Halloween can be a fun time to dress up and pretend to be someone or something else. It’s all fun and games because you know who or what is underneath the costume. But what if you didn’t?
Likewise, are you sure you fully understand what’s behind some of your asset choices?
Learn here about gold ETFs and how people say they’re “putting money in gold” without actually owning a single ounce of the yellow metal—and how these people might be missing out on some of real gold’s most important attributes.
What Is a Gold ETF?
An exchange-traded fund (ETF) tracks an index, sector, commodity, or other asset. Shares of this fund can be bought or sold on a stock exchange, just as a regular share of stock can be, according to Investopedia.
One ETF commodity can be gold. But a gold ETF does not mean you actually own physical gold. Instead, the ETF represents a paper claim on the commodity and not the actual commodity itself. An ETF provider actually holds the physical gold—in the form of gold bars—within a trust. When you buy shares in a gold ETF, you’re purchasing a figurative slice of the gold that the trust is keeping.
Gold ETFs “are nothing more than paper proxies or derivatives of gold. They do not represent legal ownership of gold. These proxies may work as planned during normal market conditions but may fail under stress, when investors need the safe haven of bullion the most,” one market watcher explained to Wealth Professional.
What Are the Differences Between Gold ETFs and Physical Gold?
Five factors make physical gold stand out when compared with gold ETFs:
- When you own shares of a gold ETF, you own an asset on paper. In other words, you can’t touch the gold that backs the ETF. Physical gold within your own possession, on the other hand, is a tangible asset that you can touch, hold, and store in a safe place.
- Shares of gold ETFs (and the gold supporting them) cannot be sold outside a formal financial setup, but physical gold can be. When you hold physical gold for yourself, you can sell it, trade it, and store it how you see fit (unless you’re holding it in a gold IRA—in that case, check out the gold storage rules for IRAs).
- A company that offers gold ETFs may hit you with management fees.
- Physical gold doesn’t react to the exact same market conditions as gold ETFs.
- Gold has been around for centuries, while the first gold ETF appeared in 2004.
Cited on Wealth Professional, another important difference to highlight between the two is that “unlike physical gold, ETFs have counterparty risk, because there’s a possibility that the other parties, such as the Authorized Participant (AP), the trustee, or others, may default or fail to uphold their part of the agreement.”
What Are the Alternatives to Gold ETFs?
When considering alternatives to paper-based asset like a gold ETF, how can you buy physical gold? You have a couple of options.
- You can buy gold bars or coins from a trusted precious metals distributor like U.S. Money Reserve. Gold bars and coins are typically sold by weight.
- You can open a self-directed IRA, allowing you to hold alternative assets like IRS-approved gold. If this type of IRA contains physical gold, it’s known as a gold IRA.
What Are the Advantages of Owning Physical Gold?
“Gold-backed ETFs have created an illusion, tricking [people] away from examining the benefits of owning physical gold,” Wealth Professional warns.
Physical gold provides several benefits:
- Gold offers portfolio diversification. The price of the yellow metal has historically moved in a different direction from stocks and other paper assets.
- Gold can act as a hedge against inflation.
- Gold can counteract the weakness of the U.S. dollar.
- Gold’s price can go up amid geopolitical volatility when the U.S. dollar is put at risk.
Want to enhance your portfolio with the benefits of physical gold? Download our free Gold Information Kit to learn about the real power of physical gold.