Savvy investors will already choose physical gold to avoid the counterparty risk of futures accounts, ETFs, and other forms of paper gold. But the jurisdiction of gold storage represents another, often overlooked counterparty risk.
When disaster strikes and the global financial system is plunged into chaos, your gold is more valuable than ever — not just to other investors, but to governments and central banks as a means of controlling the economy.
Throughout history, authorities have intervened and seized the gold of citizens — not only in fascist regimes like Stalin’s Russia and Mao’s China, but in the land of the free when President Roosevelt confiscated gold to bailout the Federal Reserve in 1933. To avoid being left high and dry, investors should factor the risk of such an event happening again into every decision about where to store gold.
Today, bullion buyers today are often confronted with the choice between vaulting gold in the small Alpine nation of Switzerland, and the economic superpower of the United States. Both are developed nations that promise a degree of prosperity and stability. But different laws, history and culture mean only one country is a truly safe bet.
Political and Economic Stability
The United States of America is the largest and most powerful economy ever to exist, and is perhaps now the greatest it’s ever been. (At least if we listen to president Trump!) But beneath the surface, the U.S. faces several threats that make the country an inferior choice for storing gold.
As America plays the global policeman, it increasingly risks getting sucked into wars. During the Obama presidency alone, America attacked an average of one country a year, dramatically raising the geopolitical risk of using the country to store gold. This is reflected in the rank awarded to the nation by the World Bank’s political stability index. The USA comes in at number 69, below the communist nation Cuba at 58, and the African nation of Namibia at 59.
Years of dysfunctional warfare have also sunk the United States ever deeper into debt, and the country now runs the risk of debt-induced instability, hyper-inflation, and social unrest. At the end of the fiscal year 2019, the United States’ national debt to GDP ratio was 79% — and coronavirus response measures have since added to the burden.
While some economists argue debt doesn’t threaten stability, The U.S. government has a track record of defaulting on obligations; either by creating new currencies as in the revolutionary war and the civil war, or with President Franklin D.Roosevelt’s infamous Executive Order 6102 in April 1933 during the Great Depression, which meant private gold owners were obliged to take their bullion to a bank and exchange it for dollars.
Switzerland is a neutral nation that has stepped back from Europe’s political shenanigans since the middle ages, but still maintained an army to defend incase of invasion. This nonpartisan status is reflected in the country’s role as host to the headquarters of multiple international organisations, and its economy focused on commerce, finance, and foreign investment.
The Swiss people have a reputation for prudence, and the Swiss economy is characterized by low inflation, stability, and relatively low debt. Compared to the United States’ 79% Debt to GDP ratio, Switzerland’s was just 33% in 2019.
Both Switzerland and the States harbour a historic fondness for gold. In America, this dates back to when “there’s gold in them thar hills!” became a catchphrase for prospectors heading west, and in Switzerland, since Celts and Romans panned for gold in mountain streams.
But while America gave up the gold standard in 1971 under President Nixon, the Swiss franc remained 40% backed by gold until 1992 when the country joined the IMF. Even today, a good chunk of the population would still prefer to go back to gold-backed money — as shown by the failed referendum of November 2014 which proposed a restoration of 20% gold backing for the Swiss franc.
The sheer scale of the United States means it can lay claim to having the largest official gold holdings in the world. But when measured per capita, Switzerland is actually home to the world’s largest gold reserves. This is due to the country’s status as a hub of the gold industry.
Each year, around 70% of gold mined makes its way to Switzerland to be refined before being cast into bars, coins, jewelry and other forms for industrial use, and as the majority of gold vaulting companies are also based in Switzerland, this creates a deep and liquid market for physical gold trading.
Industry Regulations and Banking Secrecy Laws
You can fly into the United States with any amount of gold worth under $10,000 without telling a soul. But if you are carrying more than $10,000 of gold, you will be flagged as a potential money launderer and required to fill out a FinCEN 105 form to explain your activities to the authorities.
Switzerland on the other hand has no limits on what you can carry in. Besides the baggage weight restrictions for travelers on commercial airlines! This laissez faire attitude and lack of currency restrictions have helped give Swiss banks an infamous reputation as the final resting place of the ill-gotten gains of banksters. And while banking requirements today are more stringent than ever, Switzerland still grants a greater degree of privacy and seclusion than its American counterparts.
The repatriation of gold from America
If you’re still unconvinced that Switzerland is the best place for your gold, then you only need to look at the moves of central banks.
Since the crisis of 2008 when faith in the financial system was shaken, European central banks have been pulling gold out of American vaults and back to Europe: The German Bundesbank took 300 tons of its 1,500 tonne gold reserve from the U.S. to Frankfurt in 2013, and Holland then followed suit in 2014, returning 122.5 tons of Dutch gold reserves to Amsterdam from New York.
Turkey, Hungary and other European countries have since made similar moves, citing the need for absolute security in times of crisis.
The world is teetering on the brink of a new economic policy. Not one that was written about by capitalism’s founding father Adam Smith, or even John Maynard Keynes, but a giant experiment in which we will all be the subject.
Negative interest rates threaten to turn the whole financial world upside down — punishing savers and paying borrowers in a complete reversal of normal circumstances.
Investors wishing to protect their hard-won wealth in this distorted economic environment must quickly adjust. But how are assets likely to behave once negative interest rates are put in place? And will the centuries-old safe haven of gold still offer a refuge?
Why are interest rates going negative?
Negative interest rates are a shocking idea. After all, who in their right mind would pay someone to take their money?
The answer can be found by delving deep into the mechanism of the modern monetary system.
Central banks, which are responsible for monetary policy, adjust interest rates to control inflation. This impacts people’s ability to borrow money with mortgages, business loans and other forms of credit.
By keeping inflation at a certain level—usually 2-3%—central banks aim to create steady growth and economic stability.
In economic boom times, people will be confident in the future and borrow more funds—leading to more money sloshing around the economy and higher rates of inflation. To bring levels of inflation down, central banks will raise interest rates and curb the amount of borrowing—making it more attractive for people to keep funds in the bank, and more difficult for them to borrow.
In economic downturns, people are less likely to borrow and spend and more likely to horde funds in the bank. To stimulate the economy, central banks will lower interest rates, incentivising commercial banks to stop storing cash with the central bank at a poor rate, and start loaning it out to businesses, making new ventures more economically viable, creating jobs and boosting the economy.
At least, that’s the theory…
However, since the financial crisis in 2008, confidence in the economy has remained at a low ebb. People are saving more money, and banks are lending less. This has caused inflation and growth to stay below targeted levels, leading banks to continually lower interest rates.
But with interest rates now approaching zero, banks are forced to consider a last-ditch attempt to keep the economy afloat: negative interest rates.
This policy was tried for the first time in Sweden in 2009 as a temporary measure, and since then has been introduced by Japan and other European central banks.
At the moment, the negative rates are mostly confined to the domain of large financial institutions and governments, but they are gradually starting to trickle out from the upper echelons of global finance to high street banks. As seen in Denmark with the introduction of the world’s first negative interest rate mortgage in July 2019.
What happens when interest rates go negative?
Twenty years ago, nobody would have considered negative interest rates to be a possibility. And even today, economists still disagree on the implications for the global economy.
Some policymakers, like President Trump, are keen to embrace negative interest rates to bolster economic growth. Others are more skeptical, like JP Morgan’s Jamie Dimon who said negative rates are “one of the great experiments of all time”, and have “adverse consequences which we do not fully understand.”
One of the potential problems with negative interest rates is that they would not lead to more spending, but actually cause another catastrophic event — a bank run, where people rush to withdraw all their cash at once.
Whether this will happen or not is difficult to say, but banks are certainly likely to face squeezed margins and lower profits, which could discourage them from lending entirely and lead the negative interest rates to pull the economy down further into the quagmire.
Competitive high street banks may also be reluctant to pass on the negative interest rates to customers, for fear of losing them. This attitude is already playing out in Denmark, as the Housing Economist of Danish bank Jyske told The Guardian, “no bank wants to be the first mover into negative deposit rates.”
But with digital cash looming on the horizon, central banks are consolidating power over their currencies — tightening the reins over the money supply and ultimately gaining more power to enforce controversial policies like negative interest rates.
How to invest with negative interest rates
It is a commonly held belief among investors that high interest rates exert a gravitational pull on asset valuations — pulling prices down as investors choose to park funds in cash at the bank to earn regular interest.
Some investors even suggest that the only reason the stock market has performed so well over the last decade is because interest rates have been pushed down so low by central bankers.
On the surface, negative rates would seem to make holding cash even less attractive and further pump up the stock market as the yield of bonds falls.
But the enforcement of negative interest rates is likely to be triggered by very weak growth, or even a recession. This would create a “risk-off” environment that could counterbalance the appeal of equities.
Are negative interest rates good for gold?
Gold and interest rates traditionally have a negative correlation, with gold prices going up as interest rates go down.
This correlation makes negative interest rates bullish for gold, and the metal is also likely to benefit from safe haven demand as the public begin to question the new and experimental central bank policy.
Until now, the impact of negative interest rates has been largely limited to central bank reserves. But when implemented in places like Japan, the results of pushing rates to the negative has been lackluster, with inflation falling instead of rising as the measure failed to stimulate the economy.
The danger is that the poor results could lead central banks like Japan’s to go deeper into negative interest rates, and potentially unleash even more bizarre and dystopian consequences — like mortgages that stretch for many decades to keep that sweet debt for as long as possible, or children being glad at the prospect of inheriting debt.
In this new strange world, the idea of sound money might just make more sense than ever.
Horror stories of the prices of bread and milk spinning out of control have fixed the concept of inflation firmly in the public imagination. These hark back to the worst cases, like in the Weimar Republic where shoppers were forced to buy loaves of bread with wheelbarrows full of bills, and diners would pay for meals in advance because prices would have risen by the time they finished eating. Monthly inflation reached almost 29,500% at the peak of the Weimar Republic crisis in 1923, with prices doubling every 3.7 days. But even the 2% inflation rates of the modern day will destroy the buying power of your bank balance faster than you might think…
In 1913, USD $500 could buy you a state-of-the-art Ford Model T Runabout. Since then, that same $500 has lost 96% of its purchasing power through inflation, leaving you with enough value to scrape the rent in a small city — never mind buying a brand new car!
Few people live long enough to see such a decline in purchasing power, but even over the last 20 years the effect of inflation is still very noticeable.
During the last two decades, the U.S. dollar has experienced an average inflation rate of 2.04% per year. This might sound small, but it compounds to a staggering 50%. So to get what would have been $100 worth of groceries in the year 2000, you will need to pay $150 in 2020.
In many European countries inflation has been even more extreme, with UK inflation averaging 2.8% between 2000 and 2020 — a rate that compounds to 70% over two decades.
So how can you protect your funds against this silent thief?
Protecting savings from inflation with gold
In the classic example of the Weimar Republic, the devaluation of the currency left citizens sweeping worthless bank notes into sewers and returning to a barter economy where goods and services were swapped directly. Eventually, the government restored the gold standard and the economy stabilized, but the scars that were left eventually led to the rise of the third reich.
If you had held gold instead of cash during the turmoil, you would not only have survived, but suddenly become extremely wealthy compared to your cash-holding neighbours.
But while gold would have protected you against hyper-inflation, would it still guard against the “silent thief” of the lower inflation rates that we see in more modern times?
Let’s take a trip back through the last fifty years to see how gold held up against inflation in the final decades of the twentieth century…
“The Great Inflation” of the ’70s
As the swingin’ sixties drew to a close and President Nixon dropped the gold standard, the West entered a period of sustained currency devaluation.
Inflation ratcheted up through the 1970s and hit a massive 14% in 1980. Most economists attribute this to loose monetary policy, which Wharton professor Jeremy Siegel famously called “the greatest failure of American macroeconomic policy in the postwar period.”
Meanwhile, gold took centre stage, delivering more than 1700% returns over the decade, and peaking at $850 in January 1980. This surge outpaced inflation and made gold the star of the seventies.
But some of the stellar performance can be put down to the artificially low starting price of $35 — as set by the United States Treasury from 1934. And although gold acted effectively as a hedge against inflation, the sudden spike in 1979 and 1980 is more commonly attributed to uncertainty over the Russian invasion of Afghanistan, and unconventional policy actions from the Fed, rather than inflation.
By the early ’80s, inflation had persisted at 3% or more for 15 years, with prices more than doubling in ten years.
But after sitting above $700 for a couple of weeks in 1980, gold returned to trade between $300 and $500. Then as the new decade got under way the demand for gold dropped, and even though inflation continued to ramp up, the price of gold didn’t follow.
If you had chosen to hold gold as a hedge against inflation in the 1980s, you would have lost money to inflation, and watched as the stock market ripped higher.
As the cold war thawed and Kurt Cobain played on MTV, the world witnessed a period of strong economic growth, low inflation, and relative stability.
Gold’s performance during this period was lackluster, to say the least. The metal ranged for the early part of the decade, before dropping in 1997 and not stopping until 1999. Gold only found a footing in the new millennium, and eventually surged skywards on the recession of 2000 and 2001.
Gold: A hedge againstinflation the fear of inflation
As shown by gold’s performance during these three decades, the metal’s inverse correlation with inflation is far from perfect.
Gold is not bound to keep up with inflation, and it often doesn’t — like in the 1980s when inflation surged and gold dropped, and the 1990s when gold fell amid steady inflation.
Against slow and steady inflation, gold doesn’t seem to offer any protection. But, the fear associated with high levels of inflation does push up the price of gold.
This was seen in the 1970s when experimentation with monetary policy — along with oil shocks, war, and economic troubles — led to lots of uncertainty and doubt: The perfect recipe for making gold rise.
So although gold doesn’t act as a direct hedge against inflation, it does act as a hedge against the fear and uncertainty associated with it.
As most investors suggest, a well-diversified portfolio, including gold alongside other assets like stocks and bonds, is the best way to protect your savings from inflation in both the short-term and the long-term.
Disclaimer: This content is for informational purposes only and should not be construed as investment or financial advice.
As far back as Ancient Rome, prospectors would sit aside streams swilling water in pans with the hope of glimpsing the yellow metal. Even today, you can still get your hands on gold in this way, but buying online through a broker is your best bet for a secure, cheap service — with no luck involved!
Before you buy, here are a few points to consider:
Gold is not like other investments, but is more of an insurance premium against economic unrest and financial collapse.
Unlike stocks, bonds, and other financial products, gold predates the existing financial system, and doesn’t rely on it for value. That’s why many investors prefer to buy physical gold—which hurts if you drop it on your foot—rather than the ‘paper gold’ of ETFs, and CFDs that entail additional counterparty risk.
As gold is an insurance, rather than an investment, it is more important than ever that you have solid infrastructure for buying and selling. When demand shoots up and physical gold hard to find in times of crisis, you need to be sure that your broker will still deliver an excellent buying experience.
With that said, here are a few qualities to look for in a gold broker:
Trust and Transparency
Solid Gold Quality
Trust and Transparency
The gold market is not exactly known for transparency. Most bullion is bought and sold behind closed doors, and every now and then the market is rocked by mysterious massive trades. But as technologies like blockchain are enabling more transparency, gold custodians are under pressure to verify the existence of holdings and offer direct proof of ownership.
Bar9 uses the pioneering ‘Glass Books‘ transparency protocol to verify your precious metal holdings, while preserving your anonymity.
As if that wasn’t enough, precious metal stock is confirmed every month by our vaulting manager pro aurum Switzerland, and each year the full stock is audited and confirmed by independent auditing company BDO Switzerland.
You might have heard of hard-to-detect fake gold bars making their way into the market. These are often simply blocks of cheaper metal plated with gold.
Real investment-quality gold bars are ~99% pure, with only 1% of another metal — usually silver, copper, or an alloy.
Bar9 only trades bars from manufacturers that are accredited by the London Bullion Market Association (LBMA). This ensures all gold meets the highest standards of physical appearance, purity and quality.
As a hedge against financial turmoil, or even the emergence of a post-apocalyptic Mad Max world, secure storage for your gold is of paramount importance.
Bullion bought with Bar9 is stored in high-security facility “Embraport” 8424, Embrach, Switzerland. Or if you prefer to take delivery, you can store the gold in your own vault or safe deposit box.
Some traders like to hedge their bets by keeping most of their gold locked in a Swiss vault, and a few coins or bars in a safe at home. This guards against the possibility of loss from burglary, but also means you have funds available without having to wait until the rest of the gold in your account can be delivered.
But even if your gold is kept in a Swiss vault, Bar9 doesn’t use the assets for lending or speculating. Gold purchased stored with Bar9 remains under your ownership, and is always 100% stored in the Embraport vault. You own the actual allocated gold, not shares or IOU notes. So if Bar9 went bankrupt, your gold would remain yours.
In the unlikely event of loss or theft, bullion purchased through Bar9 is protected by Helvetia Insurance, established in 1858 and headquartered in St Gallen, Switzerland.
Any asset that can quickly be converted into cash can be considered liquid. Gold is normally a very liquid asset, but In times of crisis this liquidity can dry up. If you need to be able to buy or sell quickly, Bar9 lets you access your precious metals around the clock, 365 days a year. Customer service is available by email, chat and telephone during German working hours.
If you need a specific cash amount—say €850.70 in cash for a mortgage payment—you can sell that specific amount of gold and receive the exact amount of cash.
As a virtual dealer, Bar9 has fewer overheads and can offer more competitive fees than brick-and-mortar gold shops. We pass these savings to you in reduced fees. And unlike our competitors, we offer a simple and easily understood fee structure.
Instead of being forced to wade through a complex list of fees and charges for management, custody, transactions, shipping and more, Bar9 only charges a simple storage fee.
Zero transaction fees each time buy and sell, unlike our competitors
Minimal storage fees of 0.05% / month 0.6% / year
With 1000€ gold in your vault, you would pay 6€ per year. That covers your storage, insurance and auditing. The storage fee is calculated daily but billed to your account monthly.
Low delivery fees from 150€ across Europe, depending on weight and distance
How do I Buy Gold and Silver with Bar9?
Bar9 allows you to buy gold with euros (and more currencies soon!) via SEPA transfer.
Switch euros into gold by navigating to the ‘Fund’ section of the sidebar and selecting how much gold you would like to buy.
Before confirming, you will see the final price.
How to withdraw?
If you wish to take delivery of your gold, you must be based in one of the following countries:
Countless civilizations—from ancient Egypt to Mesopotamaia—have built their economies on the solid foundations of gold and silver bullion. The exchange rate between the two metals dates back as far as 3000 BC.
But while both metals are often lumped together by investors in the commodities basket, the price of each asset is buoyed by different forces.
In recessions, wars, and the many different types of economic turmoil, each metal will behave differently.
So As COVID-19 spreads like wildfire around the world, let’s ask the important question…
Will gold or silver perform best in a global pandemic?
From ‘just the flu’ to a deeply deadly disease, doctors (and Twitter users) are still trying to understand the virus, and economists are still grappling with the possible effects on business. But anyone can see that hitting ‘pause’ on the global economy by putting one-third of humanity under lockdown will have complications — and lead to a possible recession.
To stop the economy collapsing completely, policymakers are turning to extreme helicopter money and quantitative easing. Pumping money into the economy creates the perfect storm for deflationary metals like gold and silver. And, the wave of fear sweeping over the populations has turned even ‘normies’ into overnight doomsday preppers—stockpiling masks, tinned foods, and sound money metals…
Gold, the 5,000 year-old tried-and-tested ‘sound money’, is typically the first choice of investment. Although it is used in electronics, the bulk of the demand comes from its safe haven appeal—as shown by the buying activity of central banks in uncertain times.
Silver also has safe haven appeal, but typically suffers from a weakened outlook in recessions. The metal has a variety of uses—from stopping Lululemon yoga pants stinking, to turning sunlight into energy in solar panels—and as the economy stalls, demand from industry drops.
But enough theory, let’s look at the data…
How did gold and silver hold up in past recessions?
The Energy Crisis Recession(November 1980 – August 1982)
When Iraq invaded Iran in 1980, the price of oil exploded higher. Inconsistencies in the supply of the valuable commodity then coincided with stagnant economic growth, high unemployment, and high inflation—a dangerous economic brew known as stagflation. Then when Federal Reserve Chairman Paul Volckert tried to tame the inflation through restrictive monetary policy, the brew turned toxic and the U.S. sank into a recession that left stocks, gold, and silver worse for wear.
Note: Though nothing was immune to this downturn, gold’s inability to act as a safe haven could be explained by timing. The metal had just emerged from its biggest bull market in history, where it climbed over 2,300 percent between 1970 and 1980.
The Gulf War Recession(July 1990 – March 1991)
The recession of 1990-1991 had three major catalysts: Restrictive monetary policy enacted by central banks in response to inflation, the banking collapse of the savings and loan crisis, and the oil shock triggered by Iraq’s invasion of Kuwait.
When global markets had finally settled, gold was up, but silver was down.
The 9/11 Recession (March 2001 – November 2001)
The dot-com bubble popped in March 2000, and as stock prices declined, internet companies went bankrupt. Then in the following year a series of accounting scandals at major U.S. corporations worsened the downturn. To top things off, the attacks of 9/11 sent markets plummeting, leading stock exchanges to close for several days after the attacks. It only took a few months for markets to recover, but while gold managed to weather the storm, silver lost value.
The Global Financial Crisis (April 2007 – March 2009)
The trigger of the biggest recession in recent memory was immortalised in the film The Big Short. This dramatized the subprime mortgage crisis and excessive risk-taking by banks like Lehman Brothers. The collapse of credit bubbles around the world had a global impact, leading stocks to collapse, banks to be bailed out by governments, and prolonged mass unemployment.
Although gold dropped at the beginning as investors ran to cash, it eventually pushed up as silver remained flat.
Gold or Silver: Which has the most safe haven appeal?
As these historical examples show, In three of the four big recessions of the last 40 years, gold has outperformed silver. The only outlier was after gold’s biggest bull market in history.
When there is fear in the market, gold is the classic ‘risk off’ asset that has a stronger negative correlation with the stock market. When equities move down, gold moves up, and vice versa.
As we saw in 2008 and with the recent coronavirus crash of Black Thursday, both silver and gold can fall with stocks when global markets decide to jump off a cliff and investors run to cash to cover margin calls. But in the longer term over the length of the recession, gold has consistently demonstrated an increase in value. Silver on the other hand often remains flat during downturns, and has a tendency to lose value due to its high usage in industry.
So bear in mind that if you buy silver to act as ‘insurance’ against the threat of recession, then you may be disappointed. Although its bigger brother gold has significant safe haven appeal, silver Is primarily an industrial metal and is statistically unlikely to ride higher during a recession — particularly one induced by a global pandemic that Is disrupting huge supply chain disruptions.
The information in this article is for informational and educational purposes only and should not be considered financial or investment advice.