In Canada, the threat of inflation is intensifying to the point that we are now feeling it. Our Federal Government has printed copious amounts of paper money with little regard for the depreciation of our currency long term. And our total debt has risen faster than at any time in history within the past 15 months. We remain on high alert for potential new waves of Covid Variants. Our housing market is effectively off-limits to 90% of Canadian home buyers, and the expected post-Covid 3rd wave boom is fizzling out.
It feels very much like preparing for a market collapse far more significant than last year, and 2008/09 is becoming conventional. As a result, investing in physical gold or paper gold is becoming increasingly popular for investors. Which one is best? Physical Gold vs. Paper Gold (in the form of stocks or ETFs or certificates), which is better? Here is a breakdown of each possible investment as we find out why physical rules.
Suppose you want to safeguard your wealth against inflation while diversifying your wealth strategy with something more "crash-proof." In that case, one of the best things you can do historically is to devote a portion of your total wealth strategy to gold or other precious metals.
A study carried out by Ibbotson Associates in 2005, Wealth strategy Diversification with Gold, Silver and Platinum, noted that, since 1969, stock and bond correlations have increased and, contrary to popular belief, a mix of these will not result in a diversified wealth strategy. Today, most wealth strategies lack the negatively correlated asset classes - real estate, commodities and precious metals - necessary to achieve total diversification and are exposed to risk and volatility. With that said, there are many ways you can go about doing this.
When discussing physical gold vs paper gold, there are some clear comparisons and even some unique variances. For one, physical gold is a smart way to hedge against inflation. In other words, whatever value your wealth strategy risks losing because of inflation, you can many times, as history has shown us, recover in terms of appreciation of your gold holdings. This benefit can solely focus on investors looking at long-term protection and insurance for their wealth strategy.
On the other hand, gold mining stocks have the short-term potential to offer more leveraged growth than just gold, especially for higher-risk investors. In many cases, focusing more on paper stocks than physical precious metals within a typical stock market bull run will make sense. To be clear about your overall strategy regarding paper gold vs physical gold, you must first know your overall wealth objectives.
Are you looking for your wealth strategy to grow considerably over a short period, or are you looking principally for a hedge? Likewise, if you are considering getting into gold, why are you doing so? Are you looking to grow the value of the gold portion of your wealth strategy, or are you seeking a hedge against inflation or a market recession? Know your wealth objectives: Higher Risk Growth or hedge/insurance.
Gold's Conventional Power
When it comes to defining the value of investing in either paper gold vs physical gold, one thing is clear. Gold has specific traditional strengths that both forms share. Physical gold's traditional strengths are not going to change. They are a traditional store of value, liquidity and refuge in times of economic uncertainty and a growing one which is often not discussed, which is industrial uses. Increasingly gold industrial demand is growing in many parts of the world. These traditional strengths of gold have never changed. Whether you are deciding on paper or physical, both types of gold are affected by these commonalities.
Here are some advantages and disadvantages to each.
The Advantage of Gold Mining Stocks
Gold mining stocks are not pieces of gold. When you invest in gold mining stock, you're not buying a position in physical gold bars or coins. You are buying paper (digital) shares in companies. Shares that can have little to nothing to actually do with gold’s performance and far more to do with the health of the company. You are investing in miners and that is far more risky; keep this in mind.
You are wagering that they are well handled and managed compared to other companies within their industry. If you make the wrong bet, your investment isn't going to appreciate much. Why? You aren't investing in the health of the gold market or gold in general. You have, instead, invested in the health of one particular company. So what is the advantage?
The significant advantage of gold mining stocks is that they appreciate similar to stocks. So if there is a big run-up in stock values, propelled by either an increase in gold prices or market news, gold mining stocks go up. Mining stocks appreciate like stocks, so the growth can be pretty significant. However, they are still paper (digital) stocks. This is why countless shareholders who want to make 'pure gold plays' get cold feet with gold miners.
Regular company stocks appreciate partly due to their performance and partly due to the performance of other stocks in their industry and based on the stock market's health in the broad sense. But, there are so many other extra considerations to keep in mind. Contrast this to the addition of pure gold to your wealth strategy. It is a big difference. With that said, if you select the right mining stock, they might grow much faster than gold metal prices.
The Weaknesses of Gold Mining Stocks
The dilemma with investing in gold mining stocks is that while gold shares, in general, have a tendency to to go up due to market sentiment, you still have to choose the right companies.
If there is an imminent market crash or negative market variable, or inflation picks up, as it is now, gold mining shares can go up very quickly. However, if you intend to place a bet on gold mining companies that will continue to go up and produce the best ROI, you have to play this investment the same way you would general stocks. You still have to select the right stocks and make changes off and on as the market develops or the company grows. You have to do this despite the fact that although the market is moving upwards in a general trend some stocks are moving downwards due to other variable. Embezzlement, fraud, poor accounting, missuse of capital etc.
Therefore, if you are going to stick to the paper gold stocks it makes sense to utilize proven stock selection techniques like picking out dominant market players (blue chips) based on price-earnings, analyzing the news etc. Meaning, you have to use the same evaluation process you would use when selecting shares of stock.
This possible indecision could be a severe disadvantage because even if you use proven analytical tools in your evaluation process, you're not guaranteed to pick the right stock. If investing in stocks was just a function of looking at a broad range of data points and selecting the shares that meet those data points, then there would be a lot more millionaires on bay street then there are now.
The truth is that data can only take your stock picks so far. There is still a market to contend with, which operates with its own rules and trends. Anyone's guess at any time as to which gold mining stocks are worth it in the long hall could be correct. If you employ traditional stock-picking techniques for selecting gold mining stocks, your chances of making the right decision are higher but the variety and the selction of different companies still gives you worse odds then simply selecting physical gold bars or coins, taking them home or into your own allocated storage.
The Benefits of Physical Gold
Physical gold is liquid. It is the most liquid asset on the face of the Earth today. That's not much of an advantage in and of itself as trading floors and business do operate withi the Mon-Fri structure but some companies, such as Delta Harbour keep certain types of physical gold accounts liquid 24 hours a day from Sunday evening to Friday evening.
Physical gold also mirrors the market's sentiment against economic slumps, depressions, recessions etc., much faster than gold mining stocks.
Gold mining companies and their stock, while engaged in the business of gold, are valued differently. Each gold miner is incredibly different from another. Gold mining companies differ in overall company health, personnel, industry, capital and specific geological areas they are mining. There are so many variables among gold mining stocks that the only thing they all have in common is their plight to rid the ground of all the gold in the world.
You don't have the same amount of variables when you are investing in physical gold bars and coins. The rise of the physical gold price is more stable, more constant. Why? Because you're dealing in physical gold. Gold prices are relatively the same the world over. A Royal Canadian Mint .9999 gold bar is the same as a PAMP .9999 gold bar despite each bar being fabricated in different parts of the world by different companies. They may not look the same but their value is equal. This is in stark contrast to gold mining stocks.
There are additional value variable that you really cannot overlook and that you cannot account for in paper investments. If you want to get the best possible return for your dollar and the peace of mind you have from holding a tangible hard asset such as gold bars and coins, it's a great idea to invest in physical gold versus the paper. This peace of mind is a critical distinction in determining the difference between gold mining stocks vs physical gold. Physical gold is an excellent hedge. It's a safer hedge than gold mining stocks because the reaction you get in gold prices is more transparent and more decisive.
The Downside of Physical Gold
The downside of physical gold is that it tends to get left behind when the equities market improves. When inflation takes a beating, or the stock market zooms to a new record, the price of physical gold generally tends to go down, not as an iron rule. If you have lousy market timing skills or tend to have a buy-and-hold approach, you could get left in the proverbial dust when the market recovers. You could end up holding on to physical gold for too long.
Physical gold tends to shoot up up and down very quickly. But it remains the winner in terms of returns over a long period. (Case in point it has averaged over 10% per year return cumulatively since 2002)
Diversification is the Key
Gold is an excellent diversifier for your wealth strategy. Not only can you diversify in terms of adding a physical hard asset to your overall wealth strategy, but you can also diversify within your positions of physical gold. You can add silver, platinum, and palladium. In other words, you can turn investment disparities of gold mining stocks vs physical gold to your benefit because, as mentioned above, these different types of investing in gold or precious metals have their own sets of benefits and detriments. You can use this diversification as a hedge and make additional money through the differences.
You have to time the form of your gold diversification strategy correctly. This timing is easier said than done. A lot of investors would do quite well in the market if they were better at timing their entries and exits with particular investment positions. Sadly, only a tiny minority know how to time their investments well enough to capture the full appreciation of their positions. The good news is, with gold and precious metals in general, you have a longer time frame than when diversifying with stocks or other more highly liquid investment forms.
At the end of the day, you decide what is best for your wealth strategy. We have a bias at Delta Harbour, and we are transparent about that preference with our clients. However, discussing alternatives to physical gold and silver is always essential. We believe the market is ideally situated for a new bull cycle in gold and silver. Those entering now or shortly will thrive even against the backdrop of a falling stock market and even against gold mining stocks.
Yours to the penny,
Darren V. Long