Physical Gold vs. Paper Gold

Paper gold, at least in my mind, consists of the gold ETFs.  The idea behind gold ETFs is simple.  The ETF sponsor buys a pile of gold and divides it into shares.  These shares are traded like stock.

One advantage of a gold ETF is the ease of trading.  You can buy or sell all day long, just as you can with any listed stock.  Physical gold takes a bit more effort to buy or sell.

Another advantage is the low costs of buying, selling, and holding gold ETFs.  Buying and selling you’ll pay the same commission you would for any stock, and the expense ratio while you’re holding will likely be .40%.

Of course you can hold gold in your home with no storage fee, and even a safe deposit box is cheap unless you’re storing an awfully lot of gold.  Buying and selling though, are likely to cost you several percent each way.

So from a financial angle it seems that paper gold (ETFs) have the advantage.  Let me ask you this though.  In a true crisis, are you certain that the brokerage holding you gold ETF won’t fail?  Or that the government won’t seize the gold?  Or that the gold is really even “there?”

I have no specific reason to doubt the integrity of any gold ETF sponsor, but if you spend a little time on the GATA web site, you’ll realize that some very credible people think that some ETFs may not hold nearly the amount of metals they claim to have.

To borrow from the World Gold Council “. . . gold is an asset that bears no credit risk.  Holding assets in the yellow metal involves no counterparty and is no one's liability.”

This statement is undoubtedly true with a coin in your hand, but NOT with an ETF.

I'm sure it's probably obvious, but the differences between physical gold and paper gold apply well to physical silver and paper silver also.

1 comment:

  1. Hi all! I think, there is always many benefits of investing in Gold Bullions (I mean long-term investments). First, that's diversification of your portfolio. It makes you less dependent of any crisis and consequent currencies and paper-backed assets fluctuations. Owning Gold hedges your purchasing power against inflation when government just prints more money in time of crisis. Then, protection of your wealth is higher when part of it converted into Gold or Silver, as the assets they are less vulnerable to political and economic uncertainties. And last, but not the least, is that Gold has a great potential to grow, with strong demand for it in many countries.
    So, we should put some money into Gold Bullions. As for me I prefer to buy bullion coins, Maple Leaves, Eagles etc. I tried many websites and chose , as best price-convinient combination

    And where do you buy gold? Do you prefer physical gold or not?