Gold Exchange-traded Fund (ETFs) vs. Physical Gold – Which Is Better?

Investing in gold is becoming more common as it is a viable alternative to what some people consider unstable currencies. Investors in Europe have also seen the value of gold as a hedge against the policies of central banks that are not favorable to savers.

Until now, the US dollar has avoided much of the adverse effects of a currency crisis because it’s widely accepted as an international reserve currency. As fiat currencies become more and more obsolete, the net encircling them appears to be widening by the day. With an ever-increasing trend, the dollar might soon feel the impact.

What are my choices?

There are many ways to invest in gold, including ETFs, gold mining stock, future equities, and physical gold. Each type has its pros and cons. Before investing, you should understand how they work and the associated risks. By 2015, ETFs and physical items (coins or bullion bars) were the two popular ways of investing in gold.

What are ETFs?

Exchange-traded funds (ETFs) are a type of security that tracks the performance of a single commodity or economic indicator. ETFs allow investors to gain exposure to a commodity or index without actually owning it. Instead, the investor is essentially loaning money to someone else who has gold and wants cash.

ETFs, resemble stocks because they are listed on exchanges and trade all day. They have high liquidity, low fees, making them a good investment choice for speculative investors looking to make short-term moves in the gold price upwards or downwards. However, ETFs have one drawback for investors seeking to hold gold for an extended period. An investor cannot redeem their investment in physical gold with an ETF.

Many gold investors are questioning whether or not ETF shares represent physical assets and/or the actual market price of gold.

There is a great deal of speculation in the gold investment world about how much physical assets ETFs hold to fund their products. For skeptics, investing in gold through ETFs is an unallocated claim on a pool of gold that may or may not exist. Institutional investors buying gold to insure themselves against systemic or counterparty risk in the financial system often find ETFs do not appeal for their lack of transparency.

What could be pushing more investors into buying physical gold bullion?

While many ETFs exist, there is no physical gold backing them. Investing in coins and bullion is a popular alternative for those who do not wish to deal with the hassle of often redeeming their holdings. Investors typically pay for physical gold in full by using online dealers, brokers, coin specialists, bullion banks, or certain retail banks. Purchasing physical gold requires full payment upfront. Banks may or may not offer margin financing for those who don’t have the cash on hand to buy it in full. Holding physical gold is advantageous in many ways. You are guaranteed of your ownership, and there’s no danger of dispute when it comes to possession – what you hold is, essentially, what you own. By knowing what you have, where it is located, and how it interacts with other systems in the financial industry, you are better prepared for systemic failures. If catastrophe strikes again, the last thing that investors need to worry about is where they are currently insured.

The most significant disadvantage of physical gold, particularly for large quantities, is the associated storage and shipping costs. Significant pension funds are unlikely to have physical gold locked up in a safe in the office somewhere or under the fund manager’s desk. Gold needs to be transported and stored in specialist facilities, incurring additional costs that should always be considered for significant investments.

Gold IRAs: Safe Gold Investment?

Gold IRA accounts remove many of the disadvantages associated with holding physical gold while providing tax advantages. An added benefit of a Gold IRA is that many custodians offer offshore storage for customers’ money. The United States is typically the only option, but international vaults in countries like Hong Kong and Switzerland are often viable options with better protection and flexibility.

When you leave a firm maintaining your retirement account, it is worth considering transferring to precious physical metals by liquidating the existing holdings and reallocating to a self-directed or gold-backed IRA. Traditional IRAs cannot purchase gold bars, but a self-directed IRA enables one to select the investment vehicles they want. Investing in bullion will preclude any costly tax liabilities by working with an established broker for your transactions.

Determining your reasons for investing in gold is crucial when deciding on a type of investment. ETFs are a great way to play the physical metal with no storage costs and hassle, but they do not grant you ownership of the actual gold. As opposed to merely investing in gold as an insurance policy against systemic risk within the economy, physical possession is the more favorable solution for investors with economic stability in mind.

Raymond Banks Administrator
Raymond Banks is a published author in the commodity world. He has written extensively about gold and silver investments, and his work has been featured in some of the most respected financial journals in the industry. Raymond\\\'s expertise in the commodities market is highly sought-after, and he regularly delivers presentations on behalf of various investment firms. He is also a regular guest on financial news programmes, where he offers his expert insights into the latest commodity trends.