Letter Re: Physical Gold Versus Electronic Gold

Dear Mr. Rawles:
You are clearly (and presciently) on the record as recommending the purchase of precious metals, ahead of the current inflationary cycle. Congratulations on that excellent macro call. But I believe you also recommend holding the physical commodity rather than synthetic ownership through an exchange traded fund/note. This makes less sense to me.

As an economic hedge against fiat currency deflation, synthetic gold has lower transaction costs since you don’t have to pay for the transport of the gold, the retail broker markup, or the non-gold coinage aspects of value that are embedded into Krugerrand, Maple Leaf, and American Eagle. Gold Exchange Traded Funds (ETFs) like the iShares Comex Trust typically charge a modest expense ratio of 0.4% per year to pay for storage and other fund costs, and gold ETFs are backed dollar-for-dollar by physical gold. Synthetic gold can be instantaneously bought and sold, and easily transferred into different currencies or across borders, with a few keystrokes.

Synthetic gold is also safer. If you own physical gold, you have to guard against theft and other loss. You could insure against this risk, but then the cost of insurance (which is quite high for precious metals) will be a material drag on your returns. I suppose one could argue that synthetic gold is exposed to extraordinarily unlikely events such as a nuclear exchange with a resulting EMP that wipes the digital record of your ownership—although I am not even sure that is correct because of redundant, multi-location data backup—but if that is the principal risk you’re trying to guard against, relocation to the Australian outback would seem more sensible (i.e., you have bigger worries than inflation).

It is true that physical gold, in a SHTF situation, would have value as an instrument of barter, whereas synthetic gold would not. However as an instrument of barter, physical gold has tremendous limitations. First, the instrument is not easily divisible, and if you were trying to barter with 1 ounce coins, it could be a bit like trying to buy things with a $100 bill and nobody being able to make change. Second, in a SHTF situation, because your barter counterparty would likely have problems establishing authenticity and weight, you would be charged a discount to value by him/her. In a nutshell, if physical gold’s bartering qualities are what attract you, I would propose that owning other commodities like coffee, cartridges, salt, etc. would be more effective.

My own view is that physical gold combines the worst of all worlds, given the risks that a reasonably prudent (but less than apocalyptic) survivalist should be considering. I’m curious about your view. – DC

JWR Replies: In precious metals investing, there is a continuum of risk that ranges from negligible risk to maximum risk. To my way of thinking, the “near end” of this continuum starts with the gold in your teeth and it terminates with highly leveraged futures contracts at the far end. Electronic gold is somewhere in between, and probably closer to the “safe” end, in normal times. However, since much of my thinking is geared toward some unpleasant “what ifs”, I err on the side of caution. I realize that I’m foregoing the convenience of electronic gold, but being a survivalist dinosaur, I want my metals in hand, if at all possible.

As a preparedness-minded individual, I am relatively risk adverse, and I suspect that the majority of SurvivalBlog readers share my outlook. I recommend buying physical silver, stored very well hidden at home. See the SurvivalBlog archives for some recommendations on wall caches and other secret hiding places.

There are indeed limitations of physical gold in barter as you mentioned (and as I illustrated in the “For An Ounce of Gold” chapter of my novel “Patriots: Surviving the Coming Collapse”). Recognizing that, my approach has been to encourage my readers to buy and hold a core holding of silver coins, for barter. Pre-1965 mint date US circulated 90% silver coins are widely recognized and have small unit values that makes them ideal for barter transactions.