Fiat Money or Gold?
Investing in gold is more than just a matter of trust, both when it comes to buying coins and bars and when purchasing ‘paper gold’. Both types of investments are associated with various risks.
For instance, buying coins and bars requires trust in the dealer, who should be able to guarantee the product’s quality and supply all the required certificates. Physical gold also needs safe storage, since it’s subjected to the risk of theft.
Those who invest in gold derivatives have to trust that the service provider has enough physical yellow metal to redeem investors, if they submit such a request. Thus, investors face a difficult choice: which instrument should they choose to minimize the risks?
Last year’s Covid-19 crisis showed that institutional investors preferred paper gold. The total inflow of capital into this investment vehicle amounted to a record of 877 tons, which was 35% higher than 2009’s ATH of 649 tons. The sales of physical gold in coins and bars amounted to 896.1 tons, which was just 3% higher than the 870.9 tons in 2019.
However, in 2021 investors’ priorities seem to be changing. While the sales of coins and bars grew from 250.5 tons to 339.5 tons in Q1 2021 (+35.5%), gold ETF saw a capital outflow of 175.6 tons, as opposed to an inflow of 299.1 tons a year earlier.
It’s worth saying that institutional investors prefer ETFs funds thanks to their low fees and the ease of trading, but the institutional investment horizon is rather short. By contrast, gold bars and coins are usually purchased in order to hold them for the long term, as there is a large difference between the purchase price and the sale price. They require waiting for a longer time to make a profit and cost a lot to store. Gold investors buy coins and bars because of their security and reliability, proven over many generations.
Meanwhile, those who buy ETF shares view them as a temporary solution during periods of instability or crisis. In 2020, fear and uncertainty dominated, but in 2021, the mood is optimistic and full of hope for a return to normality.
The possible negative factors, such as the increase of interest rates or the growing exchange rate of the US dollar, will hardly pressure the owners of coins and bars into selling. The growth in interest rates will be accompanied by an increase in the risk of bond defaults, as debtors have gotten all too used to supercheap money.
The monetary policy isn’t likely to return to ‘normalcy’ any time soon, and this should make cautious investors consider safer ways of protecting their savings from complete depreciation.
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