The Downside of Holding Physical Gold

In the spirit of the ‘Playful Dance‘, that is, responding to other bloggers' posts in my own posts, I'm going to start what I hope is a long-running series where I write a response to something another author has put up.  Sometimes I'll agree, more often I'll disagree (it gets pretty boring if everyone is saying the same things all the time), and most of the time I'll simply try to find an alternative view on what is being said.  Enjoy it, and be sure to check out the article I'm responding to, as well; there's plenty of great personal finance writing out there, just waiting to be found.

When going back over some of the posts published last week to find what I should include in my latest round up, I came across Holding Physical Gold is About Safety, Not Speculation from 20s Money.  He advocates holding gold (actual, physical gold, stored at home) as a way to be more secure.

I have to disagree.  While gold can be add diversification to your portfolio (I said as much way back when I covered gold for my Investing 101 series), I think that some of the reasons provided could be misinterpreted.  Here's my take on a few of the claims made:

Claim One: ‘The reality is that gold [and silver] will have value today, and hundreds of years from now.'

Yes, and no.  True, there are uses for gold beyond serving as a store of money.  However, the major use for good in current society is to look pretty and serve as a store of wealth.  If something happens that would lead to a great deal of new gold being produced (say, a massive new gold mine or the discovery of alchemy-like process that can generate a great deal of gold), the price could very easily drop far below the current levels, leaving you holding gold worth much less than you actually paid.  If gold prices behave as they have in the past, after the last big run up in price, they'll actually start falling once things return to normal (as they have for most of the past quarter century).

Claim Two: ‘If the dollar continues to weaken, which has been the trend, we will be not hurt as badly if we own gold [and silver].'

This is a trickier one.  Yes, holding assets that aren't denominated in dollars and which tend to hold value even as the dollar declines is one way to hedge against a falling dollar.  However, holding physical gold is far from the only, or even the best way, to do so.  Holding foreign stocks, bonds, or even foreign currency provides a more ready way to hedge against falling dollar prices; when a stronger foreign currency is converted into a weaker one, you'll end up getting more bang for your buck (or rather, more bucks for your Euro, pound, yen, ruble, etc.).  The transaction costs will be less than buying and selling physical gold, and if you're holding foreign stocks or bonds in a mutual fund, the disbursements will be automatically converted to dollars before being sent to you.

Claim Three: ‘What does concern me is that I am more secure by having some holdings of physical gold [and silver].'

This one, I suppose, depends on your definition of security.  Holding a sizable amount of physical gold in your own house will save you from paying the costs for a safe deposit box or other source of gold storage, but there are downsides, as well.  You need to worry that your gold could get lost or stolen, that the gold is, in fact, gold (as well as the same quality and quantity you originally paid for) and whether the transaction costs of buying and selling the gold will destroy the actual value of the gold itself.  With all those problems, it seems hard to justify the ownership of gold, at least, physical, you need to find a place to store it and protect it, gold.

My Conclusion

In spite of all of this, I have no real problem with gold investing.  All I ask is that you consider exactly why you're doing so, look at some of the alternatives (both alternative ways to invest in gold, rather than holding gold bullion at home, and alternatives to gold investing itself), and do what makes the most financial sense for your situation.  If that means having some gold at home in a safe place because it helps you sleep at night, go right ahead.  Just know the real price of that insurance, in terms of dollars, investment risk, and storage costs.

(Before I forget, Kevin wrote a post that referenced my blog, the The Allure of Alexa, which inspired me to read his blog and write this post in response to one of his other posts.  So, um, this is a sort of thank you where I nitpick your argument the whole time.  You're…welcome?  It was really all in good fun and the attempt to spread the word, my friend.)

What do you think about gold investing?  Did I miss any major pros that more than justify the cons listed here?  Did I completely misunderstand Kevin's point and reasoning behind his gold investments?

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