The Myths about Gold Bullion
This article is extracted from BullionStar, a Singapore online bullion company where you can buy gold and silver at competitive prices.
Despite the surge in financial risks during the Great Recession, gold bullion continues to be absent in most institutional and individual investment portfolios. Global pension funds and insurance companies with trillions of dollars’ worth of assets continue to overlook gold as a form of sustainable wealth protection insurance. Many individuals have also misunderstood gold and ignored the substantial benefits of owning gold. All these misconceptions are due to the prevailing myths about gold bullion ownership.
One of the top myths is that gold is a bad investment compared to equities. This myth seems to have its roots in the 1979-1980 rally when gold reached $850 per ounce. Those who had bought gold during this peak cycle would have to wait for about twenty-eight long years in order to break even. However, those who bought gold on 15 August 1971, when President Nixon cut the link between gold and the dollar, would have a different story to tell. Gold was priced at $38.90 per ounce and those who purchased at that time would have enjoyed a gain of about 5000 percent, surpassing Dow Jones gain of about 1500 for the same period. So the moral of the story is, if you buy any form of investment at a cyclical peak, you will have to wait a long time to break even.
When we talk about gold, it is important to differentiate between paper gold and physical gold. Paper gold refers to Exchange Traded Funds (ETFs), gold shares or options and futures. These products are better suited for speculators or traders seeking fast returns. There are risks involved for paper gold, such as counterpart risk. Physical gold refers to bullion – gold bars and coins. When we talk about investment, you give up part of your wealth in exchange for the possibility of returns. So strictly speaking, bullion is not an “investment” per se because it is money and should be seen as stores of wealth, rather than a trading vehicle.
Gold bullion held in a vault are essentially risk-free, because you are in physical possession of them and therefore, there is no counter-party risk. Likewise if you were to put your cash in the safe box, it would be risk-free too, but would not yield any interest or dividends. One of the favourite criticisms of bullions used by investment analysts and bankers is that unlike equity, gold does not pay interest or dividends. They failed to realise that no asset produces returns unless you give up possession of capital and assume the risk of not getting it back. One cannot compare bullions held in safe box to an investment in stock. Similarly, stocks cannot be compared to gold when it comes to risk.