Is Gold a Safe Investment When Bought in Small Quantities?

When considering investments, one of the primary concerns is the safety and potential returns of the chosen asset. This article explores whether investing in small quantities of gold makes it a safe and viable option.

The Nature of Gold as an Investment

Gold has been a valued material for thousands of years, often serving as a hedge against economic uncertainty. Historically, large quantities of gold can offer substantial returns or significant losses. However, for investors with smaller portfolios, purchasing gold in small quantities presents a different set of considerations.

Gold Investment vs. Other Financial Instruments

Gold is a commodity, and its price is influenced by supply and demand factors. Historically, the price of gold has fluctuated over time. For instance, in 2011, gold was valued at $1911.00 per ounce, while by March 11, 2019, its price had dropped to $1296.90. This results in a potential loss of 32% for an investor who bought at the peak and sold today, highlighting the inherent risks associated with commodity investments.

Impact of Quantity on Investment Returns

The quantity of gold purchased significantly affects the potential losses or gains. Holding a larger quantity of gold means a larger capital investment, and thus, a greater potential loss. Smaller quantities of gold, however, can still be a viable investment strategy. For instance, even small amounts of gold can be used as a hedge against economic downturns and inflation.

Personal Experience and Strategies

Perspectives vary, but some individuals, like myself, hold a very small amount of gold in the form of miner shares and individual gold coins. These investments are not expected to generate substantial financial returns, but they serve as a safety net against market fluctuations.

The Value of Gold Over Time

Gold's intrinsic value and historical significance have made it a valuable asset throughout history. For example, during the 1970s, General Motors (G.M.) and Exxon were the most valuable corporations in the world. However, by 2022, G.M. had filed for bankruptcy, and its stock became worthless. In contrast, a single ounce of gold, weighing 31.1 grams, would have been sufficient to purchase a fine toga, a pair of sandals, and left over enough for a dinner at a popular establishment in ancient Pompeii.

Modern Context and Comparisons

In today's context, buying a one-ounce Maple Leaf or Krugerrand gold bullion coin may allow an individual to purchase a tailored business suit, a pair of leather shoes, and possibly a dinner for two with some additional funds for quality wine.

Gold as Compared to Stocks

While gold can be a hedge against economic uncertainty, stocks held in a brokerage account can offer better returns with less risk. Shares held under the street name of a broker are easier to buy and sell, especially in the event of significant price changes. This convenience is a significant advantage over physical gold.

Challenges of Small Quantity Gold Investments

When investing in small quantities of gold, one must consider several factors:

Market Price Premiums and Discounts: Acquiring physical gold often comes with higher premiums, while selling might result in lower market value. The exact premiums and discounts depend on the seller and the buyer involved in the transaction. Physical Possession vs. Deposits: Holding physical gold means incurring the costs associated with storage, insurance, and potential sale delays. If gold is held on deposit with a bullion dealer, it may involve non-regulated dealers who might be at risk of bankruptcy, potentially affecting the safety of the investment. Counterfeits and Testing: Recently, counterfeit tungsten-cored bullion has become a significant issue. Gold dealers often insist on testing the gold before purchasing it from individuals to ensure its authenticity.

Conclusion

While gold can be a safe investment when owned in small quantities, it is essential to weigh the risks and benefits carefully. Despite the challenges, gold can still serve as a valuable hedge against financial uncertainty, especially when used in conjunction with other investment strategies.