“Inflation” and “recession” continue to be two of the hottest words in financial news these days. On October 25, 2022, Bloomberg reported that “there are early signs that U.S. consumers, who have been largely resilient in the face of relentless inflation, are beginning to balk at high prices.” Meanwhile, Fortune.com wrote on October 24, 2022, that according to JPMorgan president Daniel Pinto, “a recession is the ‘price we have to pay’ to put inflation ‘back in a box.’”
But while these two intertwined topics are on everyone’s minds, there’s another important topic that I think should be discussed just as often: what steps we, as portfolio holders, can take to help protect our wealth during these volatile economic times.
Gold has historically been used as a hedge against inflation.
For generations, gold has been used to add an extra level of protection to a portfolio during times of economic uncertainty. Since gold has historically maintained its purchasing power relative to a falling dollar, consumers will often turn to the precious metal as a financial hedge against market factors like recession and inflation.
As someone who likes to plan ahead, I appreciate gold’s long-running history of use as a financial hedge. But before you decide to add gold to your portfolio, it’s important to know what kind of gold you’re purchasing.
So-called “paper gold” may have “gold” in its name, but it is not the same as physical gold.
If you’ve ever done a web search for ways to own gold, you’ll often come up against articles describing multiple ways to own the precious metal. But what consumers may not know is that some of these assets are merely gold-related, and not the hard, physical asset itself.
For example, some websites will suggest that purchasing gold Exchange Traded Funds (ETFs), stock in gold mining companies, or other paper-based assets like gold contracts or futures is a way to “buy gold.” However, there are certain key points that you may want to consider before purchasing any of these assets.
The most important key point, in my opinion, is that many consumers purchase gold for exactly the reasons I stated above: as a hedge and level of protection against certain market factors. But while gold has historically responded differently or inversely to certain economic factors compared to stocks, paper gold may not. As paper-based assets themselves, they are often subject to the same massive swings in financial markets as stocks or bonds.
Another major difference is that, as an article by financial advisor Euro-Phoenix points out, “there is vastly more paper gold… than physical gold—some $200–300 trillion, compared to [approximately] $11 trillion of physical gold.”
The article, titled “An Upcoming Paper Gold Crisis?” presents an intriguing theory: that since some forms of paper gold, like gold contracts, are meant to take the place of physical gold held on deposit, and since institutions may sell more contracts than they have gold on hand, a run on gold supplies is theoretically possible.
Think of it like a run on banks, where account holders all show up asking for their money—cash the bank doesn’t actually have on hand. If the same were to happen with paper gold, the article suggests that “paper gold prices might collapse, and physical gold prices could go through the roof,” and that it “could theoretically in and of itself trigger a recession or turn a recession into a depression,” as we would see hundreds of trillions of dollars’ worth of “paper” gold become essentially meaningless once the gold used to back them runs out.
Of course, such a run on paper gold is only theoretical, and may never happen. It’s an extreme example, but one that illustrates the major differences between these types of gold-related assets. It also illustrates why I’m such a strong believer in quality consumer education. I feel that it’s essential for all of our U.S. Money Reserve clients to have information available to help them understand these important differences—and make more educated decisions regarding their financial futures.
In the event of a recession, physical and paper gold may act differently—and I know which one I would prefer to have in my portfolio.
If our nation—or the world—finds itself once more in a recession, we may once again see consumers turn to gold as a store of wealth and hedge against uncertainty. But which type of gold asset will they choose? Diversification is a powerful risk-management strategy for any portfolio, but not all gold assets will respond in the same way to the same market factors.
“Paper” gold like gold ETFs may respond similarly to other paper-based assets like stocks, which may not help reduce your overall risk exposure. Keeping tangible, physical gold either at home, in a safe, or in a depository as part of a precious metals IRA ensures that you will have the ability to physically hold your wealth in your hands, and from my point of view, there is a peace of mind that comes from that tangible nature that a paper asset will never match.
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