Investors buy gold for various reasons – currency, commodity or investment. Buying as a currency provides an investor with a hedge against currency devaluation, i.e. U.S. Dollar goes down, gold goes up. If owning it as a commodity, it may offer protection against inflation or deflation. As an investment, it competes with money set aside for stocks or bonds. So during uncertain economic times, it is the asset of choice with the hope of appreciation.
These are the main reasons why investors own gold, but how they want to own it is the next important question. There are a number of ways investors can gain exposure to gold, including physical gold like bars and coins and exchange-traded funds (ETFs).
Owning Gold Bars and Coins
Physically purchasing gold bars and coins provides the most direct contact to gold. Buying gold in bulk form exposes the investor to bullion, which often comes in the form of bars and minted-coins. Gold bullion’s value is driven by its mass and purity rather than by monetary face value. This means that even if a gold coin is issued with a monetary face value, it’s going to be valued by its fine gold content.
Since physical gold can be bought from government mints, private collectors, precious metal dealers, and jewelers, the exact same item may be sold at different prices. If buying physical gold, it is important to do your homework to find the best deal. Furthermore, when you purchase physical gold, there is no leverage, you must pay the full price.
Besides the purchase price, there are other costs associated with owning physical gold, including storage and insurance costs, and the transaction fees and markups associated with buying and selling the commodity.
The size of the purchase should also be taken into consideration. Smaller orders may involve processing fees and other costs associated with small lot orders. While smaller investors may choose to ignore these costs, larger investors may find them prohibitive.
Buying Gold ETFs
As mentioned previously, physical gold is purchased through various dealers such as mints and jewelers. However, a gold ETF is purchased like shares on a stock exchange. An investor who purchases a gold ETF incurs some costs associated with processing the order and a management fee. However, in doing so, the investor avoids the costs and inconvenience of markups, storage costs, and security risks of holding physical gold.
Industry reports show that the largest gold ETF – the SPDR Gold Shares ETF – has a management fee of 0.40%. That means an investor would pay $80 per year in fees for a $20,000 investment.
Investors could also pay a commission for buying and selling a gold ETF. They can vary from free to as high as $25 per trade. It all depends if you are buying on your own or if you are seeking the advice of a registered account executive.
Finally, it is important to remember that when you buy a gold ETF, you do not own any physical gold even if you invest in a physically-backed ETF: you cannot redeem or sell shares in exchange for gold.
Owning a gold ETF is cleaner than owning physical gold. You don’t have to store it or insure it. Furthermore, you don’t have to negotiate a buy or sell price with a dealer. Additionally, there is more liquidity in the gold ETF market, which allows for better price discovery and tighter price spreads.
Essentially, it comes down to which type of investment is suitable for your portfolio with affordability being the best way to determine this.