What Is Paper Gold? Physical Gold vs. Paper Gold

by | Aug 26, 2020

If you’re looking to invest in gold, you might have a mental picture of what that looks like: gold bars stacked high on a table in front of you, or a giant vault of coins you can swim in. The truth is these are just two types of gold you can buy.

Another type is what’s known as “paper gold.” Despite what the name may imply, it’s less tangible than the other types of gold mentioned here. But that doesn’t mean it’s not worth investing in.

Both of those options for gold investment provide benefits and concerns. And it’s not as simple as a hands-off approach versus a physical good. Storage, costs, fees, and maintenance are all things you will have to consider and research before investing in any type of gold.

Which is the best choice for you? Read on to find out a bit more about what each option can provide you.

What is Paper Gold?

The first thing to know about physical gold versus paper gold is the primary difference between them: what they look like.

Physical gold is precisely what the name implies and what you were thinking of when you first envisioned investing in gold. It covers things like gold bars or coins that investors can hold and own outright.

On the other hand, paper gold is the term applied to investments that cover gold exchange-traded funds or ETFs. If you’re familiar with how mutual funds work, then gold ETFs won’t throw you for a loop. Essentially, your fund buys a certain amount of gold and issues shares in that fund. The value of your shares will theoretically track the price of gold, rising and falling as a result.

It functions like any other fund, where you’re unlikely to ever physically hold your investment in your hands, but you still own it. Once you have shares in an ETF, it’s up to your fund’s custodian to manage. You would be able to track the value of your gold ETF the same way you would any other stock since ETFs are traded publicly on the stock market.

You don’t have to pick one form of investment over the other. But if you’re just starting, it’s worth thinking about what more accurately fits your lifestyle.

Where Do You Buy Paper Gold?

If you already have a broker you can trust, they can help you find an ETF that fits your needs. If you have further questions, we can also help you figure out what sort of paper gold fund is best to balance your portfolio.

What Are the Advantages of Investing in Gold ETFs?

Depending on your investment strategies, there are plenty of positives to utilizing a gold ETF in your portfolio. Among some of the pros include:  

  • Affordability: You can buy it in smaller amounts and don’t have to worry about the costs of storing or delivering the gold.
  • Liquidity and Leverage: Gold ETFs are much easier and efficient to trade. As long as you have access to the market or bank, they are easily liquid. You can also trade the most liquid ETFs with options.
  • Flexibility: If the type of gold you’re investing in isn’t something that matters to you. In that case, an ETF would be perfect for you, since it is a liquid asset that invests directly in gold coins and bars.

What Are the Disadvantages of Investing in Gold ETFs?

The advantages of ETFs should be weighed against their downsides before you make any decisions. To determine whether a gold ETF is right for you, consider these cons:

  • You don’t own it: If you can’t hold it, you can’t take physical possession of it, unlike physical gold. If things go south, all you’d be able to get is a cash settlement.
  • Bad management risks: Similar to the first point, if you don’t own the gold outright, then you’re relying on intermediaries to manage it for you. Those third parties could file for bankruptcy, or obscure whether they own the gold investors are buying.
  • Solid selection: When you invest in physical gold, you get to pick in what form the gold is. Since gold isn’t valued as a monolith, that means that certain types will hold their value more than others. With ETFs, you don’t get to choose what form your investment takes. You’re purchasing shares of a gold bar, and that means there may be limitations on how your investment will grow over the years.
  • Market whims: Subsequently, your valuation is dependent on how the market is buying and selling gold. That makes it more volatile than you may want a “stable” investment to be.
  • Expense ratio and other fees: The expense ratio is the recurring annual fee charged by funds to cover the management expenses and costs. You may have to pay that on top of commission for the buying and selling of an ETF. It’s important to know if these costs outweigh the burden of physical gold storage.

Where Do You Buy Physical Gold?

buying physical gold
You can purchase physical gold through the internet. You’ll find direct sellers, which relieve you of some of the costs that come with negotiating through mediators.

But it’s best to start with a bit of research. Do you know what kind of gold you want? Which type of gold coin is most appealing for your needs, based on its nationality, weight, and purity? Are you sure the retailer you’re buying from is reputable?

If you’re worried about where to start, we can help. Our experts know how to help you navigate the world of gold investment and are happy to help you find a reputable dealer for physical gold.

Advantages of Investing Physical Gold

 Physical gold will always provide the most direct exposure to gold, especially when compared to paper gold. Experts commonly cite bullion, bars, and coins as the best way to purchase gold because it provides the most security to the investor.

Other advantages include:

  • Tangibility: If you can hold it, you know you own it, which is provides some of the greatest peace of mind when it comes to investments.
  • Reliability: Sure, gold’s overall value with swing back and forth over time. But given the centuries of appreciation, you can trust that your gold will never be truly worthless. By owning it outright, you have the most solid investment money can buy.
  • Malleability: Even if you can’t find a way to sell your gold as a currency, gold is always in demand for something; industrial purposes, jewelry, etc.

Disadvantages of Owning Physical Gold

If you’re worried about having gold bricks sitting around your house, you’re not alone. That’s one of the most commonly cited downsides to investing in physical over paper gold. Others include:

  • Upfront costs: As one might expect, gold in the form of coins or bullion will come with premium costs. Depending on how you’re acquiring the gold, it may also cost you more to cover the insurance, transportation, or expedition fees. Depending on your municipality, you may also have to pay taxation on the gold.
  • Storage: Pop culture loves the visual of a thief stealing gold bars for a reason, and that’s a genuine fear for those who opt to invest in physical gold. If you go this route, proper storage and protection of your investment won’t come cheap, either.
  • Slow to liquidate: Because physical gold comes as a tangible thing, it’s not as easy to unload a little at a time, like paper gold is.
  • Backend costs: Whenever you decide to sell your gold, you will once again likely have to pay the dealer’s fee as part of the purchase.

What’s Better: Physical Gold vs. Paper Gold

While owning physical gold or paper gold may share the overall stability that comes with gold investing, there are certainly positives and negatives to investing in either option. What is right for you might not be the right thing for everyone.

But diversification can be your friend. If the costs or struggles that come with either physical or paper gold don’t sway you one way or another, many people find a way to allow their investment portfolio to include both. It’s all about weighing which method can fit within your specific needs.

After all, in any form, gold should never be the sole thing in your investment portfolio. Though it’s reliable compared to many other commodities, its price will fluctuate from time to time. It’s considered a safe haven investment when it’s part of a balanced strategy to keep your goals and expenditures in line with your lifestyle needs.

If you think you might want more help navigating the tricky market of gold investing, you’re not alone. We can help you determine what sort of fees and information you need to fully consider to know what type of ownership you’re most comfortable with.

Don’t hesitate to reach out and see what our friendly staff can do to help you with your gold investing journey.

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