Gold ETF vs Physical Gold: What’s the Difference?

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Many investors have always preferred to invest in gold to ward off the negative impact of inflation. Economic scholars will tell you that the rupee loses its value as the inflation rate goes up.

However, gold has shown a remarkable ability to keep up with rising inflation, with historical data supporting its use as a hedging tool. For this reason, gold prices seem to increase as inflation rises.

Nowadays, it has become exceedingly easy to invest in gold. This is because you can buy gold bullion or jewelry and store the precious metals in your home or bank.

Alternatively, you may invest in gold ETFs, making golf investment and ownership straightforward for everyone.

Gold ETFs are one of the simplest ways of investing in gold. Additionally, "Gold ETF" is a common phrase in gold investment. This article will explain who should invest in physical gold or gold ETFs.

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What is Physical Gold?


Investment in gold refers to purchasing precious metal in a tangible form. This means that, upon purchase, the gold you buy can be held in your hands. This gold is sold in coins, ingots, bars, and rounds.

The overall amount of gold in the world is limited. Gold is a rare natural resource, making it challenging to supply large volumes on demand.

The value of physical gold has remained resolute for thousands of years because many people find it an attractive investment amidst economic volatility. The value of gold may change because of several factors.

Notwithstanding, the value of gold is based on its weight and fineness. 

On the other hand, you have to worry about storing and transporting physical gold upon purchase. You are allowed to store the physical gold at home. However, you risk getting your gold stolen or lost in mysterious ways.

Gold Bullion


The purity of gold bullion ranges between 99.5% and 99.9% and is produced in the form of rectangular bars or ingots for more accessible storage.

Usually, central banks prefer to store part of their wealth in vaults in gold bullion, an effective reserve asset.

Investing in gold bullion allows investors to participate in the gold market directly.

several gold bars stacked up

Nonetheless, gold is highly valued. At the start of 2022, the price of gold averaged around $2,000 per ounce. A gold bar is even more expensive, and the ingot costs much more based on its size. 

Apart from buying a gold bar or ingot, the investor must pay for their gold products' insurance and storage costs. Investors looking for long-term investment options could consider allocating part of their wealth to gold bullion.

However, gold bullion investments are not ideal for short-term investors and traders.

Cost of Buying Physical Gold Vs. The Spot Price of Gold


A spot price refers to the cost of immediate delivery of gold. It is a good way of measuring the accuracy of an ask or retail price of gold. The retail price of gold includes a markup or premium.

Unfortunately, some investors do not know the difference between the spot price and the actual price of physical gold until they have made their first purchase.

Other than premiums, investors need to be aware and ready to pay extra costs when buying pure gold, including shipping, handling, and insurance costs.

The investor may have to pay processing fees to be allowed to own the yellow metals or other fees for smaller purchases. Sometimes, the prices may be higher for clients who pay for the gold using a credit card.

Also, please note that you may pay a lower price for the gold if you buy larger quantities of the product.

Investing in Gold Coins


Investors prefer to invest in gold coins because they are available in smaller denominations compared to gold bars. This quality makes them easy to transport from one location to another and store safely. 

Identifying the right dealer is one of the essential steps for gold investment. If you want gold coins, consider buying them from independent traders and pawn shops in your area. However, some dealers may sell with a high markup of between 30% and 50%.

What Kinds of Physical Gold Should You Invest In?


Generally, there are two main types of physical gold you can invest in: bars and coins, and both have their benefits and drawbacks. Therefore, before buying gold coins or gold bars, it is essential to determine the option that suits your portfolio. 

Gold bars are the most common form of commercial physical gold bullion. Gold bullion bars are physical blocks of the gold cast in shape through minting (therefore minted gold bars) or casting (thus gold cast bars). 

For simplicity and uniformity in the gold market, manufacturers use the same weight measures worldwide. For instance, one troy ounce of the gold bar has the same weight regardless of the mint that produced it.

In addition, the volume of gold in the ounce may vary slightly because of the fineness level. You will pay a higher price when buying a bullion bar with high gold content.

If you want to invest in physical gold, consider buying bars instead – they offer the most straightforward and affordable method of diversifying your investment portfolio.

Gold bars have maintained a high customer demand level because of the numerous benefits they provide investors. 

You can buy gold bullion in the form of rounds or coins. Generally, the precious metal used to make your coin is engraved on the coin's face. This applies to collectible bullion coins and other kinds of unique metal coins.

In addition, the gold product you buy must be marked with the coin's purity level and mass, e.g., .9999 fine gold or 24k, and the weight.

The most remarkable difference between gold bars and gold coins is their pricing. Every coin has its denominational value, just like the value denoted on paper currency.

The precise value of the coin is higher than the value of its legal tender status; the price of these products varies depending on the prevailing pieces in the gold market.

The price of gold bullion depends on the spot price of one troy ounce of gold and the premium over the spot.

Many investors seek gold investment opportunities to grow their wealth or safeguard it from market risk. Usually, gold bars bear a lower premium over the spot price than coins and rounds because of lower production costs, storage, and transportation costs.

In addition, you need to remember this when buying gold bars: the greater the weight of the bar you are investing in, the lower the premium you will pay above the spot.

Where Should You Purchase Physical Gold?


You can invest in gold through government mints, private mints, dealers in precious metals, or jewelry shops. Investors are advised to avoid investing in numismatic coins or gold products bought to collect or gift them to a friend. 

This is because these products are meant for a different game and are not quickly sold in the ordinary gold market. 

When determining the best place to buy your gold, it is best to consider how easy it will be to sell it later. Several businesses dealing in gold may be willing to repurchase the numismatic coin, while others will buy the same coin at a relatively lower price.

In addition, not all fees and premiums on buying physical gold are uniform. Various sellers may sell the same product at different prices; potential investors must study their options and select the best offer.

Benefits of Investing in Physical Gold


Physical gold has been the most secure and dependable commodity for long-term investment. There is less risk in gold investment compared to ETFs.

This is because many investors feel safer knowing their gold is stored safely in a vault than when their money is invested in an intangible asset and exposed to numerous risky situations.

Physical gold offers extra financial security. For this reason, gold has been used to safeguard investors from unstable market conditions while consistently delivering successful outcomes.

However, ETFs lack similar safety features, making them less sure in the market.  

ETFs offer investors total control when it comes to selling. This is because their value changes more broadly compared to physical gold, and investors sell at the wrong time.

On the other hand, the value of physical gold remains relatively level, providing the investor with extra control when they want to sell or trade and putting less pressure on the investor's decision-making process.

What is a Gold EFT?


A gold EFT refers to an exchange-traded fund. This is a tradable commodity that includes only one principal asset: gold.

Exchange-traded funds resemble individual stocks in their structure and how they are traded on an exchange between investors.

stock market chart

 Nonetheless, the market for the fund is based on gold derivative contracts that are (supposedly) backed by gold. 

That means, by investing in a gold ETF, you will not own any physical gold, and upon redemption of a gold ETF, you will not receive delivery of any precious metals. Rather, the investor gets the money of the same value.

Basic Principle Behind Investing in Gold ETFs


Many investors rely on gold ETFs to monitor and estimate the price of gold. The fund's structure allows the fund to be backed by gold, but the overall goal is not for the client to own physical gold.

Through a gold ETF, the investor gets to know the performance of the gold market and the prevailing prices of gold.

How to Invest in Gold ETFs


Gold ETFs provide similar defensive-asset-class features to bonds, endearing them to investors as a hedging tool against negative economic and political influences and currency debasements.

Usually, the price of gold goes up when the currency's value falls. As a result, investing in a gold ETF protects your wealth from market erosion if your investment portfolio contains assets denominated in dollars.

Contrariwise, selling off a gold ETF can help guard your portfolio or profit against this market risk.

A gold ETF refers to a tradable exchange-traded fund used to safeguard your gold commodity risks or profit from variations of gold itself. Investing in a gold ETF can lower risk when portfolio assets are put under threat by increasing gold prices.

Alternatively, an investor who, following extensive research or based on experience, opts to short gold may trade an inverse gold ETF to profit from falling gold prices.

General Uses


Although gold is a commodity ETF, it can also be an effective industry investment. For instance, an investor who wants to participate in the gold mining industry can invest in a gold ETF as an ideal portfolio management strategy.

We note that investing in individual stocks of a gold-mining company or precious metals indexes is possible. However, a gold ETF is a more accessible and unique participation method in the gold mining sector.

In addition, ETFs come with specific benefits, making them ideal investment assets for your wealth.

Gold ETFs can also help the portfolio gain foreign exposure or safeguard against regional risk. If a particular country's economy is heavily based on gold, an individual with assets in that country may sell, or short, a gold ETF as a cover.

Therefore, the short ETF will minimize the investor's loss if gold prices fall.

Advantages of a Gold ETF


Gold ETFs provide all the financial advantages of conventional investment in gold and all the benefits of an exchange-traded fund.

This implies that:

  • Precious metal assets help diversify your portfolio or safeguard against hostile market forces.
  • Investing in ETFs is more accessible than owning physical gold. In addition, ownership of an ETF has no expiration.
  • An investor does not require huge capital outlays to invest in ETFs.
  • ETF investments can be sold any day the market is open.
  • EFTs provide additional investment methods other than gold bullion, assets such as stocks in gold-mining companies or currencies.
  • ETF's are ideal for short term investors, traders, and investors that are ok with adding more risk to their portfolio.

Some Drawbacks of ETFs


An investor can't own physical gold by investing in a gold ETF.  A gold ETF is a gold contract and a derivative and does not imply holding gold bars, bullion, or gold coins.  

Gold ETFs are known as "paper gold" in the precious metals investing community.

In addition, upon redeeming the ETF, the investor receives money only; no physical gold is given to the investor.

Although ETFs have numerous tax advantages, gold can be categorized as a "collectible" by the IRS, which comes with its tax implications.

Before investing, it is best to consult a certified public accountant to tell you what you can expect when investing in gold ETFs and the tax implications of this investment.

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