Should I buy physical gold?

Dear readers,

First of all, I want to state clearly that I am not a financial advisor. I have always been fascinated by the financial markets since childhood and had in fact completed my first financial transactions before I turned eighteen years old. In 2009, following an internship in a Swiss bank, I realized that I could never picture career in the traditional banking sector. In 2013, I graduated with a bachelor’s in management from HEC Lausanne (Switzerland) where I acquired my general knowledge of the global economy.

For the reasons listed above, I have a global financial vision, but my point of view should not be considered as investment advice. As William Ernest Henley said in his precious poem “Invictus”, “you are the master of your fate”.

Being the CEO of Goldavenue.com, a company in the precious metals industry, I am being asked on a daily basis these two questions: Should I invest in physical precious metals? Is now the right time to invest?

Why buy gold?

In my opinion, the first point to consider is that physical precious metals should not be viewed as a speculative asset class, but more as a long-term investment.

When buying physical precious metals, your aim should not be to generate a quick income, but rather to protect your wealth, balance your investment portfolio and look for long-term returns. As a consequence, I find it more appropriate to define gold as long-term insurance.

Precious metals, and more particularly gold, have always been considered as a safe haven. Human civilization has valued gold for over 5,000 years as a tangible wealth preservation asset class, and its value is recognized all around the world. During wars, recessions, change of governments, natural disasters, financial market crashes and other catastrophic events, gold has maintained its value/purchasing power over time all around the world.

Below is an image of one of the world’s first gold coin (Ca. 564-539 B.C., of King Kroisos): 

A profitable long-term investment

Since the collapse of Bretton Woods (The United States unilaterally terminated convertibility of the US dollar to gold) gold price increased by an average of 10%!! per year since 1971. Moreover Gold has also protected investors against extreme inflation. In years when inflation has been higher than 3%, gold’s price has increased by 15% on average.

One of the reasons for this robust performance is that the available above-ground supply of gold has changed little overtime – over the past two decades increasing approximately 1.6% per year through mine production. By contrast, fiat money can be printed in unlimited quantities to support monetary policies.

As you can see in the following chart (Relative value between major currencies and gold since 1900), over the past century, gold has greatly outperformed all major currencies as a means of exchange.

Financial products versus physical

As mentioned above, there is a difference between a “Financial product” bought to generate an income in the short term and insurance you buy for the purpose of protecting your wealth in the long term.  

If you want to invest in Gold, you have plenty of different options:

• Unallocated or pooled gold accounts
• Gold mining shares
• Exchange Traded Funds (ETFs)
• Gold Futures
• Gold options
• Contracts for Differences (CFDs)
• Physical Gold

Unlike physical gold, paper gold has what is called counterparty risk. Counterparty risk simply means your asset (in this case paper gold) is at the same time someone else’s liability. You must then rely on another party—known to you or not—to make good on the investment. You are dependent upon, among other things, management prowess, fund structure, chain of custody, operational integrity, regulatory oversight, delivery protocols and so on. If any of these breaks down, your investment is at risk. As it is a complex universe full of options and variables, you must have a very precise knowledge of each product to avoid putting your capital at risk and not to blindly trust your financial advisor.

As you can understand “paper gold” and “physical gold” have significant differences.

Should I buy gold today?

If you haven’t bought gold yet, then the short answer to this question is yes.

It’s important to have a diversified portfolio and Gold price historically increase during periods of financial instability, providing positive returns and reducing portfolio losses.

The amount of your portfolio that you should invest in precious metals will vary depending on your profile of risk. If you have a high-risk profile, many financial gurus will suggest that you have less than 5% of your wealth in precious metals, whereas if you have a risk-averse profile it could go up to 15% or higher. That means that even if you lose all your other assets (stock, real estate, cash,...) you will still have a secure hold over a percentage of your assets to avoid risking everything.

Most experts tend to agree on having at least 5% of your wealth in precious metals. A buyer with a clear strategy would not pay attention to the current price, because regardless of the market price, every time he has a new income he will place an established percentage of it in this asset class. If the price decreases he can reduce his “buying average price” and if the price increases the global value of his metal grows with it. When you are comfortable with that, in the long run, your asset will steadily increase its value, the fact that you can buy more products at a lower price can just be positive.

But are we sure that after 5’000 years the price of gold will not fall to zero?

Certainly, everything in life is possible, but we can say that it is very unlikely.

The best estimates currently available suggest that around 190,040 tonnes of gold have been mined throughout history, of which around two-thirds has been mined since 1950. And since gold is virtually indestructible, this means that almost all of this metal is still around in one form or another. If every single ounce of this gold were placed next to each other, the resulting cube of pure gold would only measure around 21 meters on each side (end-2017). The estimated below-ground reserves are around 54,000 tonnes.

1. Jewelry: 90,718 tonnes
2. Private investment: 40,035 tonnes
3. Official sector: 32,575 tonnes
4. Other: 26,711 tonnes
5. Below ground: 54,000 tonnes

Mine production accounts for the largest part of the gold supply – typically, 75% each year. However, annual demand requires more gold than is newly mined and the shortfall is made up from recycling. Overall levels of mine production have grown over the last decade, although substantial new discoveries are increasingly rare and production levels are plateauing.

Attached a graphic of the trends of the five top gold-producing countries:

As with most resources on earth, Gold is limited. The more we mine, the less we will be able to mine in the future. In the following graphic, you can observe the ore grade (the concentration of an element of interest in a potentially mineable ore deposit) of the last century:

The logical effect of the reduction of below-ground reserves is the increase in mining costs. For years, miners liked to talk about "cash costs," the mine-level expenses of pulling an ounce of gold from the ground. For the most part, cash costs ran from $500 (U.S.) to $800 per ounce, depending on a miner's properties. That's because cash costs left out a host of expenses, from the costs of running the company to annual spending on equipment. The new "all-inclusive" measures attempt to solve that. The most frequently used metric, "all-in sustaining costs," AISC, puts the average cost of extracting an ounce of gold at more than 924$/oz industrywide as of today (Q3 2018; GFMS GOLD SURVEY 2018)

As gold demand remains stable and the cost of mining keeps increasing, miners will have to close unprofitable mines because they cannot afford to produce at a loss. The subsequent reduction in newly mined supply will increasingly put an underlying bid under gold. New projects will have increased environmental permitting take longer to bring online and will likely, as shown in the graphic above have lower ore grades which will lead to higher AISC and ultimately a revaluation of above-ground stocks.

I might be biased given my position, but I would never have accepted this new startup challenge if I didn’t believe in this industry and its potential in the long term. If you don’t have yet a trusted precious metals dealer, I suggest you open an account on Gold Avenue and with a few clicks start to build your precious metals portfolio.

I thank you for reading through my third article (here the first and the second one) and I would be more than happy to read your valuable feedback and opinions in the comment section below.

All the best,

Source: Metals Focus; GFMS, Thomson Reuters, US Geological Survey, World Gold Council, Gold.org, theglobeandmail,Wikipedia.

Disclaimer:

The purpose of this article is to provide general information only and the contents of this article do not purport to provide personal financial advice. I strongly recommend that investors consult a financial adviser prior to making any investment decision.

The contents of my viewpoints do not take into account the investment objectives, financial situation or particular needs of any person and should not be used as the basis for making any financial or other decisions.

The information is selective and may not be complete or accurate for your particular purposes and should not be construed as a recommendation to invest in any particular product, investment or security. The information provided on this article is given in good faith and is believed to be accurate at the time of compilation.