Investing in precious metals is a way to protect yourself from volatile markets and to diversify your investment portfolio. However it is your choice on how exactly you wish to invest in physical precious metals.
There are several options one can take, each with its own unique benefits. Buying physical gold or silver as an investment is not always as straightforward as it sounds.
Novice investors often lose themselves in a variety of options: “Should I buy minted bars or sovereign coins?” “Maybe that limited edition coin would be a good investment?”
Throughout human history, gold has constantly emerged as an unparalleled form of savings, investment and wealth preservation.
Due to its unique characteristics and features, gold has inherent value and cannot be debased.
When holding physical gold, there is no counterparty risk or default risk. You can also store and hold your wealth in gold anonymously and secretly.
Main Reasons to Own Physical Gold Bullion (Rather than Paper Gold)
There are various reasons to own physical gold in the form of investment-grade gold bars and coins but these three reasons stand out the most:
- Gold’s ability to retain its purchasing power over time,
- The safe haven it provides in times of financial turmoil and uncertainty, and
- Its ability to diversify investment risk.
1) Gold is Tangible with Inherent Value
Physical gold is real and tangible. It is indestructible, impossible to create artificially, and difficult to counterfeit.
Mining physical gold is arduous and costly. Physical gold, therefore, has inherent value and worth.
In contrast, paper money doesn’t have any inherent value.
2) Physical Gold Has No Counterparty Risk
Physical gold has no counterparty risk. When you hold and own gold bars and gold coins outright, there is no counterparty risk.
In contrast, paper gold (gold futures, gold certificates, gold-backed ETFs) all involve counterparty risk.
3) The Scarcity of Gold
Gold deposits are relatively scarce across the world and difficult to mine and extract.
New supplies of physical gold are therefore limited and explains why gold is a precious metal. Gold’s scarcity reinforces its inherent value.
4) Gold Cannot Be Debased
Because of its physical characteristics and features, gold cannot be debased, and gold supply is immune to political meddling.
Compare this to the fiat money supplies which the government constantly debases and destroys. They undermine fiat money supplies through deficit government spending, central bank quantitative easing and financial system bailouts.
On a survivorship scale, gold has far outlived all fiat currencies by thousands of years.
5) A 6000 Year History
Gold has played a central role in society for thousands of years from the early civilizations of ancient Egypt, right up to the contemporary era.
Gold has facilitated international trade throughout history, has been directly responsible for the economic expansion and prosperity of numerous civilizations throughout history.
Due to gold exploration and mining, it has even been the direct catalyst for the growth of some of today’s best-known cities such as San Francisco, Johannesburg, and Sydney.
6) Gold is a Preeminent Store of Value
Gold is a preeminent store of value. Physical gold, in the form of gold bars or gold coins, retains its purchasing power over long periods of time despite general increases in the price of goods and services.
In contrast, fiat currencies such as the US Dollar are not stores of value and their purchasing power consistently becomes eroded by inflation or the general increase in the price level.
Fiat currencies have a long history of either becoming totally worthless and going out of circulation. They are otherwise known to become completely debased, such as the US dollar, while remaining in circulation.
7) Gold is a Long-Term Inflation Hedge
People sometimes refer to the purchasing power of physical gold over time as the “Golden Constant.” This reflects the fact that gold’s purchasing power is constant over long periods of time.
This ‘constant’ exists because the gold price adjusts to changes in inflation and future inflation expectations. Therefore, physical gold is a long-term hedge against inflation.
8) A 2500 Year Track Record as Money
Because of its ability to retain value and act as a store of value, physical gold has been used as money for over 2500 years.
Gold coins were first issued in the Lydian civilization in what is now modern Turkey.
Subsequently gold was used as a stable form of money in Persia, ancient Greece, ancient Rome, the Spanish and Portuguese Empires, the British Empire, even right up to the various international gold standards of the 20th century.
It was only in August 1971 that the US famously suspended the convertibility of the US dollar into gold. This famous political move triggered the debt-fueled expansion of fiat currency which still shows its repercussions in today’s monetary system.
Let’s put gold’s monetary importance into perspective this way. For 97% of the last 2500 years gold has been recorded to be chosen by numerous sophisticated civilizations as its base form of money. Its anchor of stability is precisely because of its ability to retain its value.
9) Gold is a Safe Haven Against Economic Turmoil
Physical gold acts as a safe haven asset in times of conflict, war and geopolitical turmoil.
During the financial market stresses and heightened uncertainties caused by wars, conflicts and turmoil, the counterparty risk of most financial assets spikes.
But since physical gold does not have any counterparty risk, investors rush to gold during these periods so as to preserve their wealth.
This is analogous to sheltering in a safe harbor. Gold can thus be seen as a form of financial
10) Gold Has Universal Acceptance as an Item of High Value
Gold is universally accepted as money across the world. There are highly liquid global market always providing ample sales opportunities for gold bars and gold coins.
This means that whichever city you are in across the world, you can always sell or trade your gold bars and gold coins.
11) Gold Acts as Emergency Money
Military personnel are often issued with gold coins that they carry with them in conflicts zones as a form of emergency universal money.
For example, the British Ministry of Defense often issues RAF pilots and SAS soldiers with Gold Sovereign coins to carry on their persons during combat missions and activities, such as in the Middle East.
12) Gold Operates Outside the Banking System
In the current era of global financial repression, physical gold is one of the few assets outside the financial system.
There is no monetary authority, central bank or government that issues gold. Gold is independent of the banking system because there is no government or central bank that issues it.
Fully owned physical gold stored in a non-bank vault or held in one’s possession is outside the banking system.
13) Gold Has No Default Risk
Unlike a government bond, Gold does not have any default risk because it is not issued by any authority that could default.
Gold bars and gold coins are no one else’s liability. Physical gold cannot go bankrupt or become insolvent.
Therefore, there is no need to have to trust any other party when holding physical gold.
14) Gold Optimizes Portfolio Diversification
Adding an investment in gold to an existing portfolio of other investment assets such as stocks and bonds, reduces the volatility (risk) of the investment portfolio and can increase portfolio returns.
This is because the gold price has a low to negative correlation with the prices of most other financial assets. Gold is less influenced by business cycles and macro-economic cycles than most other assets.
Numerous empirical studies by financial academics, as well as industry bodies, such as the World Gold Council, have validated gold’s role as a strategic portfolio diversifier.
15) Gold is a Currency Hedge
There is generally an inverse relationship between the gold price and the US dollar. The gold price generally moves in opposite directions to the US dollar, showing this inverse correlation.
Therefore, holding gold can act as a currency hedge of the US dollar, and help manage the currency risk of portfolios denominated in US dollars.
16) Gold’s Various Metallic Properties
Gold has many and varied metallic properties. These properties provide gold with many technological and commercial applications and uses. In turn these properties contribute as demand drivers in addition to the financial demand for gold.
The high-value metal is highly ductile. It is also highly malleable.Gold is a very good conductor of electricity and heat, and does not corrode or tarnish. It is chemically unreactive, non-toxic to the human body, possesses a high luster and shine, and has an attractive yellow glow.
These properties explain gold’s use in electrical and electronic wiring and circuits (e.g. computers and internet switches), its use in the medical and dental fields, its use in solar panels, space travel, and further uses in jewelry, decoration, and ornamentation.
With new technological uses being found for gold all the time, gold’s demand pattern is diversified and underpinned by its commercial importance.
Physical Gold – A Tiny Fraction of Paper Gold
However, these markets only trade derivatives on gold (futures and unallocated positions). These paper assets can never be convertible to actual physical gold.
In a scenario under which these paper gold markets became unsustainable, the prices of paper gold and physical gold would diverge, with the paper gold markets ceasing to trade and collapsing, and only physical gold retaining any real value.
Owning physical gold is therefore an insurance against the collapse of the world’s vast paper gold markets.
IRA-Backed Physical Gold: Not an ETF by Definition
Investing in hysical gold provides all the benefits that gold-backed exchange traded funds (ETF’s) do not.
ETF’s provide exposure to the gold price, not to gold. Holding physical gold is by definition direct exposure to gold.
You cannot convert gold ETF’s into actual physical gold and have them delivered to you. In many cases with a Gold IRA, on the other hand, the owners of the Gold IRA may not even know where the vault location is, as it is stored safely by the depository.
If holding physical allocated gold bars or gold coins in a vault, such as with BullionStar in Singapore, you can always take delivery.
Gold ETF’s have many counterparty risks since there are many moving parts in an ETF such as a trustee, a custodian, and a sponsor / issuer.
Physical gold has no counterparty risks. When you hold physical gold, you always remain with 100% of the actual gold you first purchased. There is no erosion of holdings.
Sensible investors evaluate bullion options by the price and premium on the gold spot price. But the premium is only one part of the equation. It doesn’t necessarily mean that you’ll get that premium back upon the sale.
Worse, there are unscrupulous dealers out there. They will try to trick you into buying numismatics and other collectibles that have a huge premium and won’t retain their value over time.
Best Option: Physical Gold-Backed IRA
As a result, it’s essential to get an understanding of precious metals before dipping your toes into this market.
To research more about investing in physical gold, read first why we recommend purchasing or rolling over your retirement plan to a Gold IRA here.
If you are ready to invest your resources into or rollover your retirement plan to a Gold IRA already, view our List of Top 10 Gold IRA Companies and see for yourself why we recommend Regal Assets as the #1 Gold IRA company.
Do you have any questions on why it is a good idea to add gold bullion to your precious metals IRA in 2019? Ask below!