People who occupy themselves with the issue of physical gold as an investment vehicle will usually be met with collective “shaking of heads” by friends, acquaintances and almost the entire financial sector. How can such a relic asset even be considered? Some of their arguments are even persuasive – which, however, is true for every other capital investment at close examination. Let us begin our considerations regarding physical gold with a quote:

“Today, there is no government agency, that would pay for the payment promises of Alexander the Great, Julius Caesar, Louis XIV, Peter the Great, Napoleon or Hitler. They were powerful men in their time, but no bank will cash their checks today. If you take a gold bar, however, that once lay in their treasuries, you will receive its equivalent value anywhere in the world. The durability and universality of gold gives it a money-like authority, that no other money has.”

William Rees-Mogg former chief editor of the London Times

If a consideration, if one should buy gold, is solely motivated by the hope of rising prices, one should probably select other instruments. Paper gold assets are plentifully available and they can be bought and sold without secure transportation at very small margins daily. This is a fitting solution for those not actually wanting to own gold but only want to make a profit from it. In that case, purchasing physical gold hardly pays off. Actually, the short- and mid-term price development of the metal in EURO or US$ is secondary, if one is truly interested in “genuine gold”.  One possibility is, though, that acquired treasures are simply left to be inherited, because the financial system might have proven less dynamic than expected. If 100% of one’s capital investments consists, as is usual today, of merely virtually recorded shares and not in physically existent value securitizations, one better be 100% sure that “nothing bad” will happen to the financial system and these virtual worlds in one’s time. A small residual doubt, like an only 90% bet (according to the principle: “nothing is going to happen, but then, you never know”) may not be unfounded and then, physical gold would still have found a small place in one’s deposit.

Historically, paper securities never turned out well, by the way – not one single time. Bonds and compound interest might have worked out for, say, 100-150 years, sometimes for only 20-50 years, until values that were deemed safe, collapsed for utterly diverse reasons.  Even paper backed by gold is nothing new. There were dozens of gold-secured certificates and government bonds, such as the 5.5% gold debenture bond German Government International Loan of 1930 (see photo).

When it became clear (in 1933), that the debtor had neither currencies nor gold to settle it, the profits amounted to: nothing. Today, these decorative government paper gold securities at least have a small collector’s value. In the virtual world of today, not even that remains. After writing off the asset, plainly nothing remains of the bits and bytes. But: it’s modern.
Physical gold in Germany is privileged like no other form of investment from various viewpoints; but it is simply not discussed. Physical gold is not subject to the flat rate withholding tax (of Germany), while most gold backed paper assets are and the fiscal treatment of paper assets with the right to delivery in gold is being fought over once more. Moreover, there is virtually no other form of investment, that is equally as anonymous, transportable and accepted worldwide as a value conservation and payment method, as physical gold. Fully transparent bank accounts and deposits are a reality now for a number of good reasons. The old relic of capital investment that is gold, still staunchly eludes this transparency.

Concerning interest: This is true, but then, gold is not borrowed and you will not get stuck with debtors unable to repay you, because the value is in the metal itself. But why not try a long-term comparison with the oldest debenture bond known to us that is still being settled today (this is not true for 99.9% of the cases because something or other has happened along the way).
The 3% obligation Burgermeester Heemraden Zierikzsee of 11/20/1777 is still distributing today. Was that enough to secure the purchasing power of the originally invested 100 guilders since 1777? Unfortunately not. Has the alternative investment in gold retained  its purchasing power? Yes. A real value increase is virtually nonexistent, but the preservation of real purchasing power is a fact. Sadly, the majority of bonds has eluded the comparison by complete failure.

Concerning stocks (better): This not easily answered, because this investment vehicle is so young. The first stocks in Germany were those of the Dillinger Hütte in 1806 (Saarlouis). That was about 200 years ago. To compare an asset of 200 years with one that is already mentioned in the Old Testament is possible, yet one has to be careful what is being measured in which stocks at what time. Considering the Dow Jones of 1929 and the gold price at the time, gold wins by a small margin regarding the quotation development (effective June 2009). But this may change again. In the end, the question of gold or stocks does not really come up, but the question of unsecured paper values versus tangible assets – and both belong to that category – does indeed arise.

A true investor in physical gold will usually care little about these comparisons. Physical gold is a means of conserving purchasing power of today with the aim of outlasting financial or virtual collapses. There is an argument against that: “When times became hard, the possession of gold was always prohibited.” That is a simplistic statement. A closer look at the facts reveals a different story when examining these “bans”, especially in the US in 1933. In short, there were reimbursements in “gold currency”. It was still permissible to convert the gold-backed currency to gold mine shares, which turned out to be an advantageous investment (the quotation of Homestake Mining immediately doubled subsequently). Collector’s coins were also excluded and about 5 ounces of gold assets remained unprohibited.

We will leave it open, whether one single nation would be able to enact such a prohibition alone today. A global intervention is rather improbable, some countries are even discussing in earnest to introduce a currency backed by gold (gold dinar) or have just implemented private access to gold politically (China).

The finance industry, by the way, has little interest in the investment vehicle physical gold. The reason is: it is a one-time transaction with a low margin. The money invested in gold usually never returns to the financial and, therefore, provisions cycle. No running management fees, no lasting other revenues from the capital investment.

In conclusion, one question remains: Do we already have a gold bubble? As long as one person can name 20 people who definitely own stocks, funds etc. without difficulty and will struggle to name 5 people involved with physical gold (not gold price reflections in paper), we probably do not. How should a bubble even develop, when all gold produced so far fits into a cube of about 19 meters edge length? There is simply no valve on it to blow it up …

Golden Greetings,     
Yours,

Aureus