When it comes to investing in gold, there is often confusion between the purchase of Physical Gold and the purchase of a certificate of ownership.
We have always remembered on these pages that a diversified investment portfolio is a great way to protect your assets. Of the many different options, from stocks and bonds to real estate and fine art, one of the best is to buy gold. Of all the precious metals, gold has been a trusted investment around the world for centuries. Before paper money, gold itself was used as money for over 2,300 years.
However, for those approaching the gold market for the first time, it is not easy to immediately understand the different investment formulas, which are varied but which refer to physical or paper possession. The main distinction is made when speaking of physical gold, or having physical possession of the metal through ingots or coins.
Paper gold on the other hand refers to investing in exchange-traded funds (ETFs) that themselves invest in gold or gold futures and options.
Physical gold is real and tangible. It is impossible to create it artificially and must be mined from gold deposits, of which there is a limited amount. This process becomes more difficult and costly as these gold deposits become scarcer. This scarcity adds intrinsic value to physical gold.
Conversely, paper gold by itself has no intrinsic value as its value depends on the issuer and the terms of the issue, not necessarily the underlying gold.
The consequences of the Covid-19 pandemic could have much longer economic consequences, and more and more people are looking for an investment formula that defends their savings. Gold is seen by many as the ” currency of last resort ” – something of a buffer or defense in times of economic turmoil.
As far as the price is concerned, we have to evaluate this further difference:
• Physical Gold Price: Refers to one bar of pure gold in coin or bar format. And the additional price of purchasing physical bullion products is associated with the production, refining, minting, marketing, and storage of the bullion for sale.
• The spot price of gold on the other hand is the price of gold traded in the financial markets. It is determined by gold futures contracts.
Gold futures investors buy and sell gold futures on exchanges around the world. While often not physically trading any real-world commodity, gold futures drive fluctuations in the spot price of gold in various fiat currencies, including the spot price of gold in US dollars.
We should also keep in mind that:
• The spread of the virus has forced central banks to cut rates and buy assets in unprecedented quantities. Gold is distinguished from other assets by its ability to preserve value.
• While some major central banks, including the Fed, use printing to increase the money supply, gold is scarce and unreproducible, making it more valuable.
• Gold has always been a favorite hedging instrument. The demand for gold increases significantly at times when the economy is in trouble.
• Typically, gold has an inverse relationship to the US dollar. A decline in the USD supports the gold price.
• Physical gold maintains its value and purchasing power even for long periods, protecting against the erosion of purchasing power caused by inflation.
• Physical gold, as a tangible asset, is also safe from cyberattacks and the risks of hacking that paper gold might have, especially if that paper is stored electronically.
Paper gold does not have the same appeal and importance as physical gold. And it’s these same advantages that drive central banks to hoard gold, even though it technically competes with their fiat currencies. In reality, by holding physical gold as a reserve asset, central banks can stabilize their fiat currencies in a way that is not possible with paper gold.
Physical gold is a much more attractive investment than paper gold and buying physical gold as a diversification tool is supported by numerous studies, including by the World Gold Council.
Ray Dalio, the founder of Bridgewater Associates, one of the largest hedge funds in the world, suggests allocating 10% of a multi-asset portfolio to buying gold.
