Gold is one of the investments that continues to prove its reliability over time. Amongst all the precious and semi-precious metals, it continues to be the most popular by far. This also makes it an excellent method for careful investors to reduce the risk level of their portfolio.
If you are thinking about investing in gold or looking for ways to increase your overall gold exposure, there are a variety of options. The two most popular come down to either owning physical pieces of gold or investing in a gold exchange-traded fund, also known as a gold ETF.
In order for you to own physical gold, you will need to go through a process carried out by a licensed precious metals dealer. This will also involve implementing measures for securely storing the physical gold yourself or finding a service to do it.
A gold ETF on the other hand is a type of mutual fund which can be traded on the stock exchange just like any other mutual fund. There are some gold ETFs that invest directly in the precious metal, and some that simply follow a gold index, or a specific group of companies who specialize in things like gold acquisition or large-scale gold mining companies.
Don’t be cavalier about jumping into any gold ETF in hopes of quickly improving your gold exposure. Take the time to carefully read the description, which is sometimes called a prospectus any gold ETF you are considering. Make sure that it’s the investment type you prefer.
The types of ETFs that directly invest in gold are often easier to use than the sometimes complex and often arcane process of buying gold through an authorized dealer. When you buy shares in this type of gold ETF, that specific value of physical gold directly purchased through the fund. It is then stored by their contracted custodian. It essentially allows you to invest in physical gold without directly owning any.
There are advantages and disadvantages of physical gold as well as gold ETFs. Taking a closer look at their strengths and weaknesses can help you choose which one is right for you and your investment strategy.
What Are The Benefits Of Owning Physical Gold?
Gold has a strong history of holding its value, especially in times of large-scale economic distress. This means it is an especially solid investment which also makes a great hedge against times of inflation. Gold’s price per ounce does occasionally fluctuate, yet it rarely takes a major nosedive, and it won’t be devalued throughout the global market.
Investing in physical gold also puts you in the driver’s seat when it comes to directing your investment. You aren’t blindly trusting a firm or a custodian, which is often the case when you invest in a gold ETF. It’s in your hands to choose how it is stored and secured.
Any time you sell or liquidate a gold ETF, that information is immediately transmitted to the government by the brokerage and must be accounted for in your tax documentation. When you sell gold bullion, bars or other forms of physical gold you must also report the capital gains on your income tax return.
What Are The Cons Or Owning Physical Gold?
The more common forms of physical gold like bullion, bars, and gold coins, that are stored in your home increase your risk of losing your investment to basic theft. Securing your gold properly in a depository run by a servicer also costs money. You will also need to insure your gold, which is yet another additional cost. These factors all mean that you are paying more for your gold than you would if you allocated your gold exposure to an ETF.
With certain gold collectibles, there is also the increased cost of making sure it isn’t a counterfeit. There might be other costs incurred with things like ensuring its purity. With some high-value numismatic gold coins, you might also need to spend additional money on security and insurance.
Later on down the line, if you decide to sell your physical gold, you will also need to pay a dealer’s fee. This will be based on a set percentage amount of the sale.
All these things ultimately mean that you are getting less total value per unit for any physical gold you own.
What Are The Benefits Of Gold ETFs?
A gold ETF is a very convenient way to improve your gold exposure, without all the security and insurance issues that come with owning physical gold. Your investment makes gains based on market price increases just as if you bought and sold the precious metal.
At any time you can sell off some or all of your gold ETF shares. With an ETF you complete a transaction online with little more than the simple click of a button, without the hassles of securing a dealer and paying fees.
A gold ETF can also be integrated into an IRA, but since the IRS considers gold as a type of collectible, it is only suitable for a self-directed IRA.
What Are The Cons Of A Gold ETF?
When you invest in a gold ETF, you never actually own the physical gold and when you liquidated it you are paid that amount in cash, not physical gold.
A gold ETF can also come with some inherent risk in that you are essentially trusting a fund manager to take care of your investment and to make sure that it is properly insured.
A gold ETFs also has a very small amount of management expense, which means you will be paying someone a small fee to take care of your gold.
Trying to decide between actual gold and a gold ETF? Consider your end-goal and not only the potential earnings.
Making Your Choice Between A Gold ETF And Physical Gold
While there are many similarities between owning physical gold and owning a gold ETF there are different reasons for investing in them. There are many individuals who invest in both. Just make sure to take your time to weigh the benefits of each type of gold investment and factor them into your specific needs and goals.