Physical Gold or Gold-Backed ETFs: The Pros and Cons

Gold has long been favored by investors looking for a safe haven from economic uncertainty and a way to diversify their portfolios. Gold exchange-traded funds or Gold-Backed ETFs were created as an alternative way for investors to gain exposure to the precious metal.

In this article, we’ll cover the pros and cons of gold-backed ETFs vs. investing in the physical precious metal.

What Is a Gold-Backed ETF?

A gold-backed ETF is an exchange-traded fund that allows investors to gain portfolio exposure to gold without buying, storing, and selling the precious metal. The company offering the fund buys and stores gold bullion itself — usually through a trust — and allows investors to buy shares on the stock market as they would the shares of a company. Each share corresponds to a certain number of gold bars held by the company. Typically, the fund’s value rises or falls with the price of gold.

Here in the U.S., the most popular gold-backed exchange-traded fund is the SPDR Gold Shares ETF (GLD).

Like physical gold, gold-backed ETFs can be held in an individual retirement account (IRA).

In addition to gold-backed ETFs, there are other ETFs that invest in companies in the gold mining sector. These funds have added risk because they’re based on company performance, which is more likely to be volatile than the value of gold.

Why Invest in Gold-Backed ETFs?

ETFs are relatively liquid and easy to trade. Working with a brokerage service, you can efficiently buy and sell shares of gold ETFs online without storing physical gold.

Physical Gold vs. Gold-Backed ETFs: Key Differences Explained Buying and Selling

Typically, it’s easy to buy and sell both physical gold and gold-backed ETFs. ETFs trade just like stocks on the NYSE Arca exchange, which was created specifically for ETFs. You can buy and sell shares throughout the day online.

On the other hand, physical gold can be purchased from various sources, including government and private mints and precious metals dealers.

It’s also easy to find a buyer for physical gold — especially if you use a trusted precious metals dealer.

A trustworthy precious metals dealer will offer you a fair price based on the current price of gold. On the other hand, any return you’ll receive when you sell an ETF will be based on the current price of the ETF — which could differ from the price of gold.

Storage

When you buy shares of a gold-backed ETF, the company offering the fund stores the precious metal on your behalf. However, you will pay an annual fee to cover storage and maintenance costs.

When you buy physical gold, you’ll need to find a secure place to store it. This could be a top-of-the-line safe, a bank safety deposit box, or a firm specializing in storing precious metals. Storage costs vary by method.

Stability

One of the advantages that physical gold has over a gold-backed ETF is its stability and independence from currency.

Like other stock market assets, gold-backed ETFs are still subject to market volatility. They’re also directly tied to the value of the exchange currency.

Conversely, gold’s value over the long term has always been independent of stock market risk and currency fluctuations. That’s what makes gold such an effective hedge against inflation and other currency risks.

Physical Gold Pros and Cons Pros:

• Timeless hedge against inflation and economic crisis
• Can be passed on to other family members
• Used to pay for goods and services
• Tangible and private
• Liquid — easy to trade

Cons:

• Must be safely stored
• Additional expenses for storage and insurance

Gold-Backed ETF Pros and Cons Pros:

• Storage and insurance are not needed
• Increased liquidity
• No shipment of physical product

Cons:

• You don’t physically own the gold
• The fund may not correctly track the price of gold
• Annual maintenance fees that can deteriorate your funds over time
• Stock market risk and volatility

How To Invest in Gold

You can buy physical gold from a variety of outlets, including:

• Precious metals dealers
• Government mints
• Private mints
• Coin collectors
• Pawn shops

Gold and silver dealers are among the most reputable options for buying physical gold. Many will allow you to purchase gold over the internet or phone and ship the gold directly to you. Look for a dealer that offers attentive customer service that can help guide you through your first physical gold purchase.

How To Invest in Gold-Backed ETFs

To invest in a gold-backed ETF, you can use an online stock broker service. You may have to pay commissions of up to $25 per ETF trade to the broker. In addition, you may also have to pay annual maintenance fees to the company issuing the fund shares.

You’ll also have to determine which ETF is suitable for you. Several ETFs trade on the NYSE Arca exchange, including SPDR Gold Shares, the first gold-backed ETF in the U.S.

Physical Gold vs. Gold-Backed ETF: How To Know Which Is Right for You

The choice to invest in physical gold or a gold-backed ETF largely boils down to this question: Why do you want to invest in gold?

If you are more interested in gold as a quick trade than a long-term way to store and generate wealth, an ETF may be better suited to your needs.

If you want to invest in gold for the long term — even over generations — and benefit from its qualities as a hedge against economic and geopolitical uncertainty, physical gold ownership is the clear choice. Physical gold is an effective way to diversify your portfolio and has been a proven method of preserving and building wealth for centuries. Call us to learn more.

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