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Home » Buying Guide » Why Should You Invest in Physical Gold and not ETFs?

Why Should You Invest in Physical Gold and not ETFs?

Investment in physical gold is considered as a smart investment. It is often seen as a better investment as compared to investment in Exchange Traded Funds (ETFs). There are several benefits why physical gold is regarded as a better investment option as compared to ETF's.

Before we can start comparing, it is important to understand what Gold backed Exchange Traded Funds (ETFs) really is. ETF is considered to be a regulated financial product that has been created to provide gold investors an insight into the price performance of spot gold bullion. When you invest in ETF, you are not really taking a physical delivery of gold and are often referred to as paper gold.

The importance of physical gold investment lies in the fact that the worldwide investment market of today is going through turbulent time with economic uncertainty playing a defining role. In such turbulent times, when there is instability in the banking sector, poor performance in the property sector, underperforming currencies, low interest rates, volatile stocks and dipping in share value, physical gold offers the much needed security and relief to investors.

The UK has not yet completely recovered from the recession of 2008 when the world witnessed a £50bn bailout for Royal Bank of Scotland. Such financial crisis can happen anytime but the question is - are you prepared to handle such a situation? This is where the importance of physical gold needs to be reiterated. Physical gold has time and again proven to be an invaluable asset and has the ability to offer financial protection during periods of financial and economic crisis.

What benefits does physical gold have over ETF's?

One of the things that you need to understand is that you can enjoy the benefits of physical gold only if you are able to hold it for long term. If you buy physical gold today and sell it within 3 months then the returns will not be that good. On the other hand, if you keep your gold bullion for a period of 3 years then the returns can be quite high.

If you are able to hold on to your gold coins and bars then it will provide you with a stronger layer of security and protection as compared to Gold Exchange Traded Funds. Even though, the primary commodity being traded through ETF's is gold, it comes with a lot of uncertainty. In fact, ETF companies are considered to be unpredictable and vulnerable to economic and financial crisis. When you have physical gold, you are in control of that gold. You know how much gold you have and you can decide when to sell it. That is not the case with ETF as their performance are completely governed by the ETF companies and hence outside your control.

One of the recent and shocking news revolves around London Gold Exchange, an ETF company. The London Gold Exchange was owned by LGE International LTD and it was forced to permanently close down its business as they were facing operational difficulties. The closure took place in September 2011. Investors who owned ETF in the London Gold Exchange had to bear with heavy financial losses. This type of loss can happen anytime and your ETF is not protected but with physical gold bullion, you can take on any financial challenge.

Historical data provides us with information pertaining to performance of gold price. It states that gold price has effectively and consistently outperformed any other form of investment including ETF's. ETF is considered to be a speculative investment and should only be opted for if an investor is interested in taking a risk.

Let us take a look at a comparative analysis of physical gold bullion and ETF's.

Physical Gold (Gold Bars and coins) Gold ETF
It is one of the safest long term investments Safety is not guaranteed
It offers extra protection during bank crisis Does not have any protection against financial crisis. It is most often affected by bank crisis.
It can be physically held and directly traded Cannot be traded against physical gold
Offers hedges against volatility of paper investments No hedge against volatility as it is a paper investment
It is easy to liquidate anywhere in the world Can be liquidated through proper channels.
Greater returns are guaranteed only when physical gold is held for longer duration ETF's can be bought and sold quickly just like shares and stocks
It can be used as a replacement for currency for purchases It cannot be used as a replacement of currency
Physical gold has an intrinsic value and can never be zero If the ETF firm crashes then the value of the ETF will be zero and investor will lose everything
Physical gold holdings will be known to the investor Physical gold holdings of the ETF will not be known
The more physical gold you buy, the higher the amount of asset ETF is considered to be a depleting asset.

These are some of the benefits that investors can derive through buying of physical gold. Another important aspect is that you can spread your gold investment over bars and coins. You can buy different weights of gold bars depending on your current financial situation.  You can invest in 1gm, 2.5gm, 5gm, 10gm, 20gm, 50gm, and 100gm gold bars. Alternatively, you can also invest in gold coins including 1 ounce Gold Britannia and South African Krugerrand coins. This will further strengthen your investment portfolio and provide a strong financial protection.

It is always recommended to start with small investments in physical gold as it is expensive and requires storage space. Ideally, investors should start by allocating 5% or 10% of their liquid wealth towards strengthening their gold investment portfolio. You can also invest in silver bars along with gold. Price of silver bullion is less than that of gold but it has been quite consistent over the last few years. Silver coins and bars also offers a high degree of security as compared to ETF. Hence, it is always better to invest in both physical gold and silver bullion, so that your investment portfolio is well spread.


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