First gold mine in India was Kolar Gold Fields, Karnataka. But today, all the physical gold that India buys is imported from other countries. But why is it important? And why buy physical gold or silver, when we can buy it digitally with a click of a button?
Gold is a currency, a store of value and also an insurance against global failure. Following are the reasons why you should buy physical gold or silver:
Audit
Digital Gold like Sovereign Gold Bonds (SGB) & ETFs are like fiat (₹, $) – governments tell us that they are backed by something but you cannot verify that yourself. You have to trust them and consider that govt is not lying to us or the Asset Management Company (AMC) handling that ETF is not lying to Govt in the first place. Basically it is backed by “trust me bro”.
So audit at a personal level is not possible in the case of digital gold. But when you buy it physically – it is literally on your hand and you can touch it to audit its weight, purity, etc.
Counterparty Risk
Let’s say you are buying Digital Gold from an app called GoldPe for a long time. Due to recession or global instability gold price is stable or increasing and you think your portfolio is well placed. Suddenly GoldPe announces that they are going bankrupt. Now, gold in itself will not go to ₹0 but the company you chose went to ₹0 – then there is a high chance you lost all your gold holding as technically they hold your gold, not you. This is called Counterparty Risk. You are depending on a different party – so their risk is your risk too.
In case of Physical Gold – if I buy it from Titan, Senco Gold or MMTC PAMP; I don’t care if they went bankrupt. I already got the delivery and I hold it myself. So their risk is not my risk.
Relying on Banks
Every financial crisis is caused by banks and some bank or the other shuts down due to that. Read the last line again and keep that in mind while we go through the below points.
In India, as per rules – every Gold ETF must be backed by physical gold. Now the problem is most AMCs never reveal where they store this physical gold, neither there is a regular audit by RBI or SEBI to ensure they aren’t making Gold ETFs out of thin air while telling everyone that it is backed.
As per insider information and some reports by AMCs themselves – there are mainly two ways AMCs use & store their physical gold:
The first is through Gold Monetisation Scheme (GMS). Indian Government launched GMS in 2015. Under this scheme, one can deposit their gold in banks in any form in a GMS account to earn interest as the price of the gold goes up. So these AMCs buy physical gold and give it to banks to earn extra interest on it.
Second is through Scotiabank. Most AMCs use Canada-based Scotiabank to store their physical gold. So whenever you buy a Gold ETF in India – mostly your gold is stacked outside India. This makes Canada more independent & sovereign, not India. They actually own the physical gold, with our money. Also, these offshore banks have a long history of not returning the gold to their original owners. Even very recently, Venezuela claimed that the gold they stored in the UK is being illegitimately claimed by UK Government as UK’s gold not Venezuela’s gold.
Basically, when you buy a Gold ETF you are trusting not only the AMC making that ETF but also a random bank that you don’t know about and sometimes a bank that doesn’t even come under Indian laws.
Gold is used to protect against the banking system – and most ETFs are part of that system.
Independent
An interruption in the electrical grid, no internet connection, a security breach, exchange going down, holidays, etc. everything affects the working of a Gold ETF or Bond.
Physical Gold is truly independent of everything. It doesn’t require anything to work efficiently. Even the physical gold market in India is more liquid than the digital market.
Your 1gm physical gold coin is globally accepted. You can buy it from Delhi and sell it in Singapore. But your Gold ETF only works inside that very exchange. No one other than NSE or BSE recognizes or accepts it.
Use Case
Gold is made to work in extreme environments. In many countries especially in the Middle East, we hear terrorists taking control of major regions. From these regions, we hear similar stories on how families bribe officials with gold to get food or exit that region all together and save their families. During all such extreme cases, neither fiat nor an imaginary gold ETF or even a govt-issued gold bond is accepted by anyone – all want gold, pure physical gold.
Physical Gold doesn’t just work under terrorist threats, it also works when Govts themselves turn into dictators and threaten their own citizens. Many people have saved their lives by fleeing countries like Russia, North Korea, Iran, China etc. And most of the time every party helping in the escape asks for gold as a payment method – physical gold.
Conclusion
In ETFs, Bonds, apps, etc. lots of trust is needed and there is almost no way to independently verify their legitimacy. With physical, you can sleep well knowing that someone else making a mistake won’t make you lose your hard-earned gold.
Now, of course I do not believe that holding 100% of your gold or silver in physical form is very wise. But I highly suggest you to keep some portion of your precious metal holding in physical form.
Personally, I hold 60% in digital and 40% in physical form.
Keep in mind – When you buy a gold coin, you’re buying gold. When you buy a Gold ETF or Bond, you’re buying a promise of gold.
And please don’t take this as investment advice; I am in no way an investment advisor. This is just a one-to-one talk about helping and motivating you to start your gold stacking journey as fast as possible.
As always, never forget our life mantra: Save Invest Repeat. And if you have any questions, please send them at – @InvestRepeat. Also, you can join my private Telegram channel (Username: InvestRepeat).
Your man,
SIR
