Unlike physical gold, ETFs can be bought on a stock exchange just like stocks. ETFs give investors access to gold while avoiding the costs and inconveniences such as premiums, storage costs, and security risks associated with holding physical gold. While gold ETFs can be a good investment, they come with a high counterparty risk associated with their custody chain. And this risk will only increase in line with systemic uncertainties.
Gold ETFs are backed by 99.5% pure gold, so investors can rely on the quality of gold. Investors keep the gold ETFs in a Demat account and don’t have to worry about their safety, as is the case with physical gold. The pricing of physical gold is not usually uniform, whereas the gold ETF follows international prices. Dhanteras, the first day of Diwali in India, is considered cheap to buy gold and silver.
Buying gold on cheap occasions is part of the Indian tradition. Investments in gold can take the form of physical gold, government gold bonds, gold ETFs, and gold funds. Gold ETFs are basically exchange-traded funds that invest in gold. As mentioned earlier, you won’t actually own physical gold with this type of ETF.
Gold ETFs give traders the opportunity to invest in gold without having to handle the physical gold. Gold ETFs are generally trusts, and a share in an ETF is a paper asset that represents a specific amount of gold held by the trust. Each share can be bought and sold just like a stock. Instead, the government classifies this type of investment as a collectible, subject to the same tax rules as owning physical gold.
This creates a scenario in which investors essentially hope that the statement they receive about their gold ETF investment is true, especially since they’ll never see any of the gold they supposedly invested in. There are various gold ETFs you can invest in, but you should expect to pay a commission and fees per trade based on your fund’s expense ratio. Although their investors never own the actual gold, these trusts hold physical gold. The other advantage is that options allow you to use leverage, which can be risky, but that’s not possible with gold bars.
When you take a closer look at both assets, it becomes clear that gold ETFs and gold bars are very different investments. Unlike investing in something like a steel company, the gold you invest in doesn’t generate any income. The value of the gold in the vaults is likely to be much higher than this limited policy would cover. Instead of getting access to physical gold, you simply get a paper or online document that states how much gold your investment involves.
However, since gold ETFs are part of the banking system that you need to be protected from, you need to ask yourself whether they serve one of the primary purposes of owning gold. Much to investors’ dismay, this is true every time you sell your gold ETF, as the government considers it a taxable event. Gold ETFs may seem like a great option given the historical value that gold has had for over a century, but they’re actually not the best decision when it comes to using money to invest. Gold is a rare natural resource, so there is only a limited amount, and the new supply is limited compared to the amount already in circulation.
Therefore, you should consider this if you’re not sure whether or not to invest in gold ETFs. There is no middleman and no counterparty risk, just direct ownership of gold bars, which are stored securely and fully insured. You should only buy gold physically if you buy it for immediate personal consumption and use.