Physical Gold & Silver Bullion VS Gold & Silver ETFs, what’s the best investment?

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Last Updated on: 10th February 2023, 06:59 pm

There is an age old debate going on between the merits of owning gold and silver as physical tangible bullion versus owning gold and silver ETF exchange traded funds. Both sides have their proponents as to which one represents the better form of investing in the precious metals. In this article, we will explore and consider what each is, what elements of storage are involved in owning gold and silver in physical form, and which makes the most sense from a straight cost of ownership perspective.

What Are The Various Types of Gold and Silver Bullion?

First of all, you have to understand what investors mean when they say precious metals bullion. Gold and silver bullion refers to coins, bars, and ingots that contain a very pure composition of the precious metal. Bars and ingots are simply physical manifestations of gold or silver measured in either grams or ounces. Ingots are smaller versions of these bars. The coins are something special and more unique. These are face value carrying coins which generally have between 90 percent and 99.999 percent gold or silver purity of the metal contained.

All of the bullion coins have identifying national elements of the particular mint and country which strikes them. These contrast with rare coins in that they are mass produced for investors as opposed to limited edition pieces made for collectors. As such, true bullion coins do not have much value above the spot price of gold or silver, except for a small premium for the cost of minting, marketing, and distributing them to investors.

Examples of bullion gold and silver coins include Canadian Maple Leafs, American Eagles, Vienna Philharmonics, and British Britannias, pictured above. These bullion coins (in either gold or silver form) come in a variety of sizes measured in ounces. The most common is the single ounce coin, though there also offer many of these beautiful pieces in five ounces, ten ounces, kilogram, and even half-, quarter-, and tenth-ounce sizes.

What Are Gold and Silver ETFs and What Do They Represent?

ETFs stands for Exchange Traded Funds. In the case of the gold and silver ETFs, these are mutual fund like investments that pool money together from thousands upon thousands of investors then use them to purchase the underlying precious metals as their fund holdings. When more people purchase additional shares, they buy still more holdings. As people cash out, they simply sell off the commiserate numbers of ounces or kilogram bullion bars of gold or silver.

Nowadays dozens of gold and silver ETFs populate the markets. Each of them is created with the goal of providing you the investor with a convenient means of tracking the rise and fall of the underlying prices of gold and silver. These ETFs hold the gold ownership, though some provide you with a direct ownership of the requisite physical amount of gold or silver in your shares. Most of them do not. Instead, these are an indirect means of owning gold or silver. There are still other ETFs which follow the share prices of gold and silver mining companies.

If you are going to invest in gold or silver ETFs, then you must realize the important criteria for which of these funds is the best one for you. The most sensible precious metals ETFs are the ones that move more or less in lockstep with the prices of the underlying gold or silver. Otherwise, it is possible to invest in a gold ETF and watch in helpless frustration as the price of the yellow metal roars ahead while your particular ETF merely crawls forward.

You can see this in action by looking at the chart below. It displays the grandfather of all gold ETFs— GLD SPDR Gold Trust (and the popular ETF of senior gold mining companies— GDX the Market Vectors Gold Miners ETF) alongside the physical gold prices for the last decade:

Without a doubt, the GLD SPDR Gold Trust remains the hands down largest and most popular of all gold ETFs. It contains in excess of $40 billion worth of gold holdings. The stated objective of the fund (per its own fact sheet) is “to reflect the performance of the price of gold bullion, less the Trust's expenses.” Considering the chart above, GLD has delivered the goods rather well. Ownership of this fund is not free however. The annual expenses amount to .4 percent and this causes the small but still notable underperformance of the GLD fund in relationship to actual gold prices.

You also need to know that this greatest of all the gold ETFs funds is not direct ownership of the gold they hold. Their fact sheet tells you that, “the Gold Shares represent fractional, undivided interests in the Trust, the sole assets of which are physical gold bullion and, from time to time, cash.” You are in fact investing in the Gold Trust, not the gold itself. Simply put, the trust owns the gold; you do not.

The second biggest gold ETF is the iShares Gold Trust. While this remains the second most popular Gold Trust fund it is vastly smaller, but it also offers a lower expense ratio. At .25 percent per year, this proves to be the best deal going of the major Gold ETF shares ownership options. It means that IAU tracks gold prices closer, but still not perfectly, over time.

How Much Does It Cost to Buy Physical Gold and Silver Bullion?

One consideration in purchasing physical gold and silver bullion is that there is an upfront buying and then final closing out selling cost (as there are similarly brokerage fees for acquiring shares in the ETFs). This typically amounts to between three and four percent for each side of the physical bullion transaction. It sounds like quite a lot, but if you plan to hold your gold or silver investment for ten to twenty years or even longer, then it amounts to a fairly insignificant amount over the long-term life of the investment. You only pay the difference in price over gold on the sell side at that point when you cash out in any case.

What Storage Options Are Available for Physical Gold and Silver?

A major factor in any investment has to do with the storage options. With shares of stock (aa with the precious metals ETFs), you do not have to be concerned about this. It is because they are mostly held electronically anymore, meaning that no one needs to worry about a safe in which to store their stock shares or bond certificates any longer. Storage matters are not this simple and straightforward with precious metals. There are some considerations you need to be aware of regarding storage, which we cover in this section.

There is An Important Distinction Between IRA Account Gold and Other Invested Physical Gold

When you are talking about physical gold, you have to make a distinction between outright owned physical gold and Precious Metals IRA account owned physical gold. The reason for this is that there are particular restrictions on the storage of gold or silver held in the Gold IRA and Silver IRA accounts.

The biggest regulation which the Internal Revenue sets is that these IRA accounts can not store the gold at home. You can not keep your gold in your local bank safe deposit box either in the majority of cases. Instead, you have to store the precious metals in one of six approved depository vaults located on American soil. These acceptable storage companies are as follows:

  • Delaware Depository
  • Brinks Security
  • HSBC Bank USA
  • JPMorgan Chase Bank North America
  • Scotia Mocatta
  • CNT Depository

The advantage to this arrangement which forbids you handling or taking possession of your physical precious metals (unless you receive them as a distribution) is that the storage fees for gold and silver held this way are actually significantly less than fees for storing outright owned gold and silver. We will compare these fees in more detail later in the article.

Even the industry-leading Gold IRA companies admit that the most popular means of investing in gold is through buying it and then taking physical delivery. This involves purchasing physical gold bullion coins like Canadian Maple Leafs, American Eagles, or South African Krugerrands. Each of these are revered for their legendary purity and gold or silver content which are fully guaranteed by the authorizing governments and producing mints for both their weight and precious metal purity. From the year 1900, the value of gold bullion has increased by a dramatic 4,500 percent in total price. This represents an average gain per year of more than 35 percent.

Bank Safe Deposit Box Storage

If you acquire gold by physical delivery, then you need to have a physical place to store it. Keeping a large amount of valuables of any kind (much less easily portable and saleable precious metals) in your home only invites thieves, risk of fire, or other potential manmade or natural disasters. This is why your best option for gold or silver you receive physical delivery of is to store it in your local bank safe deposit box. The costs for this are quite inexpensive and range usually from $75 to $125 per year (which varies based on the deposit box size).

The advantages to this are that such safe deposit boxes prove to be both simple to access and secure in the bank's own vault. In the majority of banks with safe deposit box service you are able to come in without providing advance notice as many as six days per week. You may also include other important valuables such as jewelry and critical documents. The boxes are private, and the banks do not even know what you keep in them. This means that neither does the U.S. federal government.

Such safe deposit boxes are not without their risks however. The flip side of the bank not knowing what is in your safe deposit box is that they also will not insure it. In fact, unbeknown to many safe deposit box holding individuals, banks do not even insure them against bank vault robbery or catastrophic natural disasters. Acquiring such an insurance policy, even for in bank-based, safe deposit-vaulted precious metals, is generally prohibitively expensive. If the Federal Government issues a bank a search and seizure warrant for any safe deposit box, the bank will cheerfully turn it straight over to them with no compensation or even apology offered to you, as precedent has shown on a number of times in the last few years.

Allocated (Co-mingled) vs. Segregated Vault Storage

This means that vault storage with a fully licensed, secured, and insured gold depository is really the safest and most economically practical way to go in storing any significant quantity of precious metals. You still have to watch out for tricks that these vaulting companies can play on you. Many of them will offer a standard form of precious metals storage that they refer to as either allocated or co-mingled.

This simply means that there is a giant vault room where the depository lumps together all of its various clients' holdings of precious metals bullion. They keep an inventory of each individual's holdings. In fact this is the majority of such precious metals depositories' standard operating procedure for how they store their customers' gold and silver bullion holdings. It also means that you will not receive back from the vault the same precious metals you deposited with them. They might also decide to loan out your gold or silver hoard to other customers at will without notifying you whatsoever. It once again puts the third party counterparty risk in play between you and your precious metals.

The best option with these precious metals depositories is the alternative method of fully segregated storage. To obtain this, you will need to get it in writing from the vault that they are separately storing your particular holdings in a separate small vault or storage container like a safe deposit box. Only this way can you be guaranteed that your holdings are segregated from those of the other clients' precious metals assets. Your gold and silver will also be fully insured and inventoried on a regular basis. The same metals you deliver to the vault are the ones you will receive, should you request delivery of them.

This protects you from the possible disappearance of your metals in the unlikely event that the depository goes bankrupt. Segregated storage like this often costs more, but it does not have to if you choose your custodian vault carefully. Segregated precious metals will typically be third-party insured for even $50 million per account as well. The gold and silver must be titled in only your name. The law requires that they clearly disclose to you in writing the type of storage you are getting and the price you are paying for this storage.

Domestic vs Offshore Storage

You will also need to make a decision on whether to store your physical precious metals bullion inside of the United States or “offshore,” which simply means internationally and beyond the confiscating reach of the U.S. Federal government or any Federal court order. There are many examples of offshore vaulting storage, and it does not have to cost more than keeping it within the U.S. Some of the more famous international gold and silver vault storage options include:

  • HSBC the mega British bank with precious metals vault storage in London, Singapore, Zurich, and Hong Kong
  • Brinks Security in its London vault
  • Scotia Mocatta that offers international vaulting choices in its home country of Toronto, Canada
  • American JP Morgan Chase that provides offshore vault storage in both London and Singapore

The obvious advantages to overseas storage of your precious metals are there. Places like Singapore, Zurich, Dubai, and Hong Kong are all financially more stable and far safer legal jurisdictions than any possible vault based in the United States. Singapore as an example does not confiscate clients' gold or silver holdings at will.

Besides its occasional seizure of private citizens' gold on a case by case basis today, the U.S. Federal government boasts a track record of confiscating all non-collectable gold hoards in the U.S. in the early 1930s under the administration of President Franklin D. Roosevelt. If you do not think that this is an issue in the U.S. today, ask yourself why the IRS requested (and received) legislation in 1997 which today requires by law all Precious Metals IRA accounts be mandatorily stored in the United States on American soil.

Pricing of Physical Gold and Silver Bullion Storage Versus Gold and Silver ETF Fees

Now that you have seen what is involved with purchasing gold and silver via either physical precious metals bullion or Gold or Silver Exchange Traded Funds, it is necessary to count the costs of the two competing methods of owning the gold and silver. Here we will examine the ownership costs of ETFs versus storage costs of physical precious metals bullion.

Physical Bullion Storage Can Be The Same or Less Than ETF Ownership

Many individuals naturally assume that it is expensive to store gold or silver in a vault. This is particularly the belief when a foreign vault which fully insures and properly segregates the precious metals is involved. The reality is actually far different.

In these tables you can compare the actually quite costly management fees which the most popular gold and silver ETFs charge against the real prices for physically storing either gold or silver bullion holdings in fully segregated and insured vaults. First consider the gold comparison costs table, which is based on $500,000 in gold holdings:

Method of
Yearly Costs
$500k Gold
Storage of
Vault Location
Bank Safety
Deposit Box Storage
(Local Bank)
$200 FlatDelivered bullion is the same as stored bullion.Hometown local bank storage.Any size or amount with no withdrawal fees. Pickup only.
Segregated Gold IRA Vault Storage
$150 FlatDelivered bullion is the same as stored bullion.IRS requirements mean gold must be stored in the U.S.Any size or amount with no withdrawal fees. Delivery or pickup available.
GLD$2,000 (.40%)No. Bars are owned and allocated by the trust.No.No.
IAU$1,250 (.25%)No. Bars are owned and allocated by the trust.No.No.
PHYS$1,750 (.35%)No. Bars are owned and allocated by the trust.No.No.
SGOL$1,950 (.39%)No. Bars are owned and allocated by the trust.No.No.
OUNZ$2,000 (.40%)No segregated storage but conversion possible for delivery at 7% fees.No.Yes, if you are willing to pay pricey conversion fees assuming they have your desired metals available.

You can see what value this physical vault storage represents. This is especially the case for the American Bullion, and Advantage Bullion companies which offer flat storage fees for only $150 regardless of how many ounces or kilograms of bullion in gold or silver you hold. Look at the comparative costs for $500,000 of silver in this second table and you will see where even the greater value lies:

Method of
Yearly Costs
$500k Silver
Storage of
Vault Location
Bank Safety
Deposit Box Storage
(Local Bank)
$200 FlatDelivered bullion is the same as stored bullion.Hometown local bank storage.Any size or amount with no withdrawal fees. Pickup only.
Segregated Silver IRA Vault Storage$150 FlatDelivered bullion is the same as stored bullion.IRS requirements mean silver must be stored in the U.S.Any size or amount with no withdrawal fees. Delivery or pickup available.
SLV$2,500 (.50%)No. Bars are owned and allocated by the trust.No.No.
SIVR$2,250 (.45%)No. Bars are owned and allocated by the trust.No.No.
ZKB$3,000 (.60%)No. Bars are owned and allocated by the trust.No.No.
PSLV$2,250 (.45%)No. Bars are owned and allocated by the trust.No.No.

Remember too that the choice to go with physically owned gold or silver which you have stored in segregated and insured foreign or domestic vaults eliminates many problems common to the majority of the gold and silver exchange traded funds. These include:

  • Inability or at the very least difficulty in obtaining physical possession of your precious metals
  • Complicated banking regulations and easily traceable banking transactions
  • Imperfections of the ETFs in fully matching the moving price of gold and silver in the short to medium time frame
David Crowder
David Crowder

W.D. Crowder is an American published author. His background and areas of expertise include history, economics, expatriate living, international relations, investments and personal finance. A widely read and top of his class graduate of Stetson University, he obtained his bachelor of arts degree in History with minors in Latin American Studies and International Relations and a special emphasis in Economics. He was President of his Phi Alpha Theta (National History Honors Fraternity) Stetson University chapter and a Phi Beta Kappa (National Honors Fraternity) member.

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