Gold ETFs vs Physical Gold

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Last Updated on: 29th December 2020, 12:01 am

Allocating gold to your personal investment portfolio is becoming increasingly prudent given the precarious position that nearly all fiat currencies are exhibiting. In recent months European investors have also witnessed first hand the value of holding gold as insurance against the saver crushing policies of central banks.

The US dollar's reserve currency status has sheltered American investors from most of the effects of a full blown currency crisis up until now– but the net encircling fiat currencies appears to be encroaching at an ever increasing pace and who's to say when it will appear on the dollar's horizon.

What are my options?

As an investor– you are faced with a myriad of options when it comes to owning gold. ETFs, gold mining stocks, futures equities, and physical gold are all viable means of holding gold, each with their own advantages and disadvantages. Two of the most popular ways of investing in gold in 2015 continue to be ETFs and physical coins and bullion bars.

What are ETFs?

Exchange Traded Funds (ETFs) are a type of security which track the underlying performance of a specific commodity or index. ETFs are similar investments to stocks- they are listed on an exchange and trade continuously throughout the day. ETFs are highly liquid, and their low fee structure make them a very attractive investment vehicle for short term investors who are primarily concerned with making speculative bests on the price of gold.

ETFs do have one major shortfall however for investors who wish to hold gold for the long haul. Owning gold through an ETF does not usually allow an an investor to redeem their investment in physical gold. Much speculation exists within the gold community as to how much physical assets ETFs actually hold in order to back their fund. For the sceptics, buying ETF gold is really just an unallocated claim on a pool of gold that may or may not exist. For investors who are buying gold for insurance purposes against systemic and counterpary risk within the financial system – the murky nature of the gold holdings within ETFs are often a deal breaker.

Why are more investors seeking physical gold bullion?

Buying physical coins and bullion is a popular alternative to ETFs for gold investors, particularly for those investors who value holding gold for the long term . Bullion can be bought in a multitude of ways – through online dealers, brokers, coin specialists, bullion banks, and even certain retail banks offer physical gold sales. Investors in physical gold will typically have to pay for their purchases in full, margin financing is not common. A premium over spot price is also typical. The advantages of holding gold are clear. There is no danger of ownership dispute when you hold physical gold-what you hold is what you own. In times of elevated counterparty risk within the financial system, knowing what you own and where it is located is often invaluable. As we have seen during the Lehman crisis, the financial system is a web of complex interactions between different firms – when one shoe drops many more often follow. If this were to happen again, the last thing investors want to be worrying about is where their insurance policy against such an event is actually located.

Physical gold's biggest disadvantage, particularly for large quantities, are the associated storage and logistic costs. Large pension funds are unlikely to have physical gold locked up in a safe in the office somewhere, or under the fund managers desk. Gold needs to be transported, and stored in specialist facilities. This is an additional cost and should always be taken into consideration for large investments.

Gold IRAs: Hold Physical Gold without the hassle

Gold IRAs are a great way for investors to place physical bullion into a tax-advantaged retirement vehicle without some of the more troublesome aspects traditionally associated with holding physical gold. An added bonus of Gold IRAs is that custodians are often able to make storage arrangements outside the US. Offshore vaults in countries like Hong Kong, Singapore, and Switzerland are all viable, and provide a great deal of added flexibility and protection for your investment.

Should you no longer work for the firm maintaining your retirement account, consider transferring you account into physical precious metals by liquidating the existing holdings and reallocating your assets into a self-directed or gold backed IRA. In contrast to a traditional IRA, a gold backed one permits investors to purchase physical bullion bars, while a self-directed IRA enables one to select the investment vehicles you desire. Trust an established broker with this type of transaction to preclude any costly tax liabilities.

When investing in gold, investors need to be clear on their own personal underlying reasons for holding gold when deciding which method of investment to use. ETFs are a great way for to play the physical metal without having to worry about storage costs and logistical problems, but it doesn’t equate to a claim of ownership on real gold. For investors who wish to take advantage of gold's insurance properties as a hedge against systemic risk within the economy – then physical possession is the more favorable solution.