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Investing in Gold: A Financial Planner's Perspective

July 28, 2010378 view(s)

TV personalities and their guests have been on TV incessantly debating the investing virtues (or lack thereof) of gold. And of course, inflation is the most often mentioned reason behind the purchase of gold.

Others simply own it because it has gone up from historically super low levels or because it makes a nice chart that moves from "bottom left to top right." Owning gold in the ETF form ("paper form") is one option for this kind of investment strategy, for a trade, or for a person who wants all of their assets reflected on their brokerage statement.

Buying gold in this manner is not much different than owning a gold mining stock, or any corporate stock -- it is a paper asset. However, I recommend gold purchases (and silver), and particularly physical gold purchases to clients for a much different reason -- as a store of easily convertible value/wealth preservation.

Consequently, if the reason we own gold in physical form is for wealth protection -- from currency debasement, monetary disruption, and to ensure global convertibility of our wealth to local currencies (and it is) -- then the only sure way to know that we actually "own" gold is to have it in our possession -- in a safe for example.

Why not "paper gold?" Unfortunately, there are too many stories coming out claiming that gold stored for customers in large banks (i.e. unallocated gold) is being lent and used as collateral for transactions or that the gold backing ETF isn't really there. I'm not sure how true they are but these stories don't make me feel safe because in a true catastrophe, it is likely the bank won't get that gold back! As noted economist Marc Faber says often, we must be our OWN central bank. Physical gold is accepted everywhere (unlike American Express!) and is not an asset with an underlying liability.

In  times of true distress, if access to paper assets (the kind that shows up on your computer screen, not in your safe) is non-existent, then it would be good to have cash and more importantly, metal "cash." For example, I could take my gold to Canada and exchange it for Canadian dollars and keep the value of my wealth, my "cash," even if the US dollar was dropping in relative value against the Canadian dollar.

Inflation is a good reason to own gold as an "investment" but to truly protect from this and monetary debasement, real assets in one's possession is key to "preserving wealth" and the easiest, readily convertible real asset for the average person to own and carry around is one of the oldest forms of money in the world -- gold.

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