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Gold Investment: Physical Gold VS Gold ETFs?

In the 21st century, gold is valued as a currency, investment, and commodity. Gold Investment is popular among investors as it can be used as a hedge against currency devaluation, inflation or deflation, and it can provide economic and financial support during times of economic and financial problems. Gold’s market is highly liquid. There are a number of ways through which investment in gold can get exposure to this metal like holding physical gold (coins and bars) and exchange-traded funds (ETFs).

Gold Investment: Should I Invest In Gold Or Gold ETFs?

Physical Gold

Physical gold facilitates the most direct exposure to the precious metal. In its bulk form, it is referred to as bullion. It can be cast into bars. It can also be minted into coins. Bullion’s value is dependant on its purity and mass, more readily than a monetary appearance value.

Also read – Gold ETFs : More Than 100% Growth In The First Two Months Of 2012

If a gold coin is issued with its monetary face value, its market value is tied to the value of its fine gold content.

Physical gold can be bought from private mints, jewelers, government mints and precious metal dealers. Different sellers can offer the exact same gold item but at different prices. When physical gold is purchased by an investor, its full price is paid. Its ownership has a number of costs included, like insurance costs, markups, storage-related costs, and transaction fees. While making small purchases, processing fees and small lot fees are also included at times.  These costs might not remarkably affect an investor looking to invest a small portion of their portfolio in gold, the expenses might become prohibitive for investors looking to gain a larger exposure.

Gold ETFs

Gold ETFs can be purchased on margin, unlike physical gold. It means that investors only give a percentage of the investment’s value. Exchange-traded funds let investors get access to gold while facilitating the avoidance of the costs, the inconvenience of markups, storage costs and security risks of holding gold physically. Investors lose a percentage of their investment value each year to the fund’s expense ratio. The recurring annual fee charged by funds covering management and administrative costs is known as an expense ratio. For selling and buying an ETF, investors need to pay a commission. For an active trader, the commission usually goes up. Brokers typically charge a higher commission per trade for broker-assisted trades, automated phone orders and special order types. Some brokerages offer commision-free online trading for a specified suite of ETFs.

Also read – Difference Between Gold ETFs And Gold Saving Funds

In today’s world, there are more than a dozen gold-specific ETFs available like inverse and leveraged ETFs.

Gold Investment: Storage

Physical gold is stored physically. Investors have to find a storage place, which is costly. There is always a risk of theft– even at the time of transit.

Gold ETFs’ storage is taken care of by fund. They are backed by 99.5% of gold purity, which is assuring its quality. The ETFs are held in a demat account. Investors don’t need to bother about its security. International prices are followed for Gold ETFs, whereas pricing of physical gold is not uniform normally.

ETFs can be sold right away (only internet connection is required). Just like other mutual funds, money is automatically credited to your account– after the sale is realized. Meanwhile, it is a more complex process to sell physical gold.

The only counter to investment in Gold ETFs is the requirement of a demat account (where it is stored). But even if an investor doesn’t have a demat account, he/she can invest in funds (like Reliance Gold Savings Fund and SBI Gold Fund) which are investing in Gold ETFs.

Gold Investment: Physical Gold Or Gold ETF

Gold should be bought physically only when an investor needs it for immediate personal consumption and use. It is only for investment purpose, then an investor should buy gold ETFs. Due to the time lag, the design goes out of fashion for which an investor ends up paying 20-30% as making charges.

It is not a hassle-free process to buy gold. An investor needs to check its hallmark certificate for purity and also be physically involved in the whole long and tiring buying process. Meanwhile investing in gold via ETF is as simple as buying any other mutual fund. An investor can even buy as little as one gram of gold. The smallest piece of jewelry weighs at least 4 grams.

Regarding gold investment, ETFs is more economical. Gold in any form has a making charge which is charged above the market price of gold which is not in consideration when sold back. Also, jewelers buy back gold at a price of about 2-3% lower than the market rate.

Meanwhile, the only cost investors need to consider while buying gold ETFs is the fund management fee, which is an average of 1% only. Investment In Gold on physical investment concerns wealth tax and VAT. These don’t apply to gold ETFs.

Gold Investment: Gold ETFs Are A Better Option Than Physical Gold

At the end of the day (regarding gold investment), both physical gold and gold ETFs have their positive and negative aspects.

Physical gold comes with several issues like storage issues and theft. Gold holding is also a part of your wealth for wealth tax purposes. Even the returns are not hugely different than that of gold ETFs. Most gold ETFs follow the returns of physical gold in the international market.

Gold ETF is highly liquid. It is just a click of a button away, and the money gets transferred to your bank account. It is backed by a real gold holding by the fund house. Gold ETF is also highly tax-efficient. Regarding ETFs people fear IT issues, but there are adequate safeguards to prevent such issues. They are regulated by Securities and Exchange Board of India. Physical gold can be more important than gold ETFs when banks are in a financial meltdown (for example, wartime), and ETFs are lost. Then only, physical gold comes of huge investing value than gold ETFs. If an investor doesn’t need gold immediately in its physical mould, then gold ETFs are the right option to invest in.


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