Ron Swanson’s Gold Bars

If you’re like me and a big fan of the tv show Parks and Recreation, you’ll be familiar with Ron Swanson and his gold bars. In the show, Ron is a cynical, government-hating libertarian who has no faith in the financial system. Because of this, he keeps the majority of his wealth in gold bars in which he has buried in his backyard.

Believe it or not, I regularly come across people who have a similar strategy (albeit I’ve never had a client who has buried theirs in the backyard). In this blog article I’ll explain the potential issues with purchasing physical gold or other precious metals as an investment, and some alternatives available to you.

Where would you even buy gold?

A quick google search yields a number of providers which can sell you gold bars both locally and online. Many of these websites will have references to being a ‘mint’. Despite this, these providers have no affiliation with government services and instead are simply sourcing gold and selling it to consumers.

When financial commentators refer to the gold market, they are rarely talking about consumers trading gold amongst themselves. What they are instead referring to is contracts exchanged on share markets which relate to gold.

Is gold a good investment?

There are two ways an investment can earn you money. It can:

1. Go up in value; and
2. Earn you income.

For example, if you buy a share, you are buying part-ownership in a company. Not only can that company go up in value, it also earns income from its day to day operations which are distributed to shareholders as dividends.

When it comes to gold, the entirety of your investment potential is on the basis that its value may go up. Gold earns no income reducing one part of your potential earnings.

Will gold go up in value?

Assessing how much something is worth and whether you are getting a good deal is always a challenging task. As the saying goes “beauty is in the eye of the beholder” and whilst one person may consider something valuable, another may consider it worthless.

When it comes to valuing shares, the task can be a bit easier. Shares are part-ownership in a company and the value of the share is usually linked to how much profit the company earns each year. In the financial world, this is called the “multiple” and refers to how many years of profit you would need to receive before you made back the purchase price of the share.

When it comes to gold, its value is anyone’s guess. It all comes down to how much is being bought and sold at that time and what people are willing to pay. If gold is to go up in value, it requires an increase in demand with a limited amount of supply.

Is gold a good investment if there is a major catastrophe such as World War 3?

A thing I hear from time to time is that gold is a safe investment when markets are disrupted. When tensions kick off between two nations, there always seems to be an uptick in gold prices.

The idea behind this is that gold was the original currency and if money does collapse, we can always go back to gold. This presents a number of problems.

First of all, despite popular opinion, gold wasn’t the original currency. The original currency was thought to be grain. Whilst gold was later used as a currency, its value didn’t derive from the fact that it was gold but instead that it usually had the stamp of the local king or leader which gave it value. Its value existed by the simple fact that if a peasant was to start stamping their own gold with the head of the king, they faced a certain death.

In reality, if World War 3 was to happen, most likely nobody would be interested in your gold. Instead people will be far more interested in life’s necessities like food and water.

Is there any other risks to buying gold?

The problem with having small, easily transportable, unmarked items with high value is that they make an easy target for thieves. Add to this that people who buy gold bars enjoy telling people about their gold bars, and you have a recipe for disaster.

The logical thing is to take out insurance on your gold but this adds additional costs.

It’s also important to note that the physical handling and sale of the metals mean that there are a lot of mark-ups along the way. All of these are going to affect your return on this investment.

How can you buy gold if you really want exposure to gold?

There are ways to have exposure to gold without physically buying it. This can remove the issues associated with storage, mark-ups and the general risk you will be ripped off.

A common way of buying gold is to buy a Gold Exchange Traded Fund (ETF). This is where you can buy investments which track the performance of gold without having the other issues associated with it.

So should you buy gold?

As a general rule, I don’t recommend my clients invest in anything which doesn’t earn income. This includes gold, bitcoin, beanie babies or decorative plates.

As always, if you want to discuss or have questions about what to do with your gold, please reach out.

This post is from our resident Financial Planner Ben Brett, check out his details in the About Us section.

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Posted in: Ben Brett, Investments