Introduction
Are you looking for a secure, budget-friendly way to invest your hard-earned money and protect your wealth? You’re not alone. With the current economic uncertainty looming over us, from the Israeli–Palestinian conflict to the ever-growing inflation, many are turning to gold investments as a safe-haven.
For centuries, gold has been considered a reliable way to preserve your wealth. But nowadays, there are several ways to invest in this precious metal. So, the real question is: which type of gold investment is the best for you?
If you are feeling a bit lost when it comes to choosing between physical gold and ETFs, this guide is just for you. We will walk you through the differences, compare the benefits, and help you decide which might be the best choice for your investment goals.
What is physical gold?
Physical gold refers to tangible gold items like coins, bars, and jewelry. You can physically hold these assets in your hands, store them in a safe, or even wear them. Unlike intangible assets like stocks, gold is tangible, providing you with greater security and control over your investments.
This precious metal has been considered a valuable asset for centuries, dating back to ancient civilizations. Its ability to serve as a store of value, especially during times of economic uncertainty, has made it a favorite among investors looking to protect their wealth from devaluation or loss.
By incorporating physical gold into a diversified investment portfolio, you can easily save your money and multiply your wealth over time, enhancing your overall financial security.
Properties of physical gold:
- Rarity: Gold is a rare element found in the Earth’s crust, making it highly valuable.
- Durability: One of the greatest properties of gold is its durability. It’s highly resistant to corrosion, oxidation, and tarnish, preserving its luster over time.
- Malleability: This precious metal can easily be shaped into a variety of forms without breaking, making it ideal for coins and jewelry.
- Density: It is a dense metal, meaning it has a high mass for its size.
- Beauty: Gold is one of the most beautiful precious metals in the world, with a distinctive, shiny yellow hue that has long been admired.
What are gold ETFs?
Gold ETFs, or exchange-traded funds, are financial products that track the price of gold. When you invest in a gold ETF, you don't own physical gold. You own shares in a fund that represents gold assets.
Unlike physical gold, these funds are traded on stock exchanges, making them easily accessible. Each share of a gold ETF represents a specific amount of gold, usually one-tenth of an ounce.
However, while gold ETFs are easy to obtain, investors should be aware that fees, including management fees and expense ratios, can impact returns. Not only that, you also need to consider possible tracking errors, which measure how closely a fund's performance aligns with the underlying gold price. A higher tracking error, for example, means the funds may not accurately reflect gold price movements, making gold ETFs less reliable than physical gold.
Types of gold ETFs:
- Physically-backed ETFs: These exchange-traded funds hold physical gold as their underlying asset. This means that for every share of the EFT, there is a corresponding amount of gold held somewhere in a vault.
- Unbacked ETFs: This type of fund does not hold any physical gold, but instead uses other types of financial instruments (like futures or options) to track the price of gold.
- Leveraged ETFs: These ETFs use derivatives to amplify the impact of gold price fluctuations on their returns.
Should you invest in gold?
Yes, you should definitely invest in gold! It is the perfect investment for anyone looking to benefit from its long-term appreciation potential.
Throughout its millennial history as a form of currency, gold has always been a highly valuable commodity. The Egyptians considered it to be the “flesh of the gods”, while the Romans believed it was created by the gods themselves. This reverence for gold has persisted to this day, making it a symbol of wealth, power, and status.
Just in the past twenty-four years, gold has demonstrated a remarkable surge in value, appreciating by more than 800%! This impressive growth is particularly evident during times of economic uncertainty and heightened industrial demand, much like the current global landscape.
For instance, the price of gold has skyrocketed from approximately $300 per ounce in 2000 to over $2,400 per ounce in 2024, effectively demonstrating its ability to safeguard purchasing power against inflation. This growth only solidifies gold's reputation as a reliable wealth-preservation asset.
There are a lot of benefits to gold that make it a compelling investment option:
Benefits of investing in gold
- Diversification: Gold makes an excellent addition to your investment portfolio! By allocating between 5% and 35% of your portfolio to gold, you mitigate the impact of market fluctuations.
- Inflation hedge: Gold is an amazing hedge against inflation. It's one of the most valuable assets you can own in times of rising prices because when the purchasing power of currency declines, gold maintains and even increases its value.
- Safe-haven asset: This precious metal is often seen as a safe-haven asset, providing a store of value during economic turmoil (inflation, rise in cost-of-living) and geopolitical uncertainty (the Russia-Ukraine war, the China-Taiwan conflict). Often when other assets are volatile or declining, gold becomes a savior for investors looking for refuge.
- Limited supply: Gold is a finite resource, meaning its supply is limited, contributing to its value over time, particularly as the demand increases. This scarcity is also one of the reasons why the sooner you invest, the better.
- Tangible asset: Unlike stocks or bonds, physical gold is tangible! This means you can hold it and enjoy its beauty firsthand.
Physical gold vs. ETFs: Key differences
So, you’ve decided to invest in gold but you’re unsure whether you prefer physical gold or ETFs. We’ve got you covered. Before you make your decision, it’s important for you to fully understand the nuances between the two. Here is a complete breakdown of their differences.
Cost comparison
Physical gold
While buying physical gold might have some upfront costs, these are outweighed by the benefits of owning a tangible asset that you control. Storing it securely gives you peace of mind, and the long-term value of gold often justifies the initial expenses. Plus, once purchased, there are no ongoing fees, making it a straightforward investment.
ETFs
Gold ETFs are cheaper in the beginning, but they have ongoing fees that can reduce your returns over time. Unlike physical gold, where costs are mainly upfront, ETFs require continuous payments for management and other fees.
Liquidity
Physical gold
Physical gold has a high liquidity rate, as it’s highly desirable. In general, selling physical gold can be a straightforward process, with various options available, such as dealers, pawnshops, and online forums. While it might require a visit to a local dealer or shop, this allows for direct negotiation and potential premiums for certain pieces, like coin collections or jewelry.
Additionally, holding physical gold provides immediate access to your asset, without relying on market trading hours or third parties.
ETFs
Gold ETFs offer the convenience of trading on stock exchanges. However, their liquidity is restricted to market hours, limiting when you can sell. While they can be quickly converted to cash during trading hours, you're subject to the current market conditions.
Unlike physical gold, you don't have a tangible asset in hand, which could be a drawback for those who value direct ownership.
Maintenance
Physical gold
Owning physical gold puts you in control. You decide where to store it, whether it's a safe deposit box or a home safe. This means your gold is always secure and accessible to you. Having that direct control gives you peace of mind and a sense of ownership.
ETFs
With gold ETFs, someone else takes care of storing the gold. This is convenient, but it also means you rely on others to manage your investment. While this can be nice, it might not feel as reassuring as having your gold in your own hands.
Risk analysis
Physical gold
Owning physical gold eliminates the risks associated with paper assets and digital investments, as it is immune to inflation, cyber-attacks, and digital fraud. This makes it a secure physical asset, as long as you have a safe place to store it. Not only that, but it provides direct control over your wealth, free from the influence of financial institutions.
ETFs
Gold funds carry a variety of market risks, including price fluctuations and potential loss of value, especially in volatile market conditions. While they can’t be physically stolen, they are at higher risk from cyber-attacks and digital fraud.
Investment size
Physical gold
Gold is sold in many different sizes. The most common form is coins that contain .9999 pure gold. Always strive to obtain .9999 24 carat fine gold because this is the most liquid and pure form on the market. This allows you to gradually build your gold collection with finesse.
ETFs
Gold ETFs are bought in units, with each unit representing 1 gram of gold. You can invest in fractions of a gram, so you don't need a lot of money to begin. However, ETFs may not give you the same feeling of ownership or security as physical gold, also not sure if the proclaimed gold is really stored in a vault. Remember, if you don’t hold it you don’t own it.
Accessibility
Physical gold
The convenience of online shopping has extended to the world of precious metals. Reputable online platforms like Premium Gold offer valuable gold products, like collectible coins, allowing you to invest in gold with just a few clicks. Platforms like ours provide buyers with secure payment options, insured shipping, and detailed information about the gold's purity and provenance.
ETFs
Gold ETFs are easy to buy through online brokerage accounts. This makes transactions quick and easy at the beginning. However, this convenience means you have less direct involvement with your investment and you don’t know what happens there especially in times of financial crisis when a lot of brokerage firms go bust.
Taxes
Physical gold
When you sell physical gold, you might need to pay only the capital gains tax. However, this can be good if you hold it for a long time. The tax rates can be lower over time, especially if you plan to pass the gold down to your family or sell it when you retire, and your tax rate is lower. Owning gold can be a financial investment and a family heirloom that you can manage carefully.
ETFs
Gold ETFs also have capital gains tax. They might be more flexible in managing tax payments. However, using complex strategies like tax-loss harvesting requires active management and may not be as simple as holding physical gold. The tax rules for ETFs can be more complicated and may not be a good choice for all investors. Also, you can lose all your investment if you are playing with leverage.
Long-term outlook
Physical gold
Looking ahead, gold's continued growth trajectory looks promising. With an estimated average annual growth rate of 10%, the price could potentially reach $12,000 per ounce by 2036 and $20,000 per ounce by 2048. This projection only reinforces gold's reputation as a resilient investment choice, supported by historical precedent and future potential.
ETFs
ETFs have potentially high returns. However, their performance is highly influenced by market conditions, ETF structure, and other factors. It's important to choose ETFs carefully and consider your investment goals if you decide to invest in them.
Gold ETFs vs. physical gold: Which is a better gold fund?
Now you know everything there is to know about physical gold and exchange-traded funds. All that’s left is to choose which one you want to invest in. If you’re still not quite sure which you prefer, here is a quick comparison of the pros and cons:
Physical gold
Pros: Tangible asset with intrinsic value, long-term stability, global recognition, privacy and control, safe-haven asset, historical significance, effective inflation hedge, rarity, and scarcity.
Cons: Requires secure storage and maintenance.
Gold ETFs
Pros: Lower entry cost, greater accessibility, no need for physical storage or security.
Cons: Dependent on market performance and fund management, less tangible, subject to fees and expense ratios, lack of tangible ownership, may involve counterparty risk, subject to tracking errors.
Final words
Physical gold remains the reigning champion among gold investment options. While ETFs offer convenience, they often come with a ton of fees and tracking errors that can erode returns.
Additionally, by investing in physical gold, you're not just diversifying your portfolio; you're also gaining a real asset, one that you can actually hold. Unlike ETFs, which are just numbers on a screen, physical gold offers you a tangible sense of security and control.
Regardless of your choice, investing in gold is a strategic move that will protect your money from inflation, increase your wealth, and keep you safe in times of economic uncertainty.
So, are you ready to start your gold investment journey?
