like the current one. What are the main practical advantages that you see in physical metals at this stage?
RH: Since the foundation of pro aurum in 2003, we have pointed out in thousands of articles that physical gold and silver belong in every well-diversified portfolio. And this is completely independent of whether one is living in a time of crisis or not. Physical gold cannot be multiplied at will, does not carry counter-party risk and cannot be devalued by third parties. These are unique advantages that no other asset class offers.
CG: In the uncertain months and years that await us, it would appear that political risks could prove as dangerous as the economic ones for investors. We’ve already seen serious threats to property rights in many jurisdictions. Do you think Switzerland will continue to be the exception to the rule when it comes to legal stability and respect for private property?
RH: Many observers view the developments in the Eurozone with skepticism. During the corona crisis, freedom of movement has been severely and abruptly restricted and open borders now seem to be a thing of the past. As for the fate of the euro, that’s not a foregone conclusion either. “Whatever it takes” was the answer of former ECB boss Mario Draghi to the question of what means would be used to save the euro. It remains to be seen to what lengths the ECB will go to this time and whether they’ll prove effective.
What we do know for sure, is that the spending and printing spree is already of a gigantic scale. I don’t think there is any harm in keeping some of one’s assets in Switzerland and thus also diversifying geographically. Despite the very strong currency, the Swiss economy is robust, the people are friendly and, very importantly, there is still a bit of direct democracy here. So the political class cannot go against the interests of the people for too long.
CG: Looking at the bigger picture, what do you expect the wider impact of this global economic freeze to be? Apart from the obvious economic implications, do you also see the potential for geopolitical and social changes that investors need to factor in?
RH: This is a dramatic and unprecedented shift, which I believe will affect us for a long time. It will have a lasting impact and life will be different, even after the lockdown and shutdown measures are lifted. This crisis clearly demonstrated how fragile our “normal” everyday life really is. Everything we knew and took for granted changed, practically overnight.
Perhaps the “higher, faster and further” motif that we were so used to has had its time. The pursuit of ever greater profit could now partly give way to other things, such as better, socially and ecologically more advantageous solutions for customers. We are not yet able to assess the exact consequences, as we do not know when this chapter will end. However, I personally assume that in a second or third wave of the pandemic there will be more and more people who do not follow the rules. People want to work, meet friends and go on holiday. It will also be very interesting to see when and which of our fundamental rights will be restored. Hopefully, none of them will fall by the wayside or be lost as “collateral damage” of the corona crisis.