Physical gold vs. ETFs (2023)
Choosing the right type of investment for you
Gold is an asset that has been around for thousands of years, with its trade history dating back to ancient Egypt and beyond. Today, it’s still seen as a hedge against inflation and a way to protect your purchasing power over time.
There are several ways to invest in gold today. You can invest in physical gold bullion, gold jewelry, gold exchange-traded funds (ETFs), gold stocks and even gold derivatives. Two of the easiest and most popular gold investments are physical gold (including coins and bars) and ETFs.
ConsumerAffairs is highlighting these investments for educational purposes, and this information should not be seen as legal, tax, investment, financial or other advice.
Key insights
- Gold is often thought of as a “safe haven” investment in volatile markets.
- There are several ways to invest in gold, including purchasing physical gold or gold securities.
- Buying physical gold may involve markups and additional maintenance fees.
- Gold ETFs are highly liquid and typically come with lower fees.
What is physical gold?
Investing in physical gold means you’re actually purchasing an amount of precious metal. In short, you're investing in gold you can hold in your hands. Physical gold bullion can come in the form of coins, bars and ingots.
Gold is a rare natural resource, so there's a limited amount, and the new supply is limited compared to the amount already in circulation. Physical gold has had value for thousands of years, and many who invest in it find this continuity appealing. The market value of gold fluctuates based on several factors, but individual gold products are usually measured in terms of their weight and fineness.
Physical gold can be inconvenient and expensive to transport and store. Storing your gold at home is less expensive than storing it at a precious metals depository, but home storage also carries a greater risk of your investment being lost, damaged or stolen.
» MORE: How to invest in gold
Pros and cons of physical gold
Here are some pros and cons associated with buying physical gold.
Pros
- Gold is recognized as a valuable asset around the world.
- Physical gold can be a solid hedge against inflation.
- Tangible assets like gold can help diversify a portfolio.
Cons
- Tangible assets are vulnerable to loss, damage and theft.
- The costs of transportation, storage and insurance can add up.
- Gold dealers may charge high transaction fees.
What is a gold ETF?
A gold ETF is a tradable security that can be purchased on a stock exchange. It’s a fund that holds physical gold and tracks the price of the underlying asset. This exposes investors to gold without the need for the expensive storage and insurance costs of owning physical gold.
Gold ETFs are highly liquid, as they can be traded just like stocks through a broker. This makes it easy to buy and sell gold ETFs without any hold times or transportation costs involved. And gold ETFs typically have low expense ratios, with many available for less than a 0.2% fee per year.
There are dozens of gold ETFs available on the market to choose from. Here are a few of the most popular.
» MORE: How to trade gold
SPDR Gold Shares (GLD)
iShares Gold Trust (IAU)
abrdn Physical Gold Shares (SGOL)
Pros and cons of gold ETFs
The pros and cons of investing in gold ETFs can differ significantly from investing in physical gold.
Pros
- You don’t have to manage the physical aspect of gold, but you can still own and invest in it.
- ETFs are easy to buy, and they can be bought entirely online.
- It is easy to cash out your shares at any time.
- The annual expense ratios are very low, and they may be lower than expenses associated with holding physical gold.
Cons
- You don’t get to have the gold in your possession.
- Other people manage the ETF, meaning you have less control.
- Some ETF trades may incur commissions.
Should you choose physical gold or a gold ETF?
Investing in gold is typically done as a hedge, which helps offset the potential losses of another asset class (or currency). But it’s considered an alternative asset and can carry high volatility. It’s important to create an investment plan and choose an allocation to gold that fits your overall investment goals and risk profile.
When choosing to invest in physical gold or a gold ETF, your choice should come down to the reason you are investing in the first place.
Dennis Shirshikov, a gold and silver investing expert and the head of growth for real estate investing platform Awning, mentioned that “the decision to choose one over the other depends on factors like liquidity, storage and transaction costs. Physical gold has storage and insurance costs, while ETFs have management fees.”
If you don’t trust the current financial system or simply want to own a hard asset you can physically hold, then owning gold makes sense. And if you want to be the custodian of your investment and have full control over it, you can’t get that with a gold ETF.
On the other hand, if you simply want to gain exposure to the value of gold without physically handling it, a gold ETF is one of the least expensive ways to do this. With highly liquid markets and access from most major brokers, you can quickly set up a free account and buy gold ETFs with minimal fees.
How to buy physical gold
If you want to invest in physical gold, you can purchase it from a precious metals dealer or a jewelry shop. You can also purchase physical gold through a custodian that will store the bullion for you (for a fee).
You can buy gold through a dealer online or at a local brick-and-mortar shop. The dealer may carry gold coins, bars and even ingots (that is, large gold bars). Prices vary by dealer, so it’s best to shop around to find the best price and selection.
» MORE: How to buy gold
How to buy gold ETFs
Investing in gold ETFs can be done through most online brokers and investing apps, as many gold ETFs are publicly listed on the New York Stock Exchange. Major brokers like Vanguard, Fidelity Investments and Charles Schwab allow you to buy shares of gold EFTs without any trading commissions.
You can simply open a brokerage account, seek out your preferred gold ETF and purchase shares. Some brokers even offer fractional share investing, meaning you can invest without paying the full cost of one gold ETF share.
You can also purchase gold ETFs in some workplace retirement accounts or Health Savings Accounts, but it depends on the custodian that’s contracted by your company. You can also open an individual retirement account and invest in gold ETFs as a tax-advantaged investment.
» MORE: Find the best gold ETFs
FAQ
Is gold a safe investment?
Gold is not a “risk-free” investment like a savings account or certificate of deposit, as there’s a risk of loss with any gold investment, whether physical or a gold ETF. Shirshikov said that “gold is generally considered a safe investment due to its historic store of value and hedge against inflation. However, it's essential to diversify your investment portfolio to mitigate risks.”
Are gold ETFs taxable?
Yes, gold ETFs are taxable if you sell them with a gain. But commodity ETFs invested in physical gold are treated differently than regular ETFs in that they may be taxed at a higher long-term capital gains rate of 28%. And if the ETF is set up as a grantor trust, then profit from the sale of that ETF is considered ordinary income, not capital gains.
Can you convert a gold ETF to physical gold?
U.S. gold ETFs don’t allow you to exchange your shares for physical gold. Gold ETFs are backed by physical gold, and your shares represent the value of the gold, but you can’t exchange them for the real thing.
Is gold a good hedge against inflation?
The price of gold has increased dramatically since the U.S. ended its use of the gold standard in 1971. During periods of high inflation, the price of gold tends to increase. But gold has been inconsistent as an inflation hedge. For instance, the price of gold hasn’t kept up with the sky-high inflation numbers in 2021 and 2022.
Should you buy gold before a recession?
When a recession is approaching, many investors flock to gold, and its value may begin to increase. This is evidenced by following the gold price during the last three recessions (2001, 2007 and 2020). But a recession doesn’t always guarantee a gold price increase, and a market crash can also bring down the price of gold. Gold is a long-term investment that acts as a store of value, but it doesn’t guarantee returns during a recession.
Bottom line
Physical gold and gold ETFs can both be good investment options. It’s up to you to determine which is better for your particular situation. Physical gold is a good option if you prefer owning commodities outright. But if you simply want exposure to the price of gold, gold ETFs may be the better choice. Just remember that all investments have a degree of risk, including gold. If you don’t feel confident making investment decisions, contact a financial advisor to discuss your options.
Article sources
- State Street Corporation, " SPDR Gold Shares ." Accessed May 10, 2023.
- State Street Corporation, " SPDR Gold Shares ." Accessed May 10, 2023.
- BlackRock, " iShares Gold Trust ." Accessed May 10, 2023.
- abrdn, " abrdn Physical Gold Shares ETF (SGOL) ." Accessed May 10, 2023.
- IRS, " Topic No. 409, Capital Gains and Losses ." Accessed May 10, 2023.
- GoldPrice.Org, " Gold Price ." Accessed May 10, 2023.
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