The Difference between Owning Physical Bullion and “Paper” options

When it comes to buying precious metals, you might be presented with a choice between physical bullion, and “Paper” options. Both present some advantages, but understanding the pitfalls associated with each is key to choosing an investment that is right for you.

In this article we will aim to outline some of the key differences between these investment choices, and why physical ownership is beneficial for a long-term, generational wealth building strategy. We will also investigate both the pros and cons of these investment vehicles.

Physical Gold, Silver and Platinum Bullion:

Physical Gold, Platinum, Silver or other precious metal ownership present some distinct advantages to the investor. When compared to various “paper” investments, the pros of owning tangible metals vastly outweigh the cons. Here are some facts that will enable you to judge for yourself.

Some advantages of owning physical bullion include:

• Gold, Platinum, Silver and other physical precious metals have zero counterparty risk. An ounce of silver, for example, cannot default on its obligations or declare bankruptcy.
• Own physical Gold, Platinum or Silver provides peace of mind. In the unlikely event of an economic or geopolitical catastrophe, these precious metals could be used to buy basic goods or services, such as food or any other daily living expenses.
• There are several storage options available. Many precious metals buyers will store gold, silver and other metals at home in case they are ever needed. You can also store your precious metals in a bank safe deposit box, or in a highly secure precious metals depository.
• Many gold, silver and other forms of precious metals are highly liquid. Silver rounds, for example, could be easily exchanged for goods or services should the need ever arise.
• The value of physical bullion is not influence by geography. These metals are recognized and exchanged all over the world, and an ounce of silver carries the same value anywhere you might be.
• Purchasing precious metals is a very private transaction that can be done safely and anonymously. You can buy gold, silver or other metals at any time from the comfort of your own home or office. 

There are, however, several potential disadvantages to consider when buying precious metals. Some of these include:

• The price of bullion can fluctuate. When one buys precious metals, it is possible to make money if prices go. On the downside, if the price goes down, one may lose money. That is why timing is crucial in this market.
• Buying physical precious metals can cost more than buying shares of an ETF, for example. When buying precious metals, dealer premiums, shipping, and insurance costs can add to the price. Additionally, if you are storing your metals in a safe deposit box or depository, you will incur storage fees as well. It is important to consider the best, cost-effective facility that can insure and store your bullion.
• Storing precious metals at home or on your property may present the risk of loss or theft.

In summary, precious metals are a long-play that ensures that your wealth is out of Fiat based currencies. It is important to diversify your wealth across several investment options (between 7-20% into Physical bullion). Physical bullion very much has its place, especially over the coming decade.

Precious Metal Paper or Stock Options

People often consider owning stock in gold, platinum or silver mining companies a proxy for owning physical precious metals.

However, investing in “paper” precious metal products comes with some serious drawbacks as well. Some issues that must be considered are:

• Counterparty risk. Any type of paper investment carries with it counterparty risk. If you own shares of a mining company, for example, there is always a risk that the company can go bankrupt.
• The potential for a significant drop in the share or stock price, reducing the monetary value of your shares.
• In the event of an economic, geopolitical or currency crises, paper investments will not do much good. You cannot, for example, exchange your shares of a gold mining company for a gallon of gas or groceries.
• Ownership of paper investments is not the same as owning physical, tangible precious metals.

Buying precious metals backed ETFs

An ETF, or Exchange Traded Fund, is another “paper” vehicle that investors may use to get exposure to gold or silver. When an investor purchases shares of an ETF, they are buying an interest in a fund that holds gold or silver as its primary asset. Precious metals backed ETFs buy gold or silver and handle the storage and management of the physical metals. These ETFs were designed to mimic the price of gold or silver. Precious metals backed ETFs also have their own pros and cons.

Some of the potential benefits of precious metals ETFs may include:

• A simple way to gain exposure to precious metals prices.
• Low transaction costs and good liquidity.
• May pay dividend income.
• Individual investors do not have to deal with the storage or management of precious metals.
• Small amounts of capital may be used to invest.

Precious metals backed ETFs also present some serious disadvantages. These include:

• Investors are not entitled to any physical precious metals.
• Investors have no control over metal storage, security or expenses of the fund.
• ETFs cannot be exchanged for goods or services.
• ETFs, like other paper investments, carry counterparty risk.
• Investors have no way of verifying the fund’s actual holdings or inspecting the metals held.

Gold or Silver Futures

A futures contract is simply an agreement between parties for the purchase or sale of an asset at a certain price, at a certain date in the future. Futures contracts are highly leveraged, allowing investors to control a large amount of gold, silver, corn, crude oil or other contract for a small amount of the total contract value. This leverage gives investors a way to magnify their gains, while also and equally providing a way to magnify their losses. Certain futures contracts are physically deliverable, while many are settled with cash.

Futures contracts have some significant drawbacks that must be considered. These may include:

• Magnification of losses – serious risk of loss.
• Possible margin calls.
• Process for taking delivery of precious metals may be costly and cumbersome.
• Does not equate to owning physical precious metals unless delivery is taken.
• Contract sizes are standardised. Investors cannot take delivery of a small amount of gold, platinum or silver.

Gold or Silver certificates

Certificates are another form of paper investment. Issued by banks or financial institutions, certificates indicate ownership of a specific amount of Gold or Silver. There are different types of Gold or Silver certificates available, including allocated certificates and unallocated certificates. There are very few advantages to investing in Gold or Silver certificates.

As with other forms of paper investments, however, there are some disadvantages to consider. These disadvantages include:

• Your bullion is not accessible.
• Certificates may require a high initial investment.
• Storage costs can be significant. It is always important to know with whom to Vault and Insure your bullion.
• Counterparty risk.

Conclusion

There is a common theme seen in all paper precious metal investments. They are simply not the same as owning physical precious metals. Ownership of physical Gold, Platinum, Silver or other precious metals tie all of the potential benefits together like no other investment vehicle. Owning physical bullion allows you to:

• Participate in potential price appreciation.
• Diversify your investment portfolio (7% – 20% in physical bullion of total investment portfolio).
• Enjoy the peace of mind that comes with physical ownership.

Unlike paper investment vehicles, physical Gold, Platinum and Silver bullion have been considered a reliable medium of exchange and store of value for thousands of years. Governments may fall, companies may go bankrupt, and banks may fail. Physical gold and silver have zero counterparty risk and zero risk of default. These metals will continue to be reliable and valued in an ever-changing world.