Precious metals especially gold and silver acted as currency for thousands of years. The demand for precious metals has gone up in modern times. Consequently, investment and mining companies have come up with arrangements that allow people to invest in precious metals without owning the product physically. However, many people are still undecided when it comes to paper vs. physical precious metal investing.
This article helps you to make an informed decision on whether to invest in paper vs physical precious metals. For instance, some of the ways you can invest in paper gold include buying shares in ETFs (exchange-traded gold funds), investing in a mining firm, spread betting, and CFDs (gold futures trading or contracts for difference). So, which is a better option, physical gold vs paper gold? Let’s find out.
Investing In Paper Precious Metals
Investing in paper precious metals is an option that gives investors a chance to buy into a portion of precious metals shares without physically owning the bullion product. The most commonly bought paper precious metals are ETFs. People buy them through popular precious metal trusts. The trust stores the physical bullion product in secured vaults and creates ETFs to represent the value of the gold or silver held in the vault.
In principle, when you buy ETFs you own a portion of gold or silver equivalent to your investment. However, you can never have the gold or silver physically delivered to you even if you wish to do so. Now, let’s look at the benefits of investing in precious physical metals vs. paper metals.
The Benefits of Investing in Paper Precious Metal
- Spread betting has the potential for very high returns.
- ETFs are relatively cheap and can be bought and sold quickly.
- Well-established hedge funds are easy to access and well-regulated.
- Owning shares of a mining company has higher returns compared to trading in gold or silver.
Investing In Physical Precious Metals
Studies have shown that gold is the most effective hedge against inflation and that’s why the demand for gold goes up during recessions. Furthermore, precious metals enable investors to diversify their portfolios and protect wealth. One of the best methods of protecting and diversifying your portfolio is investing in physical precious metals especially gold. Below are the main advantages of investing in physical gold vs. paper gold.
The Benefits of Investing In Physical Precious Metals
1. Precious Metals Are Tangible Assets With Intrinsic Value
Physical precious metals like gold and silver are real and tangible assets that cannot be forged. Moreover, gold is scarce which keeps on driving up its value. On the contrary, paper gold lacks intrinsic value and its worth depends on the issuer and the terms and conditions of the deal.
2. Gold Is Accepted As A Currency Around The World
Gold and silver have been accepted as a means of exchange and a symbol of prosperity throughout history. Gold was used as money for more than 2,300 years before the arrival of paper currency (fiat currency). Physical gold is much more stable compared to paper currency and can withstand political upheavals and government interference.
3. Protection Against Inflation And Currency Decline
Precious metals like gold retain purchasing power for a long time compared to paper precious metals. For example, longitudinal studies have shown that since 1971 the U.S dollar has lost more than 98% of its value compared to physical gold. This is why the demand for gold goes up during recession and inflation caused by natural calamities like the ongoing COVID-19 virus. Read this journal article to learn more about the relationship between global stock and precious metals under COVID-19.
4. Protection Against Uncertainty And Other Risks
Physical gold is not directly connected to governments or the monetary system, which makes it a haven against different types of risks. During financial turmoil, trust funds and institutions that sell paper gold, are adversely affected. This significantly lowers the value of paper gold.
5. Banks Prefer Physical Gold As Collateral
Financial institutions prefer gold as collateral because of its intrinsic value. Paper gold is not held in the same esteem. The intrinsic value of gold is the reason central banks hold huge amounts of physical gold.
Which One Is A Better Investment-Paper Or Physical Precious Metals?
From the evidence presented above, investing in physical precious metals is lucrative and secure compared to paper precious metals. Physical precious metals like gold and silver protect you against inflation and currency decline. You can also have your investment physically delivered to you. Moreover, the value of physical gold keeps going up even during recessions. Lastly, physical gold and silver are the best collateral for securing a loan when you need it.