Why Is It Worthwhile To Invest In Physical Gold?
Growing interest in investing in gold as a result of the coronavirus makes the question even more pertinent: which is the best channel to invest in? We have summarized the main differences between buying physical gold and investing in ETFs (Exchange-Traded Funds) or derivatives of gold.
Gold assets such as bars, collector coins or jewelry are produced from this rare raw material. However, most of the trading in the gold market is conducted indirectly, through speculative assets which do not usually include a significant holding of physical gold.
Indirect trading in the gold markets is conducted partly through the London and New York stock exchanges, or through futures contracts, options and gold ETFs, which are traded in the usual stock markets. There are some big differences between the different financial instruments that track gold, some of which offer convenient, liquid investment options. However, it is important that every investor in this domain should recognize the essential characteristic that distinguishes between these options and the purchasing of physical gold: investing in these financial instruments is conducted through brokers, while the investor is further away from ownership of the precious metal itself and exposed to a number of associated risks.
Pictured: Gold Bars.
Physical gold: stable and mobile
The main reason for gold's unique value is the rarity of the glistening metal, an advantage that has proven itself over thousands of years. So far, 190 thousand tons of gold have been mined in the world, and it is estimated that another 50 thousand tons of gold are hidden unmined underground. This rarity distinguishes gold from other precious metals and most of the other investment channels. When the constant demand for gold assets has met with the limited supply of the metal, stability in price has been assured. It is expected that such will be the case in the future.
Holding physical gold assets, such as coins, bars and medals, provides investors with a direct connection to the rare metal and, of course, the possibility of mobility and trading, anywhere in the world, at any time. Most assets in the gold market, which are, as said, only derivatives of the physical gold price, do not provide these significant advantages.
Printing of money without limit by the world's central banks, during the coronavirus crisis, has been increasing the rush for gold. Goldman Sachs economists recently said that gold is the currency "of last resort", especially in the current environment, when governments are devaluing their currencies and bringing interest rates down to all-time lows.
The renowned investor Warren Buffett, who was for decades a strong opponent of investment in gold, changed his direction in face of the recent events. His financial investment company, Berkshire Hathaway, bought the shares of a gold-mining company for about half a billion dollars. Ray Dalio, founder of Bridgewater, one of the world's largest investing companies, clearly stated last year that "cash is trash and too much money is still held in cash. In my opinion, an investment portfolio must include gold", referring mainly to physical gold.
Pictured: Ray Dalio, founder of Bridgewater, one of the world's largest investment companies.
The disadvantages of etfs and gold derivatives
Gold ETFs are a convenient and common means of investment, which, while supposed to be linked to the gold price, do not all, in practice, involve the purchase of gold at all. Many investors are not aware of the fact that gold ETFs are usually not significant investments in physical gold. Also, ETFs that invest a significant part of their assets in real gold bars still create two significant risks for an investor, which we will go into more detail now.
Third Party Risk
An essential reason for investing in gold lies in its being an independent, secure and mobile asset. An investment in gold is a kind of "certificate of security" against unexpected events in the economic and political world: rampant inflation, financial crises, government bankruptcies and more – events we have seen in the past and will most probably experience again in the future.
With gold derivatives, an investor is dependent on brokerage companies, which are exposed to business problems of their own, changes in the regulatory environment in addition to many other challenges. Therefore, investing in gold derivatives, such as ETFs or options is not secure as is holding physical gold, which the investor actually possesses.
Market Risk
Since physical gold represents only 1% or even less of the gold derivatives market, there is a possibility of a crisis, even if a low probability as of today, should many of the shareholders decide to realize their investments at a certain moment. Such demand, of course, would be impossible because of the limited quantity of physical gold in relation to the great value of derivatives.
In the past, there have been similar events in the markets in which silver is traded, when the United States government intervened aggressively in order to protect investors. Those really harmed from this kind of market turmoil will probably be those who will purchase gold derivatives, while those holding physical gold will enjoy relative protection, and possibly even an upsurge in value of the metal in their possession as a result of such a crisis.
How does one buy physical gold?
There are many ways to buy physical gold: from purchasing bars, to investing in bullion (coins for investment), as well as collector coins and medals. Leading world mints are excellent arenas for such purchases and Israel Coins and Medals Corp. in Israel, with a reputation of many decades, offers an extensive collection of gold products.
Pictured: The Holy Land Mint 1g up to 1kg Gold Bars.
In the investment category on ICMC's website, you can select the products you would like from The Holy Land Mint gold and silver investment products, which are produced by Israel Coins and Medals Corporation. The wide product selection, including weights ranging from one-gram to one-kilo, provides an opportunity for beginner investors to learn, make first investments with ease and with small sums. Alongside ICMC products, you will also see a choice selection of investment products from the leading mints of the world.
Shop gold for investment now >>
Contact one of our representatives >>
The information contained in this website should not be construed as investment advice or as a substitute for investment advice suited to your own individual financial needs for purchase or investment, investment activities or transactions, or as recommendations or opinions as to the benefits of investing in gold or in any other specific products. The information contained in this website does not constitute an alternative for investment advice and you should not act upon it, before seeking advice adapted to your own personal situation and needs.