Physical Gold and Silver – The Ultimate Insurance Policy

An increasing number of commentators are advising everyone to own physical gold and silver, and so I have decided to do some investigating and provide a report on what it all means, and how to do it.

Gold and silver represents the ultimate store of value. As the government continues to print money, the purchasing power of each dollar diminishes. One day, they may be worthless. Fortunately, no-one can “print” gold or silver, so hard assets are and excellent way to preserve wealth.

For many years I have owned gold and silver stocks (gold stocks like Barrick Gold Corp., Agnico-Eagle Mines Ltd., Kinross Gold Corp. and Goldcorp Inc., and silver stocks including Pan American Silver Corp., Silver Wheaton Corp., and Silver Standard Resources Inc. The big advantage of owning stocks, in most cases, is liquidity. If I want to invest $100,000, I push a few keys on my computer, and it’s done. If I want to sell, same thing; a few clicks and it’s done.

Also, gold stocks give you great leverage. If the price of gold goes up by 10%, a gold stock could go up by 50%, because all increases in the price of gold are pure profit for the gold producer.

Finally, gold stocks pay dividends, and have no “cost of ownership”; there is no need to buy insurance on your gold stocks.

There are, however, some disadvantages to owning stocks:

First, a swing in the general market will effect individual stocks. The market volatility in the Fall of 2008 caused all stocks to swing wildly up and down, regardless of underlying fundamentals. I own some small stocks that are trading at below their cash value, which makes no sense, but that’s how it sometimes works. Markets can be, in the short term, wildly irrational.

Second, company specific news will impact the stock price. If I own a great company and the CEO quits, the stock price may drop. That’s not a risk when you hold physical metal.

Third, if there is a “Great Depression” and stock brokers start failing, how easy will it be to get access to your shares so you can sell them? It’s doubtful that that will happen, but it is a risk, and is a good example of how stocks can become very illiquid.

The Case For Owning Physical Gold and Silver

Which brings us to the reasons for owning physical gold and silver.

1 First and foremost, gold is insurance against uncertain times. Gold has been accepted as currency for thousands of years, and probably will be for the next thousand. Even if the dollar and the economy collapses, gold will still be accepted as a form of currency.

2 Gold holds it’s value. Inflation reduces the purchasing power of a dollar each year, but the purchasing power of gold does not diminish over the long term. Two hundred years ago an ounce of gold would buy you a good quality man’s suit. The same is true today.

3 Physical metal is not subject to the vagaries of company specific news. I don’t have to worry about the CEO quitting, or bad drill results.

4 Physical metal is highly liquid, and the liquidity increases in a “Great Depression” where banks are failing and people are reluctant to take credit cards and other forms of payment.

To clarify, lest you think I am talking out of both sides of my mouth, stocks are liquid in a normal market, because they can be sold instantly. However, when the market is crashing and hedge funds and mutual funds are selling, prices can drop quickly, making it difficult to get a decent price on the sale. In that scenario, physical gold may be the only acceptable form of payment.

What would happen if there was a nuclear attack on a large financial center, and computers and banks were rendered inoperable? In that dire circumstance, physical gold may be the only form of currency that would be acceptable. What if some computer hacker stole your identity, or someone sued you for a billion dollars because they slipped on your sidewalk? Even in that unlikely and bizarre situation, you would still have your physical gold.

5 Finally, it looks great. (Okay, that’s probably not a good reason for owning it, but at least it’s not ugly).

I have prepare two more articles, discussing How to Buy Physical Gold, and Where to Store Physical Gold.

Feel free to add your additional suggestions and comments below, or post your comments on the Buy High Sell Higher Forum.