Gold ETFs vs Physical Gold

Asad Dossani
Last time, I discussed why gold jewelry is a bad investment. This is due to the high transaction costs involved in buying and selling jewelry. As an alternative, I suggested gold ETFs as a better way to invest in gold. Many of you have written in comments talking about the merits of ETFs vs physical gold, and I'd like to address that in today's article.

Let's suppose you've decided to invest in gold. And now suppose you're choosing between two options to accomplish this. First, you can buy an ETF. Alternatively, you can buy physical gold bars. What's the best option?

A gold ETF is like a stock that tracks the price of gold. This is definitely the cheapest option for investing in gold. Your ETFs are backed by physical gold stored in a vault. You'll never see the actual gold, but you can always redeem your ETFs for cash at the current gold price. And doing so is extremely easy. Just place an order with your broker.

On the other hand, owning a gold bar will incur higher transaction costs. You'll have to buy from a gold dealer that will take their cut. And if and when you decide to redeem the physical gold for cash, you'll again pay a transaction cost. It won't be as high as jewelry, but it will be higher than an ETF.

Finally, you'll have to store the gold in your home, and you run the risk of it getting stolen, or something bad happening to it.

From a financial perspective, an ETF is the clear winner over physical gold. But there are some benefits to holding physical gold.

The obviously one is that you can see it, feel it, touch it, etc. This isn't a financial benefit, but it is benefit that some people do value. From a financial perspective, does physical gold have any benefits over ETFs?

Yes, but only in an apocalyptic scenario. Imagine that the banking system collapsed, and your broker goes bust. Furthermore, the government is also going bust and unable to fulfil their obligations to ensure deposits. When this occurs, your gold ETF could become worthless. But you'd still have the physical gold.

But let's keep this in perspective. Such a scenario is highly unlikely to occur. The Indian government has never defaulted on its own debt, despite the country going through plenty of economic and political challenges since independence.

Another issue here is what the physical gold would be worth if such a scenario were to occur. If no one has any money, will the gold price crash? We don't know, and hopefully we won't ever find out.  

If I'm making the choice to invest in gold, I'm going with the ETF.

Would you choose to invest in a gold ETF or physical gold? Share your views in the Club or share your comments here.

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23 Responses to "Gold ETFs vs Physical Gold"
04 Aug, 2015
Dear friends, Let ETFs be part of your Investments and wealth creation but not the scope of calamaties. Physical gold is the universally accepted currency alternate. Suppose, you are broke and in some other country, the physical gold comes in handy. The same case even if you are placed in our own country as well. Coming to the Add on charges on Physical Gold, its negligible if purchased in coins / bars. However, the ornaments would not come free of cost. So, what we are not going to take our wealth to heavens. Here, Gold comes first then the making charges which are just 7-8 % for plain jewellery. Its worth because you cant go roaming around in other countries with coins in your pocket. So, physical gold has its place otherwise, why the silver ornaments are not favored much. In nutshell, Physical Gold has its own place. so, have the cake and eat it too. Wish , I could throw some light. regards. Like 
03 Aug, 2015
Please read following news article NDTV | Last Updated: July 31, 2014 14:42 (IST) But in one sweeping step, Finance Minister Arun Jaitley in the budget changed tax laws for gold ETFs and gold funds that fall under the non-equity mutual funds. According to the new tax law, long-term capital gains tax on gold ETFs and gold funds will double from 10 per cent to 20 per cent. What is more, the minimum holding period for to qualify for long-term capital gains tax has also been increased to 36 months, from 12 months. Like 
03 Aug, 2015
I fail understand why most financial experts (knowingly ) ignore fact that 1) gold ETF shall incur 1% to 1.5% mutual fund management fee per year. This is 10 to 15 % in ten years if you are accumulating gold for your daughter marriage 2) There shall be tax on gain you make when you sale ETF to buy physical gold to make jewellery Like 
Sammer Parekh
03 Aug, 2015
I would go for a ETF over Physical gold anyday. I have one query. What is the difference in buying through the ETF route V/s buying through SIP route in a gold fund? What are the tax implications, if any. What is the difference in the returns?Like 
k c sarangi
02 Aug, 2015
ETFs are the best option but still you have to choose from which mf you purchaseLike (1)
02 Aug, 2015
I am not sure if the gold price will crash in an event of Indian catastrophe as its price is largely determined in global markets (USD) and the rupee would have gone for a toss. Infact it will be much more valuable provided some body has the cash to buy it.... I am sure the greeks will prefer gold to drachma today... so the case for gold (as well as ETF) is only if you believe things will get worse globally as well as locally Like 
Geeta Palekar
02 Aug, 2015
It all depends upon perception & with what intention you have invested. If from investment point of view ETF is good but from user point of view physical gold in jewellary form is good as you can wear them in various functions & ladies definitely get pride in wearing them & satisfaction they get is much more than the returns on ETF investments. Regards,Like 
02 Aug, 2015
Interesting. Black money transactions will reduce and also the loss of 30% as you described in your earlier mail will be a gain.Like 
01 Aug, 2015
Zgadzam sie z opisem kontraktowym zlota, tez wolalbym byc EFT jako hurtownik a nie jako skromny jubiler z kilkoma precjozami. Like 
01 Aug, 2015
Sir, Sorry i do not agree.agree. I bought gold etf thru kotak at around 2200/- 5yrs ago thinking it safe.I bought for Rs50000/-.Now it is worth only 4000/-.How do you explain this? kpj Like 
Amod Joshi
01 Aug, 2015
Physical Gold ofcourseLike 
Sharad Narvekar
31 Jul, 2015
hoshang dehnugara
31 Jul, 2015
i will go with gold etfLike 
31 Jul, 2015
There are two more advantages in buying a Gold ETF : 1) There is no brokerage cost involved when buying or selling Gold ETF. 2) There's no capital gaons tax on Gold ETF profits, if sold after one year from the date of pirchase, whereas in case of physical gold it's three years. Like 
31 Jul, 2015
I had invested in gold ETFs during in the past and booked good profit with a single click...Dividend on ETFs also reduces the cost of buying. I wonder when people express fear about buying ETFs and opt for physical gold for the same reason you mentioned. In case of physical holding if apocalyptic situation occur crime rate will also go up and carrying/ holding physical gold will create more stress than worries about value of ETFs gone down. Even in the all-is-well law and order situation there are chain snatching are rampant in urban areas, imagine what will happen in the situation when country going through plenty of economic and political challenges.Like 
Krishnan Venkatasubbu
31 Jul, 2015
I will invest 25 % in physical Gold and 75 % in ETF. The swing is more towards ETF, of course. But minimum amount in physical Gold to satisfy my wife, to see it/feel it/wear it for the functions......Like 
31 Jul, 2015
Dear All, Presently the whole world is resting on fiat money, unrealistic debts of governments so in any crisis which pans out in bigger or longer probably physical gold would make lot of sense as it can be converted to cash very fast. Vibhor JainLike 
31 Jul, 2015
Dear Sir, As per my view, Physical gold is much better option for those having less liquidity.It may be used for marriage of the son, daughter etc. While, as you said Gold E.T.F. is also good for those, who are investing just to earn a money. I have to invest in physical gold. 903873177Like 
31 Jul, 2015
Which is the best gold ETF available in the market.Like 
31 Jul, 2015
Gold ETFs is better than physical gold purchase for some times not in long term say for 10 yrs or more. All are not market oriented and moderate with market rather than take physically hold through locker for safety and security and brings them at the time of urgent need, thouhg it is not earned any interest but increased value not less than purchase value in generalLike 
31 Jul, 2015
definitely gold etf is best.nobody can steal it.nobody can sell it in a pawn shop.value will be increased. iLike 
31 Jul, 2015
Your choice to invest in a gold ETF shows the right direction towards investment in gold.Like 
Kuntesh Damania
31 Jul, 2015
I am regularly reading the Profit Hunter today abou tGOLD ETF can you please suggest in which GOLD ETF should i start SIP? for one year , which is the best please send me the company name. Look forward for your reply. Kuntesh Like 
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