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Should You Invest in Gold and Silver With Bullion or Paper? - Pros and Cons

Updated on November 8, 2017
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John Tsang grew up in a town whose economy depended on precious metals. His investments include precious metals.

Throughout history, precious metals have played an important role as a form of money and as a way to store something of value. Coinage made from precious metals, such as gold and especially silver, were very common until the early part of the twentieth century. After their role was taken over by paper money, precious metals fell out of favor as a form of investment.

World events have caused many people reconsider to precious metals as an alternative form of investment. Economic crisis, war, high inflation and other instability have all led to people losing faith in global currencies. People are now much more willing to look at the various forms of investing in precious metals than they were just a few years ago.

How to invest in precious metals such as gold and silver?

There are many different precious metals. The most popular are gold and silver and, to a lesser extent, platinum and palladium. There are also different ways of investing in precious metals, but all of them can basically be divided into two main categories.

  • Investing by actually owning the precious metals in bullion or physical form.
  • Investing in precious metals without actually holding them through various means, also known as paper investing.

It is therefore good to know what the pros and cons are of investing in precious metals using bullion or paper.


Pros and cons of buying gold and silver in physical form

This method of investing involves purchasing some quantities of precious metals, having them delivered and then storing them. This has some advantages.

  • Having possession of your precious metals makes you immune from any third party risk.
  • Actually holding precious metals gives you access at any point in time should you need them.

Disadvantages of owning physical metals.

  • Finding a suitable place of storage may be an issue for some investors.
  • Security must be provided to prevent theft and may not be safe for every investor.
  • Can be the most expensive form of investing due to transaction costs that are generally higher.

How do I invest in gold and silver without actually holding any physical metals?

Paper investing can be done through various means:

  • Using Exchange Traded Products
  • Using certificates
  • Using accounts
  • Using derivatives

Pros and cons of investing using Exchange Traded Products

A popular form of investing is through a form of Exchange Traded Products known as an Exchange Traded Fund (ETF). Exchange Traded Funds are stocks that follow a benchmark, which in this case is the spot price of the precious metals minus expenses associated with metals storage and management fees.

The shares of some of these Exchange Traded Funds is backed by actual precious metals holdings. Examples of these are the SPDR Gold Shares (GLD) in the case of gold and iShares Silver Trust (SLV) in the case of silver.

Exchange Traded Funds have some advantages.

  • Trading in shares is much easier and cheaper compare to actual precious metals. Transaction costs associated with trading are usually much lower and the market for these shares is very liquid.
  • Owning shares is very secure and cannot easily be stolen.
  • The cost of storing shares is negligible compared to actually owning physical metals.

Exchange-traded Funds also have disadvantages.

  • You do not actually possess precious metals, which you can access at any point in time. Trading in shares is only possible when the stock market is open.
  • There is a chance of irregularities within Exchange-traded Funds. In case of problems, you may have to wait a long time for your claim and suffer some losses.
  • Trading in shares can be suspended at any point, usually without any prior warning. Entire markets can be shut down by authorities. You are almost certain to take a hit in this scenario.


Pros and cons of investing using precious metal certificates

Some governments and their banks issue certificates, which state that it is holding a certain amount of a precious metal for the owner of the certificate. There are several different types of certificates.

  • A certificate to an allocated account gives the investor the right to specific types and amounts of a precious metal. For example, an investor may be entitled to ten gold bars made by Credit Suisse, each weighing ten troy ounces. The investor has to pay initial purchase fees and ongoing storage fees.
  • A certificate to a pool allocated account entitles the owner to a share of a larger amount in precious metals. That share is not specifically defined and has similar, but lower fees as in an allocated account.
  • A certificate to a pool unallocated account is similar, except that the issuer of the certificate has the right to access the pool containing the precious metals, which usually is not the case. These certificates have the lowest costs due to the absence of any storage fees.

Precious metal certificates have some advantages.

  • Owning certificates backed by a government is safe and secure. You do not have to store any precious metals, which the certificate issuer does for you.
  • Transaction costs are relatively low, depending on what account you have and are much better than having to deal with actual precious metals.

Precious metal certificates have their disadvantages.

  • The precious metals are stored somewhere else, which you cannot have available when you need them immediately.
  • Certificates are not suitable for the small investor. Certificates are issued in minimum amounts, which may exceed the purchasing power of many investors.


Pros and cons of investing using precious metal accounts

Investing using accounts address the last problem that certificates have. They are available in smaller quantities, which make them an option to the small investor. Precious metal accounts are available from a number of private companies such as Kitco.

Precious metal accounts have the following advantages.

  • Are similar to certificates with all their advantages.
  • The difference is that they are also available to the small investor.

Precious metal accounts have the following disadvantages.

  • Have all the disadvantages that certificates have.
  • Accounts from private companies require a certain level of thrust.

Keep in mind that there lots of things that can go wrong with private companies. Management might be incompetent. Ownership might decide to run off with all your gold and silver. The possibilities are endless and so are the risks.

Pros and cons of investing using precious metal derivatives

Another way of investing in precious metals is through their derivatives such as futures. Precious metal futures are contracts between a buyer and seller of a precious metal at a certain price and at some point in time in the future. Options are also derivatives, which are similar to futures.

Derivatives and their advantages:

  • Gives the investor leverage, which can vastly increase returns or profits on invested capital. If you're looking to maximize profits, derivatives are what you're looking for.
  • You do not have to handle any precious metals and their associated issues with security, storage and so on.

Derivatives and their disadvantages:

  • Being leveraged is very risky and can lead to much greater losses. Some people take out loans to leverage themselves, which leads to even greater problems.
  • Derivatives are complicated with many factors playing a role, including some not related to precious metals.

Generally speaking, most people should stay away from derivatives since they do not possess the knowledge and skills needed to trade in derivatives. The risks outweigh the benefits in most instances. Derivatives may offer the opportunity of making a fortune in precious metals and some people might be attracted to that, but always remember that you can also lose a fortune due to derivatives.

Should I invest in mining companies instead of precious metals?

Another way some people like to invest in precious metals is through the mining companies. The thinking is that rising prices of precious metals should benefit these companies. These benefits should in turn lead to higher share prices.

However, it is important to remember that the share price of these companies is determined by a host of factors. The price of precious metals is just one of many. For example, bad management can negatively impact share prices, despite higher prices for gold and silver. There are many other issues to keep track of besides gold and silver prices to determine whether company shares will go up or down.

Investing in the miners is therefore not really a substitute form of investing compared to the previously mentioned methods. However, it could be used in addition to the more traditional forms of investing in precious metals.


There are a wide array of choices available to the investor interested in precious metals. No single method is best under all circumstances, but each one offers their own advantages and disadvantages. What is preferred by one person may not be appropriate for someone else. Which one is best to use is in the end for the individual investor to decide.


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      4 years ago

      We entertained the idea of buying stock in mining companies, but instead we chose to slowly populate our bank safe deposit box with the real thing. If you are a collector, you may lean to buying the real coins or bullion. Remember to use a safe deposit box for storage and security!


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