Managing Risk
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Stock market ups and downs and uncertain economic news are worrisome for smart investors who want to diversify their portfolios with the promise of less volatility. One of the most common ways to achieve this goal is by investing in gold and precious metals, but the options are numerous, so how do you choose?
Should you go for Gold ETFs, mining stocks or gold certificates instead of Physical Gold, and what are the benefits or risks of each one of these alternatives as compared to Physical Gold?
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Advantages of Physical Gold 1. Physical Ownership: One of the greatest advantages of tangible Gold is being able to take physical ownership of your investments. Instead of having digital numbers on a screen, you have direct control over the assets. 2. Low-Risk: Although the US dollar is one of the strongest currencies, the greenback has lost 99% of its value when compared to Gold. This makes physical Gold one of the sturdiest long-term assets since the majority of paper assets are directly linked to the USD. 3. Privacy: Physical Gold offers investors significantly more privacy and anonymity versus paper Gold and other virtual assets. This is a growing concern as the government makes strides toward instituting a digital dollar. Tangible assets are the final safe havens of privacy when it comes to investments. 4. Bartering: Before the US abandoned the Gold standard, this physical metal was the backing of all fiat currency in the world. For centuries, Gold has been a defacto international currency that everyone recognizes. This makes it a viable bartering instrument no matter the global economic conditions. 5. True Diversification: Physical Gold has always been a go-to asset for investors looking to optimize portfolio diversification. In its physical form, Gold offers true diversity because it’s detached from the factors that influence the price of paper assets such as stocks and paper Gold. |
Advantages of Paper Gold 1. High Liquidity: Selling paper gold is more straightforward because no physical exchange is required. These assets can be traded as easily and efficiently as stocks, allowing for quick and smooth transactions. This high liquidity enables investors to convert their assets into cash with ease. 2. Low Barrier to Entry: Investing in paper gold comes with fewer obstacles. Most trading platforms provide access to paper gold through ETFs, mutual funds, and mining stocks, eliminating the need for setting up a separate account or dealing with physical products. 3. No Storage Concerns: Storage is a common issue when investing in physical precious metals. However, by opting for paper metals, investors can avoid this concern altogether, as all transactions are handled digitally. 4. Ease of Divisibility: Paper gold allows for easy divisibility, which means investors can buy or sell gold in smaller quantities, making it accessible to a broader range of investors. |
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Disadvantages of Physical Gold 1. Storage and Security Costs: Owning Physical Gold requires proper storage to ensure its safety. For larger holdings, storage can become costly, especially if you choose a secure facility such as a bank vault or private depository. While home storage is an option, it may not provide the same level of protection 2. Risk of Theft: Due to its high value, Physical Gold is a potential target for theft. If stored at home, you may need to invest in high-quality security systems or safes to safeguard your investment. Even when kept in a secure facility, there is always some level of risk, and insurance may be necessary for added protection. The possibility of theft can be a source of concern for investors, making it important to carefully consider where and how you store your gold. 3: Higher Transaction Costs: Investing in Real Gold often involves higher transaction costs compared to buying Paper Gold. Factors include storage, fluctuating premiums, and insurance. 4: Minimum Investment Threshold: The minimum investment threshold for gold varies by dealer, but reputable gold firms often require a minimum purchase to ensure quality service, expert guidance, and secure transactions, making professional customer support available only to serious investors. |
Disadvantages of Paper Gold 1. Counterparty Risk: First and foremost, there’s always counterparty risk is the likelihood that someone in a transaction could default on fulfilling their obligation. Obviously this is a risk in any investment, but issues may be more likely to occur with Paper Gold such as Gold certificates or ETFs, where there are generally many parties involved. 2. Diminishing Value of Shares: Just like in the stock market, in a situation where you’re buying shares, there is always a risk that the value of each individual share may go down over time.this means that overtime the total value of your investment can go down instead of up. 3. Zero Liability: ETFs include a note in their paperwork that exempts them from liability for most things that could happen to the shares. This includes terms that can be somewhat loose in interpretation, such as “loss” or “damage.” 4. Market Risk: Paper Gold is essentially a speculation, while buying Physical Gold gives you direct possession of a tangible item with many industrial uses. Paper Gold by its’ nature is much more susceptible to market fluctuations, as it is tied more closely with the stock market. With options such as mining stocks, their performance is not always tied to the value of Gold directly. Since mining companies are worldwide, if there are instabilities in foreign governments that affect what a Gold mining company is allowed to do, the changes in mining stock prices may not align with the changes in gold prices. 5. Poor Capital Allocation: By purchasing a share of a business, the investor becomes subject to the management’s decision and its resulting performance. The price of a share and the performance of the investment is affected much more by the business management than the price of Gold itself. 6. Lack of Insurance Coverage: One of the main reasons Physical Gold is such a safe investment is that after purchasing Gold it is placed with a custodian, and it is then directly protected by their insurance in a contract between you and the custodian. This gives the assurance of an investment that will not be subject to the whims of the stock market, and the peace of mind that your valuables are secured and do not need to be stored at home. In situations such a Gold ETF, the contract with the custodian can be uncertain. The ETF is not a direct beneficiary of the insurance policy, therefore it has no ability to control the terms of the insurance, which are determined by the custodian. They pick a token insurance policy that covers the bare minimum, only to fulfill their claim that they “offer insurance”. Unfortunately this means the full value of your gold is not covered by such a policy. 7. No Choice of Type Gold You Buy: There are so many forms and types of Gold: bars, bullion, proof, numismatic coins, etc. As an investor, you may want to explore the difference between these options, as they often have various returns. Paper Gold does not give you these options. 8. Loss of Taxable Income Control: This is a common risk seen with ETFs. Investors sometimes choose to sell shares in order to carry out tax loss harvesting to reduce capital gains and save on taxes. The trustees of ETFs decide how to adjust the fund’s portfolio, so investors don’t have the same flexibility. Gold and Silver ETF investors face 28% top tax bracket rate on profits. which is even higher than the bracket for stock. The reason being is that ETFs are considered as collectibles for tax purposes, which means they carry a 28% topfederal tax rate on long-term capital gains. Stocks, bonds and other investments in contrast have a 20% bracket on profits. 9. Expense Ratios: Every year, part of an ETFs investment will lose a percentage of its’ value due to the fund’s expense ratio. This is the recurring annual fee charged by funds to cover the management expenses and administrative costs. For example, one of the largest gold ETF – the SPDR Gold Shares ETF – has an expense ratio of 0.40%. It seems unnecessary to constantly pay a fee for something that you don’t actually own. |
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Why Physical Gold May Be Your Best Option
The risks associated with Paper Gold do not transfer to Physical Gold ownership. Here are the key reasons for buying Physical Gold:
Actual Physical Ownership
While it is definitely recommended to place gold in a secure, insured depository as opposed to storing it at home, either way the investor can claim it at any time. This is one of the main differences between Physical and Paper Gold.
Purchasing an Asset with Real Value
The returns on Gold versus stocks tend to be inversely proportional, which means that when stock prices fall, gold prices tend to rise. With real Gold, you don’t own a piece of paper which is promising a share of a company that is prone to fluctuation. Physical Gold is valued and in-demand for reasons beyond its investment potential with applications that include electronics through jewelry. It has intrinsic value.
Growth Potential Backed by Historical Performance
Americans nearing retirement age are particularly at risk in volatile economic times. While no investment comes with 100% certainty, Gold has a track record that is steady or better even when the dollar has suffered. Gold has historically moved opposite the stock market and in the long term, can preserve your purchasing power. Another reason for Physical Gold’s steady growth over the years is the limited supply. While more money can always be printed, the supply of actual Physical Gold in the world is limited. This scarcity means there’s an increased demand in sectors such as medical and industrial, which translates in future gains for Gold investors.
Diversify Your Savings
It is always a good idea to invest in opportunities that move differently. Buying Physical Gold versus currency-based assets gives investors access to a market that operates by following different performance trends. Such diversification allows for more security and less negative momentum for smart investors.
Hedge Against Inflation or Economic Downturn
The stock market crash in 2007-2009 is a perfect example of how Gold moved opposite of the market. Gold not only maintained its value, but continued to rise. Most recently, during the Coronavirus pandemic and the resulting inflation and bear market, Gold is continuing the rally it started in 2018. Over the course of two years, it surged 72% and it surpassed $2,000 for the first time in August 2020.
When you purchase Physical Gold, it is yours to keep and store, sell or trade. It can be used as a currency, and it is also a highly desirable liquid commodity. With Gold you can have the assurance of an investment that will not be subject to the whims of the stock market, and the peace of mind that your valuables are secured. We have witnessed the strength of Gold’s historical performance as it persists or even grows in value during times of uncertainty and economic downturn. In fact such difficult times for the stock market or Paper Gold only increase the value of your holdings of Physical Gold.
