Behold the power of physical gold

The dystopic, nightmarish future conjured by gold detractors is ending.

The story was shaped as a dystopian future were people bought physical gold because they knew the financial system would fail and gold coins would be required to buy food. The story is meant to conjure ideas of apocalyptic times where survivalists scurry to find resources, an ‘end of times’ narrative so people would look like kooks if they considered gold as an asset. In the meantime, bankers flooded fiat products and the economy financialized. Welcome to current year.

So, in 2018, what can we do to make money? If buy low, sell high sounds good to you, then I recommend a healthy smorgasbord of your favourite commodities plays, but especially gold bullion. Central banks, investment banks, cryptocurrency developers and wealthy families are increasing positions in gold. What is more important today is how the wealthy and informed are buying gold.

Why buy physical gold instead of the ETF?

The answer lies in our financial system and memories of the mortgage collapse of 2008. That failure resonates today when people consider if they would like to own land outright or an engineered banking product (mortgage). It resonates when they ask should they own a commodity or an idea, in short, a tangible asset or a number on a computer terminal. It asks the fundamental question: Do you trust financial engineering, or do you think it might be causing many of the financial problems?

The answer is simple for gold. The cost of owning bullion and storing it far outweighs any small savings gained by buying the derivative financial product. When you buy gold as insurance you want to build as strong a foundation as possible. Buying gold today is just as fast as an ETF, at the paperwork is fast, perhaps easier than an ETF, and you have the benefit of owning the asset and transferring it worldwide. It is loved by sophisticated investors, global travellers, cosmopolitan personalities and wealthy families. So first let us look at two concepts: Gold as insurance; and risk.

Gold as insurance is a concept of building a strong financial foundation. It is mirroring what banks do. The world financial players all have gold held by their central banks. That alone tells you something. The fact that specific players are repatriating gold from the US and purchasing vast quantities is the second indicator that gold still holds value. These players see gold as the core foundation of a nation. Gold as insurance is replacing your near money or cash equivalents with gold.

Whether you like it or not, holding these positions is a currency trade—and you are losing money. In Canada, you have been losing money each year by holding these deposits in these products rather than in gold. It is sound advice to keep emergency cash positions, and the fees are reasonably small, but imagine the volume and the total fees earned by banks. They have no vested interest in those cash funds moving to a core asset of gold. Those marginal fees on billions are still ‘free money’ for banks. We will be looking at this in more detail in another piece but this difference in owning gold compared to cash is significant.

To begin we must consider the concept of risk. Being deeply interested in risk management and mitigation for most of my career, I find the analogy of an onion as a good illustration for risk. This article evaluates gold as insurance: A concept of mitigating socio-political and economic risk that is prevalent in the markets, coupled with high volatility. We want a product that has intrinsic, historical value that is a hedge against inflation, holds true value and allows an investor to wait out the financial uncertainty.

Risk has a direct correlation with return. If you are willing to accept more risk than you are expecting a higher rate of return. Conversely if you are risk adverse, you will get a meagre rate of return. Your cash assets in a money market ETF might get you 1.2% and you would expect to get that without losing any sleep. This is basically the skin of the onion. You peel off the flakey, dry outer crumbling shell and remove the thin slice of onion but basically there is a whole onion, this can be viewed as your bullion position or gold as insurance. At the core, or the other end of the spectrum, peeling all the layers of the onion away you will have purchased a future contract a complicated, leveraged financial instrument with a huge upside potential mirrored with the possibility and in many cases probability of losing the entire investment. This is the core of the onion. This is an extreme range illustrating how removing or peeling off each layer of skin reveals different risks. By removing a layer or shaving off part of the actual gold bar you are taking away part of it, giving up some actual gold or security for something else, and for each layer you get better upside potential and volatility. You are debasing the gold and creating a new tool.

The first layer might be a bond fund, or gold backed security. The next level might be an ETF, followed by mining companies, actual gold stocks ranging from explorers to producers. The final would be highest risk level, the speculative options and futures market. At this point you have no gold, in fact you are leveraging or borrowing massive quantities of gold that you do not have as a derivative (or contract) and moving these vast sums with a fraction of the cost. What you need to decide is which layer of risk you want. Peeling away all risk reveals nothing, there is no more gold there you have taken a physical asset and created an abstraction. This is key in a fiat currency system as it creates value where there is none. It optimizes or utilizes value through financial engineering.

Another way to view this is as a pyramid: A strong foundation which reflects the actual asset stored in private vaults and central bank vaults. The second tier reveals layers of risk ranging arguably from holding a cash position in your bank to an ETF or gold backed instrument and up to an actual gold mining company.


The most common financial instrument retail investors use is a gold Exchange Traded Fund (ETF). This product gives the investor a way to get exposure to gold without having to purchase or have any claim on gold. You will find ETFs on the second tier of the risk layers. The investor is exposed to the price movement on a financial exchange. This is a convenient product with low costs of transactions and active trading on stock markets. Investment banks like to create products like this because it leverages the system creating something from nothing. This is a great derivative product that increases the interconnectedness of the entire fiat system. The ETF in theory owns gold in reserve but this is not a certainty. One of the most popular ETFs, GLD states in its prospectus: “GLD represents fractional, undivided interest in the Trust.” You own a trust, a financial instrument which tracks the price of gold. You are not exposed to gold; you are exposed to a number on a terminal. The NAV, Net Asset Value of the ETF is then traded on an exchange, which then introduces in theory liquidity risk. You get exposure to price parity. There is no claim to the underlying asset and the trust may own a fractional amount of gold, here lays the first problem. Many investors buy gold as portfolio insurance against a systemic failure in the financial system. Investors want gold because of current socio-geopolitical risk; gold is a ‘safe haven’ and can be held in safe jurisdictions. ETFs are bank products. There is a direct correlation between bank risk and its products. On top of this is the fact that these holdings are not insured. These risks can be dismissed by many as unlikely scenarios but at what dollar cost. If the cost is small you should buy the asset.

Physical gold is straight forward. You purchase gold from a commodities dealer at World Wide Precious Metals. The account takes minutes to set up and funds transfer from the clearing house RBC. It is important to use a reputable company like WWPM, who uses strong companies like RBC to clear funds. There is one more step involved which is calling up to make a trade. The trade is then placed, and you choose if you would like to receive the gold or store it in a vault. Most people store the gold in a vault like Brinks so that gold is fully insured. You then can transfer your gold free of charge to any vault that WWPM deals with, and that is a lengthy list of cities and countries. You do not own a share, or paper like a certificate but actual coins and bars. The value is then reflected on the London Bullion Exchange. You pay a fee to buy and sell the gold as well as a monthly storage fee which covers all the costs of transactions, storage, and insurance. This fee is minimal for the risk being mitigated.

In all, people are looking at physical gold because there is uncertainty. There is fear of inflation. There is political chaos at home and abroad. There is a flight of smart money to tangible assets. Gold is the obvious asset, and many central banks are buying and producing a great deal. People want the asset. They do are not as interested in the ETF as a core asset but do see the ability to hedge the gold position through an ETF. Take advantage of strategies others are employing. Safeguard your foundation with gold as insurance and then consider other gold instruments for the tumultuous near term till we see our way through these volatile times.


Pros: you own the asset outright; it is likely insured in a vault. You have paid a small fee to not have claim on an asset but to own it, easy to trade, buy and sell 24 hours a day, can set price sell orders, portable with free transfers to other countries, low storage fees, may borrow against the asset, opening an account takes minutes. Short term solution, fantastic for hedging strategies

Cons: transaction costs are slightly higher than the financial instrument. You do not own gold.


Pros: great for hedging existing gold holdings, if you are a sophisticated investor buying an ETF can be a good hedge against your own holdings. Low fees and fast settlement of funds means you have access to capital quickly. Traded on the exchange, you can sell online without a broker.

Cons: setting up an account it annoying – it takes some time with paperwork. No leverage with an ETF (if you buy through a brokerage account you can get up to 50% borrowing through the brokerage), no use of the asset. Counterparty risk (this is a financial contract). Exposed to systematic risk – financial products are tied to banks; exposure to the financial system still exists.

Securities Disclosure: I, Andrew O’Donnell, hold no direct investment interest in any company mentioned in this article. I was not paid for this article.

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