Physical Gold and Silver or “Paper” Gold and Silver?
Investors today have a lot of choices when it comes to investing in precious metals. Gold or silver backed ETFs, gold or silver mining stocks and certificates are just a few of the choices available. We believe that owning physical, tangible precious metals is the best way to go. This guide will outline some of the key differences between these investment choices, and why physical ownership may be beneficial.
Here we will briefly discuss some of the potential precious metals products available today. We will discuss both the pros and cons of these investment vehicles. We will also highlight differences between actually owning physical precious metals as opposed to owning “paper” precious metals products.
Owning physical gold or silver: This is our method of choice. Physical gold, silver or other precious metal ownership has some distinct advantages to the investor in our opinion. When compared to various “paper” investments, we feel the pros of owning tangible metals vastly outweigh the cons. Judge for yourself. Some of these distinct advantages include:
- Gold, silver and other physical precious metals have zero counterparty risk. An ounce of silver, for example, cannot default on its obligations or declare bankruptcy.
- When you own physical gold or silver, it can provide peace of mind. In the unlikely event of an economic or geopolitical catastrophe, one could use these precious metals to buy basic goods or services such as food or gasoline.
- There are several storage options available. Many precious metals buyers will store gold, silver and other metals at home in case they are ever needed. One can also store their precious metals in a bank safe deposit box or in a highly secure precious metals depository.
- Many gold, silver and other forms of precious metals are highly liquid. Silver rounds, for example, could be easily exchanged for goods or services should the need ever arise. These metals are recognized and exchanged all over the world, and an ounce of silver carries the same value anywhere you might be.
- Purchasing precious metals can be done safely and anonymously. Precious metals purchases are a very private transaction. One can buy gold, silver or other metals at any time from the comfort of their own home or office.
Owning physical gold, silver or other metals is our vehicle of choice. That being said, there are some issues one must consider when buying precious metals. Some of these issues include:
- Precious metals do not provide dividend income. When one buys precious metals, they may make money if prices go up and they may lose money if prices go down. The lack of investment income may present an opportunity cost to hold physical precious metals.
- Buying physical precious metals can cost more than buying shares of an ETF, for example. When buying precious metals, one will pay dealer premiums and shipping and insurance costs on most purchases. In addition, if you are storing your metals in a safe deposit box or depository, you will incur storage costs as well.
- Storing precious metals at home or on your property may present the risk of loss or theft.
Buying mining company stocks: People often consider owning stock in gold or silver mining companies a proxy for precious metals ownership. While it is not the same by any means, some investors may elect to go this route. Some of the potential benefits may include:
- The potential for a rise in the stock or share price. Stock or ETF investors may potentially profit if the share or stock price rises.
- The chance to earn investment income. Some mining companies, for example, may pay dividends to stock holders.
- Stocks and ETFs today are transacted cheaply and easily. With electronic trading really taking hold in the last decade, one can move in or out of these vehicles with minimal cost.
- When someone owns a “paper” precious metals investment, they do have to worry about storing the precious metals themselves.
Investing in ‘paper” precious metals products comes with some serious problems as well. Some of the issues that must be considered are:
- Counterparty risk. Any type of paper investment carries with it counterparty risk. If you own shares of a mining company, for example, what is to say that the company won’t go bankrupt?
- The potential for a significant drop in the share or stock price.
- In the unlikely event of an economic, geopolitical or currency crises, paper investments will not do much good. You cannot, for example, exchange your shares of a gold mining company for a gallon of gas or groceries.
- Ownership of paper investments is not the same as owning physical, tangible precious metals.
- Buying precious metals backed ETFs: An ETF, or exchange traded fund, is another “paper” vehicle that investors may use to get exposure to gold or silver. When an investor purchases shares of an ETF, they are buying an interest in a fund that holds gold or silver as its primary asset. Precious metals backed ETFs buy gold or silver and handle the storage and management of the physical metals. These ETFs were designed to mimic the price of gold or silver. Precious metals backed ETFs also have their own pros and cons. Some of the potential benefits of precious metals ETFs may include:
- A simple way to gain exposure to gold, silver or other precious metals prices
- Low transaction costs and good liquidity
- May pay dividend income
- Individual investors do not have to deal with storage or management of precious metals
- Small amounts of capital may be used
Precious metals backed ETFs also have some serious problems as well. These problems may include:
- Investors are not entitled to any physical precious metals
- Investors have no control over metal storage, security or expenses of the fund
- ETFs cannot be exchanged for goods or services
- ETFs, like other paper investments, carry counterparty risk
- Investors have no way of verifying the fund’s actual holdings or inspecting the metals held
Gold or silver futures: A futures contract is simply an agreement between parties for the purchase or sale of an asset at a certain price at a certain date in the future. Futures contracts are highly leveraged, allowing investors to control a large amount of gold, silver, corn, crude oil or other contract for a small amount of the total contract value. This leverage gives investors a way to magnify their gains, while also and equally providing a way to magnify their losses. Certain futures contracts are physically deliverable, while many are settled with cash. Some of the potential benefits of using futures contracts may be:
- Ability to potentially magnify gains
- Very low transaction costs
- Extended trading hours
Futures contracts have some significant drawbacks that must be considered. These drawbacks may include:
- Magnification of losses-serious risk of loss
- Possible margin calls
- Process for taking delivery of precious metals may be costly and cumbersome
- Does not equate to owning physical precious metals unless delivery is taken
- Contract sizes are standardized, one cannot take delivery of a small amount of gold or silver
Gold or silver certificates: Certificates are another form of paper investment issued by banks or financial institutions that indicate ownership of a specific amount of gold or silver. There are different types of gold or silver certificates available including allocated certificates and unallocated certificates. We do not see a lot of positives to certificates. The only pluses in our opinion are:
- Storage of precious metals is handled by institution
- Fees may be competitive
As with other forms of paper investments, we see some potential issues with gold or silver certificates. In our opinion, some of these issues include:
- Precious metals are not accessible
- Certificates may require a high initial investment
- Storage costs can be significant
- Counterparty risk
There is a common theme seen in all paper precious metals investments. They are not the same as owning physical precious metals yourself!
Ownership of physical gold, silver or other precious metals ties all of the potential benefits together like no other vehicle. Owning physical metals allows one to:
- Participate in potential price appreciation
- Diversify their investment portfolio
- Enjoy the peace of mind that comes with physical ownership
Unlike paper investment vehicles, gold and silver have been considered a reliable medium of exchange and store of value for thousands of years. Governments may fall, companies may go bankrupt, and banks may fail. Physical gold and silver have zero counterparty risk and zero risk of default. These metals will continue to be reliable and valued in an ever-changing world.