Financial markets are never static. Capital moves, information changes expectations and apparent equilibria often dissolve just as quickly as they emerge. A thought-provoking article by Dr Stefan M. Kremeth, CEO & Head of Wealth Management at Incrementum AG, examines this interplay from an unusual perspective: Thermodynamics.
This leads to an insight that is particularly relevant for long-term investors: The key is not to predict the future perfectly, but to structure wealth in a way that can withstand as many different future scenarios as possible.
FINANCIAL MARKETS AS A DYNAMIC SYSTEM
Anyone seeking to understand financial markets will usually look at interest rates, inflation, corporate earnings or economic cycles. In his article “Financial Markets as a Dance Against Entropy: Lessons from Thermodynamics and a Philosophical Approach to Investing”, Dr Stefan M. Kremeth takes a different approach.
He describes financial markets as open, dynamic systems in which information, expectations and capital flows continuously interact. The analogy is intuitive: Just as energy is redistributed in nature and systems constantly seek new states of equilibrium, capital also moves continuously between asset classes, sectors, regions and currencies.
A permanent equilibrium effectively does not exist. As soon as one piece of information has been absorbed, the next begins to alter the overall picture again.
UNCERTAINTY IS THE NORMAL STATE
In thermodynamics, entropy can be understood in simplified terms as the tendency towards increasing disorder. Applied to financial markets, this means that new corporate figures, inflation data, political decisions or geopolitical events initially create uncertainty. Market participants interpret the same information in different ways, leading to buying, selling and price movements.
The key insight is therefore simple: Uncertainty is not an exceptional condition in financial markets. It is their normal state.
This also changes the way we look at volatility. Fluctuating prices are not automatically the same as permanent capital loss. An asset can fall sharply and later recover.
Far more dangerous are events that remove an investor from the game permanently. Kremeth summarises this idea with a simple principle: Avoid ruin. Those who permanently lose their capital can no longer participate in future recoveries or long-term returns.
ROBUSTNESS INSTEAD OF FORECASTING
This shifts the central question in long-term wealth building. It is no longer only about which investment promises the highest return, but above all about how to structure wealth so that individual crises, poor decisions or unexpected developments do not cause existential damage.
A highly concentrated strategy can be exceptionally successful if exactly the expected scenario unfolds. At the same time, however, it becomes more vulnerable to surprises.
Diversification is therefore more than simply spreading risk. It is an acknowledgement that nobody can know with certainty which economic, political or technological developments will shape the coming decades.
Successful investing may therefore be less about predicting the future better than others and more about becoming less dependent on any single forecast.
THE ROLE OF PHYSICAL PRECIOUS METALS
This is precisely where gold and silver become interesting. Not because anyone can reliably predict where their prices will stand in 5 or 10 years. And not because precious metals should replace other asset classes.
Their particular role stems instead from the characteristics they can bring to a diversified wealth structure.
- A share represents ownership in a company.
- A bond is a claim against a debtor.
- A bank deposit is a claim against a bank.
- Physical gold and silver, by contrast, are tangible assets. They can therefore form part of a wealth structure whose existence does not depend on the solvency of an issuer.
OWNERSHIP INSTEAD OF A CLAIM
This idea lies at the heart of Elementum. Elementum International AG specialises exclusively in the storage of physical precious metals in Switzerland. Purchases and sales are handled through the respective national Elementum companies.
The precious metals held in storage remain the property of the clients and do not form part of the corporate assets of Elementum International AG. In this respect, physical custody differs fundamentally from many financial products that merely represent a contractual claim or receivable.
This distinction may appear relatively minor during calm market conditions. In periods of financial stress, however, it can become highly significant.
GOLD AND SILVER AS PART OF A ROBUST STRUCTURE
Physical precious metals should therefore be viewed less as short-term speculation and more as a potential way to make an existing wealth structure more robust. They can complement equities, real estate, liquidity and other investments with an asset class that has different characteristics.
Diversification can also play a role within precious metals themselves. Gold and silver do not always move in the same way. The gold-silver ratio illustrates how significantly their relative valuations can change over longer periods.
Flexible switching between both metals can therefore be understood as a form of rebalancing. Corresponding switching options are also part of Elementum’s product offering.
WHERE ASSETS ARE STORED ALSO MATTERS
Robustness does not end with the choice of asset class. The location of custody can also form part of a long-term wealth strategy.
Elementum International AG has deliberately specialised in storage in Switzerland. For investors, this can provide an additional form of geographic diversification by avoiding the concentration of all assets within the same political, economic and regulatory framework.
The same principle applies here: Do not make everything dependent on a single system.
YOU DO NOT NEED TO KNOW THE FUTURE
Perhaps this is the most important insight from Kremeth’s article. Nobody knows what inflation will be in 2035. Nobody knows which companies or technologies will dominate in 20 years. Nobody can reliably predict the future price of gold or silver.
That does not have to be a problem. You do not need to know the future in order to prepare for a range of possible outcomes.
A robust wealth structure therefore does not attempt to predict every market movement. Instead, it combines different types of assets, reduces dependencies and avoids risks that could lead to permanent losses.
Physical gold and silver can play a particular role within such a structure: As tangible assets, as a complement to traditional financial investments and as direct property rather than a mere promise of payment.
BOTTOM LINE: KEEP DANCING WHEN THE MUSIC CHANGES
Thermodynamics does not, of course, provide a model for calculating stock prices or precious metal prices. The value of the analogy lies elsewhere. It encourages us to view financial markets for what they are: Complex systems that are constantly changing.
For investors, this leads to a simple but important conclusion: Long-term success does not necessarily depend on predicting the future correctly. What matters more is structuring wealth robustly enough to remain resilient even when the future unfolds very differently from what was expected.
Diversification, physical ownership, geographic diversification, rebalancing and protection against irreversible losses are all different expressions of the same principle.
Or, to return to Stefan Kremeth’s metaphor: The music in financial markets will keep changing. The goal is not so much to predict the next beat, but to remain able to dance when the rhythm suddenly changes.
Recommended reading: This article was inspired by the highly recommended piece by Dr Stefan M. Kremeth, CEO & Head of Wealth Management at Incrementum AG: “Financial Markets as a Dance Against Entropy: Lessons from Thermodynamics and a Philosophical Approach to Investing.”
Read the original article at Incrementum
We would like to thank Dr Stefan M. Kremeth and Incrementum for this inspiring perspective on financial markets. Incrementum is also the publisher of the renowned “In Gold We Trust” report, of which Elementum International AG has been a Premium Partner for many years.
How can you buy precious metals cheaply and store them safely?
Elementum Deutschland GmbH, based in Sindelfingen (Germany), specializes in trading physical precious metals. Customers who purchase precious metals from Elementum Deutschland (or one of the other national Elementum companies in five European countries) can store them in the renowned high-security vaulting facilities in the St. Gotthard Massif in Switzerland at Elementum International AG.
Of course, you also have the option of purchasing gold and silver directly and having it delivered to your desired address. However, storing silver in the so-called open duty-free warehouse (“offenes Zollfreilager”) at St. Gotthard offers decisive tax advantages:
- The 19% value added tax customary in Germany is completely waived on purchases and sales – a considerable price advantage that effectively secures you 19% more silver for your money.
- If you store your silver in this high-security vault, you can sell it back to Elementum Deutschland GmbH at any time – without any bureaucratic hassle and also without VAT, as the trade takes place within the duty-free warehouse. You will receive the funds via bank wire.
- VAT is only payable when you physically remove the stored silver – either by picking it up in person (after prior notification) or by having it shipped to your address.
More silver, more return
Thanks to duty-free storage, you receive 19% more physical silver when you buy. This additional amount also participates in the performance of the silver price if it rises – a leverage effect that significantly improves your return opportunities.
About Elementum
Elementum is a second-generation, owner-managed family business. Trust, consistency, and long-term thinking are at the heart of our philosophy. The Board of Directors of Elementum International AG is composed of internationally renowned experts in the money and precious metals markets, including economists, analysts, university professors, and precious metals specialists. This in-depth expertise forms the backbone of our actions – for your security, your assets, and your future.
About the Author
Stephan Bogner
CEO of Elementum International AG
Stephan Bogner, who holds a degree in business administration, studied economics at ISM Dortmund (Germany) and wrote the university’s first thesis on precious metals as a hedge against inflation. After studying in the UK and Australia and gaining professional experience in Dubai, he took over as CEO of Elementum International AG in Switzerland in 2012. His expertise in precious metals has had a significant impact on the company’s development.
Contact
Rockstone News & Research
Stephan Bogner (Dipl. Kfm., FH)
Müligässli 1, 8598 Bottighofen
Switzerland
Phone: +41-71-5896911
Email: info@rockstone-news.com
Disclaimer: This article reflects the personal opinion of the author. Elementum assumes no responsibility for the accuracy of the content and accepts no liability for its use. This article may contain links to external third-party websites. Elementum is not responsible for the content of these external sites and expressly distances itself from all information provided there. At the time the links were created, no unlawful content was identifiable. This article does not constitute a recommendation to buy or sell. Elementum International AG is a Swiss company that specializes exclusively in the storage of physical precious metals in a high-security vault facility located in the St. Gotthard mountain massif in Central Switzerland. The Board of Directors and Executive Management of Elementum International AG have been selected solely based on their professional expertise and long-standing experience in precious metals markets. As these individuals may also be professionally active outside their roles at Elementum International AG, the company has no influence over their external activities and respects their right to freedom of expression. Therefore, the views expressed by persons working with or for Elementum do not necessarily reflect the opinion of Elementum International AG. Investments in precious metals are subject to risks, including those specific to the structure of this market. Please read our full risk disclosures and consult a licensed financial advisor before making any investment decisions. Neither the author, Elementum International AG, nor Elementum Deutschland GmbH assume any liability for actions taken based on the information provided. Past performance is not indicative of future results. The cover picture has been obtained and licenced from 123rf.com.
