Last updated on March 31st, 2021Home / Precious Metals / Should You Invest in Physical Gold or Paper Gold?
Physical Gold vs Paper Gold: Which one a better option to invest in?
By knowing the nuances in advance, investors can make more educated decisions. Before starting our post here are a few recommended gold investment books you want to take a look at.
Physical gold is the solid form of gold in the shape of bars, coins, or bullion. It is a good hedge against a crisis since it protects its value during high inflation.
Investors can purchase physical gold from private mints, precious metal dealers, and jewelers.
Although it is a liquid form of gold, it requires responsible ownership. It is best if it is stored in safe boxes, banks, or precious metal depositories rather than in living residences.
The price of it is determined by the quantity, and quality (gold content), as well as the market supply and demand.
Paper gold is the gold ownership but in no physical form. It can be gold ETF, mining shares, Contracts for Difference (CFD's), or gold futures.
Its ownership is digitally tracked and regulated by organs like SEC under the Securities Act of 1933.
It can be taxable, tax-deferred, or tax-free investment depending on the type of investment and the actual funding source utilized.
Some advantages of buying physical gold are:
Safety from Internet exposure: Physical gold is safe from cyber-attacks and hacking risks that paper gold might have, especially if that paper is held electronically.
No third-party involvement:
It is easier to purchase. There are no many regulatory formalities and don't warrant a counterparty involvement for transactions. You can decide where to store it, sell it or process it. It's all up to you.
Tangible: It is tangible and belongs to you. There is a physical assurance because you are not just seeing it but can also touch it.
Decentralized: it can be a haven against many different risks as it is not connected to any government or financial body.
Reliable: The fluctuating price of gold will not in any way affect your physical gold because the worth remains overtime.
A wide option of sales: Gold can either be sold as a currency and raw material for industrial purposes and production. There is always a market for it.
Very affordable: Unlike physical gold, you can purchase paper gold in smaller quantities of up to 1 gram.
Safe to own: There is no concern for security, transportation, and storage of the gold. Gold ETFs are owned in Demat form.
Liquidity: Paper gold is very easy and fast to buy and sell as there is always an available market for it.
You can trade gold ETFs like SPDR on the stock market at trading hours and at the leverage of entering or exiting a trade at your convenience.
Purity: An ETF has an equivalent of 99.5% purity of physical gold. There is no concern for the purity of paper gold, unlike the physical gold, where the buyer has to determine the percentage purity of the gold.
The disadvantages of buying physical gold are:
Safety and risk associated: Owning physical gold sometimes is risky. You can be robbed, kidnapped, or even killed. It requires a good security system and safety measures put in place.
Storage: Acquiring good storage facilities for your gold won't come so cheap, especially when you invest in large quantities. To avoid theft, damages, and other safety risks, a lot is put into adequate storing and securing.
High costs: Purchasing physical gold is not going to be easy, of course.
It requires huge costs apart from the purchase fee, including transportation, taxes, insurance to be safe from unexpected occurrences, and even wages to the workers and negotiators where the case may be.
The general cost associated with gold investing is relatively high, so you need to consider your pocket depth before making an investment decision.
No ownership: You can't take possession of the gold as it is not physical unless converted.
You just have the certificate of ownership, and often, there isn't enough physical gold to back it up. This means all you can often get in case things get out of hand is cash compensation.
Third-party involvement: Third parties like banks have so much involvement in the transactions and activities involved, and there is a risk of losing your investment if these third parties close out of business or go bankrupt.
No market control: There is no right to control and determine what happens in the market. All transaction depends on the market trend, either bearish or bullish, thereby creating high volatility.
Security: There is the challenge of keeping physical gold safe from theft and housebreaking. This may result in insuring the commodity or providing adequate security.
Gold Impurity: Investors with little knowledge of physical quality may be cheated and buy gold with less quality.
High Cost: The price of owning physical gold is relatively high. It usually involves purchasing, shipping, and storage.
Government Capital Control: Most governmental and regulatory controls are so much and may limit the investment of gold as any defaulting may result in the form of loss of money or instability
High Volatility: ETFs have high investment risks as gold prices can either rise or drop drastically at any point, and the direction of the movement is not certain.
Tax risk: Like stocks are taxed, ETFs are also taxed either in the form of income tax or capital task based on the broker.
Fear of shut down: Some ETFs are at risk of shutting down, especially those who are not doing well in the market or cannot meet up with government regulations and banks' collateral bargains on loans.
Counterparty risk: Some banks issue exchange-traded notes (ETNs), which are debit notes. When you buy an ETN, you'll be paid by the bank per the rising gold price.
If the bank folds up or losses, the investor is at the risk of losing his money.
Price spread refers to the difference between the selling and buying price, and it is usually high for gold transactions due to its high volatility.
There are different reasons why the gold price spread is so high. Some of which are listed below:
Recession: The gold market, like other global markets, is associated with uncertainty, like a recession. The government releases lots of money into the system, which lowers the dollar's value. This will result in inflation in prices beyond the normal.
An outbreak of viruses: The outbreak of viruses causing an epidemic or pandemic, as the case may be, may harm the supply of gold.
Many mining companies were shut down during the recent coronavirus pandemic, meaning that no gold was mined for those months.
This lead to a shortage of supply and many investors had to start trading the futures market, i.e., buying gold in the paper that will only be owned at a future date.
This ardently led to an increase in the price spread of gold.
High demand for gold: Apart from being a rare and precious metal, gold has the edge over paper currency because its value does not diminish.
At all times, the demand for gold is rising as it is a safe way of investing in difficult times or below par economies.
It is even better to keep it safe during a recession till the economy balances up again.
This advantage of investing in gold led to a great demand for the commodity, which pushed the price upward.
Gold mutual funds do not normally buy physical gold. If they do, it is usually just a few assets owned by the mutual fund.
They usually purchase stocks from gold mining companies and don't buy physical gold directly.
Some ETFs invest in physical gold by buying the bars or gold futures for certain reasons, like following up on gold prices or having the upper hand when transacting.
Like every other business, there are disadvantages to this; for example, the fund will not obey global rules but will undulate with changing values of the physical gold bullion, while the mutual funds that don't invest in physical gold will only be affected by the market value of the company they have a stock with.
There is usually not enough physical gold in the world to back paper gold being traded in the market. Many times, ETFs are just paper ownership, and the physical gold owned may not exist.
Like other fund systems for precious metals and financial exchange, ETFs are controlled by a body, usually a bank or a government, and are referred to as paper markets.
They are called paper markets because the physical gold may not always be available, especially while it is in use during a transaction between lots of traders.
The research discovered that an estimated hundred ounces of paper gold owned might have as little as one ounce of physical gold to back it up, although the exact amount cannot be said.
It is usually a preventive risk measure to own paper gold because what happens next cannot be predicted; for example, the outbreak of a disease may result in limited physical gold mined and traded, causing a systematic rise in the gold price.
In times like this, those whole trade on gold will only be issued the paper gold due to the limited availability of physical gold.
Gold is actively in demand, either in physical form or in paper. Selling gold physical will need you to determine a buyer and negotiate the terms of the transaction.
After that, the gold will be delivered to the person or company.
The negotiation processes are usually hectic and time-consuming, unlike when selling paper gold. Selling paper gold only requires you to log into your broker's account and sell when all analysis points you to sell.
However, there are other side effects to it; for example, the market can turn around at any instant, so it requires careful analysis, patience, and full attention.
From these two analyses, there is no best way to sell gold. It all depends on the investor's approach and the one with the minimum risk involved.
It is possible to convert a gold ETF into physical gold, but a limit can be converted depending on gold size.
An advantage of paper gold is that it allows for investment even in little quantities, but this doesn't provide the room to convert any gold owned into physical gold.
The convertible sizes range from 500gr to 1kg gold ETFs, which vary with different fund houses.
To convert your gold ETF into physical gold, a certain amount of money is paid, known as brokerage. This is not an exchange rate but is paid to the ETF during conversion.
There are risks associated with investing in paper gold or physical gold, but the investor should determine the safest form of investment.
Buying physical gold or gold bullions is a straightforward method. It involves meeting up with the person or company that wants to sell that particular gold and bargain the price.
The other way, of course, is buying paper gold in the form of ETFs. This gives you ownership of that particular gold even though you will not have any access to it.
The most affordable way to buy gold is the least risk associated, considering the pros and cons of buying gold. Investing in ETFs is relatively stress-free and offers numerous advantages.
If you can take full responsibility for the storage and security of physical gold, you should go for it.
If you invest from your retirement account in form of a gold IRA you must work with an IRS-approved depository.
There is no better option per se. It all boils down to which you prefer, considering both physical and paper gold positives and negatives.
If the advantages of one over the other are more, specifically for you, considering your business, financial strength, and other factors, it will be advisable to go for that.
However, it is also advised to diversify your plans by going for both if the current circumstances are favorable and worth investing in.
Some of the advantages and disadvantages of buying either physical or paper gold are listed below.
Gold exchange-traded funds (ETFs) invest in gold bullion and have exchange rates just like other exchange funds such as the New York Stock Exchange (NYSE).
An ETF is the same thing as paper gold. Prices are listed on it to either purchase or sell, and it has a spread that is usually high due to the high liquidity of the ETF market.
This means that the prices fluctuate at different times based on the market's progression (either a buy or sell) and other factors that affect the price, such as availability and other national or political effects.
The possessor of an ETF is the real owner of the gold, but it is not in the physical form, meaning there is no access to the physical gold.
Rather, a certificate of ownership is issued, enabling you to perform any transaction or, better still, own your gold.
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