A common question asked by prospective investors is: “What’s the difference between buying physical gold and simply investing in a gold ETF (exchange traded fund)?” In order to determine which investment medium may potentially fit an investor’s needs, we must first educate them on the three key factors to consider.
1. Market Volatility
The biggest difference between physical precious metals and those held via indexes is simply the presence or absence of the digital market. Physical gold is stored at home or in secure depository facilities, while ETF investments are purely executed via digital trading platforms and stored virtually. While the convenience of being able to trade almost instantaneously may be appealing, a precious metals index is still very susceptible to market volatility.
This volatility is magnified by the ability of the gold ETF to engage in leveraging, which means that ETF’s do not hold every ounce of gold that their funds trades upon. Not holding the physical gold leaves the funds highly susceptible to even the smallest of downward movements in the market. In contrast, holding physical assets, such as gold bars, historically acts as a hedge against major market turbulence (i.e. the 2008 stock market crash).
2. Fund Manager vs. Supply and Demand
The value of gold, while typically universal, can be affected based on the form an investor chooses to hold it in. The value of physical metals is generally determined based on global supply and demand. For example, if China builds more solar panels utilizing silver components, the higher we see the price of silver climb.
A precious metal index on the other hand has additional factors that play into the value and ROI an investor receives. A mutual fund or ETF is going to hold a variety of precious metal investments, all affected by market movements and supply and demand. Fund managers determine which assets are included and excluded daily in a gold ETF and could have a significant impact in the fund's results.
3. Disaster Preparedness
Whether it’s a stock market crash, war or a natural disaster, there is one advantage physical assets can provide that indexes cannot – financial security. While devastating to imagine, the reality of our financial assets being rendered inaccessible or, god forbid, wiped out, is very possible. When digital assets are unavailable, physical assets provide a way to access and store wealth.
Depending on an investor’s goals the main differences between physical precious metals and indexes should be evaluated and considered closely. For investors looking to secure long-term financial security and work toward a healthy retirement, physical precious metal assets are the path to consider.
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