Gold ETF or Actual Gold: Which is the Better Investment?

The financial market has recently experienced a whirlwind of unforeseen changes and dramatic shifts. From the stock market crash in 2020 to issues related to Fintech, geopolitical events, and even the consequences of Brexit, it's extremely challenging for novice investors to make informed decisions without trustworthy advice. Luckily, there's an alternative that remains relatively stable and isn't too adversely affected by external factors - gold.

‍The Appeal of Gold

Gold as a safe haven asset: Gold has long been considered a reliable safe-haven asset, helping to preserve wealth during economic or political turbulence. The rationale behind the gold investment is its ability to serve as a buffer against inflation and market volatility, as its price typically increases when other asset classes decline.

Gold as a store of value:

Unlike cash or paper currencies, gold cannot be printed or fabricated out of nothing. This renders it an incredibly valuable asset since its supply is limited, and its inherent value remains unscathed during financial crises.

Gold's liquidity:

Gold can be readily converted into cash if necessary, unlike other investment types such as stocks or real estate. It is simple to purchase and sell gold on the open market, making it a desirable asset.

Gold as a hedge against currency devaluation:

Since gold's value is not linked to any specific currency, it is not exposed to the same foreign exchange risks. This renders it an ideal asset for those aiming to safeguard their wealth from potential currency devaluations.

Gold for diversification: 

Gold investment can enhance portfolio diversification, as it is uncorrelated with the stock market and other traditional asset classes. Consequently, it can help mitigate your portfolio's risk, making it an excellent choice for risk-averse investors.

As long as investment returns are closely monitored over time, investing in gold can be a low-risk yet fruitful endeavor.

There are two primary methods for investing in gold - through an ETF (Exchange Traded Fund) or by purchasing physical gold. However, deciding between the two can be challenging. Which option provides the most secure and profitable returns? What distinguishes a Gold ETF from actual gold investments, and which should you select?

‍Defining Actual Gold

Actual gold refers to the precious metal gold in its tangible form. It can take various forms, such as coins, bullion bars, and jewelry. It has served as a form of currency for centuries and remains a vital asset today.

You can acquire physical gold from diverse sources, including banks, online dealers, and pawn shops. It is crucial to deal with a reputable gold dealer to secure the best price and ensure your purchase is authentic.

Since gold's supply is finite, there will always be some degree of risk associated with its purchase. Additionally, gold prices can change rapidly, making it essential to buy from a reliable source and research before investing in physical gold.

Conversely, buying actual gold involves no counterparty risk, as there are no contracts or intermediaries. It is also a tangible asset, allowing you to physically possess it, making trading or exchanging more straightforward.

The returns on actual physical gold depend on market conditions and supply/demand dynamics, making it challenging to forecast returns.

To trade or exchange physical gold, you need to find a buyer or seller willing to transact with you. This can be difficult, as it's not always easy to find someone who wants to buy or sell the same amount of physical gold simultaneously.

You must also consider storage costs for your physical gold, as it can occupy significant space and necessitate special security measures.

‍Understanding Gold ETFs

A gold exchange-traded fund (ETF) is an investment instrument that tracks gold's price and offers investors exposure to its movements without the need to purchase physical gold. It is a mutual fund traded on a stock exchange, with gold as its primary asset.

Gold ETFs provide investors with a convenient and cost-effective method to gain exposure to gold price movements without needing to buy physical bullion bars or coins. This makes them an appealing option for investors seeking to diversify their holdings or hedge against inflation.

Gold ETFs also offer liquidity, as they trade like stocks, meaning you can sell them at any point during the day. They usually have lower fees and taxes than other gold investments, rendering them a more cost-efficient alternative.

To trade in ETFs, one must use a trading and Dematerialized Account (Demat Account), similar to stocks.

A trading and demat account is an electronic system that allows individuals to buy, sell, or trade securities such as stocks, commodities, mutual funds, and exchange-traded funds (ETFs). It also enables them to store these securities in a digital format known as the Demat Account.

To open a trading and demat account, one must complete an application form with basic details such as name, address, contact number, etc.

Upon finishing the application process, a unique trading and demat account number is generated for the applicant, which can be used for conducting transactions in the stock market or exchanging securities through a broker.

A Gold ETF's value is based on the current gold price. One unit of a Gold ETF is equivalent to one gram of gold, and the ETFs are backed by physical gold.

This means that when an investor buys a Gold ETF, they will own an equivalent amount of gold as a physical gold investment without needing to store it or be concerned about its security.

‍Comparing Physical Gold and Gold ETFs: Which One is Superior?

The answer depends on various factors, as investors have different needs. However, there are some notable differences between these two types of gold investments:

Price:

When opting for physical gold, prices can vary based on local costs and fees. Conversely, gold ETFs have uniform pricing that adheres to international standards. This means no hidden expenses, ensuring transparency throughout the process.

Additionally, gold ETFs offer market-linked prices, which can contribute to profitability over time.

Investment:

Physical gold has historically been a popular strategy for generating passive income, but it often requires a significant investment. Gold biscuits and coins usually come in ten-gram denominations, meaning a substantial outlay of money upfront.

Gold ETFs provide a more convenient and lower-risk alternative for investors. One ETF unit is equivalent to one gram of gold, allowing investors to purchase smaller amounts at lower costs. Trading on stock markets worldwide offers flexibility in deciding how and where to invest your money.

Cost:

Purchasing gold jewellery can be costly, as it often involves a 20-30% markup due to craftsmanship and design. In contrast, gold ETFs have a more reasonable expense ratio of 1% and brokerage charges close to 0.5%. Gold ETFs offer exceptional value for money.

Wealth Tax:

Wealth tax, a levy imposed on an individual's net worth above a specific threshold, varies by country. For example, in India, if a person owns over INR 30 lakhs in actual gold, they must pay a 1% wealth tax on their gold assets' total value. No wealth tax applies to gold ETFs, benefiting investors who would otherwise face significant expenses from physical gold ownership.

Taxation:

Gains from physical gold investments held for less than three years are taxed at the investor's income tax bracket rate. If held for more than three years, gains are taxed at a flat rate of 20%, with indexation advantages.

Gold ETFs' short-term gains (held for less than three years) are taxed at marginal rates, while long-term gains (held for three years or longer) are taxed at 20.8% (including cess) with indexation and 10% without indexation.

Returns:

Physical gold's return rate is calculated by subtracting the purchase price and making charges from the current market price of gold. Gold ETFs, however, assess returns by subtracting the purchase price and brokerage charges from the current trading price of a gold unit on the exchange. Due to market-linked prices, Gold ETFs potentially offer higher returns than physical gold.

Liquidity:

Physical gold provides excellent liquidity, as it can be bought from banks or jewelers worldwide and exchanged through jewelers in any country. Gold ETFs, traded on the stock exchange, offer the convenience of purchasing and selling as easily as trading stocks, providing flexibility when liquidating gold investments.

Also Read : Assessing Noble Gold: A Comprehensive Review

Final Thoughts

Both gold ETFs and actual gold are attractive investment options. Gold ETFs allow convenient trading on the stock market, while physical gold provides tangible portfolio diversification and a secure store of value.

Ultimately, the decision depends on your investment strategy and risk profile.

Gold is a potent addition to any portfolio, offering long-term stability and security. If you're considering investing in gold, research and consult with professionals to make the right choice for your needs.

We suggest looking into gold IRA companies specializing in helping individuals invest in physical gold and other precious metals. They can provide valuable insights into suitable options for your goals and offer comprehensive services, such as secure storage options and tax advice.

Ready to begin investing in gold? Contact us, and we'll help you find the ideal Gold IRA provider. Our team of experts has examined and researched the top service providers in the