Disclosure: Our content does not constitute financial advice. Speak to your financial advisor. We may earn money from companies reviewed. Learn more
Last Updated on: 26th January 2015, 04:49 pm
A major factor behind the popularity of Gold IRAs is that they allow you to purchase assets such as gold and other precious metals that can help protect your purchasing power against the ravages of inflation in a manner that paper currencies may not be able to do. If you are considering opening a Gold IRA, it's worthwhile to take a few minutes to examine the differences between paper currency and precious metals to form an understanding of how they they stack up against each other.
The convenience of currency
While paper currency, as we will discuss below, has the disadvantage of being subject to debasement via excessive creation of new currency by a government or central bank, it does have the advantage of convenience over gold and other precious metals. While most precious metals can be converted into currency at your local coin dealer, generally speaking they can’t be directly used to purchase goods and services in the same way currency can.
Thus even the most dyed-in-the-wool goldbugs must admit that the convenience factor favors paper currency VS precious metals, although there are movements afoot in certain areas to allow individuals to use gold and silver coins to make purchases in the course of normal commerce.
Paper currency and the risk of debasement
While paper currency may be convenient, for those looking to hold it as a store of value it has the disadvantage of not being naturally scarce. That is to say that there is no physical barrier to the creation of an excessive amount of currency as there is with a precious metal such as gold which is expensive to find and dig out of the ground, thus limiting the amount of the yellow metal in circulation at any one time.
When it comes to paper currency, history has shown that in times of financial stress the governments or entities which control a currency may be tempted to issue more of it in an attempt to deal with that stress, which, in the most extreme cases, can lead to hyperinflation as was seen in the German Weimar period of the 1920s and more recently in Zimbabwe.
Even moderate money printing (done digitally these days via the stroke of a computer) can lead to uncomfortably high inflation and erode a paper currency’s value, as was seen in the United States in the 1970s.
Precious metals as a store of value
When it comes to preserving purchasing power, the natural scarcity of precious metals such as gold, silver, palladium, and platinum gives them a distinct advantage over paper currencies. While central banks worldwide monitor inflation with an eye to keeping it from getting out of hand, as history has shown, accidents can happen; keeping the inflation genie in the bottle once it gets out of hand is not easy, those holding paper currency as a store of value must have faith that central banks and governments will avoid taking actions that will debase the currency.
Investors in precious metals, on the other hand, have the peace of mind of knowing that their holdings cannot be diluted in value by the simple expedient of running a printing press or creating more digits on a computer. While the greater convenience of paper currency is apparent, when it comes to acting as a store of value those who are aware of the natural scarcity of precious metals may consider that they hold the upper hand VS paper currency in this regard.