Editor's note (2016): It is surprising how many still visit this page first written in early 2000s. The bulk of the analysis holds up surprisingly well even though the inflation concerns mentioned never materialized.
This would be a good time to review some of the differences between gold stok ownership and owning the metal itself given that a large number of people are now interested in the gold universe. Simultaneously, inflationary fires are being fanned globally by the twin threats of rising oil prices and competitive de facto currency devaluations which only throw fuel on that fire. These fundamental developments will add more potential gold owners to our growing ranks.
It is important for investors to make the right decision -- and to be certain that the gold item they own is the one which will serve their purposes. Choices need to be made...I've worked with a great many gold investors over the years. They fall into two distinct groups: Savers and speculators.Occasionally, an investor will combine the two at some level, but savers tend to emphasize owning the metal outright, and speculators tend to emphasize stock ownership -- an 80%-20% split in either classification is not uncommon, if not 100% ownership of one or the other.
The purpose with this short essay is not to convince anyone on the merits of gold ownership. This is addressed to those who have already made the decision to own gold and are trying to decide how to allocate funds within their portfolios. Those hedging the negative financial or economic event own the physical metal in the form of coins and bullion. It would be hard to imagine an individual concerned about a breakdown of some sort saying "I think the system is going to fail. I'm going to go out and buy some gold stock." Doesn't make much sense, if you get where I'm going with this.
In recent years, the majority of our clientele has fallen into the "saver" category -- those who simply wish to preserve what they've garnered no matter what the government (or central bank) does to our money. Speculation, by and large, runs against their grain. Others, those who believe that they can beat the system by being quick on their feet, purchase gold stocks. Sometimes they win. Sometimes they lose. Most, though, are speculators looking for a return – not savers looking to protect themselves.
Most important: Stocks are stocks first and gold second. They are not (I repeat NOT) a substitute for the metal. Here are some of the differences between owning the stocks and owning the metal:
Gold needs no corporate managers.
Stocks depend upon the best managers (with, by the way, the best of intentions).
Gold is an asset which is not simultaneously a liability.
Stocks often represent substantial debts and liabilities -- monetary, environmental, climactic, political, societal, etc.
Gold does not need a cash flow to survive. It is a stand-alone asset.
Stocks can't survive without it.
Gold does not require political and social stability to survive, in fact it thrives under the worst political conditions possible.
Stocks cannot survive without it.
Gold does not have to pay dividends.
Stocks depend upon solid profits in order to pay out dividends. How many actually do? If we go by Richard Russell's maxim not to buy a stock unless it does pay a dividend, that would narrow the field to about 25% of the listed stocks -- if that.
Gold is an asset of last resort.
Stocks cannot be used in a transactional situation.
Gold does not require an operating statement and balance sheet to determine value.
Stock values are determined by often complicated balance sheets and perceived future earnings.
Gold does not attract trend investors.
Stocks attract trend investors by the boatload. Keep in mind the gung-ho fund manager today could be the first to head for the exits tomorrow.
Gold does not rely on stocks for value.
Stocks rely on gold for value.
I could go on but I'll stop there.To be sure. . . . Know thyself. And know what you want out of gold. The metal itself for savings. The stocks for speculation. Know why you are doing what you are doing when you do it. Many own both gold and stocks without knowing the purpose of each. Finally, this is not posted to knock stocks, just to point out some of the potential folds and dark holes in that universe that should be present in any lawful prospectus.
There are good reasons to own solid gold mining companies (or solid prospects) for the long run, but it has little to do with protecting one's assets except tangentially, that is, in so far as others move to protect their assets through safe haven gold ownership. But it does have everything to do with stock investing, and should be confined to the same rules applied to all other stock investing including employing all the analytical tools one can muster and finding a good advisor.
– Michael J. Kosares