Gold ETF vs physical gold: Which is a better investment?

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Gold acts as a store of value and a hedge against inflation. Historically, it has performed well in times of economic turmoil and uncertainty. During the 2008-09 financial crisis, gold prices surged as much as 25% while the US stocks crashed. Well-known investors including Ray Dalio of Bridgewater Associates have said that every investor should have at least a little exposure to gold in their portfolio. There are a number of ways you can invest in gold, including gold ETF and physical gold. In this gold ETF vs physical gold comparison, let’s check out their pros and cons to see which makes a better investment.

Gold is a highly volatile investment, and it doesn’t have a growth potential. One gram of gold will remain one gram even after years or decades. So, you shouldn’t allocate more than 5-10% of your portfolio to the yellow metal.

In times of economic uncertainty, investors large and small turn to gold because it’s considered a ‘safe haven’ investment. That’s why the demand and price of gold jumps during difficult economic conditions. If our existing economic structure collapses and the paper money loses its value, gold could be used to facilitate trade.

Physical gold

Buying physical gold is an easy and straightforward way to invest in the yellow metal. You can buy jewelry if you like wearing them. People in some countries such as India are obsessed with gold jewelry. Or you can choose to invest in bullion, gold bars, coins, and medals.

You get access to physical gold that you can keep in your home or wherever you want. You own a tangible asset. But the costs and risks involved make physical gold a little less than ideal for investment purposes. The price you pay for jewelry includes design and making charges. And when you go out to sell it, you may be offered a lower rate than the prevailing market price.

Similarly, gold coins, bars, and bullion have a markup to their prices. The final price you pay to buy them will include the dealer’s profit and the cost of turning raw gold into a coin or bar. When you decide to sell it, the dealer may quote you a price below the spot price at the time. Then there is the risk of theft if you store it at home.

Gold ETF

An ETF or exchange-traded fund trades in the same way as an individual stock on a stock exchange. A gold ETF holds derivative contracts backed by gold or buys bullion on behalf of its investors. It closely tracks the gold price. It will go up and down depending on the movement in gold prices. One of the most popular gold ETFs is SPDR Gold Shares (NYSEMKT: GLD).

When you invest in a gold ETF, you won’t get a piece of gold delivered to your doorstep. You won’t get to own physical gold. You’ll own shares of the gold ETF just like you hold shares of an individual stock. If you sell your gold ETF holdings, you’ll get cash equivalent of the spot gold price at the time.

Gold ETFs have become increasingly popular over the years. There is no risk of theft. The brokerage charges for buying and selling gold ETFs are much lower than the markups on physical gold. And you can liquidate it pretty easily. You can buy and sell shares of gold ETFs just like you’d an individual stock.

Besides the small (or nil) brokerage fee, you’ll also have to pay an annual management fee if you invest in gold ETFs. The SPDR Gold Shares (NYSEMKT: GLD) has an expense ratio of 0.4%. Traditionally, larger ETFs have lower expense ratios. You can start investing in gold ETFs even with a small amount.

Which is better?

The price of gold fluctuates depending on the global economic situation. Buying jewelry or physical gold gives you access to a tangible asset that you can sell on the open market. But the added costs and the risk of theft don’t make it as good an investment as gold ETFs.

On top of that, the convenience and liquidity in buying or selling gold ETFs is greater vs physical gold. Investors can buy and sell ETFs even in small quantities.

There is no risk of purity with gold ETFs such as SPDR Gold Shares. They are backed by the price of pure gold. When buying physical gold, you always have the question of purity in mind. Also, the physical gold prices differ from jeweler to jeweler. The pricing of gold ETFs is much more transparent.

If you do want to buy physical gold, you should purchase it from a trusted source such as the US Mint. If you want to add some gold to you portfolio, the gold ETF makes far more sense than owning physical gold.

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About the Author

Vikas Shukla
Vikas Shukla has a strong interest in business, finance, and technology. He writes regularly on these topics. - He can be contacted by email at vshukla@valuewalk.com or on Twitter @VikShukla10

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