Precious Metal VS Paper Currency
In turbulent times like these, one of the major questions that millions of people all around the globe are asking themselves is how to protect and safeguard their earnings. For this reason, more and more people are trying to learn more about different types of assets. This article is bringing you a brief description of the main differences between metal and paper currency and will introduce you to the pros and cons of both.
Precious metals have proven over time to be a good portfolio diversifier and powerful hedge against inflation and economic calamity. The natural scarcity of precious metals (such as gold, palladium, platinum, and silver) gives them a distinct advantage when talking about preserving purchasing power.
As history has shown many times, inflation can get out of hand, and the decline of purchasing power of a given paper currency makes the investors completely dependent on central banks and governments. On the other hand, investors in precious metals have peace of mind of knowing that gold can’t be expanded to suit the needs of struggling central banks. Because of their scarcity, precious metals have maintained their purchasing power throughout history and will always be supported.
Advantages of precious metals:
Apart from their biggest advantage of being a great store of value, there are some other benefits when talking about precious metals.
#1 Precious metals have a long-term stability
While paper money is relatively new in the monetary system, precious metals (especially gold) have been the main medium of global exchange for over 5000 years. Every investor is looking for assets that hold their value, especially during uncertain times and with a track record of more than 5000 years, precious metals have proven their long-term stability.
#2 Precious metals can be more efficient at storing wealth
When investing in paper currencies, in case the interest rates remain low, the money in your bank is earning basically nothing. Also, in case of inflation, all the invested cash could lose value. All of this makes precious metals a safer option when it comes to storing wealth.
#3 Precious metals are not a fiat currency
While paper money is a government-issued and established currency, precious metals can’t be expanded to suit the needs of central banks. Central banks along with government treasuries have been creating uncontrollable amounts of debt and unfunded liabilities over the last decade without any clear guidelines for repayment. This has already caused serious issues across the full spectrum of mainstream asset classes and made more and more investors wonder where to place their capital in case of an, for example, monetary debasement event.
Disadvantages of investing in precious metals:
There are two main limitations when it comes to investing in precious metals.
#1 Not producing interest
The first limitation is that they are commodities which means that a person is buying them at a particular moment in time with the expectation that they will be able to sell them for a higher price in the future. Although precious metals tend to hold their long-term value against inflation, they don’t have the capability of producing interest (for example bonds) or any cash flow (like growth stocks).
#2 Transaction costs
The second limitation is the transaction cost. When you buy precious metals, the companies who are buying the metal at wholesale prices are making a profit by selling them at retail prices. Other costs that one should be aware of when buying precious metals are shipping costs, as well as costs associated with storing them.
Paper money is widely recognized as a note of value and can be traded for any services or goods all over the world. Let’s take a look at the main advantages and disadvantages of paper currency.
Advantages of paper currency:
#1 It’s convenient to use
Paper money takes up little space which makes it an easily convertible and fungible form of money, especially compared to precious metals or any other asset. Since it’s light in weight, a large amount of paper money can be carried easily in the pocket without anyone knowing it. Also, paper currency is widely familiar and the way people spend, save and store it comes as second nature to people around the globe.
#2 It’s cheap to produce
Besides being small and easily transportable, it’s much cheaper to produce it than the value it may present. Another great advantage of paper currency is that once the notes are produced, they generally last between 4.5 and 15 years before they need to be replaced.
#3 Paper money has fiscal advantages
In emergencies, before taxes can be laid or bonds sold, paper money may be run off in anticipation of taxes or receipts from sales of bonds. It can also be used to pay the obligations of a state and amounts to a forced loan without interest.
Disadvantages of paper currency:
Excessive printing of new notes by the government increases the amount of money supply which leads to inflation in an economy. Such situations decrease the value of paper notes and in case inflation gets completely out of control, it can lead to hyperinflation where even more notes are being printed to make up for the fact that old money is continuously losing its value. The complete dependency on the decisions of central banks and governments is considered to be one of the greatest disadvantages of paper money.
#1 Unstable exchange rate
Another disadvantage of paper currency is its instability in the exchange rate. Although governments adopt some policies in order to avoid such problems, wide fluctuations in external prices often negatively influence international trade.
#2 Lack of automation
Paper currencies require monetary authority and government involvement. Without the interference of such authorities that medium of exchange can put the economy in an undesirable situation. Another problem with paper currency is that, since the government can increase or decrease its supply by printing new notes while ignoring the specific reserve conditions, it’s considered pretty unstable.
And while paper money has many advantages in the everyday life and is one of the commonly used payment methods in the world, it’s not considered to be the best available option when talking about making serious investments.