Gold ETFs vs. Physical Gold: Pros, Cons, & What to Know

There are many advantages to investing in gold exchange-traded funds (ETFs) as well as physical gold. The pros and cons of each are important when deciding which one to invest in.

Based on our over 40 years of expertise in precious metals, this guide will help you determine which asset is best for your portfolio based on your specific investment goals and preferences.

gold bars small

Gold ETFs are the most popular way for investors to speculate on future price movements in gold.

Why Invest in Gold ETFs and Physical Gold?

Investing in gold has long been a strategy for preserving wealth and withstanding economic uncertainties. Two popular avenues for gold investment are gold exchange-traded funds (ETFs) and physical gold. Both Gold ETFs and physical gold have proven to be valuable assets in the investment landscape. Both hedge against inflation and currency devaluation despite their fundamental differences.

The two largest gold ETFs are the SPDR Gold Shares (GLD) and the iShares Gold Trust (IAU). Another popular product is the Van Eck Gold Miners ETF (GDX), which is made up of companies in the gold mining sector. It's the most heavily traded ETF that tracks gold mining stocks. All of these gold derivatives are popular choices for investors who want exposure to gold without holding any physical metal.

Gold, known for its stability and historical store of value, attracts a diverse range of investors. As a globally accepted currency, gold’s value tends to rise as fiat currencies decline. Both ETFs and physical gold benefit primarily as investments from the spot gold price rising. In both cases the intrinsic value of gold helps protect the purchasing power of retail investors and investment funds alike.

However, the choice between Gold ETFs and physical gold depends on factors such as liquidity needs, storage considerations, and individual preferences. That’s why exploring the pros and cons of both investment options is important before investing.

gold ETF holdings

The first gold ETF was introduced as an investment product in 2006.

What Differentiates Gold ETFs from Physical Gold?

Gold ETFs: Gold ETFs investments track the price of gold and are traded on stock exchanges. These funds are designed to replicate the performance of gold without requiring investors to physically own and store the precious metal. Gold ETFs invest in gold-backed assets rather than theta commodity itself. Gold ETF shares can be bought and sold like stocks, providing investors with a convenient and liquid way to gain exposure to the gold market.

Physical Gold: Physical gold is the direct ownership of gold assets in the form of gold coins, gold bars or bullion, or gold jewelry. Investors can choose to hold real gold in their possession or store it in secure facilities such as bank vaults or private storage services. Physical ownership provides a tangible asset that can be held as a long-term investment or used for cultural and ornamental purposes.

The Pros & Cons of Gold ETFs

Gold ETFs offer liquidity, professional management, and cost-effective diversification, making them suitable for investors seeking convenience and flexibility. There are some risk factors with both leveraged ETFs as well as regular ETFs, and they are outlined in detail here. For specific tips on how to invest in Gold ETFs, check out our comprehensive guide.

Pros of Gold ETFs

Investing in Gold ETFs offers several advantages that make them an attractive option for a wide range of investors. Here are some of the key pros of investing in Gold ETFs:

  1. Liquidity and accessibility: Gold ETFs trade on stock exchanges, offering investors the flexibility to buy and sell shares throughout the trading day. This liquidity makes them highly accessible, allowing investors to enter or exit positions quickly. They are also usually eligible for inclusion in a Gold IRA, unlike some forms of physical gold.
  2. Cost-effective diversification: Gold ETFs provide an efficient way to diversify a portfolio without the need for large capital outlays. Investors can gain exposure to the gold market without incurring the costs associated with purchasing and storing physical gold. While there are fees associated with purchasing Gold ETFs, they tend to be minimal and affordable.
  3. Professional management: Gold ETFs are managed by financial professionals who actively track the price of gold and manage the fund's assets. This professional management can be appealing for investors who prefer a hands-off approach to their gold investments.

Cons of Gold ETFs

While Gold ETFs offer several advantages, investors need to be aware of potential drawbacks. Here are some cons or risks associated with investing in Gold ETFs:

  1. Counterparty risk: Gold ETFs involve counterparty risk, as investors rely on the financial institutions similar brokerage firms managing the fund. In case of financial distress or mismanagement, there is a risk that the value of the ETF may be affected.
  2. Management fees: Investors in Gold ETFs typically incur management fees, which can erode returns over time. While these annual fees are generally lower than actively managed funds, they still represent an ongoing cost for investors.
  3. Limited control over holdings: Investors in Gold ETFs do not have direct control over the underlying physical gold. Decisions made by the fund manager, such as changes in the fund's strategy or holdings, may impact investors without their direct input.

Only big banks can act as Authorized Participants for gold ETFs like GLD.

The Pros & Cons of Physical Gold

Physical gold provides tangible asset ownership, cultural significance, and a hedge against counterparty risk, making it attractive to those who value possession and long-term stability. But there are also some cons and risk factors to consider.

Pros of Physical Gold

Investing in physical gold, whether in the form of coins, bars, or jewelry, offers significant advantages that appeal to a range of investors. Here are some key pros of investing in physical gold:

  1. Tangible asset ownership: Physical gold represents direct ownership of a tangible asset. Some investors value the reassurance of having possession of their gold, whether held in a safe at home or stored in a secure facility.
  2. Store of value: Physical gold has a long-standing reputation as a store of value and is often regarded as a timeless asset with cultural significance. Gold jewelry, in particular, serves both as an investment and as a cherished possession. Actual gold and yellow metal holds it’s overall value well because of this.
  3. No counterparty risk: Owning physical gold eliminates counterparty risk, since there is no reliance on financial institutions or third parties. In this case, if a financial institution where you may have your gold invested goes under, that could pose a serious threat to your gold investment. But when you have full ownership of your gold, this is not an issue. This characteristic can be appealing during times of economic uncertainty.

gold bullion

Physical gold bullion typically comes in the form of bars or coins.

Cons of Physical Gold

While physical gold is valued for its tangible and historical significance, investors should carefully consider the associated challenges:

  1. Storage and security concerns: Owning physical gold requires secure storage. Storage costs and insurance costs can be prohibitive. Plus, often, there are additional costs for safe deposit boxes or professional vault services. There are also security concerns related to the risk of theft.
  2. Illiquidity: Selling physical gold can be a less liquid process compared to trading Gold ETFs on the stock exchange. It is subject to shifts in market trends what’s popular among gold collectors. The demand for different asset classes is lower and finding buyer for specific gold items may take time. The selling process may involve additional costs like paying a broker commission, for example.
  3. Transaction costs: Purchasing physical gold may involve transaction costs such as dealer premiums, shipping fees, and potential taxes. These costs can reduce the overall return on investment.

Consider All Factors Before Investing

The short answer to the question “Which asset is the better investment?” is that it depends. In the world of gold, the choice between Gold ETFs and physical gold ultimately depends on an investor's specific goals, risk tolerance, portfolio diversification, and preferences. Both provide a form of protection from inflation and currency fluctuations. Both are subject to long-term capital gains tax.

There are other options for gold investors which are also financial derivatives, such as gold mutual funds or trading gold futures contracts. Like ETFs, these investment instruments are "paper assets" that track gold price moves. Yet none of them are a claim of ownership on the underlying gold holdings.

In crafting an effective gold investment strategy, investors may find that a combination of both Gold ETFs and physical gold aligns with their financial objectives. By carefully considering the pros and cons of each option, individual investors can strike the right balance that suits their unique circumstances and preferences.

Whether opting for the ease of trading on the stock exchange or the tangible allure of physical possession, gold remains a timeless asset that continues to captivate investors worldwide. For more guides and articles on the topic of the gold and gold investment, check out the Gainesville Coins blog.

Written by Paulina Likos

Read more about investing in precious metals:

A Comprehensive Guide for Navigating the 2024 Gold Market

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