Physical or financial gold? Here's why to choose physical gold
"Why buy a bar if you can invest small amounts periodically? Invest in financial gold." Have you been told that too?
But is it true that a small investor has more advantages with financial gold? Is it really more convenient? We feel we can say no. Physical gold is only a viable alternative even for small amounts or for limited but repeated investments over time, such as a gold gram account. It is also an extremely attractive option for medium and large investors who want to lower their risk.
But what is the difference between physical and paper investment? What is 'paper gold'?
Let's see how to invest in gold and what are the pros and cons of the different modes.
The difference between physical and financial gold
When we invest we do so mainly in 3 categories
- in a physical product
- in a paper product with a physical underlying (ETF/ETC)
- paper only
The ETF obviates the whole issue of physical custody. With the Etfs Gold Bullion Securities for example, your money is invested in bullion stored in a vault of the HSBC Bank.
Beware though: physical gold and financial gold are not the same thing and carry entirely different benefits and risks. But let's look at all the types of paper gold available to investors
Etc or Etf on gold
These are investment funds that replicate the performance of physical gold (almost) perfectly. These funds can be bought in banks, but beware! A 2% increase in the price of gold will not correspond to a 2% gain for you. In the case of Etc's and Etf's, their performance will not only depend on the price of physical gold, but also on the euro/dollar exchange rate and will be influenced by fluctuations due to competition between the different parties involved (the contracts).
Futures are in fact financial contracts between two parties who agree to buy and sell a certain amount of gold, at a predetermined purity, on a predetermined date and at a predetermined price. It is a gamble because you can only make money if the price of gold is higher or lower, depending on your chosen investment strategy, at the time you sell. The complexity of a derivative instrument such as futures makes them 'accessible' mainly to an experienced user. Are futures therefore convenient for small investors? In our opinion, no.
Similar to futures, the option gives the holder the right, not the obligation, to buy or sell a certain amount of gold by a predetermined date at a predetermined price (called the strike price). By following the movement of the metal, it will be possible for the buyer or seller to make a profit on their option. Even in this case, the profit margin for small investors is unattractive.
Stocks of mining companies
By investing in shares of companies that are involved in gold mining, it is possible to earn indirectly from the price development of the metal. However, mining share prices do not only depend on gold, but also on very different factors (geographical location, company costs, margins, balance sheet, company management, ...). Investing in shares of mining companies is perhaps the most suitable paper option for small investors, but it requires a thorough study of the companies and therefore, unless you have a deep knowledge of the subject, you should rely on reliable professionals.
Advantages and disadvantages of physical and financial gold
Investing in paper products that are backed by a physical underlying has its pros and cons, however.
|INVESTING IN GOLD
|None. Immune from failure and can never be worth zero
|Exposes the issuer to the risk of bankruptcy
|It is your exclusive property
|It is held by brokers, hundreds of people claim ownership
|For large quantities it is preferable to use a storage service, but the costs are often very affordable.
|High - It is spendable anywhere (equal to current currency) and is always convertible into money according to the world's quotation.
|High - being immaterial, it can be sold in seconds ( Attention to quotations!).
|VAT exempt - subject only to capital gains taxation
|Like other financial instruments
Counterparty risk is by far the most important factor to consider, given that physical gold cannot fail in any way. Combined with other unequivocal advantages, gold proves to be the most important instrument for protecting savings to date.
Did you know that... banks have started accumulating physical (not financial!!!) gold again. This is a really important signal. Central banks bought $15.7 billion worth of gold in 2019, increasing the reserve by a whopping 374 tonnes, the likes of which has not happened since 1971, when Richard Nixon proclaimed the non-convertibility of the US currency. Let us ask why.