Confusing Investing with Wealth Protection – The Risks of Paper Gold vs Physical Gold

You’ve likely heard of reports in the past of problems with missing investor money at an Auckland bullion dealing and trading company.

We’ve previously had the odd question from readers about the situation.

We don’t know any more about it than anyone who has read the newspaper articles such as those below. We’ve had nothing to do with the company involved and so know nothing about them at all.

• Family’s $340,000 in gold lost

• Investors in bullion wait for answers from trader

• Gold firms Failure risks $3m

Where There’s Smoke…

We did read the previous articles in September 2011 and thought the situation sounded a bit strange.  And it seems that where there was smoke there may indeed be fire with the Serious Fraud Office eventually making inquires.

As we don’t know the facts we can’t offer too much on the specifics of what happened.  However it really drives home the importance of buying and taking delivery yourself of physical bullion, as opposed to paper gold and silver.  

If these people had, they wouldn’t have been faced the losses they now have.  And that’s without even getting into the subject of handing over hundreds of thousands of dollars to a relative stranger to manage for you in what can be a volatile market.

But the abdication of responsibility for managing ones wealth is these days not uncommon, as we have seen with losses in finance companies here in the past.

The Dangers of Paper Gold

There are many examples of the dangers of paper gold both abroad and in New Zealand.

Paper Gold in US – MF Global

The troubles in the US back in 2011 with MF Global really bring this point home.  We discussed at the time the dangers of holding paper gold, and how investors in the gold futures markets lost out during the MF Global collapse.

Paper Gold in Canada – Barret Capital Management

There’s also been a somewhat similar situation in Canada a few years ago too.  A company named Barret Capital Management was being shut down by Canadian regulators.  It seems customers thought they were buying physical gold and silver and storing it with the company, when in fact, Barret Capital was actually using clients money and trading it for their own account in a manner reminiscent of MF Global. The Canadian authorities are having trouble tracking where the investor money actually went – also sounds “MF Globalish”.

More Paper Gold in New Zealand – Gold Corp

The Ray Smith owned Gold Corp here in New Zealand back in the 1980’s was another situation where customers may have chosen the right path. But then got on board the wrong vehicle. Gold that customers thought was stored by Gold Corp turned out to not actually exist and a good deal of money was lost. >> Learn more: Paper Gold vs Physical Gold – What Should You Buy?

Another “Gold Trading” Scheme in New Zealand

A more recent case is that of businessman Steven Robertson. He is currently on trial over $10 million taken from investors. He has pleaded not guilty to 47 charges.

He allegedly took $10 million from investors in his share and gold trading companies, but instead he spent the money on himself and his business expenses.

“Robertson, who owned PTT Limited (Prosper Through Trading), allegedly promised 22 investors big returns on investments made in share gold and commodities, but instead used their money to buy , jewellery, cars, dining out and renovations, as well as paying his mortgage and business expenses”.

Source.

What’s Your Purpose in Buying Gold or Silver?

However all these situations actually trace back to an important initial consideration. What is that?

Well, the question we should ask ourselves in considering buying gold and silver is “What is my purpose in buying gold (or silver)?”

You see all these examples talk about “investors” losing money.  While we may use the word investing here and there we don’t really see the purchase of gold and silver as an investment.  

Rather, buying physical gold and silver is simply wealth protection.  Gold and silver are the only assets that have no counter party risk, as long as (and this is crucial) you take delivery yourself.

Why Buffet is Wrong About Gold

So we’d say don’t confuse investing with wealth protection even if Warren buffet does.  He’s had many negative comments to say about gold before. Such as this edited version of his yearly letter to shareholders printed in Fortune Magazine. Buffet compared owning gold to owning productive assets such as farmland or Exxon Mobil…

Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers — whether jewelry and industrial users, frightened individuals, or speculators — must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops — and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Don’t Compare Apples with Oranges Like Buffet Does

But Buffet is not comparing apples with apples.  In the current monetary paradigm, gold is the “anti-dollar” and that is what he should compare it to.  He states of gold supply: “Buyers — whether jewelry and industrial users, frightened individuals, or speculators — must continually absorb this additional supply to merely maintain an equilibrium at present prices.”

Well this is the very same argument as to why it is foolish to hold dollars in the current environment!  As dollar holders too “must continually absorb the additional supply” that Central Banks create every year without fail.  Only this extra supply of dollars is much greater than the additional (and very constant) supply of gold that is mined each year which is why we choose to hold gold in this environment.

For more on Buffett and gold see: Why Buffett is (Still) Wrong About Gold – But How He Loves Silver

Gold: The Only Form of Financial Insurance

So we wouldn’t say buy gold instead of farmland or oil companies but rather buy gold instead of holding dollars!

We don’t say to not invest but rather we choose not to invest everything!

We take a portion of our wealth “off the table” in this rigged casino and hold it in the form of gold and silver until “the house” changes the rules (or is forced to change them) to be more in our favour.

So if you are considering buying gold and silver our parting advice (take from it what you will) is we think it pays to ask yourself “why?”.  If you merely see it as a short term “investment” then buying an ETF or options in miners or gold futures may be the way to go.  But these come with the obvious risks of other parties involved.

However, if you see gold as the only form of financial insurance against paper currency (like we do) then physical gold and silver that you take delivery of yourself is the only way to go.  Is this 100% risk free?  No, in life there are no guarantees (except the cliched death and taxes).  There is some risk in terms of how you store the precious metals but at least these are under your control and you can “spread your eggs” so to speak.

We’re happy to give our thoughts on various storage options around NZ, so give us a call on 0800 888 465, or use our contact form.  Let us know your rough location and we’ll give you our thoughts on a storage facility or facilities near you.

Note: We could be accused of “talking our book” as we do make a commission from people who buy gold and silver via us.  But then again so could Buffet as we’re sure he’d rather people put money into the stock market which will benefit the companies he owns in Berkshire Hathaway, than remove it from the financial system by buying gold. Read more:Why Gold Bullion is Your Financial Insurance

Editors Note: This article was first published 14 February 2012. Updated 22 May 2019 to include latest reports of paper gold troubles.