Gold has long been seen as a haven for investors looking to diversify their portfolios and hedge against risk. Its value remains steady and often increases during economic and political uncertainty.
Two main options for investing in gold are exchange-traded funds (ETFs) or physical gold. Each has its advantages and understanding the differences can help investors determine which option is best for their portfolios.
Gold ETFs provide access to the gold market while allowing investors to maintain liquidity. On the other hand, physical gold can often be more cost-effective, especially when buying in bulk, but it can also come with custodial and storage costs.
Comparing gold ETFs versus actual gold can help investors decide which option is best for their investment goals. This article will break down the benefits and costs of each and help investors determine which option is best for them.
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What Makes Gold a Popular Investment Option Among Investors
Humans have used gold for thousands of years, with evidence of its use found as early as the 4th millennium BC. Gold has been a universal symbol of wealth and status since ancient times. Gold has been used in many capacities throughout history, from jewelry and coins to paper money and more recently, electronic payments.
Gold has been used for trading goods and services since ancient times and it was the first metal used for coinage. Ancient civilizations used gold coins as currency; gold jewelry was an important status symbol. Gold has also been used for religious purposes, including the crowns of kings and as a sign of power and authority in some societies.
Gold has recently been used as a store of value in financial markets. It is often seen as a safer alternative to other investments that may be more volatile. Gold is also popular for jewelry and other ornamental items due to its malleability, attractive color and resistance to tarnishing.
Gold is still highly sought after today and its value continues to rise due to its limited supply. It is used in many different industries, such as electronics, dentistry and jewelry-making and it is used to make coins and bullion bars. Gold is also used in investments and as a hedge against inflation.
There are several reasons why investors choose gold as an investment.
Investing in Gold ETFs
Gold Exchange-traded funds (ETFs) are investment funds that track the price of gold. They are bought and sold just like stocks on a stock exchange and provide an easy and cost-effective way to gain exposure to the price movements of gold.
Gold ETFs are structured as open-ended mutual funds, meaning that new shares can be created or existing shares can be redeemed when investors want to buy or sell.
Gold ETFs are backed by physical gold stored in vaults. The fund manager purchases and stores gold on behalf of the ETF shareholders. The value of the gold ETF is based on the total value of the underlying gold holdings. When investors purchase shares in a gold ETF, they do not own any gold; they merely own a portion of the gold ETF.
Because ETFs trade on stock exchanges, they are subject to market forces and fluctuations in the prices of gold. When the price of gold rises, the value of gold ETFs also rises. Conversely, when gold prices fall, the value of gold ETFs also falls.
Gold ETFs are typically managed passively, meaning that fund managers do not actively manage their portfolios. This means that they have low management fees and are a less expensive option compared to actively managed funds. It also allows investors to benefit from the potential gains of gold without buying and storing physical gold.
Benefits of Investing in Gold ETFs
Investing in Gold ETFs can provide investors with a range of potential benefits, including:
Investing in Actual Gold
Gold bars are physical gold coins that contain one-tenth of an ounce of gold. All gold bars have a unique serial number and can be used as collateral to secure loans.
Most of the world's gold is stored in vaults in the U.S., Switzerland, India and South Africa. Investments in actual gold typically involve buying one-tenth of an ounce of gold in a bar that can be used to secure a loan or returned when investors want to sell their shares.
There are a few different forms of physical gold investment that you can choose from, depending on your needs and preferences. They include:
Benefits of Investing in Actual Gold
Some of the benefits of buying gold include the following:
Do Gold IRAs Provide a Better Way of Investing in Actual Gold?
Gold IRAs are retirement accounts that allow investors to store physical gold or other precious metals such as silver, platinum and palladium. Gold IRAs are self-directed IRAs, meaning investors control how their funds are invested.
There are three types of gold IRA accounts:
What Types of Gold and Other Precious Metals Are Accepted in A Gold IRA?
The Internal Revenue Service (IRS) permits investors to hold various types of gold and other precious metals in a Gold IRA, including coins, rounds and bars. Most Gold IRAs accept gold bullion coins and bars from approved mints that meet the minimum fineness requirements of 99.5% pure gold.
The IRS also approves certain coins and bars produced by government mints that are 99.9% fine or higher. The following coins and bars are generally accepted in a Gold IRA:
In addition to gold, some Gold IRAs will accept other forms of precious metals, such as silver, platinum and palladium.
How Do You Get Started with A Gold IRA?
Opening a Gold IRA is straightforward and does not require any extensive planning or paperwork. The average IRA administrator can guide new investors who want to open a gold or precious metals IRA. Here are the steps to get started:
Bottom Line: Should You Invest in Gold ETF or Actual Gold
Gold investment is a great way to diversify your portfolio and guard against inflation. While there are many ways to invest in gold, Gold Exchange Traded Funds (ETFs) and actual physical gold are the two most popular options. When deciding between the two, actual gold should be your preferred option for several reasons.
First and foremost, when you buy actual gold, you own the asset and can store it securely in your home or a safe deposit box. When you invest in a gold ETF, you're not buying the actual metal but rather a share of a company that tracks the price of gold.
You do not own any of the underlying gold and you cannot store it. While ETFs offer liquidity and convenience, they also involve third-party risk, meaning that if something happens to the ETF issuer, you may be unable to access the funds you've invested in.
ETFs are subject to management fees and other charges, which can reduce the returns on your investment. With actual gold, you do not need to pay any management fees or additional costs for storage and security.
Furthermore, ETFs are highly susceptible to market fluctuations, which means that the value of your investment can go down and up. You are protected from market volatility with actual gold since gold is a tangible asset with intrinsic value.
Finally, investing in actual gold is better if you use gold to hedge against inflation. Gold ETFs may help you capitalize on short-term price movements but will not provide the same protection against inflation as actual gold. We recommend you consult our top-rated precious metal companies to help you invest in gold and other precious metals.
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