Owning Real Gold Has Advantages Over Paper Gold
Physical metal is a store of value and can be sold in an emergency
Many investors prefer to own physical gold rather than gold investment vehicles because they want control over their metal and access to it, Dillon Gage Metals in Dallas says.
In an emergency, gold metal can be sold for cash. Refugees fleeing wars have carried small gold bars across borders. And if they desperately need money, women -- in Asia, the Middle East and Africa in particular -- might sell a gold bracelet.
Buying physical gold generally means purchasing bullion or coins and then taking delivery and storing it, says Terry Hanlon, president of Dillon Gage Metals. "For investors buying large quantities, they can store bars and coins in a secure metals depository -- which should be chosen carefully," he adds.
In recent years, national central banks have been buyers of physical gold, Hanlon notes. In 2011, central banks were net buyers, and their purchases surged more than fivefold to 440 tons from 77 tons in 2010, according to the World Gold Council. The Federal Reserve is, in fact, the largest owner of gold in the world.
Holders of paper gold, meanwhile, are interested in price movements or diversifying their investment portfolios, Hanlon reports. Paper gold includes Exchange Traded Funds, or ETFs, and gold futures and options. Those who buy gold mining stocks are investing in a company. So, the performance of the stock is not necessarily tied to the performance of gold, but rather that of the company itself. The creation of gold ETFs, starting in 2004, offered investors another way to purchase the metal and helped investment demand for gold to grow steadily in recent years.
At least a few analysts worry that gold might at some point be subject to a "squeeze" as the metal gravitates to investors who have little intention of lending or selling it, Hanlon says. Central banks might refrain from providing liquidity. As physical gold gravitates to central banks and strong hands or big investors, above-ground gold inventories could decline and there would not be enough available to meet demand.
In the 1970s, the Hunt Brothers -- William Herbert and Nelson Bunker of Texas -- accumulated large amounts of silver and had nearly cornered the market when prices rallied to a record $50 an ounce in January 1980. Two months later, silver prices collapsed, however.
"Today, major metals exchanges around the globe are vigilant about protecting the stability of markets," Hanlon explains. "But a squeeze on gold could happen nonetheless." In the event of a squeeze, holders of paper-based instruments might not see the gains they'd come to expect. Investors able to deliver physical gold to the market would be most likely to profit.
"Handling and storage of precious metals are relatively minor inconveniences compared with the security and control that direct ownership offers," Hanlon concludes. "Paper forms of ownership are promises to pay, based on faith in and the credit of the issuer. Holding physical metal allows the owner to sell a portion of it anytime and almost anywhere in the world and to receive hard currency in return."
Posted April 4, 2012