Physical Gold vs Gold ETFs: Which is a Better Investment?
When it comes to investing in gold, there are two main paths that you can take. You can buy physical gold or invest in a gold exchange-traded fund (ETF).
Both have their merits, and the decision ultimately depends on your specific investment goals and objectives.
Let’s take a closer look at both options so you can make an informed decision.
Table of Contents
What is Physical Gold ?
Physical gold can refer to a variety of assets such as coins, bullion bars, and jewelry. It is a physical form of an asset that has been used in many cultures throughout history as a store of value and a medium of exchange.
Gold coins are the most popular form of physical gold investment and have been in circulation since the 7th century BC. Investors purchase gold coins for their collectible value as well as for their potential to increase in value over time.
Bullion bars are another form of physical gold investment and come in a variety of sizes ranging from 1-ounce bars to kilo bars (which weigh 32.15 oz). Bullion dealers usually sell gold by an ounce or kilo, and investors can purchase them through websites or local dealers.
Jewelry is also a physical form of gold that investors may consider. While not as popular as coins or bars, jewelry can provide an aesthetically pleasing way to invest in gold, while also potentially increasing in value over time.
What are ETFs?
Exchange-traded funds (ETFs) are investment vehicles that track a basket of stocks, bonds, or commodities. They provide investors with an easy and convenient way to invest in multiple assets without having to purchase them individually.
Gold ETFs can give investors exposure to the gold market without having to purchase physical gold. These ETFs track the spot price of gold, so when the price of gold rises, the value of the ETF increases as well.
Advantages of Investing in Physical Gold
Let’s dive into a few advantages of investing in physical gold that make it an attractive asset.
Limited Supply
Physical gold is a finite resource, meaning there is only so much of it available in the world.
This makes it more valuable than other assets with no limited supply such as stocks or bonds. It also means that demand could outpace supply, driving up prices and making gold an even more attractive investment option.
Tangible Asset
Gold is tangible, meaning you can physically hold onto it and have possession of your investment at all times when you buy physical gold coins or bars instead of paper-based investments like stocks or bonds.
This can provide peace of mind knowing that your investment is secure and not subject to market volatility.
Long-Term Investment Option
Gold is often seen as a long-term investment since its value can appreciate over time due to its limited supply and consistent demand for the metal internationally as a safe haven asset during economic turmoil or political uncertainty.
This makes physical gold a great option for investors looking for a longer-term strategy with steady returns over time.
Diversification
Investing in physical gold helps diversify your portfolio by adding another asset class to your mix which reduces risk from relying too heavily on any one type of security or stock market movements.
Additionally, since the price of gold doesn’t typically move in tandem with other markets such as stocks or bonds, it can help balance out losses incurred elsewhere if markets decline suddenly due to unexpected events like natural disasters or political unrest.
Easily Traded
Investing in physical gold is easy because it’s highly liquid and easily traded around the world.
It can be traded via exchanges, over-the-counter transactions, coin dealers, banks, and brokers.
This makes buying and selling relatively straightforward compared to some other assets like real estate investments which require more research into local markets before taking action on them successfully.
Low Maintenance
Physical gold does not require any active management as some other investments do.
Once purchased it literally just sits there until either you decide to sell it or if circumstances change drastically that cause significant price moves which would prompt investors to buy/sell accordingly.
Universal Value
Gold has universal value due to its appeal around the world regardless of currency values.
This means even if one country experiences significant inflation (causing its currency value to drop significantly), it can still use the physical gold it invested in earlier as a form of currency exchange, further protecting itself against financial hardship.
Advantages of Investing in Gold ETFs
Let us now explore why you should choose an ETF over physical gold when investing.
Cost Savings
When you buy physical gold, you must pay a premium on top of the spot price of the metal. This means that you’ll be paying more than the actual market value of the metal itself.
With an ETF, however, you don’t have to pay this additional cost since you’re only investing in a fractional amount of gold rather than buying the whole bar or coin.
As such, ETFs can be much cheaper than physical gold investments.
Storage and Security
You must store and secure your physical gold properly if you want it to retain its value over time.
Doing so can be expensive and time-consuming as well as risky due to potential theft or damage from natural disasters like floods or fires.
With an ETF, however, storage is not an issue since all investments are kept electronically in a brokerage account rather than physically. As such, your money is kept safe from harm and theft with an ETF investment.
Liquidity
Another advantage of ETFs is that they offer greater liquidity compared to physical gold investments.
An ETF allows investors to buy or sell their shares quickly and easily without having to go through the hassle of finding a buyer for their physical bars or coins and then dealing with shipping them around safely.
In addition, because ETFs are traded on stock exchanges just like stocks, investors can take advantage of intraday pricing — something that’s impossible with physical gold investments since prices can change multiple times throughout a single day!
Tax Benefits
ETFs also offer tax benefits compared to physical gold investments since they are taxed at lower capital gains rates when sold for profit in taxable accounts — something that isn’t available with physical bars or coins.
Additionally, if held in retirement accounts like IRAs, there are no tax implications at all which makes them even more attractive for those looking to save money on taxes while still enjoying returns from their investments!
Disadvantages of Investing in Physical Gold
Cost
Investing in physical gold is more expensive than investing in an ETF because you must pay a premium on top of the spot price of the metal. Furthermore, you have to incur additional costs such as shipping fees and storage expenses if you decide to store it yourself.
Lack of Liquidity
As mentioned above, an ETF can be sold quickly and easily but it’s much harder to find a buyer for physical gold.
Furthermore, the price of physical gold is more volatile than an ETF, so you may have difficulty selling it at the price you want.
Security
Storing physical gold requires additional security measures to ensure that it’s not stolen or damaged by natural disasters like floods or fires. With an ETF, however, all investments are kept electronically in a brokerage account and thus are much safer from harm.
Risk of Fraud
Investing in physical gold can be risky since there’s the potential for fraud due to counterfeit coins and bars being sold as genuine. With an ETF, this is not an issue since all investments are overseen by the governing authority.
Disadvantages Of Investing in Gold ETFs
While ETFs offer many advantages over tangible metals investments there are also some drawbacks to consider as well.
Physical Owning
One major disadvantage is that you don’t actually own any real metal when investing in an ETF so you don’t get all the benefits associated with ownership such as control over who handles your investment or how it’s stored.
Management Costs
ETFs usually come with higher management fees than other types of investments and those fees can eat into your returns over time if left unchecked.
Reliability
Some investors feel that investing in an ETF isn’t as secure as owning the actual metal.
This is due to the fact that its value is largely dependent on the health of the economy instead of something more reliable like supply and demand fundamentals found with tangible metals investments.
Learn more about ETFs in the video below.
Is Gold ETF better than Physical Gold?
To help you make the best decision for your investments, here are some important questions and things to consider before selecting the right form of investment.
Can You Tolerate Risk?
One of the most important questions to ask yourself when it comes to investing in gold is how much risk you’re comfortable with taking on.
Physical gold has an intrinsic value that will not change drastically in a short amount of time, while ETFs can fluctuate rapidly due to market forces. It all depends on what kind of investor you are.
If you’re looking for stability, then physical gold might be the right investment for you.
What is Your Investment Horizon?
Are you looking at long-term investments or short-term gains? Physical gold is great for long-term investors because its value does not depend on market performance or economic conditions; it tends to hold its value over time.
However, ETFs are better suited to short-term investments because they can be bought and sold quickly and easily with lower costs than physical gold.
Identifying Trading Costs
When trading ETFs, there are certain costs involved such as brokerage fees, transaction fees, and other expenses related to buying and selling shares in the fund that must be taken into account when evaluating whether this type of investment makes sense for you.
On the other hand, trading physical gold involves some additional costs such as transportation, storage, and insurance but these are generally fixed costs that remain constant regardless of how many times the metal changes hands over time.
When You Want To Liquidate?
If you need access to your money quickly then ETFs may be the better choice as they can be sold quickly without incurring any additional charges whereas liquidating physical gold requires finding a buyer who is willing to pay a fair price for it which could take some time depending on current market conditions.
Understanding Safety & Security Options
Physical gold offers more security than ETFs because there’s no chance of losing your entire investment due to market fluctuations or theft.
However, storing large amounts of precious metals requires proper security measures such as vaults or safes which may add additional costs associated with owning them long-term
This should also factor into your decision-making process when deciding which type of investment makes sense for you.
What Are The Tax Implications?
Both types of investments come with different tax implications depending on where they are held (i.e., within a retirement account vs outside).
Therefore, it’s important to understand how they will impact your overall financial situation before making any decisions regarding which one is right for you.
What Are Your Investing Goals?
What do you want out of your investment? Do you want quick profits or slow growth over time?
Different types of investments can help achieve different goals so understanding what yours are will help determine which type of investment vehicle will best meet them.
Which Option Offers Flexibility?
Both types offer flexibility but in slightly different ways; while ETFs allow investors easy access to their money, physical gold requires more effort since buyers must physically retrieve their metals from vaults or safes.
What Are The Cost Structures?
The cost structure associated with each type varies depending on factors like purity level, storage, insurance, etc.
Understanding these costs can help inform your decision about whether physical gold or ETFs make sense for your particular situation.
Understanding Regulation & Oversight
Gold markets around the world differ greatly in terms of regulations and oversight so it’s important to understand how each jurisdiction operates before investing in either type.
In addition, most countries have laws that restrict ownership rights over precious metals so understanding those laws beforehand will ensure that any purchases remain compliant with local regulations.
Conclusion
In conclusion, when deciding between investing in physical gold or investing in a gold ETF, it really depends on your individual investment goals and objectives.
Both have their pros and cons, so do your research before making any decisions!
Ultimately, both provide an excellent opportunity for diversifying your portfolio with an asset class known for its stability and reliability over time—gold!
Check out our Top 5 Precious Metals Investment Companies here.
