Investors have multiple options when it comes to gold investments. Some popular ways many investors use to add gold in their portfolios is directly owning physical metal, gold mutual funds, gold futures or options, exchange trade funds and various other vehicles. Every option has advantages and disadvantages and ultimately, the option you choose comes down to your portfolio needs along with temperament for risk.
That said, two of the most popular ways to invest in gold is through ETFs or ownership. Both ways are quite efficient for adding gold to your portfolio. However, they serve completely different purposes.
Gold ETFs (Exchange Traded Funds)
ETFs have become quite popular as of late, mainly because of their low management fees, transparency and liquidity. Exchange traded funds are structured as forty act funds and are a mutual fund type that trades on the stock exchange, just like regular stocks. Typically, ETFs provide investors exposure to a wide range of securities, oil futures, foreign currency and gold.
Silver and gold ETFs offer people the opportunity to make gold investments without the worry of storing or handling the physical gold. Therefore, whenever gold begins trending, they provide gold exposure in low cost vehicles which can be sold or purchased intraday, just like a stock.
The most popular and highest traded gold ETF is called GLD and it is structured in the form of a trust and the World Gold Council sponsors it. The council intends to reflect gold’s price performance by holding bars of gold and issuing shares that are backed by their physical metal holdings. These bars are present in the London vault of the HSBC.
One of the biggest pros of ETFs is that they let investors make gold allocations for the portfolio even if they do not purchase physical coins or bars. While this seems like an efficient option for most investors, there will be some who have difficulty accepting that the shareholders at ETF don’t have any redemption rights, meaning that the investors are not the actual owners of the gold. Instead, they own an asset that is backed from gold.
While there is no denying that the gold bars actually exist, investors cannot simply get them simply by knocking on the door.
Direct Physical Ownership
You can buy physical gold in different forms like coins, bars and jewelry. Investors often look for gold coins, mainly because the coins value is directly correlated to the gold’s spot price. The most universally recognized and easily traded coins these days are bullion coins. Premium coins like the Liberty head nickel, Barber dime or the Saint-Gaudens double eagle usually have the highest market value because of how rare they are. This also adds to the coin’s gold content.
Collector coins like these are quite limited and are highly rated by renowned entities like the PCGS (Professional Coin Grading Service.) For those who don’t know, the PCGS grades coins according to their rarity and condition.
Similar to the ETF, owning gold directly offers and investment hedge against rising rates and inflation and it even goes a step further as direct gold ownership gives investors complete control over their investments in gold. The gold is locked inside a safe and in the possession of the investor and it is a tangible asset that owners can use according to their preference.
Define the Purpose of Your Investment
Owning gold physically is vastly different from owning gold ETF. Surprisingly, a large number of investors own both options for a variety of reasons. One must closely observe their portfolio along with their strategy to understand whether they want to own physical gold, which is the tangible option of if they prefer exposure to an electronically traded asset. Opting for the latter option means that they will not have the commodity’s possession.
The Case for Physical Gold
The term used for buying precious metals is “buying physical gold.” One may invest in bullion and gold and collect it physically. Gold bars, coins and jewelry are among the most well known objects many people exchange. The weight and purity of the gold bullion are mainly used for determining its overall worth.
As far as gold bars and coins go, they either have a making value or a face value. Besides the metal melt value, this value is the main determinant of their rate. When it comes to jewelry, most of the goods are made with seventy to ninety percent pure gold. The rest of the gold’s portion is made up from metal alloys, which helps to make sure the structure remains stable.
When someone buys gold jewelry, they are charged for the gold as well as its craftsmanship. Other costs related to the ownership of gold include shipping, making fees and insurance. What’s more, if you order gold from a small store, you may have to pay a proxy fee.
Benefits of Physical Gold
- Since gold is a precious metal, it is an excellent inflation hedge. During times of regional and economic uncertainty, investing in physical gold is most definitely worth the upkeep and expense. This precious metal is adaptable because gold’s actual value doesn’t change too much with time.
- Purchasing gold gives you complete control over your investment, which may not be the case with gold mutual funds. Since the arrangement between the gold investor and dealer is completely transparent and usually doesn’t have any hidden fee, more people choose this option.
- The taxes are directly paid with the help of gold backed investments. More importantly, entities like the government do not have too much authority over it.
Cons of Choosing Physical Gold
- Crimes like robbery and theft are quite possible if you own physical gold and you could lose your complete investment, especially if you don’t have insurance.
- Extra expenses like insurance interest and annual storage charge are vital for those who own physical gold.
- Sometimes, physical gold can be face and may even have a high initial cost. This could clash with an investor’s personal circumstances.
Why Consider Investing In Gold
Take charge of your physical possession: As mentioned earlier, when you invest in gold, you can have it in physical form. It can be in the shape of coins, bars or even ornaments.
Ideal for Emergency Situations: An assets value tends to vanish whenever there is an economic or market crash. However, the value of physical gold usually remains unchanged. Therefore, those who invest in gold can remain safe during times of financial turbulence. Unlike physical gold, ETFs do not provide these advantages, which is why more people choose physical gold.
Total control over your Wealth: When an investor has physical gold, they can decide when to sell it. They are responsible towards their asset and have complete control over it.
How Gold ETFs Work
Every Gold ETF unit represents a gram of gold and its purity is just a little less than 99 percent. Physical gold is kept in vaults belonging to custodian banks and operates as the underlying, which is used by the units to determine value.
For instance, if AMC allots every unit of gold the value of one gram the price of every unit will approximately be the same as rate of one gram of gold. You will come across a wide range of investment funds that allow consumers to perform gold trading in ETFs.
Risks Associated with Gold ETF Investments
Fluctuation: As an investment option, gold has an exceptional history of remaining stable and even growing whenever the economy is not stable. If anything, many investors have been using it for hedging purposes against inflation. However, if the economic scenario of where you live is stable, gold ETF investments may not be ideal.
There is a time Limit: There is a time limit you have to follow when you are performing trades on the stock exchange. This can cause a great deal of difficulty when trading metal electronically. On the other hand, you don’t have to worry about any time limit when trading physical gold.
Expense ratio fee: The AMC charges this fee and adds it to the cost of purchase for making sure the fund functions smoothly. This ratio includes charges for the payments that cover employee salaries, record retention and various other allocated expenses. Such costs are not associated with direct equity investments and physical gold.
