Physical Gold vs Paper Gold

Physical Gold vs Paper Gold.

If part of the reason you’re investing in precious metals is as a hedge against an economic downturn, black-swan events or experimental monetary policy with a longer-term outlook, there is no substitute for owning physical gold, stored in your name.

While investments in ‘paper-gold’, i.e. gold stocks or shares in exchange traded funds (ETFs) can be an effective way to gain exposure to gold and to hedge physical holdings, they will never replicate the control and assurances that come with physical ownership.

One of the key reasons for investing in precious metals is their function as a natural hedge against monetary or banking crisis and potential systematic collapse. If such an event were to transpire into a loss of confidence in money, and paper-gold investors were to try to exercise or deliver the physical gold, what would happen? There is a possibility that investors might not be able to take delivery and ownership of the underlying assets. This is due to the low level of actual physical gold backing the paper gold.

For instance, take the largest and most liquid futures and options contracts, CME Gold futures. The open interest on the 20/09/2016, at 100 troy ounces per futures contract, equates to 79,317,700 troy ounces[i]. The underlying COMEX/CME warehouse stocks on 23/09/2016 were roughly 10,687,512 ounces[ii], of which only 2,165,480[iii] were ‘eligible’ for delivery.

I have used CME futures as an example, but the theme with Gold Exchange Traded Funds and other forms of leveraged paper gold shows a similar trend. Alpha Broking suggests that, in general, clients hold 10% of their investment funds in physical bullion. If part of your reasoning for investing in gold is to hedge against black-swan events and experimental central banking, there is no substitute for physical bullion.

Another consideration is the relative cost of physical gold vs paper gold. Physical gold costs are very transparent – transaction, storage and insurance. Paper gold has obvious transaction costs, but carries some other, less transparent costs. Any form of margined exposure to gold incurs borrowing costs on the margined amount. ETFs typically incur various fees, such as management fees, which are built into the share price movement as opposed to standard billing. Many ETFs are also market-made, and the bid/ask is presented as a spread, which acts as a further percentage-based transaction fee.

In the event of a major crisis or systematic 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.

[i] http://www.cftc.gov/dea/options/other_sof.htm Precious Metals COT Activity date 20/09/2016

[ii] CME Group Metal Depository Stocks Activity Date 23/09/2016 – rounded to the ounce

[iii] CME Group Metal Depository Stocks Activity Date 23/09/2016 – rounded to the ounce

Written by Ben Foster, Security and Futures Advisor.
You can contact Ben on 03 8662 4003 or by email, ben.foster@alphabroking.com.au

 

Important Notice

Disclaimers: Guardian Vaults Holdings Pty Ltd, Registered Office, Scottish House, 100 William Street, Melbourne, Victoria, 3000. ACN 138618176 (“Guardian Vaults”) All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from the publisher and/or the author. Information contained herein is believed to be reliable, but its accuracy cannot be guaranteed. It is not designed to meet your personal situation. Guardian Vaults, its officers, agents, representatives and employees do not hold an Australian Financial Services License (AFSL), are not an authorised representative of an AFSL and otherwise are not qualified to provide you with advice of any kind in relation to financial products. If you require advice about a financial product, you should contact a properly licensed or authorised financial advisor. The information is indicative and general in nature only and is prepared for information purposes only and does not purport to contain all matters relevant to any particular investment. Subject to any terms implied by law and which cannot be excluded, Guardian Vaults, shall not be liable for any errors, omissions, defects or misrepresentations (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (direct or indirect) suffered by persons who use or rely on such information. The opinions expressed herein are those of the publisher and/or the author and may not be representative of the opinions of Guardian Vaults, its officers, agents, representatives and employees. Such information does not take into account the particular circumstances, investment objectives and needs for investment of any person, or purport to be comprehensive or constitute investment or financial product advice and should not be relied upon as such. Past performance is not indicative of future results. Due to various factors, including changing market conditions and/or laws the content may no longer be reflective of current opinions or positions. You should seek professional advice before you decide to invest or consider any action based on the information provided. If you do not agree with any of the above disclaimers, you should immediately cease viewing or making use of any of the information provided.

Enquire now

Please provide your details and we will contact you to discuss your needs.

[contact-form-7 id="1402" title="Form1 - Enquire Now"]

Enquire Now

Please provide your details to reserve space at Guardian Vaults.

[contact-form-7 id="1402" title="Form1 - Enquire Now"]

Enquire Now

Please provide your details to reserve space at Guardian Vaults.

[contact-form-7 id="1853" title="2018 - Sydney Deposit Box"]

Enquire Now

Please provide your details to reserve space at Guardian Vaults.

[contact-form-7 id="1854" title="2018 - Melbourne Deposit Box"]

Enquire Now

Please provide your details to reserve space at Guardian Vaults.

[contact-form-7 id="1856" title="2018 - Sydney Safe Box"]

Enquire Now

Please provide your details to reserve space at Guardian Vaults.

[contact-form-7 id="1855" title="2018 - Melbourne Safe Box"]