Physical Gold vs. Gold ETF – Which Is The Best Choice?

Investing in Gold Basics

Published: January 19, 2021

Gold bullion bar on a stocks and shares chart

While the saying “material possessions don’t last” may be true about your iPhone, precious metals like gold are the exception to the rule. Gold has been in high demand for as long as there has been human civilization, and there’s no sign it’s going anywhere anytime soon.

While the ancient Egyptians may have been limited in their gold-buying options, modern gold investors have options other than simply buying physical gold. One of the most popular options is investing in gold ETFs. Keep reading to learn more about the pros and cons of physical gold and gold ETFs.

Physical Gold as an Investment

For example, in ancient Egypt, gold was used for everything from trading and jewelry to elaborate coffins and tombs for the pharaohs. Not only has gold remained in demand throughout history, but it has also been used as a modern currency and investment commodity for hundreds of years.

No matter where the price of gold goes tomorrow or next week, it’s generally a safe bet that gold will continue to appreciate in value and outpace inflation over time.

As an investment vehicle, gold has held its value throughout human history. Its value is not based purely on perception. This precious metal is a raw material used in jewelry-making, industry, and art. It has not only outperformed any other asset, but often, in financial crises, gold is the only thing that survives.

Gold also provides a level of security. You can use it to store the wealth you have acquired. You can, and should, make it part of your legacy to hand down to future generations. In a crisis, even if all financial institutions collapse, you can still move ahead in life if you have gold. While fiat currencies are subject to inflation, your investment in gold can protect you against it.

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Advantages of Investing in Physical Gold

You have a staggering number of options regarding investing in gold. There are many financial instruments built around it. Yet, the physical ownership of gold gives you several advantages you can’t have otherwise. Here are just a few for you to consider.

  1. Your gold can protect you from inflation. When a fiat currency, such as the dollar, loses value, gold tends to increase in price. This phenomenon is why many investors use gold as a hedge against inflation.
  2. When you own gold, you own a tangible asset. Ownership is the most appealing advantage of buying bullion. You can see it, touch it, hold it. You can sell it or exchange it for other goods or services without the need for an outside party to facilitate the transaction. You can show it to your friends if you are so inclined. Better still, you don’t have to keep looking at charts to see if it still holds value. You know it’s worth a lot when you feel it in your hands.
  3. It’s a liquid investment. You never doubt that someone is going to buy your gold from you. It’s one of the few commercial assets that are always in demand. Depending on the amount you’re selling, you can usually move it within hours, certainly within days. You have the peace of mind that you can use it as a medium of exchange regardless of the current financial or political situation.
  4. You’re safe from counterparty risk. Many investors worry they will lose their assets due if a financial institution fails. This anxiety comes from a rational fear. In the last few decades, there have been many losses due to bank collapses and market failures. When you own gold, that’s not a concern. As mentioned above, it has intrinsic value that doesn’t depend on outside forces.
  5. You can use gold anywhere in the world. There’s hardly a place on planet Earth where you can’t trade with gold. That’s the magic of this investment. It doesn’t matter which country or culture you visit. Gold shines everywhere you go, and there’s always someone willing to transact with you in exchange for a piece of your shiny rock.

Disadvantages of Investing in Physical Gold

Despite its undeniable value, physical gold comes with risks and disadvantages. You should be aware of these before you invest.

  1. You have to protect it at all times. The value of gold can also be its biggest drawback. It is so appealing that many will stop at nothing to take it away from you. If you’re storing your gold at home, you will need to insure it and have adequate security which comes with costs. You can also store the gold at a depository for more peace of mind, but this comes with storage costs.
  2. It can be expensive to store and transport. The measures you take to store your gold can add painful costs to your investment. If you have to move your gold to a new location, the logistics of transporting it can attract fees.
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What are Gold Exchange Traded Funds?

Gold Exchange Traded Funds (Gold ETFs) are paper assets backed by actual gold, designed to track the metal’s price. Each share of an ETF represents an amount of gold held by a trust. However, you cannot gain possession of the physical gold.

Gold ETF Advantages

ETFs are easy to buy and sell. You can sell your ETFs instantly since you don’t have to move physical gold. All you have to do is go online, log into your trading account and go ahead with the transaction. The same applies to buying ETFs.

  1. The administrative overhead is low. ETFs, help you avoid direct expenses related to owning physical costs. You don’t have to take care of handling, storing, and transporting the metal.
  2. ETFs are as good as gold (for the most part) when it comes to exposure to gold’s value. The value of an ETF, in terms of price, is almost the same. That’s because ETF represents actual gold held in custody. This asset tracks the market price of gold, so any price difference will usually be negligible.
  3. You can start small. ETFs are great for new and first-time investors. You can get started by buying small amounts. You can get an ETF representing as little as one gram of gold.

Disadvantages of Investing in Gold ETFs

Just like with physical gold investments, gold ETFs also have a few disadvantages. Here are the primary ones.

  1. Frequent trading can cost you a lot in fees, and if you buy and sell regularly, you can incur considerable transaction fees. In addition, other costs, such as a fund’s expense ratio, erode the value of your investment over time.
  2. You have to do a lot of research. There is a wide variety of ETF products from which you can choose. You have to spend time figuring out the best option for you. Each trust offers different terms, some of which you may find unfavorable. Before you buy an ETF, study all available information and read the fine print.
  3. Your ETF is subject to market risk. ETFs are just like any stock you buy on an exchange. They’re just as risky. Unlike physical gold, ETFs can lose their value if the market crashes or the trust fails.
  4. You don’t control your investment. ETFs exist within a structure. There’s a chain of custody. Someone holds the physical gold, and a trust manages the paper asset. However, you have no input at any point in the process. There’s nothing you can do to control the safety of your investment.

Buying Physical Gold In A Tax-Advantaged Gold IRA

Gold IRAs (Individual Retirement Accounts) are an alternative way to invest in gold. With a gold IRA, you own physical gold that you store with an approved custodian. In addition, the gold you buy in your IRA will receive the same tax advantages as a conventional IRA.

IRA-Approved Physical Gold Investments

Not all gold investments can be part of an IRA. For instance, you can’t transfer precious metals you already own into a gold IRA. Also, the U.S. Internal Revenue Service has restrictions regarding what metals can be part of your IRA.

Recent laws require that your gold is at least 99.5% pure. You have to store your bullion with a licensed third-party custodian. You won’t be able to take your gold home, but you can always visit your investment. This point is a deciding difference between ETFs and gold IRAs. With an IRA, you own the gold.

So, what are some of the best gold investments you can have as part of your IRA? The selection includes the official gold bullion coin of the U.S., the American Gold Eagle. This coin is minted only from gold sourced in America. Other coins you can buy include the Canadian Gold Maple Leaf and the Austrian Gold Vienna Philharmonic.

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Physical Gold or Gold ETF: Which Is Right For You?

While gold ETFs have some advantages, buying physical gold in an IRA is one of the best options for investing in precious metals. You own physical gold without the fears and hassles associated with storing it yourself until it’s time to start taking distributions.

If you’re interested in opening a gold IRA with Noble Gold Investments or want to learn more about how a gold-backed IRA works, give us a call today. Our team is standing by to help with any questions you have.

Investing in Gold Basics
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