Doug is an active trader of stocks, bonds, and commodities, as well as an experienced non-fiction writer.
Physical Gold Bullion: The Advantages and Disadvantages of Investing
There are many reasons why an individual investor may choose to invest in gold. Some people like the fact that when they put their money in gold, they can physically view the investment they have made. Whether they keep their gold at home, at a storage facility, or in a bank vault, they can visit their investment at any time and gain peace of mind. In contrast, investing in the financial markets means you are getting nothing more than a slip of paper, or a webpage, showing how much money you have and where it is being held.
Others may put their money in gold because they distrust the financial markets in general. They do not like dealing with banks, brokers, or other middlemen when they are investing their money. Instead of buying stocks or bonds or putting their money in mutual funds, they will buy physical gold as a long-term investment. They also worry about the price and value of the dollar over the coming decades, given the United States government’s excessive spending and the amount of debt it owes to various banks and countries.
And then some simply believe the price of gold will always rise, which makes it the safest long-term investment in the world. Are they correct? And what other reasons exist for putting your money in gold, as opposed to the financial markets? We have assessed the pros and cons of investing a large chunk of your savings in physical gold bullion.
One of the major reasons why investors consider adding gold to their portfolio is because of the safety of knowing that the price is going to rise steadily over time. While you may have to ride through some dips in the price of gold, it generally always goes back up. If we look at historical charts for guidance, we can conclude that the price of gold is almost certainly going to be higher in ten or twenty years than it is today.
Unlike stocks, bonds, or mutual funds, you do not have to worry about the way a particular company or industry is performing when you assess the value of your investment in gold. Even though the current state of the economy has some impact on gold prices, a poor economy does not necessarily mean the price of gold is going to go down. In fact, economic uncertainty drives more people to invest their money in gold, which further raises its price.
Pro: Inflation Hedge
One of the biggest worries we have when it comes to the money in our bank account is how inflation is going to impact the value of a single dollar. Over time, the purchasing power of the dollar declines. Look at an old magazine from twenty or thirty years ago, and you will be shocked at how cheap the prices in the advertisements appear. For example, the average price of a house in the United States was $150,000 in 1990. Twenty years later, in 2010, the average house price was $220,000. So was the house a good investment, or did the value of the dollar decline?
Now let’s look at that same house in terms of gold. In 1990 the average price of gold was $383 per troy ounce. It would have taken 392 ounces of gold to purchase the house. Now move forward to 2010, when the average price of gold was $1,118 per troy ounce. The same $220,000 house in 2010 would require only 197 ounces of gold to purchase. The gold maintained its purchasing power over that twenty-year period, whereas the value of the dollar declined.
The price of gold in January 2005 stood at roughly $435 per ounce. The price of gold in December 2014 had risen as high as $1,180 per ounce. Compare that to the rate of inflation over the roughly ten-year period we are analyzing, which was only 24 percent, and you can see how the rise in gold prices is far greater than inflation rates.
Pro: Simplicity of the Investment
Investing in gold is incredibly straightforward, even for someone who may have next to no experience with investing their money. If you ever talk with a broker or a financial analyst, they are going to play up the inconveniences of investing in gold, but they are not going to tell you about how easy it is to buy some for investment purposes. There are plenty of dealers around the United States who are happy to sell gold, whether it is in the form of jewelry, coins, or bullion bars.
If you are worried about where you are going to store your valuable gold, you do not need to fear anything. A simple deposit box at a bank is sufficient to store your gold safely and securely. As you acquire more gold over the years, you can request additional boxes so that all your gold is being kept in the safest manner possible.
Another advantage to investing in gold is that you no longer need to keep yourself apprised of what is going on in the financial markets. While you may want to keep a small eye on how the price of gold is trending, in case you ever decide to sell some of your stock when the price is really high, you do not have to pay attention to individual companies or industries. In contrast, if you have stocks in major tech, financial, or oil companies, you may constantly find yourself nervous about their upcoming earnings statements or quarterly reports.
Now you may wonder, if gold is such an easy investment to make, why are stock brokers not more encouraging when you ask them about buying physical gold? The reason is simple—brokers are not allowed to deal in gold. They are not going to make any money if the bulk of your investment portfolio consists of physical gold, but they do have much to gain if you are buying stocks and bonds through them.
Pro: Hedge Against Market Crashes
One of the biggest reasons why people put their money in gold is because they are fearful of how their other investments would pan out. For instance, a market crash like the one we saw in 2008 is something that would devastate your investment portfolio if your only investments were stocks, bonds, and mutual funds. However, someone who puts a substantial portion of their long-term investment money in physical gold would not have as much to fear from a financial crisis or global market meltdown. In fact, the price of gold often goes up during such periods because more people turn to such physical investments as they lose their faith in the financial markets.
Pro: Demand for Gold is Rising
As the world’s population continues to grow and many developing economies begin to show their financial muscle, the demand for gold is continuing to rise at sharp rates. Statistics show that most of the demand for gold in the world is coming from two places: India and China. Both of these countries, especially India, have growing populations and economies that are doing very well. As the national wealth in such nations rises, the demand for gold among their citizens and investors will increase, which means the price of gold is going to continue to rise over time, even if we experience some year-to-year declines.
Gold is a wonderful long-term investment, but it is not the best way to store your funds in the short term. When you are buying physical gold, you are buying it from a dealer, which means paying slightly over the market price of gold at the time. And the process is the same if you want to sell gold, and dealers usually pay a little less than the market price when they are buying your gold because they consider it their commission.
So if you are in a rush to sell your gold, you may have to put up with getting less money for your investment than the going market rate. It is why you should most definitely not put all your savings in gold, because you can never know when an emergency situation may require you to liquidate some of your assets. But if you put roughly 10 or 20 percent of your long-term savings in physical gold, the lack of liquidity should not pose any issues for you.
As long as you are willing to remain patient with your gold investment, by the time you do sell your gold, you are going to make a very healthy profit in relation to the price you paid to buy it. Even if your dealer of choice gives you less than the market rate at the time of selling, the market rate is probably going to be so much higher than it was when you bought the gold, which means a profit is all but guaranteed.
And even if you would wish to invest in gold for the short-term, there are ways around the liquidity problem. One option is to invest in Exchange-Traded Funds that own gold. These funds are not going to provide you with the physical gold as an investment, but they will provide you with certificates that acknowledge the amount or share of gold that you own through the fund. The benefit of investing in ETFs is that you can easily buy or sell their shares over the counter, which means your investment is highly liquid. One gold ETF that is commonly traded is SPDR Gold Trust, with a stock symbol of GLD.
Another advantage to putting your money in an Exchange-Traded Fund is the fact that the fund manager is going to employ various buying and selling techniques to maximize the returns of the fund. So you may earn even more money on an annual basis through the fund than you would earn with physical gold investments. However, ETFs are not exempt from the general investment risks that exist with any managed fund because with higher returns comes the possibility of losses as well.
Con: No Broker Assistance
As we mentioned earlier, the fact that brokers often advise against gold investments stems from the fact that they are not allowed to deal in physical gold. If you are getting all your investment money managed by a broker or through a brokerage, it is a little inconvenient to have to find a separate dealer for gold. In addition, your broker may not have the necessary knowledge or expertise about gold to advise you on how much to buy or where to buy it from.
But if you are willing to do the leg work on finding reputable dealers of gold, the process of buying gold is fairly straightforward. A vast majority of gold dealers are in it for the long haul, which means you may only have to deal with one or two gold dealers in your lifetime.
Con: Political Climate
Like any other investment, gold is impacted by the political situation in the world at any given moment. There are particular areas in the world where gold mining is especially lucrative, and any political strife in those regions may impact the price of gold temporarily. In addition, concerns about whether a central bank or national government may sell a large portion of their gold supply can prompt fears that the price of gold is about to crash.
However, fears of price fluctuation exist in every single investment you could make. Even the money sitting in your bank account or in your drawer could instantly lose a ton of its value depending on inflation rates. Investors who have studied the history of gold investments know that any price fluctuations you see with gold, especially a decline in its price, are only temporary. If you are investing in gold for the long-term, a one or two-year dip in its price is not going to impact you in any way. The price will eventually stabilize and, as history has shown us, will inevitably rise from one decade to another.
O Gold! I still prefer thee unto paper, which makes bank credit like a bark of vapour.
— Lord Byron (1788 - 1824)
Con: Minimal Gains Amidst Market Stability
One of the benefits of gold investment is how it hedges against a market collapse. But in the same vein, gold prices usually do not display significant gains during periods of market stability or progress. When investors have a great deal of confidence in the financial markets, they are less likely to put their money in gold, which means the supply of gold in the world increases, which can either drive down prices or keep them at a stable level. While you are very unlikely to lose money on a gold investment over a ten or twenty-year period, if the said period coincides with a time when the markets perform very well, your investment may not produce as great a return as you were expecting.
Moy, Edmund C. American Gold and Platinum Eagles: A Guide to the U.S. Bullion Coin Programs. Whitman Publishing, LLC. 2014.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2016 Doug West
Doug West (author) from Missouri on June 22, 2020:
Sounds complicated. Good luck!
jas on June 22, 2020:
I have Bank of Nova Scotia gold certificates from years ago. I went to the bank to exchange it for real gold, the answer as policy has changed.
Option 1. sell and incur capital gains
Option 2. Deposit them in Scotia i trade account.
The worse part is: to deposit the certificate it was $100 each and then storage in us dollars although it is stored in Canada and it is a Cdn Bank. What a hassle
Bullion Goldbar on April 07, 2019:
Really Deep Explanation awesome, Thanks for sharing helpful information about Bullion Gold.
Doug West (author) from Missouri on September 23, 2016:
When I watched the second video, Mr.Munger's comments about gold didn't make sense to me either.
Ivan Tod from Chester, ny on September 22, 2016:
Civilized people don't buy gold? hmm, well, I guess in that case everybody I know is uncivilized! I'd like to see Mr. Mungers' portfolio.
Kurusar from Chennai on September 22, 2016:
Doug West (author) from Missouri on September 22, 2016:
I am afraid so. Humans are the only ones that can assign value. Apparently humans assign value to gold since it has been a medium of exchange for 5,000 years.
Anon on September 22, 2016:
Are we doomed to forever pretend things have value without humans labeling them as valuable?
Doug West (author) from Missouri on September 22, 2016:
It really is a simple as showing up at a coin shop with cash and walking out with gold. Expect to pay a few percent (5 to 6 percent) over the melt value for a one ounce coin. You will pay a higher premium if you buy coins that are smaller than one troy ounce. Buy the US coins, they are the most widely accepted.
Yvette Marshall from Houston, Texas on September 21, 2016:
Dougwest1 thank you for an informative piece. I have always wanted to know about buying gold and the process and this piece helps enormously. Now all I have to do is save some pennies to buy the gold :-). Thanks.
Doug West (author) from Missouri on September 21, 2016:
Thanks. There is a lot to think about when it comes to investing in gold. The process of buying and selling gold is simple, but, you need to understand it first.
Larry Rankin from Oklahoma on September 21, 2016:
Very interesting and well thought out analysis.