Physical Gold versus Gold ETF
06/08/2023Daniel Fisher
ETF vs physical gold hinges on an investor’s needs. ETFs, traded on stock exchanges, offer ease of trade, cost-efficiency, and lower entry points, suitable for those seeking liquid and low-maintenance exposure to gold prices.
Physical gold, a tangible asset with no counterparty risk, is an excellent inflation hedge and offers potential tax advantages. It’s ideal for those seeking a long-term, stable investment and a wealth legacy. The choice depends on an investor’s risk tolerance, objectives, and preferences.
There’s an old saying – it’s not what you do; it’s the way that you do it! This holds true when it comes to gaining exposure to gold and silver. You have an array of investment options – the outcome, however, may be completely different from one to another. The most common ways individual investors engage with a gold investment are:
- Purchasing physical gold bullion, actual gold bars or gold coins
- Buying shares in a gold exchange-traded fund (ETF) like SPDR gold trust
- A traditional fund or gold mining stocks
- A riskier option such as spread betting, futures or contracts for difference (CFD) on online trading platforms
Comparing The Different Ways To Invest In Gold
Advantages
Disadvantages
Derivatives (Futures, CFD, Spread Betting)
Potential for very high gains due to leveraging
Speculative. Can be very complicated and high-risk. Could lose more than originally invested.
Mining Company
Potentially higher gains than the price of gold or silver with possible annual dividends.
Counterparty risk. Potentially high risk & returns may rely on new mines coming online, which may take years.
Fund
Well-established, easy to access & well regulated. Could smooth downside volatility, as not all assets are invested in physical gold or silver.
Counterparty risk. Gains and losses could be larger than fluctuations in the gold or silver price. Annual management charges. Usually, they don't hold gold or silver as physical assets. Will be invested more generally in precious metals
ETF
Relatively cheap, fast and easy to buy and sell. Could smooth downside volatility as not all assets are invested in physical gold or silver.
Counterparty risk. May not be fully physically backed. Difficult to take personal delivery of gold or silver. Gains and losses could be larger than changes to the metal price. Annual management charges.
Physical Gold And Silver
No counterparty risk. A tangible asset with an intrinsic value.. UK coins are Capital Gains Tax-free.
Relatively expensive. Premium at purchase. On-going storage. Possible insurance costs.
Gold ETF, fund or physical gold. Which option is best for me?
The choice will depend on your objectives, risk tolerance, and the current price of gold.
For instance, if you have a high appetite for risk, you might fancy your luck investing in a mining company where the performance of an individual mine can significantly impact your return on investment.
Alternatively, if you’re looking to actively trade the market, then electronic options such as ETFs or digital gold on online platforms are the most efficient way to achieve short-term speculation.
Benefits
Physical Gold
- No Counterparty Risk: When you own physical gold,. you’re not dependent on another party’s ability to fulfil contractual obligations.
- Inflation Hedge: Gold has traditionally been seen as an excellent hedge against inflation. When fiat currencies lose value, the price of gold tends to rise.
- Tangible Asset: Gold bars, gold coins, and gold jewellery provide you with a tangible asset you can hold in your hand. Unlike digital or paper gold, a computer glitch can’t erase physical gold.
- Value can rise more than just the gold price: Investing in gold coins can provide higher profits as premiums can increase with scarcity and collectability.:
- Tax Efficiency: Certain types of gold, such as investment-grade gold coins, are exempt from VAT and CGT, making them a tax-efficient investment.
- Legacy and Inheritance: Physical gold, in the form of gold bars or coins, is a tangible asset that can easily be passed down through generations, creating a lasting legacy.
Traditional Fund or Gold Mining Stocks
- Profit Potential: If the mining company strikes gold or increases efficiency, its stock may rise, offering potentially substantial returns.
- Diversification: With a gold fund, you’re not just buying one company but a collection of different companies, which can offer better risk management.
- Dividends: Unlike physical gold or ETFs, some gold mining stocks pay dividends to their shareholders, providing an additional income stream.
- Ease of Trading: Like ETFs, shares of mining companies can be bought and sold on the stock exchange through brokerage firms, providing liquidity.
- Simple to Value: Being an electronic fund means that buy and sell prices are usually accessible on a 24/7 basis online so you always know the value of your holding.
Gold ETF
- Liquidity: Gold ETFs are traded on stock exchanges like individual stocks. That allows you to buy and sell your holdings at the market price throughout the trading day on online trading platforms.
- Diversification: Gold ETFs offer a form of gold that can diversify your investment portfolio. These financial instruments traded on the stock exchange can also be used to diversify a gold investment portfolio.
- Cost-efficient: While physical gold can incur storage and insurance costs, the expense ratio of gold ETFs is often less. ETFs eliminate the need to safeguard physical gold, leading to cost savings.
- Transparent Pricing: ETFs are traded at market prices that are easy to track, providing transparency to investors. This 24/7 quoted value encourages large money managers to invest in the market.
Risk
Now that you’re aware of all the benefits, you should also consider the potential risks that come with different investments.
The most potent benefit offered by gold and silver is balance and protection. Professional traders and everyday people buy gold and silver to hedge against inflation and REDUCE their overall risk. But that doesn’t mean that investing in gold is risk-free.
Electronic and paper options like ETF shares or gold-related assets expose investors to gold prices but also present additional counterparty risk. This can undermine the value of gold & silver as an inflation hedge or as portfolio insurance in the first place. Investment experience should also play a role in deciding which type of gold investment to opt for.
Riskier options like derivatives should be left alone by most people as they’re more suitable for experienced investors. If the market moves against you, the amount you lose isn’t just limited to your original investment due to leverage.
Physical Gold Coins And Bars
Risks specific to investing in gold coins and bars mainly relate to safeguarding. While keeping your gold coins at home is satisfying and provides direct control, it also exposes your investment to theft risk.
This danger can be reduced by keeping knowledge of ownership to yourself. Store your gold in a secure home safe, ensuring their value is insured or elect for professional vaults to minimise this risk completely.
The second risk is to unwittingly buy counterfeit gold. Unless you’re an expert, it can be difficult for investors to know if their gold is real. Always invest into physical gold products from well-known gold dealers with a track record, rather than buying from individuals from platforms like Ebay.
Gold Mining Stocks
Investing in gold mining stocks requires substantial research. Not only do you need to understand the gold market itself and the price of gold, but also you’ll need to examine the underlying mining company, its structure, and the ability of its management.
The performance of each particular mining stock relies heavily on their fixed and variable cost structure and location. If the gold price falls but their costs (such as wages and fuel) increase, then some mines may have to operate at temporary losses or decide to halt production.
Gold Funds
Going for a gold fund reduces the risk of depending on one mining company’s performance. However, your investment also depends on the quality and decision-making ability of the fund manager.
And remember, you’re still investing in a fund based on mining companies rather than gold itself. At the end of the day, your holdings in gold are represented by a piece of paper, not physical metal.
Gold ETF
A gold exchange-traded fund (ETF) can be a better way of gaining exposure to gold itself, but it, too, has certain risks. The fund may be leveraged so that the amount invested into the ETF isn’t necessarily backed up by the equivalent quantities of gold in bullion.
This means that if sufficient holders of the gold ETF wished to sell their ETF shares simultaneously, there possibly wouldn’t be enough physical gold to satisfy all those sales.
Need Help Putting Together a Physical Gold Portfolio?
Use our automated portfolio builder and see just how far your investment can go.
Cost And Tax Efficiency
The cost of manufacturing gold coins and bars means the price per gram of gold you pay, is more expensive than simply buying unallocated gold electronically on brokerage firm platforms.
Don’t forget though, that the value of real gold coins can rise at a faster rate than the underlying gold price. If supply of these coins is limited or demand increases due to scarcity or collectability, then the coins can be sold at substantial premiums.
However, there are other costs to consider with ETFs and gold funds. These electronic means of ownership will have ongoing management fees to pay which can stack up over the years.
Physical Gold needs to be stored and insured, which costs money, although an increasing number of investors are taking personal possession of their coins and bars to store cheaply at home.
A major factor commonly overlooked is tax efficiency. Investment-grade gold is VAT-exempt, and certain gold coins are also Capital Gains Tax (CGT) free, making physical gold investment fully tax efficient.
For the few per cent extra you pay when buying, you may well be saving up to 28% later when you sell at a profit.
CGT more important in 2024 and beyond
In 2024 and beyond, CGT is a prime target for the UK Government to raise taxes to reduce some of their furlough-induced debt. The two things you need to know for 2023/24 and upcoming years are:
- The annual CGT tax-free allowance halved in 2023 to £6,000. The allowance is scheduled to reduce further to £3,000 from April 2024. Speculation is that an investors tax-free allowance may be abolished altogether in the coming years. Increasing the rate that CGT is charged to match an investor’s income tax level is a possibility (up to 40-45% for some!). However, the rates have stayed the same for 2023/24.
Changes to the tax on capital gains are out of your control once you’ve invested in gold. Therefore, physical gold and silver coins are by far the safest way of providing long-term stability and remaining tax efficient.
They present the most secure method of protecting your family’s wealth tax-efficiently. Physical gold investment is also the most suitable way of passing wealth down the generations. Trust me, kids prefer to receive something tangible with real value, like real gold or physical assets, rather than a piece of paper promising worth. Thus, ounces of gold in the physical form, regardless of the purity of gold, can be a superior option for investors seeking an inflation hedge.
Buy Physical Gold Today - Browse Our Extensive Range Of Coins And Bars
Share this post on:
Latest Posts: