There is no shortage of people on the internet who will say “don’t buy fractional gold – the premiums are too high!” These stackers are usually upper middle-class people who like to look down on those who can’t afford to purchase gold in full ounces like they can. I guess it makes them feel good about themselves, but they couldn’t be more wrong on the topic in my opinion. Fractional gold is as important for millionaires as it is for budget stackers!
Why The Argument Against Fractional Gold Is Severely Flawed
If we stick to the logic of the fractional gold naysayers who argue that premiums are the most important consideration when buying gold, then it would be silly to buy even 1-ounce gold coins. Why is that? The premiums on 1-kilogram bars are much lower as they are even close to spot sometimes.
Of course, the 1 oz. gold snobs don’t like that argument because it makes them feel the way they want others to feel – inadequate. But the truth is, for the ultra-wealthy (net worth of $10 Million+) 1 oz. of gold is fractional gold. It has a higher premium than 1kg bars and likely isn’t the preferred gold product of their ultra-wealthy friends. I say this as someone who got to know such ultra-wealthy people in my 7 years living in Dubai.
Please understand, this is not a criticism of 1 ounce gold coins. They make up the majority of my gold stack and I consider them to be a very important element of a metal portfolio (for those who can afford to buy them). What this example is meant to show you is the very important role fractional gold pieces play in a precious metal portfolio – flexibility! And it’s exactly why, despite being able to afford 1 ounce coins, I still buy fractional gold pieces (quite regularly in fact).
What Is The Reason To Own Gold?
To understand why flexibility in a precious metals stack is necessary, we must understand why it’s so important to own gold in the first place. The best reason I can cite – if I had to give only one – is to protect savings from an inflating dollar (or whatever other fiat currency it is you use)!
We all work in some capacity. Some of us are employees, some of us business owners, some of us are investors. No matter how you make your money, it is in our very nature to protect the fruits of our labor.
Once upon a time that meant putting money in a savings account for the bank to lend out and earn interest on – it was a great model for the risk averse! Today, in a low-interest rate reality where banks create the very money they lend out – those days are gone.
For that reason, Gold is an indispensable part of a properly built investment portfolio. And whether you call it an investment, an insurance policy, or a savings account – at the end of the day Gold is there to make sure that:
- In the best-case scenario - the value of your labor is safely protected against the evils of inflation (and Gold is a reliable inflation hedge in the 21st century).
- In the worst-case scenario - that part of your wealth stored in something that has survived every currency collapse, stock market crash, war, and political crisis that has happened in the history of humans on earth.
Avoiding Gold Because It’s “Too Expensive” Is A Mistake
Although silver is an important part of a precious metals portfolio, with the potential to rise in value faster than gold, it is no substitute for gold! The fact is gold has been a more reliable store of wealth than silver over the last 30 years as the graph below indicates. Yes, silver has had spectacular moves up – but when the market comes down the pullbacks on silver have been much steeper than on gold. A characteristic that makes gold better for investors / stackers as they advance in age (because nobody wants too much exposure to high volatility as they approach retirement).
Why Is The Stability Of Gold Important?
If you’re purchasing gold & silver as a savings mechanism to supplement retirement or just to protect yourself against uncertainties that can devalue other assets you own (including cash savings) – the day may come when you want to use your gold & silver to make a purchase (large or small).
Gold’s relative stability compared to silver (as shown above) means that when it comes time to unlock the value of what you used to purchase your gold & silver, you are less exposed to the risks of where the market is with respect to interest rate cycles (going up or down), industrial activity, etc. (all of which have an outsized impact on silver price as compared to gold). Ultimately, having gold in addition to your silver holdings makes your stack diversified and gives you choices with respect to what you want to sell and when. Especially for those of you holding on to silver for more price upside that will come because of increasing industrial and jewelry demand.
This Is Where The Importance of Fractional Gold Comes Into Play
Coming back to the original question, why pay slightly more for fractional gold vs. 1-ounce coins or even 1kg bars? The reasons are very simple:
Reason 1: Flexibility
Just as a stack made up of 1kg bars is difficult to divide and liquidate into small portions if needed (for example to cover your weekly grocery bill), the same thing applies to a gold stack that is made up of solely 1 oz. coins.
This is especially important for those who are concerned about the future of fiat currency. In instances where you need to sell some metals to cover an expense, selling a whole ounce may leave you with more fiat currency than you are comfortable holding.
Having fractional gold gives you flexibility to sell only what you need to cover immediate expenses – especially if you are unwilling to part with silver (for silver stackers waiting for prices to rise more).
Reason 2: Liquidity
As gold becomes more expensive for the average person, the market for fractional gold will grow. That means your fractional gold position could be the most liquid part of your stack / portfolio (meaning it will be the easiest to sell). In addition to that, growing demand for fractional gold will likely make it easier for you to recover the additional premiums associated with them.
How do I support that assumption? Today, at an average savings rate of 3.9%, if we look at how much gold the average American can buy in a year (using personal income per capita data), the argument for fractional gold becomes obvious. That’s because the average American is only able to purchase 1.1 ounces of gold with their entire annual savings.
In a market where inflation continues to ravage the middle class and gold prices rise due to Central Bank buying – affordability of gold may decrease even further! This will push demand for fractional pieces up even higher and could make smaller units of gold (less than 1-ounce) the standard for most buyers / investors / stackers.
Why Silver Is Not A Substitute For Fractional Gold
I think owning silver is a great thing – don’t get me wrong! But it is not a substitute for gold or even fractional gold. The mistake I see a lot of metals investors / stackers make is that they lump gold & silver together thinking that having one as is as good as having both (this applies to exclusively gold stackers too by the way). The truth is that owning gold & silver are 2 very separate things.
Yes, most people buy gold & silver for the same reason but the dynamics that impact how we value them in terms of fiat currency couldn’t be more different:
- Gold is the old money wealth preservation tool. It’s a tier 1 asset and is held by central banks around the world. This means the amount of gold purchased for investment purposes that comes back onto the market is usually far less than silver.
- The price of silver on the other hand, as mentioned above, is much more exposed to where we are in the economic cycle than gold. Slowdowns in industry or potential substitutes for silver in industry can drive its price down in ways they cannot for gold.
Final Thoughts
In a world where people say that gold is the money of kings and silver in the money of gentlemen – be a gentleman (or woman) that protects themselves like a king. This doesn’t mean you should not buy 1 oz. coins or 1kg bars of gold – those are great things to own! All this means is – don’t underestimate the importance of fractional gold and don’t look down on it because of ridiculous prejudices you have with respect to who you think the product is for.
Visit SummitMetals to purchase fractional coins.