There is a lot of uncertainty in the world right now. The US has a new president that nobody can predict. Britain is leaving Europe. Le Pen, who has vowed to do the same with France, looks almost certain to make it to the presidential run-offs. And North Korea – called by Trump the US’s greatest foreign threat – is testing missiles and murdering family of Kim Jung-un on foreign soil.
With this much insecurity about it is only natural to want some kind of financial safety. Gold has long been that safe haven. Even better, when the world is less secure, the price of gold often rises. That’s exactly what’s been happening. From the New Year till the end of February it’s gone up about $110 dollars. That means is not only a good place to secure your money but also a great investment.
The question is, should you buy actual gold or Exchange Traded Funds (ETFs)?
The downside of bullion
Buying gold has some disadvantages associated with it. The first one is that the price for gold varies depending on where you try to buy it. And so, you can’t just decide to buy gold on a whim, as then you’ll probably pay too much. What’s more, even if you do find a good price, you’ll still have to pay the whole cost up front.
Similarly, having gold brings along risks of theft, which means you’ll need to secure it and insure it.
This means that planning to buy gold can be quite a bit of work. At the same time, if you think that the world is going in a bad way (which it very well might be), perhaps it’s about time that you do a little bit of planning, no?
So what about ETFs?
ETFs have problems of their own. It starts with the fact that when you buy them you don’t actually have any gold. All you have is a piece of paper that says you own a slice of a fund which owns gold. And before you think otherwise, having that piece of paper does not give you any rights to that gold. If there would be a market crash, you couldn’t go knocking on any door to exchange your pieces of paper for actual gold.
The only people who can do that are Authorized Participants. Who are they? Well, generally they’re large banks and investment funds. They control the shares and the underlying portfolio. So while you might think you’re buying gold to be secure in case of financial market collapse, as that market is still in there that’s not the case.
It doesn’t end there. You see, particularly if you’re planning to hold gold for a longer period of time, holding it in the form of ETFs can get expensive. This is because every year you are charged money for holding them, to cover the expenses of the fund. Mind you, the costs aren’t that high (about ½ a percent on average) but that can still add up. For example, if you invested a million, then over ten years you’d lose about 44 thousand dollars.
So, if you want long-term security that will survive any market collapse, you have to buy actual gold. Yes, you’ll need space in a secure place to store it. Fortunately, though, gold is dense. A kilo of gold (32.15 ounces), which is worth $40k right now, measures only 51.86 cubic centimeters or 3.1 cubic inches.
One of those bricks you always see in the movies? They’re worth about half a million dollars. So don’t expect to end up with a cellar, or even a chest, of gold! Admittedly, that might be a bit disappointing. On the plus side, it will easy to secure.
More importantly, as you’ll actually own the gold, it won’t just disappear. You can’t be sure of that with an ETF. There might well be an overlooked clause in an ETFs small print that kicks in the event of a world market collapse.
In other words, gold, when physically held, is a fantastic commodity to give you peace of mind. Right now, we can all use a bit of that.