Gold benefits vs. other assets
Gold has the following benefits compared to other assets, if bought in a recommended way:
Gold’s benefits are relevant in times of uncertainty as explained below:
No risk from inflation
Printing money, euphemistically known as “quantitative easing”, increases the volume of money in circulation. The word “inflation” means price rises, but it used to mean an increase in the volume of money in circulation. Mining gold from the ground increases the volume of gold in circulation. The volume of money in circulation is increasing much faster than the volume of gold, because mining gold is much harder to do. Hence, the price of gold is rising and gold acts as insurance against “inflation”.
No risk from bank failure
You transfer the ownership of your money from you to the bank, when paying money into a bank account. It is effectively an un-secured loan to the bank, which can do whatever it wants with the money. This means that you may not receive the money back if the bank goes bust. A government backed insurance policy may cover some of the money, but in reality there is not enough money to pay back all the insured deposits in the banking system. It is recommended not to store gold in a bank for the same reason.
Gold can be stored in a vault without ownership being transferred to the owner of the vault. You can retain ownership of the gold irrespective of the solvency of the vault owner. So if the vault owner goes bust then you can still get your gold back. There is no risk arising from a transfer of ownership because your gold is not the vault owner’s liability, unlike money in a bank. Risks such as theft and fraud still exist, but these can be mitigated in other ways.
No risk from closure of brokerage firms or stock exchanges
When you buy shares through brokerage firms, you are generally not the outright legal owner of the shares – you are just the beneficial owner.
This means that:
- your name does not appear in the shareholder register of the company that you have bought shares in – it will show the name of your brokerage firm
- ultimately your brokerage firm controls your shares
- your brokerage firm may be lending your shares to short-sellers or using them as collateral for its own obligations without your knowledge
- if the brokerage firm should become bankrupt then you may not recover 100% of your shares
It is possible to buy and store gold with a third party while retaining outright legal ownership of the gold, so that there is no counterparty risk arising from having only beneficial ownership. Risks such as theft and fraud still exist, but these can be mitigated in other ways.
Closing stock exchanges during extreme market conditions prevents the sale of shares. Gold does not have to be sold through a central exchange and hence does not carry this risk.
No risk from internet outage
Bitcoin transactions are generally dependent on verification by 6 third-parties via the internet.
Gold transactions can be dependent on only 2 individuals, without any third-parties or technology.
No Capital Gains Tax (CGT)
Most assets (eg property, shares & bitcoin) are generally subject to CGT.
However, it is possible to buy gold in ways that it is not subject to CGT.
No risk from your jurisdiction
Assets that are physically located in the same jurisdiction as you (eg property & land) are subject to the laws of your jurisdiction. If your government’s financial position is weak, then these assets could be at risk from confiscation. In 1933, the US government confiscated gold from its citizens.
It is possible to store gold in a jurisdiction where the government’s financial position is not weak and hence confiscation is unlikely.
When buying gold it is important to understand the difference between paper gold and physical gold.