The stock market is getting plenty of attention right now, and along with it, so is “paper gold,” which is a conversational way of referring to gold-related exchange-traded funds (ETFs), futures, and options.
Though similar, paper gold and physical gold are not the same. Here we compare and contrast the two forms of gold to help you weigh the pros and cons of paper gold before you add any assets to your precious metals portfolio.
Physical Gold vs. Paper Gold
Physical gold is the kind of gold you can hold in your hand—bullion bars or bullion coins. In the case of physical gold, you own the bars or coins.
By contrast, paper gold most commonly reflects the price of gold, but only in the form of a paper asset. In other words, a piece of paper is essentially a substitute for physical gold. Types of paper gold include exchange-traded funds, gold futures, and gold options. Think of paper gold as a bit of a catchall term for buying these type of gold-related assets.
Pros and Cons of Physical and Paper Gold
So why choose physical gold instead of paper gold? The reasons are many:
- Physical gold holds intrinsic value while paper gold does not.
- Physical gold is scarce and cannot be replicated. It’s said that the ratio of traded paper gold to physical gold is anywhere from 200 to 250 to 1.
- Physical gold has been accepted as a form of currency for centuries. However, paper gold cannot be used as currency.
- While some governments mint gold coins and bars, physical gold is not directly tied to a country’s financial system. This detachment means physical gold can provide a safe haven against geopolitical turmoil that might otherwise impact a country’s currency. Paper gold might be subject to volatility amid geopolitical unrest.
- Do you hope to pass along wealth to future generations? If so, physical gold could be easier to hand down to your heirs than paper gold is. When you hold physical gold, you have immediate access to it and can pass it on to a family member at a moment’s notice.
- Physical gold diversifies your portfolio by decreasing your allocation to paper-based assets. While paper gold provides you with some exposure to the gold market, it cannot replace the physical attributes of “real” gold you can hold in your hand. You could even argue that in a way, paper gold increases your allocation of paper-based assets.
One of the advantages of paper gold may be that it could cost less than physical gold. However, you must consider whether the potentially lower cost would offset the various advantages of physical gold.
Is Physical Gold Better Than Paper Gold?
Are you looking to gain exposure to the gold market? Consider owning physical gold. Among other benefits, physical gold is tangible and has proven to be a reliable form of wealth across many centuries, continents, and cultures.
“The reasons for buying and holding coins, rounds, and bars have been multiplying over the past year and a half,” Stefan Gleason writes on Investing.com. “Precious metals prices respond well to chaos and uncertainty, and more of both seem likely.”
Inflation, Federal Reserve dovishness, and continued civil unrest could all drive bullion demand in the near future, according to Gleason.
Overall, physical gold may offer a different level of protection for your portfolio than paper gold can. But take a look at your precious metals portfolio to determine the best course of action for your needs. You may find that for you, paper gold and physical gold are complementary, not exclusive.
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