Is Investing in Physical Gold Better Than Paper Gold?
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Investing in gold is a form of diversification that you can add to your portfolio as it is a hedging instrument against inflation, exchange risk, and the share market. Gold has been regarded as a safe haven for many over the past decade, as it shelters investors from traditional volatile investments such as the stock market. As a physical commodity, gold cannot be printed by the Treasury, and thus, its value is not affected by interest rates, serving as a form of insurance against a market downturn or in a case of an economic depression.
The most traditional way to invest in gold is by purchasing gold bars or gold bullion coins. It is almost impossible to create artificial gold, as physical gold has to be mined and extracted from gold deposits. As a tangible asset with finite resources, this provides a greater sense of security especially in times of extreme economic situations such as the great depression. While gold itself is not a modern currency, it is seen as a ‘currency of last resort’ (dubbed by Goldman Sachs).
In an efficient (and calm) market environment, the price of physical gold should only have a marginally higher price above the gold spot price. The difference usually amounts to less than one percent, as they both are the exact same product. Think about the cash you have in your pocket right now and the cash in your bank account. But in times of a recession, there is a possibility of gold bullion prices to be higher than gold spot prices. What this means is that you will be able to sell the physical gold bar/coins at a higher price comparing to if trading on paper.
Investing in the form of paper gold is far more efficient than physical gold, because like almost everything else you can do it over your phone or computer. There are two types of pricing models when estimating the potential value of gold, namely future price and spot price. Gold future prices serve as a benchmark in determining the gold price. These are contracts for the physical delivery of a specified amount of gold on a set future date. Such contracts are done primarily electronically and have a higher risk due to numerous factors that could affect the delivery of gold in the future. Gold spot price is the price of gold that is to be delivered immediately after the purchase. This is done by calculating the average value of all currently traded gold futures contracts for the nearest month. The spot price for gold is the price that is traded in the financial markets.
While investing in paper gold offers more liquidity and ease of transacting, you will be required to pay for brokerage and/or transaction fees depending on your brokerage account. Depending on your account provider, the bid-ask spread might be too far apart and thus not ideal in the case of yours. The bid-ask spread is essentially the broker’s system of making money. The ask price is the price you buy the gold from the broker, while the bid price is for when you sell the gold. Say if the bid price is $100 while the ask price is $110, upon transacting you will lose $10 immediately without factoring in other costs.
An investor may prefer the security of owning physical gold and do not mind the hassle in the safekeeping and transaction process, while the other might choose to stay invested via holding paper gold or gold ETS, remember that there is no one answer to say which is better.
