Physical Gold vs. Gold ETFs

Most investors hold gold as a backup should something go seriously wrong with the economy. Institutions and individuals view it as a way to preserve wealth even in the face of recession, conflict, or another catastrophe. 

But should you hold physical gold or buy ETFs that represent it? That’s a tricky question. 

Fortunately, this post offers some guidance. It looks at the advantages of each approach and the key considerations you should make before buying. 

Investment Forms

Physical gold comes in various investable formats: coins, bars, and jewellery. 

Most coins are historical and minted by countries like the US, South Africa, the UK, Australia and Canada. For example, you can buy a British gold sovereign containing 0.24 ounces of gold, or a South African Krugerrand containing a whole ounce. 

Bars are often larger than coins and significantly more expensive. International standards say they must be 24-carat (99.5% pure metal or above) to qualify as investment-grade bullion. 

Jewellery is also a form of investable gold. However, unlike conventional coins and bars, it doesn’t carry a standard price for its weight. When pricing, valuation experts also consider other factors, such as the jewels it contains and the quality of the workmanship. 

Gold ETFs are different. These are funds that track gold prices by holding gold bars or futures contracts traded on the stock exchange. When investors buy shares in the ETF, managers buy more gold, with the reverse occurring when they sell. 

Key Differences

Because of this, there are significant differences between holding physical gold and buying a gold ETF. Here’s a table that explains this in more detail:

Table of differences between physical gold and gold ETFs

Category	Physical Gold	Gold ETFs
Ownership	Direct ownership of tangible asset	Shares representing gold ownership
Storage and Security	Requires secure storage and insurance	Managed by fund; no personal storage needed
Liquidity	May take time to sell	Easily traded on stock exchanges
Costs	Storage, insurance, potential markup	Management fees, brokerage costs
Diversification	Limited to gold itself	May include various gold-related assets
Counterparty Risk	Minimal risk	Dependent on fund management and structure

Advantages of Physical Gold

The primary benefit of physical gold is that it is a tangible asset. 

It can never disappear into a sea of derivatives. It also never tarnishes (assuming it is pure) and can be reforged into bars and coins if damaged. Because of this, investors have complete control over physical gold (particularly if they hold it on their property). 

It can remain inside safes hidden under the floorboards for decades and be sold whenever it suits the owner. 

Furthermore, some bullion has potential numismatic value. Many gold coins are worth significantly more than their constituent gold content, making them profitable investment opportunities. The older and rarer the coin, the more collectors will pay for it. 

Advantages of Gold ETFs

Likewise, gold ETFs offer investors several advantages. One is their ease of trading: buying and selling ETFs on investment apps is simple. You simply ask brokerages for a quote and, unlike physical gold, you don’t need to transport precious metals to market. 

The overall costs of holding a gold ETF may also be lower. Most funds charge a flat annual custody fee (usually around 0.5% of the value of your investment), which is less than the costs of buying a vault and gold dealer commissions. 

Lastly, gold ETFs benefit from professional management. Large investment firms, like Invesco, use their expertise to ensure metals-linked exchange-traded funds rise and fall with the spot price of physical gold on international markets. 

Considerations for Investors

However, as with any investment, caution is essential. Jumping into any particular gold strategy comes with risks. 

For example, it is essential to consider your investment goals. Holding physical gold metal is a superior strategy if you fear for the integrity of the financial system or believe society will soon break down. Meanwhile, ETFs could be superior for high-frequency trading. Getting in and out of physical gold takes time, but electronic products only require a single click to buy and sell. 

You also want to consider your risk tolerance. How much personal exposure are you willing to accept? Holding physical gold is convenient but also risky because you may have to secure it yourself, usually in your home. Although some sellers can also store it securely for you.

Meanwhile, gold ETFs often come with insurance with the underlying asset stored in the world’s most secure vaults but you are relying on the underlying investment fund’s honesty, transparency and solvency. 

Finally, it is worth considering the level of control you want. Physical gold provides you with ultimate recourse because you can hold it in your hand and sell it to whomever you want. By contrast, gold ETFs are highly fungible but you are relying on the financial institutions and structures that support them.

Physical gold vs. bitcoin may be another comparison you're interested in as part of your portfolio diversification research.

Summary

In the battle of physical gold vs gold ETFs, you may want to choose a combination of both. Physical gold offers security during a crisis while gold ETFs allow you to trade freely and avoid the risks of storing precious metals at home. If you’re looking to buy physical gold, you can contact us here.