Tuesday, January 31st 2023
Gold and other precious metals have seen a high demand recently. Gold specifically saw a decline in price and people have used that as a sign to invest in this precious metal. Both coins and bars have been popular recently. With this popularity it is well worth taking a look at why people are choosing to invest in this yellow metal over paper money. That is what we are going to take a look at today.
Physical Gold is Not Tied to a System
Paper money and other paper assets are tied to the government that produces them. That means that there is an inherent amount of risk that comes with them. The country can decide to print more money for example, and thus this will reduce the value of the paper.
When you hold an investment account such as an IRA, in most cases that account is backed by paper assets of some form. That means that the government, or system, that they are tied to affects the value of your investment. If that system were to fail, weaken, or something else were to happen, your investment would also be affected.
Gold and other precious metals, both physical and paper, will also fluctuate in value. The events of the world will affect the value of the metal. This is especially true if you are investing in paper gold such as gold ETFs. Gold ETFs are backing a company and not physical gold, so you are put at the same risk as other paper investments.
If a system that stores your assets encounters a crisis or big error, there is the chance that your assets can be restricted or even no longer be accessible at all. This has happened at multiple points in history. One of them being ABN Amro deciding to pay out paper money instead of gold on the gold contracts that it provided. When this kind of situation is going to happen is impossible to predict. MF Global is another example of this happening. When MF Global encountered financial struggles some customers lost their holdings altogether while others lost control of their assets for a long period of time.
Relying on a paper investment from a system is putting your investment at risk. Even if that investment is through a big name such as Bank of America or Fidelity.
Think about it. Do you really know what would happen if your investment company suffered a crisis? What would happen to your investments? Those who invested with MF Global and ABN Amro thought that their investments were safe. A big company is safer than using a smaller company for your investments but they still come with risks.
Knowing that you have physical assets like gold helps to give you assurance if the system should suffer a crisis.
A repeal of the Glass-Steagall Act has changed what financial institutions can do with the money that you invest with them. They can now gamble with your assets. This has already seen problems. The 2008 economic problems stemmed directly from this and JP Morgan’s multi-billion dollar loss from 2021 also was a result of them gambling with their client’s money.
The Risk of Systems
Before the appeal of the Glass-Stegall act that we mentioned before, banks and other financial institutions were not allowed to take any risks with the money that is invested with them. They were required to safeguard the paper currency that is stored with them. The repeal of this act changed that requirement.
Now banks can take risks with investors money in order to make a profit. We don’t hear about this most of the time when banks make good decisions. It is only when the banks make a bad decision that we hear about it. JP Morgan, as mentioned above, is an example of that in action. Luckily for JP Morgan, their incident did not spell the downturn of the company. However, in the 2008 crisis firms like Bear Stearns and Lehman Brothers did not survive the gambles they made.
Right now, we aren’t saying that banks or brokers are currently in a crisis or at risk. What we are trying to say is that the same factors that allowed for those crashes are still in place. Keeping your IRA assets with any bank or custodian carries a risk that you need to be aware of. Some investors may choose to hedge against this risk or avoid it all together.
Physical Gold and Gold IRAs
Many IRA custodians do not allow for alternative investments in IRAs but some specialized companies allow for precious metals, such as gold, to be invested in an IRA. Other precious metals that can be part of an IRA include silver, platinum, and palladium. Only bars and certain coins are allowed to be held in these IRAs. These IRAs are often known as gold IRA accounts. Having one of these IRAs allows you to invest in a physical item that is held outside of a system. For the most part, these assets have proven to do well at times when then the rest of the economy is in crisis.
Something else to keep in mind when it comes to gold is that there is no competition. A company doesn’t compete against gold. This is also known as counterparty risk.
Because you have also invested in physical gold, you don’t have to worry about a company issuing you a certificate. This can lead to difficulties like we mentioned above. You get the peace of mind knowing that you have a physical asset that holds its value quite well and is far less susceptible to risk.