Paper Gold vs Physical Gold

For investors out there! Are you planning to invest in gold? I have good news for you! Are you aware that there are many avenues that you can use should you decide to invest in gold? These avenues are broken down into two approaches: buying paper gold and buying physical gold. First, let me give you a short explanation of the two:

Physical Gold

This is what most of you think when you hear the word “gold”, including jewelry, bars, and gold coins. Physical gold refers to all gold products without numismatic value.

Paper Gold

This is intangible and available in many forms of financial assets including exchange traded funds or gold mutual funds.

No matter what type of gold you decide to partake in, you have the chance to engage with the instabilities of the gold market. Though, it’s vital to understand the pros and cons associated with each form of gold before arriving at your decision at investing in an a gold alternative.

Physical Gold Investment: Exploring the Pros and Cons

Physical gold is a tangible asset. But, like other types of investment, physical gold also comes with perks and flaws. Let me give you an insight into the pros and cons of this form of investment:

Advantages

If you’re finding the most direct approach to acquiring and possessing gold, opting for physical gold is a clear choice! Typically taking the form of coins, bars, or ingots, investment-grade physical gold boasts a purity of at least 99.9% and is easily valued. Here are some notable advantages of embracing gold in its tangible form:

Tangibility

The palpable nature of physical gold stands as a distinct advantage, allowing you to see, touch, and hold your investment. Particularly during times of economic uncertainty, the presence of tangible assets garners heightened appreciation from investors.

Aesthetic Appeal

Gold without a doubt is an undeniable and unmatched beauty. Gold’s aesthetic value contributes to its long-lasting and historical significance, which renders it an important possession all through the years.

Versatility

Beyond its historical role as currency and a store of value, physical gold holds the potential for transformative use. Whether fashioning it into jewelry or harnessing its properties for industrial purposes, the adaptability of physical gold augments its inherent worth.

If you engage with physical gold, it presents a chance to intertwine tangibility, appeal as well as utility. This makes a very compelling way for us to seek a historically and tangible revered investment.

Physical Gold Investments Drawbacks

Physical gold is a good investment. However, it also comes with flaws that are worth considering. Some of the common cons are as follows:

Markups

Since actual gold is often at least 99.9% pure, figuring out its “true” worth is simple. Unfortunately, you will always pay more for actual gold than its current market worth since dealers mark up the price to earn a profit.

Storage

You need a place to keep your physical gold if you own any. It can be unsettling to keep gold at your home because it is weighty and bulky. A custodian will charge you fees if you want to have them store it for you. Additionally, you’ll need to pay for insurance.

Illiquidity

Although you can always find a buyer for your gold, if you are eager to sell, you might not obtain a very favorable price. You will have to work with a dealer who may or may not give you the best price because there is no open market for the buying and selling of gold bullion. The transaction’s actual execution will take time as well.

Paper Gold Investment Overview

Paper gold refers to the asset which signifies the value of gold but is not gold. It is not supported by true or real metal; thus, it is only worth paper.

Possessing paper gold enables you to get exposure to gold prices without owning real gold bullion. It is more advantageous for long-term investing than stock trading.

Paper gold assets are not in the form of physical precious metals but rather represented through financial instruments such as gold exchange-traded funds (ETFs), futures contracts, options, gold futures, or other derivatives. These instruments provide exposure to the price movements of gold without requiring the ownership or storage of physical metal.

While paper gold assets offer convenience and flexibility, they also entail counterparty risk, as investors rely on the issuer’s ability to honor the investment.

Unlike owning physical precious metals, paper gold assets do not grant direct ownership of the underlying precious metal, making them subject to market fluctuations and potential disconnects from actual gold prices.

Paper Gold: Overview of the Benefits

Compared to physical gold, paper gold offers a lot of benefits that take into account the following:

Liquidity

Unlike real gold, which is difficult to buy or sell, paper gold may be purchased or sold on the open market in a matter of milliseconds in the form of gold mutual funds, gold ETFs, or even gold mining stocks.

If you choose a zero-commission broker, you won’t even be charged any fees to buy or sell your gold investment; you can always know what the market price of your gold investment is.

No Additional Costs

With your paper gold, you won’t need to pay for storage or insurance.

There is No Risk of Theft

Even though you can insure your gold, there is still a chance that a thief may steal your investment. Since your investment is only an electronic entry, there is nothing to physically steal while dealing in paper gold.

Paper Gold Drawbacks

Despite of many advantages this type of investment offers, it comes with some flaws. For investors out there, my advice is to think of these flaws when deciding between paper gold vs. physical gold.

You Don’t Own Tangible Gold of any Form

Even if you may hold a financial asset that is correlated to the price of gold, you do not own any tangible gold.

Your Investment Might or Might Not Posses Actual Gold

Portfolio managers monitor mutual funds and exchange-traded funds (ETFs), which may or may not own physical gold.

Your fund might not even own physical gold; instead, it might hold shares of gold mining firms, depending on the prospectus’s restrictions. To find out where your paper gold is invested, you’ll need to do some investigating.

Market risk

Despite rising gold prices, your paper gold may trade at a loss due to a variety of market variables. Supply and demand, negative publicity, or macroeconomic shocks are a few examples.

Expense Ratio or Cost Ratio

Although owning paper gold would not require paying a commission, it almost certainly will require continuous annual expenses in the form of an expense ratio. The fees that a fund automatically deducts to cover its managers’ salaries, administrative costs, trading commissions, and other expenditures all lower your overall return.

How to Buy Physical Gold vs. Paper Gold

You must visit a precious metals dealer if you want to purchase actual gold. Pick a broker with a solid name in the market, affordable fees, and dependable customer service. Refrain from doing business with gold sellers that are pushy or who try to sell you on assets that you don’t need or want.

You can typically engage with a broker who already manages your other investments to purchase paper gold.

You may typically purchase paper gold on the open market, preferably through a zero-commission broker, as it is available as mutual funds, ETFs, or even gold mining stocks.

Which Investment Is Better?

Investments in physical gold and paper gold might be significantly different from one another. While the value of real gold may fluctuate with the gold market, you will pay dealer markups or fees when entering and exiting positions.

With paper gold, you might be able to avoid those fees, but even if your fund is a pure bullion fund, there is no assurance that it will track the price of gold as closely as physical gold.

This does not automatically imply that one form of gold investment is superior to another. The optimal investment may not be the same for you as it is for someone else due to differences in financial circumstances, investing goals, and risk tolerance.

Examining what you want from your gold and your investing style is one way to choose the best investment.

Buying both physical and paper gold is another way to diversify your holdings of metal. Whatever form of gold you choose, keep in mind that it should never make up the entirety of your financial portfolio.

FAQ

Here are some of the most often-asked questions about the differences between actual gold and paper gold.

Is physical gold used to back up paper gold?

Your paper gold investments might or might not be supported by real gold. Portfolio managers are in charge of managing mutual funds and ETFs. Your fund might not even own physical gold; instead, it might hold shares of gold mining firms, depending on the prospectus’s restrictions. To find out where your paper gold is invested, you’ll need to do some investigating.

Is it fine to buy paper gold?

Paper gold can be an excellent investment since it offers liquidity, no extra fees, and no chance of theft.

What kind of gold retains its value the best?

Gold bars tend to hold their value and are highly popular with investors.

Tim Schmidt

About 

Tim Schmidt is an Entrepreneur who has covered retirement investing since 2012. He started IRA Investing to share his expertise in using his Self-Directed IRA for alternative investments. His views on retirement investing have been highlighted in USA Today, Business Insider, Tech Times, and more. He invested with Goldco.