On the High Cost of Owning Physical Gold and Silver

The Value of a Kiss

There are many ways to own gold and silver, and some, I will be the first to admit, far cheaper than physical gold and silver. Options, futures, mining stocks, or warehouse receipts all carry lower transaction costs than physical metal. Clearly, that ought to be the case. All these forms of paper gold and silver cost their originator no more trouble than scooting around electrons in a computer, or shuffling paper from one side of a desk to the other.

Not so with physicals. No only must somebody do all the work of documenting the transaction similar to paper metals, but someone must also warehouse the physical metal, insure it, provide security, then physically pull, pack, and deliver it. But life is more than transaction costs. Look only at that and you risk overlooking the chief advantages of holding physical silver and gold in your own two hands.


First of all, there is no substitute for physical gold.

  • Certificates are not gold.
  • Gold notes are not gold.
  • Futures are not gold.
  • Options are not gold.
  • Mining stocks are not gold.
  • Electronic gold currencies (“E-gold”) are not gold.

All of these are “claims on gold,” which is not gold, but a claim. All of these ownership mechanisms interpose an extra layer of risk between the owner and his gold. All history teaches us that from time to time the extra risk layer explodes, leaving the owner without his gold. There is no substitute for owning physical gold. Obviously, all that applies to physical silver as well. Buy physical metals first, and only then branch out into the other forms.


How should we view the transaction cost of owning gold? After all, physical metals pay no interest while you hold them, and they also risk a price drop. For a fit contrast, we should compare the cost of holding metals against the cost of holding US dollar denominated assets.

Something that cost $100 in 2000, will cost you $128.18 in 2011. That is a loss in value of 22%. Setting aside for a moment gold’s gain from 2000 through 2011 and assuming that gold had remained flat during this period, what would holding gold have cost? Anyone swapping dollars into gold in 2000 and back into dollars in 2011 would be (22% -7%) = 15% better off in physical gold, even assuming a 7% transaction cost.

While for short periods fiat currencies (like the US dollar) may actually rise against gold, over the long term their course is uniformly down, so there is always an inherent cost in holding fiat currencies. Naively remaining in US dollars does not avoid currency risk—it just concentrates all your risk in one currency.


What is true of fiat dollars against gold is also true of fiat-dollar-denominated assets such as equities and bonds. Ask yourself what performance did dollar-denominated assets need to post last year to beat physical gold? In the past year dollar denominated assets had to rise by

  1. the fall in the dollar less gold’s physical transaction cost, and
  2. the rise in gold itself.
  3. Thus if a dollar denominated asset has remained unchanged, it has actually lost against gold even including the transaction cost. It had to rise by at least 15% (to make good the loss in the US dollar in which it is denominated), PLUS the rise in gold for the period (you can research this one).
  4. What’s the bottom line? In rough terms, over the past eleven years any paper denominated asset which has not gained at least 15% has lost money against physical gold, even including transaction costs.


Compared to paper investments, the “spread”—the difference between the “buy” and “sell” prices for physical metals and every investment—is large, but not meaningless or arbitrary. Costs arise from moving and securing physical metal, costs not incurred by moving electrons around in a computer. To make a sound investment decision, you have to weigh the cost of owning physical metal against the benefit of owning physical metal.

The chief benefit is having in your own possession and control at all times the ultimate liquidity, the value of all values, the self-authenticating asset. That benefit has a very strange value curve. Most of the time that benefit is nugatory, because most of the time there is no panic to chase every frightened soul in the herd into ultimate liquidity’s safety—most of the time. However, occasionally that panic does arrive, and whereas before the value of actually holding physical metal was trivial, under panic conditions its value become almost infinite. Owning physical metal is just like owning a parachute—it’s just clumsy luggage until you really need it.


From the futures markets comes an old saying: sooner or later everything comes back to physicals. In our modern age, where unreal abstracts and imaginary derivatives have been substituted for real values, we find that proverb opaque or quaintly out of date. But the mistake is ours. Only reality remains real, and not our abstracts and derivatives.

A wife’s kiss always beats a wife’s letter.