Gold is an important part of any investment portfolio. It is the best hedge against uncertain economies and a great way to protect your portfolio from risks. Gold is also an excellent way to store wealth.
With all these reasons, it is not surprising that you want to add gold to your portfolio. But then you find out that you have to choose from two options. You could buy physical gold or gold stocks. You are stuck between the two and wish to know which option is best.
The correct option depends on your goals and needs. They offer different benefits for your portfolio, and only when you know the difference can you make an informed decision about which option to buy.
This article is an attempt to help you answer that question. We will look at the two options in the backdrop of different scenarios and see how they fare against each other.
What Is Physical Gold?
Physical gold is gold, as most people know it. A simple definition would be that physical gold is tangible gold you can touch and feel. The most common kind of physical gold is Jewelry.
But jewelry isn’t what comes to mind when discussing investing in physical gold. What comes to mind in this situation are gold bullions: Bars and coins that are usually at .9999 Gold fineness.
1. Gold Coins
If you have watched enough pirate movies, you probably thought gold coins were the only kind of gold to exist. Gold coins have been around the longest. It is believed that the first gold coin to be produced was in the 6th century BC.
Gold coins were used as currency, and in some parts of the world, they still retain that use. However, gold coins are now mostly used as investment options.
2. Gold Bars
Investors will tell you gold bars are the best way to purchase physical gold because you buy them at the lowest price possible.
Gold bars can be cast or minted. You might be able to tell the difference between these two forms if they are placed side by side. However, aesthetics is the only difference between these two forms. Their values are still the same.
Related Article: Gold Coins Vs. Gold Bars
What Is Gold Stocks?
When you buy gold stocks, you buy gold shares. The implication is you have a piece of paper that states you have ownership of a particular amount of the precious metal. The gold is not in your possession, but you are reaping the benefits of a gold owner.
They are often referred to as paper gold and come in different forms; Gold Certificates, Mining Stocks, and Gold ETFs.
Unlike physical gold, you can buy paper gold or gold stocks without any premium. You also do not have to worry about storage and security.
1. Gold Certificates
This was one of the earliest ways of buying gold stocks. They are no longer as popular since the USA left the gold standard.
Gold certificates are documents that state you own an amount of gold that is not in your possession. So they are not stocks in the literal sense, more like proof of ownership.
However, gold certificates have a major disadvantage. If the company that gave you the certificate goes bankrupt or dissolves, you lose all your investment. This is another reason gold certificates are not popular anymore.
2. Gold Mining Stocks
Gold mining stocks are not stocks for gold. They are shares of a gold mining company. You go on a stock exchange and purchase shares in a gold mining company. The value of your shares rises or falls depending on how well the company is doing on the market.
The value of your gold mining stocks is not tied to the value of gold. While it is usual to see the price of these stocks fluctuate with that of Gold, it is not always the case.
3. Gold ETFs
A gold ETF or gold exchange-traded fund is a means of buying gold mining stocks in different companies.
A gold ETF invests in different companies, so when you purchase shares in the ETF, you buy stock in all these companies. Gold ETFs trade on the stock market like all stocks and ETFs.
The beautiful thing about gold ETFs is that they reduce the risks you face from buying shares of one gold mining company.
Where Do You Buy Gold Stocks?
Buying gold mining stocks or gold ETFs gives you indirect access to gold. With stocks, you buy into a particular company, but ETFs give you access to shares from different companies.
The process of buying gold stocks and gold ETFs are similar. You can purchase them through brokerage firms and trade them on the stock market.
Because you can trade them on the stock market, you can also keep tabs on the value of your shares.
Watch to learn more from this video:
Pros And Cons Of Physical Gold
Pros
- Your Gold Will Always Be Worth Something: Physical gold retains its value. You own a physical asset that is liquid. You can sell it for money anytime you want. Even if the price of gold goes down, you can still sell your physical gold.
The great thing is that the price of gold seems to have an upward trajectory, so you do not have to worry about the price for a long time. - It Is Stable Even During Economic Uncertainty: This is another great thing about tangible gold. Stocks, gold stocks included, tend to do poorly during economic uncertainties.
Physical gold does not have this issue, and history shows gold does better when the stock exchange suffers. Physical gold is great protection against economic crises, inflation, wars, and recession. - Can Be Used As A Legal Tender: Physical gold, especially coins, was first used as legal tenders. In some places, it still retains this use. And if Fiat currency loses its value, you can use your gold as legal tender.
- Complete Control Over Your Asset: When you buy gold, you gain complete control of your holding. You can store and use them as you see fit. You also do not require permission from anyone to sell them.
- No Third-Party Risks: Because you have control over your physical gold, you do not face any third-party risks. You do not have to deal with external parties once your gold is in your possession.
Cons
- Requires Storage: Physical gold is tangible, so you need to find a suitable storage space for them. You can store them anywhere, including sticking them under your mattress, but you should know that you carry the risks of loss, theft, and damage.
Looking for a secure storage option means you have to spend money on storage. And the storage option you choose might mean you have to pay regular fees. - Requires You To Pay Premium: If you are buying physical gold, you need to pay a premium. This is not something you see when you buy gold stocks. The amount of premium you pay depends on the form of physical gold you buy. Bars tend to have a lower premium than other forms of gold.
Pros And Cons Of Gold Stocks
Pros
- You Can Easily Add Them To Your Portfolio: If you are in the investment field, then you probably have stocks and trade the stock markets. In this situation, buying gold stocks is the best way to add gold to your portfolio.
- Does Not Depend On The Price Of Gold: While this might not sound advantageous, it could be in the right situations. Gold stocks follow stock market trends, so even if the price of gold falls, the value of your stock will remain the same.
If the company you own stocks in does well, the value of your stocks will rise. This is why it is a good idea to buy into an ETF because you get to own shares in different gold companies. - You Do Not Have To Worry About Storage And Security: When you buy gold stocks, you gain indirect access to most of the advantages of buying physical gold without the worries about security and storage. You do not have to store or insure your Gold stocks.
- An Efficient Purchase Process: A downside of buying physical gold is the inefficient purchase system. If you do not have a gold IRA, it will be difficult to sell your physical gold. Gold stocks eliminate this inefficient process and make it easy to sell your gold stocks.
Cons
- Affected By External Factors: While your physical gold is independent of external factors, your gold stocks depend heavily on them.
If the company you have stocks in is not doing well, the value of your stocks will go down. The success of a company depends on too many factors. - Does Not Depend On The Price Of Gold: I listed this as an advantage, but, unfortunately, it can be a disadvantage too. Gold stocks do not depend on gold’s price but rather follow the stock market. Imagine what would happen if the market crashed.
So Which One Should You Buy?
If you are looking for an investment vehicle that is stable and independent of the stock market, then physical gold is ideal. As an investment option, it has its market and conditions. Physical gold is also great if you want diversification beyond the stock exchange.
Gold stocks are great for the person who wants to reap the benefits of the gold industry without leaving the stock exchange. If you want something with quicker returns, you might be looking for gold stocks.
Conclusion
These two options might seem similar, but they are significantly different. If you buy into an option that does not meet your needs, you might regret them for a long time.
Look at your situation and goals and find the right option for you. Or better still, you can buy into the two options to reap benefits on both ends.
Martin Thomas, the owner of Sutter Gold Mining, is a true gold investment aficionado. With decades of experience and a wealth of knowledge, he is the go-to source for anyone navigating the vast world of precious metals. Martin has dedicated decades of his life to understanding the intricacies of the precious metals market and the best strategies for maximizing returns. His expertise in this field is unmatched, and his commitment to helping others make informed investment decisions is unwavering. With him as your guide, you’ll gain a deeper understanding of the gold market and learn how to make smart investment choices that will benefit you for years. With his guidance and wisdom, you will never have to worry about taking the wrong investment step again.
