PAPER GOLD/SILVER VS.
REAL GOLD AND SILVER
With so many options to invest in with precious metals, how do you decide whether to invest in gold and silver stocks, ETFs, or physical gold & silver?
Investing in gold and silver stocks usually consists of purchasing shares in companies that may produce, explore, or even refine gold and silver. These gold and silver stocks have greatly benefited from the rise in the price of gold and silver in the last 25 years. It's true that some stocks have made decent returns for investors. But the fact that you don't own a physical product will never change.
Should you decide to invest in a precious metals stock, you are relying on that specific company being able to make profits regardless of the price of gold or silver. If the price of gold or silver rises, but the cost associated with managing the company also increases, then the mining company's stock can lose value.
The most important thing to remember about gold/silver stocks is that these stocks to do not always reflect the actual price of gold or silver. In fact, the value of some of the stocks may very well be disconnected from the real gold or silver market. Investors should always work with a licensed professional should you decide to invest in any stocks.
An exchange-traded fund (ETF) is the same as a mutual fund. The ETF tracks with an asset or an index of assets. A silver ETF may consist of various silver assets, including mining companies and other companies associated with silver production or refinement. ETFs have become very popular in the last 25 years as money has continued to pour into these funds.
ETFs are appropriate if you are looking to trade your funds actively. ETFs are especially advantageous if you are a high-frequency trader (you can move in and out of a position as often as you like – and quickly too). ETFs also offer the ability to 'own' precious metals without having to take possession of the gold or silver.
Investing in ETFs may seem like an attractive path, but ETFs lack some fundamental qualities that only come with owning physical gold and silver.
No Physical Ownership – ETFs consist of derivatives and contracts. They are redeemable for cash – only. At no time do you own any physical gold or silver products. Also, ETFs never actually possess the quantities of physical gold or silver they need in order to back their contracts entirely. Also, because you are paying a financial institution to manage your ETFs, the value of your ETF may not follow the price of the bullion you are trying to invest in. Those management fees can have a substantial and negative impact on the value of your investment. You also don't have any insulation from the inherent risks of the financial system.
Trading Volumes are Often Low – If an ETF experiences low trading volume, any advantage of owning an ETF diminishes over owning equity or a futures contract. Low trading volume can be a result of the bid/ask spread being too high to make the investment cost-effective.
ETFs Are Not Always Good for Long-Term Investors – While ETFs offer great short-term trading opportunities, ETFs may not fit into a long-term investing strategy. For many investors, it is essential to know your investment goals before deciding if an ETF works in your portfolio.
Paper Gold/Silver vs. Real Gold/Silver
If part of the reason you're interested in investing precious metals is as a hedge against an economic downturn, black-swan events, there is no substitute or owning physical gold and silver.
Investments in 'paper gold' may seem like an effective way to gain exposure to gold and silver. However, paper gold will never replicate the control and assurances that come from physical ownership.
While ETFs are supposed to be backed by real physical gold or silver – shareholders don't own any metals. Shareholders are essentially trusting their wealth to banks who are the custodians for the ETFs bullion products. With the collapse of MF Global, Lehman Brothers, IndyMac and Washington Mutual, investors should be wary of trusting large financial institutions.
To make matters worse, several financial watchdog organizations have already raised concerns the major ETFs are backing some of their shares with derivatives instead of physical metals. They are also engaging in hidden leases, swaps, and commingling.
In the event of a significant crisis or systemic failure, when the dust settles, paper gold will be little more than a piece of paper. A bar of gold will always be a bar of gold.
Physical Gold & Silver are the Answer
Physical gold and silver are a simple solution to precious metals ownership. Physical metals carry no third-party risk; they cannot be printed at will by a bank and are a real tangible property that cannot be diluted. Physical precious metals are proven assets that have withstood the test of time over thousands of years.
Gold and silver have maintained their value through times of market volatility, inflation, political turmoil, terrorism, war, and currency devaluation. Meanwhile, as inflation and the continued devaluation of paper currency erode our purchasing power, precious metals continue to be reliable sources of protection that continue to shield investors from potentially destructive forces.