Jan 2024


Jan 2024

Why Buy Gold? Reasons to Invest in Physical Gold Bullion

By StoneX Bullion

There’s no doubt that buying gold has a certain allure that makes it attractive to investors and collectors alike. Long associated with power and wealth, gold is an asset that almost all of humanity can agree holds intrinsic value. But what is it about gold that makes it such an enduring and secure investment option?

In this article, we look at the benefits of buying physical gold, including its ability to withstand economic and political turbulence, independence from technology and third party risk, and resilience through time and geographical boundaries. We also look at why owning physical gold is a better option than investing in ETFs (otherwise known as paper gold).

1. Gold will protect you in times of crisis

In the midst of wars, natural disasters, or economic crises, the only gold that truly matters is the physical gold in your possession. This has been consistent throughout history, where gold has been proven to be a safe haven throughout centuries of human conflict and economic crashes. In times of crisis, when fear is elevated and global tensions rise, the value of gold naturally increases as people flock back to its security. This is how it earned its nickname as the ‘crisis commodity’.

Physical gold will always hold its value regardless of external circumstances - be it political turmoil, economic crises, or global disasters. Let’s use the United States in the late 70s as an example. During these decades, interest rates were over 15%, unemployment was rife, inflation was at 14%, and the world was undergoing various crises including the Cold War, oil embargo, and Soviet invasion of Afghanistan. In response, the price of gold increased by 721% between 1976 and 1980. A similar situation happened early 2022 in the wake of the Russia-Ukraine conflict, driving gold prices up by 6%.

A quote by De Nederlandsche Bank (DNB) wraps up gold’s relative safety well: “A bar of gold always keeps its value. Crisis or not. That gives a safe feeling”. At a time where our world is facing various impending risks, from political strife to economic crises and environmental chaos, we only know one thing. The greater the chaos, the higher the value of gold.

2. Gold is independent from modern technology

In an increasingly digital age, one of the standout features of physical gold is its independence from modern technology like electricity or the internet. Unlike credit cards or cryptocurrency, physical gold doesn’t rely on technology to exist. It’s tangible and it will continue to exist whether you’re connected to wifi or not.

This adds another advantage to owning physical gold: it’s completely immune to digital vulnerabilities. Unlike bank and brokerage accounts, credit cards, or crypto, a 100g Valcambi gold bar cannot be hacked into or erased.

In a hypothetical situation where the modern world and all its technologies came crashing down around us, only one thing is certain: physical gold will remain, its value will be retained (or maybe even higher) and all other notions of currency will be rendered meaningless. Speaking of crisis: physical gold cannot be destroyed by fire, water, or even time - it really is a bulletproof investment.

3. Gold is politically secure

Believe it or not, governments hold the power to freeze bank accounts and even confiscate funds, especially in times of economic or financial crises when they need extra revenue. It may seem out of reach but it’s happened before, in several countries, and it could happen again without warning.

Let’s go back to the UK in 2008, when the banking crisis was at its peak. Former Chancellor Alistair Darling made an announcement stating that people were only 2 hours away from being unable to withdraw their own money from British banks. The Royal Bank of Scotland (RBS) was near collapse and would have brought the entire British banking system down with it had it not been for a £50bn emergency bailout.

Holding physical gold - especially offshore - can provide a shield against such situations, adding an extra layer between your assets and bureaucratic interventions. The only way to be truly independent and secure from political intervention is to invest in physical gold and store it in professional vault storage or the safety of your own home - and to do this before anything happens.

4. Gold has no counterparty risk

In the world of investments, gold is unique in that it doesn’t rely on external parties or entities. Unlike stocks and bonds, which hinge on the performance or credibility of third parties, the value of physical gold is self-contained.

It will never go bankrupt or broke unlike companies you buy stocks from. It will never collapse as banks have been known to do, with money disappearing overnight. And, finally, it doesn’t rely on other people to fulfill their obligations. It is purely yours.

This is how gold has managed to retain its value for over 3000 years. Its worth is intrinsic to the metal itself and you can always sell it if you need currency.

5. Physical gold is the only true money

The value of gold has transcended ancient civilizations, cultures, borders, and millenia of evolution. From ancient Egypt to the modern age, gold has remained significant throughout time - which is more than you can say for currencies. You might even say that physical gold is the only true money that’s out there.

The truth is, fiat currency is not a store of value. In fact, paper currency loses value over time. As Voltaire once said: “Paper money eventually returns to its intrinsic value - zero”. And he’s right: all major currencies have depreciated relative to gold. While gold’s price does go up and down, its value has been retained over thousands of years and will continue to do so.

On top of that, gold’s value is recognized all over the world. You’ll always be able to pay with it or find someone to buy it. It’s unlikely that a 1kg gold bar will ever not be valuable.

6. Physical gold is a hedge against inflation

Throughout history, buying gold has been proven time and again to be an excellent hedge against inflation. When the cost of living surges, gold also increases in value. We’ve seen this over the last five decades as the price of gold increased while stock markets plunged during years of high inflation.

On the other hand, there are numerous currencies that have plummeted and lost their value due to extreme inflation, such as the German papiermark, Hungarian pengo, and Argentine peso. We shouldn't be so arrogant as to assume any currency is immune from the effects of inflation. History tells us that money - regardless of the currency - is not a long-term store of value.

In the end, gold tends to hold its value and purchasing power despite fluctuations in currency. $5,000 sixty years ago may have afforded you a car, but $5,000 today is unlikely to do so. On the other hand, 20 gold coins sixty years ago is just as valuable as 20 gold coins today.

Gold vs ETFs (paper gold)

Buying physical gold isn't the only way you can invest in gold. Another option is to buy gold-backed exchange-traded funds (ETFs), also known as paper gold, which have become popular over the last several years.

While there are benefits to holding ETFs, such as not having to take care of transportation and storage, physical gold has unique advantages that make it a superior investment choice over ETFs. These include:

  1. Physical gold is a tangible asset: The biggest difference between owning physical gold vs ETFs is that when you buy physical gold, you actually own the gold itself. On the other hand, owning a gold ETF means you just buy into gold mutual funds that track the price of gold. This means you miss out on all the benefits of owning physical gold, such as its tangibility and universal recognition as being an object of value.
  2. Physical gold has intrinsic value: When you own physical gold, you possess a commodity that has inherent value independent of third-party obligations or intermediaries. If technology came crashing down, you’d still have an object of value in your possession.
  3. Physical gold can withstand crises: Physical gold is largely independent from traditional market fluctuations that affect financial instruments like ETFs. This means that it’s more likely to retain its value (and maybe even increase in value) during economic uncertainties or crises.

Manipulation of gold prices with COMEX

While we're on the topic of paper gold, we can't avoid talking about the potentiality of gold price manipulation in the COMEX market.

COMEX, also known as Commodities Exchange, is a major trading platform where commodities, like gold, are bought and sold through futures contracts. One way that COMEX can influence global gold prices is by trading paper gold at high volumes. We briefly explain how this works below.

In the commodities market, there are investors who buy and sell physical gold, and there are traders who never intend to own physical gold. Instead, they trade what are essentially contracts that represent gold (known as gold futures contracts or options). These are promises to buy or sell gold at a specific price at a specified time in the future. Issues arise when these paper contracts are traded at volumes that vastly exceed the amount of actual gold in supply. This imbalance between paper contracts sold and physical gold in supply creates the potential for price manipulation.

For example, if there’s a flood of sell orders for paper gold contracts without enough physical gold to back them up, it can drive the price of gold down in the short-term. This means the price isn’t actually reflecting the actual supply and demand for physical gold but rather the trading activity of paper contracts.

It’s important to note that whether or not COMEX is actually manipulating gold prices through paper gold trading is up for debate. Some argue that gold price manipulation exists while others disagree. The positive effect of these debates is that they call for greater transparency and regulation in the commodities market to prevent manipulation and keep trading practices fair.

Buy physical gold safely

Investing in physical gold, whether you want to buy gold bars, gold bullion, or gold jewelry is a way to tap into a universally recognized asset that’s stable, secure, and resilient. The only real way to benefit from gold’s value is to buy gold in its physical form.

At StoneX Bullion, we make it easy to buy gold bullion coins and pure gold bars safely and securely. We only use trusted shipping companies and securely package and insure all orders. Start investing in your future and fortify your portfolio with the enduring value of physical gold.