Gold ETFs, also called “paper gold,” have become more popular in recent years. However, there’s a common misconception that investing in a gold ETF has the same effect as buying physical gold. The truth is that there are significant differences.

What Is a Gold ETF?

First, let’s examine what is meant by paper gold. A gold ETF is an exchange-traded fund - an investment vehicle. Simply put, a gold ETF is a paper document that gives you a share in a fund that is intended to follow the price of gold. The most common are GLD (NYSEARCA:GLD) and SLV (NYSEARCA:SLV)

Do You Own the Gold?

The short answer is, no, you do not own the gold when you have a gold ETF. In some cases, the fund has a store of gold, but even then, you do not directly own the gold. This type of investment is called a physical gold ETF. 

Commodity gold ETFs are simply funds that follow the gold market. Even the fund itself may not own any gold, and you certainly don’t. In either case, if you wanted to trade in your gold ETF for gold, you would quickly find out that is not possible. 

ETF Managers Can Create More Shares

One thing that’s different between paper gold and physical gold is that gold ETF managers can add more shares if the demand is high. This means that there’s more paper backing less gold, if the company actually holds any gold. Then, if demand decreases, the ETF weakens, and the managers may have to resort to selling assets if you want to redeem your shares.Ultimately, this can lead to the ETF company’s default. If that happens, your shares will lose all value.

Counterparty Risk with a Gold ETF vs. Physical Gold

Whenever you trade in ETFs, you face counterparty risk. That is, your ETF contract could quickly lose value or even become worthless if the ETF funds managers make a mistake, commit fraud, or create an unsound structure for the ETF. You are dependent on the managers’ skills, honesty, and financial stability. 

With physical gold, you have no counterparty risk. You already own the gold. The gold does have to be stored somewhere, and if it’s in an IRA, it has to be managed by a custodian. Yet, none of the people that could come in contact with or manage your physical gold can change the fact that you own it directly. 

If someone broke into your home would you rather have a share of Smith & Wesson stock or a Smith & Wesson in your hand?

When Does an ETF Make Sense?

At this point, it’s natural to ask, why do people invest in ETFs? A gold ETF does offer a few advantages.

• People who have very little to invest can buy a few shares without making a large investment. ETF shares usually represent 1/10 ounce of gold.
• It’s fast and easy to sell ETF shares - provided that the ETF company isn’t in default.
• You don’t have any storage or transportation issues or costs with an ETF.
• You can buy it quickly and easily online
• Skilled short-term investors can see gains from the quick and wide fluctuations in the market for a particular ETF.

Therefore, if you have only a small amount of cash to invest, a gold ETF might be the right choice for you. Those who prefer making frequent exchanges might prefer ETFs. If, on the other hand, you’re a serious, long-term investor, an ETF might not be the best option for you.

The Benefits of Physical Gold

It’s important to know the differences between physical gold and ETFs. Bullion does have some advantages that ETFs don’t share.

You Own Physical Gold

When you buy physical gold, you own it directly. You make the decisions regarding buying, selling, and storage. You don’t have to worry about a company that holds your gold going under. If they do, your gold is still there, and it’s still yours. In fact, if your gold were stored in a bank vault and the bank folded, they would have to give you your gold, because they don’t own it - you do. They don’t even record it on their balance sheet, because it is not their asset.

Physical Gold Offers True Diversification

Diversifying your investment portfolio is critical. However, paper securities, such as stocks, bonds, and yes, gold ETFs, are all paper, and they’re all tied to the dollar in some way. Because of this, sticking with only paper investments doesn’t provide you with the true diversification you need.

When the dollar becomes weaker or the economy tanks, paper investments dependent on the dollar can decrease in value rapidly. In the same scenario, gold prices typically stay stable or increase. 

Physical gold is profoundly different from other types of investment. Gold is scarce, and its value has been recognized throughout the ages. What’s more, it doesn’t matter where in the world you go, gold has value everywhere. 

Understand the Value of Physical Gold

Gold ETFs may be popular, but nothing can replace the long-term, reliable value of gold. If you’d like to learn more about the benefits of investing in physical gold, such as bullion bars and coins, speak with our gold specialists at True Gold Republic. 

Interested in learning how to buy gold and buy silver?

Call 1-800-300-(GOLD) and speak with a Precious Metals Specialist today!

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