There are several ways you can buy gold, but which one is better? Here are the reasons why physical gold is superior to paper gold.
It’s no secret that gold makes an exceptional addition to a portfolio. It’s a safe-haven asset that doesn’t rely upon fluctuations in the stock market. However, all that glitters isn’t necessarily gold—there are paper options that eliminate the need to actually purchase and store the actual metal. But is it worth the risk? Not really.
You don’t own the physical metal.
Basically, paper gold—exchange traded funds (ETF) and pool accounts—is a contract that is backed by the value of gold. You are buying a share of a store of gold—you do not actually own any gold, but are instead investing in the performance of gold.
Fees, fees, and more fees
There are numerous fees associated with paper gold—brokerage fees,commission, and management expenses—that could corrode your return.
Significant counterparty risk
Like any type of futures contract, you are depending on upon the stability of the primary custodian of the gold. You don’t hold the title to the gold itself, but are instead relying upon the bank/financial institution that may be holding physical gold and gold derivatives. It is very possible that the institution isn’t actually holding the amount of gold that they want investors to believe.
One of the main advantages of owning physical precious metals is that they exist outside the financial system. ETFs could be adversely affected should a banking crisis occur again. (When MF Global declared bankruptcy, clients’ gold accounts were drained.)