It’s tangible, with inherent value. Physical gold is real and tangible. It is indestructible, impossible to create artificially, and difficult to counterfeit. Mining physical gold is arduous and costly, therefore it has inherent value and worth. In contrast, paper money doesn’t have any inherent value.
No counterparty risk. Physical gold is an asset that isn’t someone else’s liability; when you hold and own gold bars and gold coins outright, there is no counterparty. In contrast, paper gold (gold futures, gold certificates, gold-backed ETFs) do all involve counterparty risk.
Scarcity. Gold deposits are relatively scarce across the world and difficult to mine and extract. New supply of physical gold is therefore limited and explains why gold is a precious asset. Gold’s scarcity reinforces its inherent value.
Cannot be debased. Because of its physical characteristics and features, gold cannot be debased, and its supply is immune to political meddling. Compare this to “printed” and electronic money whose supplies are constantly being debased and destroyed via deficit government spending, central bank quantitative easing and financial system bailouts.
A 6,000-year history. Gold has played a central role in society for thousands of years from the early civilizations of ancient Egypt, right up to the contemporary era. Gold has facilitated international trade throughout history, has been directly responsible for the economic expansion and prosperity of numerous civilizations throughout history. It has even been, due to gold exploration and mining, the direct catalyst for the growth of some of today’s best-known cities such as San Francisco, Johannesburg and Sydney.
Store of value. Gold is a pre-eminent store of value. Physical gold, in the form of gold bars or gold coins, retains its purchasing power over long periods of time despite general increases in the prices of goods and services.
In contrast, fiat currencies — government-issued money not backed by a physical commodity with intrinsic value such as precious metals — are not stores of value. Their purchasing power is eroded by inflation… the general increase in prices. Fiat currencies have a long history of either becoming totally worthless and going out of circulation, or else becoming completely debased while remaining in circulation. Since the creation of the U.S. Federal Reserve in 1913, the U.S. dollar has lost over 98 percent of its value its purchasing power — relative to gold.
A long-term inflation hedge. Physical gold’s ability to retain its purchasing power over time is sometimes referred to as the “Golden Constant”. This reflects the fact that gold’s purchasing power is constant over long periods of time. This ‘constant’ exists because the gold price adjusts to changes in inflation and future inflation expectations. Physical gold is a long-term hedge against inflation.
A 2,500-year track record as money. Because of its ability to retain value and act as a store of value, physical gold has been used as money for thousands of years. Gold coins were first issued in the Lydian civilization in what is now modern Turkey. Subsequently gold was used as a stable form of money in Persia, ancient Greece, ancient Rome, the Spanish and Portuguese empires, the British empire, and right through to the various international gold standards of the 20th century.
For 97 percent of the last 2,500 years gold has been chosen by numerous sophisticated civilizations as the form of money par excellence and an anchor of stability. It was only in August 1971 that the U.S. suspended the convertibility of the U.S. dollar into gold… a move which triggered the debt-fuelled global expansion that is still having repercussions.
A safe haven. Physical gold acts as a safe haven asset in times of conflict, war and geopolitical turmoil. During the financial market stresses and heightened uncertainties caused by wars, conflicts and turmoil, the counterparty risk of most financial assets spikes. But since physical gold does not have any counterparty risk, investors rush to it during these periods so as to preserve their wealth. This is analogous to sheltering in a safe harbour. Gold can thus be seen as a form of financial insurance against catastrophe.
Portable anonymous wealth. Gold bars combine high value with high portability. In times of conflict and war, gold bars and gold coins are ideal for transporting wealth and savings across borders and within conflict zones in an anonymous fashion.
Universal acceptance. Gold is universally accepted as money, with the highly liquid global market always providing ample sales opportunities for gold bars and gold coins. This means that whichever city you are in across the world, you can always sell or trade your gold bars and gold coins.
Emergency money. Military personnel are often issued with gold coins that they carry with them in conflict zones as a form of emergency universal money. For example, the British ministry of defence often issued RAF pilots and SAS soldiers with gold sovereign coins to carry on their persons during combat missions and activities.
Outside the banking system. In the current era of global financial repression, physical gold is one of the few assets outside the financial system. Gold is not now issued as currency by any monetary authority or central bank or government. Gold is independent of the banking system. Fully owned physical gold, if stored in a non-bank vault or held in your possession, is outside the banking system.
No default risk. Unlike a government bond, there is also no default risk with gold because it is not issued by any authority that could default. Gold bars and gold coins are no-one else’s liability. Physical gold cannot go bankrupt or become insolvent. Therefore, there is no need to have to trust any other party when holding physical gold.
Portfolio diversification. Adding an investment in gold to an existing portfolio of other investment assets such as stocks and bonds reduces the volatility (risk) of the investment portfolio and can increase returns. This is because the gold price has a low to negative correlation with the prices of most other financial assets, because gold is less influenced by business cycles than most other assets.
Numerous empirical studies by financial academics, as well as industry bodies, have validated gold’s role as a strategic portfolio diversifier.
Currency hedge. There is generally an inverse relationship between the gold price and the U.S. dollar. The gold price generally moves in opposite directions to the dollar. Therefore, holding gold can act as a currency hedge and help manage the currency risk of portfolios.
Metallic properties. Gold has many and varied metallic properties. These provide gold with many technological and commercial applications and uses, which in turn contribute as demand drivers in addition to investment and monetary demand for gold.
Gold is highly ductile (can be drawn into very thin wire). It is also highly malleable (can be hammered and flattened into very thin film). Gold is a very good conductor of electricity and heat. It does not corrode or tarnish. It is chemically unreactive and non-toxic to the human body. It has a high lustre and shine, and an attractive yellow glow.
These properties explain gold’s use in electrical and electronic wiring and circuits (for example, computers and Internet switches), its use in the medical and dental fields, its use in solar panels and space travel, and gold’s traditional uses in jewellery, decoration and ornamentation. With new technological uses being found for gold all the time, gold’s demand pattern is diversified and underpinned by its commercial importance.
Physical gold — a tiny fraction of paper gold. The London wholesale gold market and the U.S.-based gold futures market generate huge trading volumes of paper gold that dwarf the size of the physical gold market. However, these markets only trade derivatives on gold (futures and unallocated positions), representing fractionally-backed and unbacked claims on gold that could never be convertible into physical gold by claim holders.
In a scenario under which these paper gold markets became unsustainable, the prices of paper gold and physical gold would diverge, with the paper gold markets ceasing to trade and collapsing, and only physical gold retaining any real value. Physical gold is therefore an insurance against the collapse of the world’s vast paper gold markets.
Not an ETF. Physical gold provides all the benefits that gold-backed Exchange Traded Funds (ETFs) do not. ETFs provide exposure to the gold price, not to gold itself. Holding physical gold is by definition direct exposure to gold. With most gold-backed ETFs you cannot convert the units into gold and take delivery of the gold, and in many cases the locations of the vaults are not even known. If holding physical allocated gold bars or gold coins in a vault, such as with BullionStar in Singapore, you can always take delivery.
Gold ETFs have many counterparty risks since there are many moving parts in an ETF such as a trustee, a custodian, and a sponsor/issuer. Physical gold has no such counterparty risks. When you hold a gold-backed ETF, the quantity of gold backing the ETF declines over time due to management fees being offset against the gold holdings. When you hold physical gold, you always remain with 100 percent of the actual gold you first purchased. There is no erosion of holdings.
Anonymous storage. Gold can be stored anonymously, either in your possession within your house or property, or in a vault in a jurisdiction, such as Singapore, that has no reporting requirements. Since gold has a high value to weight ratio, storing gold does not take up much space.
Independent of Internet. Owning physical gold is not reliant on having Internet access and access to electronic wallets and cryptocurrency exchanges. Furthermore, gold cannot be stolen by hacking an electronic address or by transferring or deleting a number in a computer.
Real gold is measured by weight. Physical gold is measured in weight, not through a number set by a politician or central banker. When you buy a kilo gold bar, a 10 Tola gold bar or a one-ounce gold coin, you will always have that bar or coin, irrespective of the fluctuations of currencies. While thinking of the value of physical gold in terms of a fiat currency might be convenient, a better way is to think of a gold holding in terms of the weight you own.
Collectibles. Buying investment gold bars and bullion gold coins allows you to build a diverse collection of bars and coins that are at the same time a fascinating pastime as well as a form of investment and saving.
Bullion gold coins from the world’s major mints are beautiful and often have a connection to history. Investment gold bars from the world’s major gold refineries are distinctively different from one another and you can vary a collection by cast or minted bars, and a selection of weights.
Physical gold feels like real wealth. When you hold a handful of one-ounce gold coins in your hand, you intrinsically know that you are holding real wealth; they’re something that is scarce and that has been costly to produce.
Loan collateral. Gold can be used as loan collateral. Since gold is highly liquid and valuable, it can be lent and used as a form of financing, and as a way of generating interest. The wholesale gold lending market between central banks and bullion banks is highly active. Likewise, retail gold holders can also in various ways lend their gold to receive financing or interest, with new innovations to do this arising all the time.
Central banks hold gold. Although the world’s central banks like to downplay the importance of gold because it competes with their fiat currencies, most of them continue to hold substantial amounts of physical gold bars and gold coins in their vaults. They hold this gold as a reserve asset on their balance sheets, valuing this gold at market prices.
Like private gold investors, central banks hold physical gold because it is highly liquid, it lacks counterparty risk, and because gold is a safe haven or ‘war chest’ asset that acts as a financial insurance in times of crisis. Central banks also hold gold for the unpublished reason that if and when gold re-emerges at the centre of a new monetary system, these very same central banks will not be caught out having no gold.
For gifting. Gold coins and small gold bars make great gifts. Gold is a traditional gift in many societies around the world. Gifting a gold coin or small gold bar to mark a birth, anniversary, wedding or other special occasion is an ideal present that will be highly appreciated by the recipient.
For inheritance. Gold bars and gold coins are a great form of inheritance for your children and family members. Because gold is real, tangible, valuable, and has a highly liquid trading market, it is an ideal asset for inter-generational wealth transfers. Because it’s fabricated in convenient weight denominations, such as troy ounces and kilograms, it can be distributed equitably among recipients, as often specified in wills and trusts.
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