Two Ways to Own Gold
Investors seeking gold exposure can choose between physical gold (bars and coins) or gold exchange-traded funds (ETFs). Each approach has distinct characteristics worth understanding.
Physical Gold: True Ownership
When you buy a 1 kilo gold bar, you own the actual metal. It's yours, stored where you choose, and accessible without intermediaries.
Advantages:
- No counterparty risk: Your gold doesn't depend on any institution's solvency
- Tangible asset: Hold it, store it, transport it as you see fit
- Privacy: Purchases can be made with varying degrees of anonymity
- Crisis resilience: Accessible even if financial systems fail
- Historical track record: Gold has been money for 5,000+ years
Disadvantages:
- Storage responsibility: You must secure and insure it
- Higher transaction costs: Dealer spreads, premiums over spot
- Less liquid: Selling requires finding a buyer, physical transfer
- Verification: Buyers may require authentication
- Theft risk: Physical assets can be stolen
Gold ETFs: Paper Convenience
Gold ETFs (like GLD, IAU) hold gold bullion and issue shares representing fractional ownership. You buy and sell shares like stocks.
Advantages:
- Easy trading: Buy/sell instantly during market hours
- Low transaction costs: Brokerage fees often minimal
- No storage hassle: The fund handles everything
- Precise amounts: Buy exactly the dollar value you want
- Portfolio integration: Fits seamlessly in brokerage accounts
Disadvantages:
- Counterparty risk: You trust the fund sponsor, custodian, and system
- Management fees: Annual expense ratios (0.25-0.40% typical)
- No physical access: You can't take delivery of your gold
- Taxed as collectible: Higher capital gains tax rate than stocks
- System dependent: Requires functioning markets and institutions
Cost Comparison
For a $65,000 gold investment held 10 years:
Physical Kilo Bar:
- Purchase premium: ~$1,300 (2% over spot)
- Storage: ~$2,500-3,500 (vault storage ~0.4%/year)
- Insurance: Often included in vault fees
- Sale spread: ~$650 (1% under spot)
- Total 10-year cost: ~$4,450-5,450
Gold ETF (0.40% expense ratio):
- Purchase: Market price, minimal commission
- Annual fees: ~$260/year × 10 = $2,600
- No storage or insurance direct costs
- Sale: Market price, minimal commission
- Total 10-year cost: ~$2,700
Risk Considerations
Physical Gold Risks:
- Theft or loss
- Damage during storage
- Authentication challenges when selling
- Dealer default (rare with established dealers)
ETF Risks:
- Custodian failure or fraud
- Trading halts during crises
- Tracking error from spot price
- Regulatory changes affecting fund structure
- Forced liquidation scenarios
Which Is Right for You?
Choose Physical Gold If:
- You want true ownership and zero counterparty risk
- You value crisis resilience and financial privacy
- You're buying substantial amounts for long-term holding
- You have secure, cost-effective storage options
Choose Gold ETFs If:
- You want easy, liquid exposure without storage concerns
- You're making smaller or tactical allocations
- You prioritize convenience and low transaction costs
- You're comfortable with institutional counterparty risk
A Hybrid Approach
Many investors use both:
- Core position: Physical gold for true ownership and crisis insurance
- Trading position: ETFs for tactical adjustments and rebalancing
This combination captures the security of physical ownership while maintaining flexibility for portfolio management.
Ready to add physical gold to your portfolio? Explore your options for investing in gold with established dealers.