When most people think of investments they tend to picture stock options or real estate. However, the key to a secure portfolio is to think outside the box with more diverse forms of assets.
This typically leads people to one of the most historically sought-after metals on the planet: gold. Gold can be an incredible investment. However, it's important to remember that it's not just available in physical form.
You can also invest in it in the form of ETF gold. So, what's the difference between physical gold and ETF gold? And what are the pros and cons associated with both options?
In this guide, we'll answer these questions so you can get a better sense of what form of gold investment is right for you.
What Is Physical Gold?
Physical gold is the most tangible form of the precious metal because you get physical access to it. When you buy gold in this type of bulk form you're typically buying it as a bullion.
A gold bullion is an umbrella term that can refer to both gold coins and bars. Instead of assigning physical gold a monetary value, assessors will instead look at two areas to determine what it is worth.
This includes the overall mass as well as the purity percentage. The purity of gold is typically measured in karats. It's also important to note that gold jewelry can also count as physical gold if it's genuine.
Storage is an important part of owning physical gold. You need to make sure it's secure by investing in good, safe, or other secure storage methods.
While hiding or burying your gold might seem like a good idea, it's not. The potential for theft or loss is simply too high.
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What Is ETF Gold?
The other option for purchasing gold is an ETF (aka an exchange-traded fund). This option allows you to purchase gold in the same type of way that you would purchase shares on the stock market.
Here's how it works: most gold ETFs are structured like a trust. Each fund has a specific number of goal bars that are represented by each share that's issued.
So when you buy one of these shares it represents your stake in the gold that's being held by the trust. Investors like this option because it's a good way to add gold to your portfolio without having to buy and store physical gold assets.
The price of your ETF will be directly tied to the market price for gold. Sometimes tracking errors can create some deviation from the market price. When this happens you can typically expect an arbitrageur to step in and take advantage of it.
What Are the Differences Between Physical Gold vs ETF Gold?
There are four distinct areas in which physical gold and ETF gold differ from each other. The first area is how you buy and sell it. With physical gold, you will need to go with in-person or online sellers in the form of a government mint or a dealer.
With a gold ETF, you purchase shares on a stock exchange. The second area is the maintenance that comes with it. The maintenance of physical gold can be intensive because you also need to store it safely and insure it.
And if you have a lot of gold this can get expensive. With a gold ETF, the specific fund is taking care of all the maintenance. All you need to do is pay an annual fee to cover the costs.
Third, there's the liquidity. Physical gold is a liquid asset and there are plenty of buyers out there. That being said, you do need to seek out and find them. And unfortunately, there will be plenty of people along the way trying to rip you off.
As such, they aren't as liquid as gold ETFs which can be traded throughout the day in the same way as stocks. The final area where they differ from one another is with returns.
With physical gold, the amount of money you get back will be determined by the price of gold at the moment. A gold fund, on the other hand, gets its value from the specific price of the gold fund.
Pros of Physical Gold
One of the biggest benefits of physical gold is that it can be used as a hedge against inflation. Inflation can cause the value of traditional investments to plummet.
That's because these investments are directly tied to the power of a country's currency. So when that currency is going through inflation it can cause investors to lose money.
Luckily, physical gold has long been used as a hedge against this problem. That's because whenever the price of currency drops the price of gold rises. As such, many people like using it to diversify their portfolios.
It provides a bit of protection against the inevitability of inflation. There's also the physical nature of it. Physical gold is something tangible you can touch. In the event of an emergency, you can grab it quickly and take it with you.
Or you can pass it down to other family members in your will to continue your financial legacy. The physical nature of it is a big incentive for people who might distrust financial institutions.
Lastly, there's the simplicity to it. Stocks and ETFs can confuse a lot of people. As such, there can be something liberating about physically owning your investment.
Cons of Physical Gold
One con that a lot of people note about physical gold is the additional costs that come with it. These arrive in the form of security and insurance expenses.
If you want to make sure your investment is secure you'll need to store it in either a home safe or a safety deposit box. However, it's important to keep in mind that both of these methods aren't 100% secure.
As such, you'll likely want to pay for insurance too which can quickly add up. Next, physical gold isn't a form of passive income. Unlike many stock options, you're not going to generate income from it. There are also problems with liquidity.
There are plenty of gold buyers out there. However, finding one that will give you a good price can be hard to find. So if you need to sell your gold quickly you'll likely take a loss on your asset.
Lastly, there are the taxes to consider. When you sell gold at a profit it will be subject to the capital gains tax. So this is another cost you will need to factor in.
Pros of ETF Gold
One of the reasons a lot of people love gold ETFs is the convenience. With physical gold, you need to worry about finding a reputable dealer. Then you'll need to secure it and insure it which can be a big hassle for a casual investor.
With an ETF the process can be much easier. All you need to do is find a good online broker and then place your order. Many types of ETFs are also treated as regular investments for tax purposes.
As such, you won't be taxed as heavily as you would if you bought physical gold. Many shares of an ETF come at a lower cost than if you were buying the physical gold. Lastly, your shares will be more liquid.
With physical gold, you need to find a buyer and often leave your home to meet them. With ETF gold, you can sell your shares all from the comfort of your couch.
Cons of ETF Gold
The biggest con of a gold ETF is that you don't physically own the gold. Instead, you own an intangible share. Now this might not be a big deal for some people. However, it can have implications for your investment.
For example, most ETFs will hold the gold they claim to have in their shares. For some, the gold in the vaults isn't directly controlled by the manager. This can create a layer of risk if you choose the wrong ETF.
As we mentioned, there's also the possibility that the ETF fails to properly track the price of the gold. When this happens it can decrease the price of everyone's share.
Lastly, there are the annual fees. In exchange for storing and securing the gold, you'll need to pay annual costs. While this comes with the convenience of taking care of the gold for you it is another thing you should consider.
How Do You Buy Physical Gold?
You can purchase physical gold from a variety of suppliers. Some popular options include things like:
- Government mints
- Gold dealers
- Private collectors
- Jewelry shops
- Pawn shops
- Online marketplaces
Some investors prefer to purchase their physical gold from local investors. While these individuals can be more trustworthy, the gold they offer typically costs a lot more. That's why most people turn to online gold dealers.
These professionals allow you to purchase your physical gold online which will then be shipped to you. However, you need to be careful with this option. The world of gold investments is filled with scams.
Often sellers will attempt to pass off fakes for the real things. So if a price seems too good to be true, it likely is. Make sure that you're only purchasing from reputable sellers.
It also makes sense to get your gold appraised before you purchase it. This can be costly but it's worth it for the peace of mind.
How Do You Buy Gold ETF?
To buy a gold ETF you will need the help of a stockbroker. This is a middleman who can buy and sell shares of an ETF for you when gold investing. In exchange, you'll need to pay them a commission.
The good news is that these commissions are relatively low. Typically for online gold ETF transactions, this will cost you between $10 to $25 per trade. The bad news is that they can quickly add up if you're an active trader.
Also, keep your eyes out for certain brokers that offer commission-free trades of specific ETFs. You'll also need to decide what ETF to buy from. There are many great low-cost ones out there.
Some good options include things like:
- IAU
- GDX
- SGOL
- BAR
- GLD
That being said, it's important to research each one before you invest in it. That way you can make sure that the expenses, costs, and fees align with your expectations.
If you aren't sure which one to invest in, consider asking your broker or financial advisor for some advice. They can give you their recommendations for which ones make sense for your specific portfolio.
Which One Is Right for You?
There's no clear answer for whether physical gold is better than ETF gold. That's because depending on your financial priorities they can both be valuable. When deciding which one is right for you the first thing you should look at is your investment goals.
Do you want gold as a long-term investment for future wealth? If so, invest in physical gold since it's not as liquid as gold ETFs. Gold ETFs allow for much quicker trading in short-term investments.
Your experience level can also be a factor. Buying and securing physical gold is a much more intensive process. So if you want something that's fairly hands-off, ETFs are your best bet.
Your comfort level should also be noted. For many people, owning physical gold can be quite stressful because they're constantly worrying about it getting stolen.
For others, physical gold can bring relief knowing they have something physical to fall back on in the event of an emergency.
Interested in Gold Investments? Use the United States Gold Bureau
We hope this guide helped you learn more about the pros and cons of physical gold vs ETF gold. Here at the United States Gold Bureau, we know that which form of gold to invest in is usually the tip of the iceberg when it comes to gold financial advice.
Our clients also want to know things like how to get the most gold for their money and how to use gold as a hedge against inflation.
That's why we made a free Precious Metals Investment Guide for people like you. So download it today to start learning more about gold.
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byUnited States Gold Bureau