Gold ETF | Gold Bullion ETF vs. Physical Gold Bullion

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Gold Bullion ETF vs. Physical Gold Bullion

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Many investors buy a gold bullion ETF to capitalize on gold’s price movements.  So what is a gold ETF vs. bullion and how does buying an ETF differ from actually buying physical gold?

A gold bullion ETF is simply an exchange traded fund that tracks the price of physical gold.  If the price of gold goes up 10%, the ETF will go up the same proportion and if the gold price goes down 10%, again the ETF will follow. Each ETF share normally represents one-tenth of an ounce of gold bullion.

Now before deciding to buy a physical gold ETF, there are a few things you should know about them.  Firstly, like all ETFs there is a MER (management expense ratio) involved to cover the costs of managing the fund.  Luckily however the fee is typically very low (~0.4%) compared to other types of funds.

Another key point about an ETF gold bullion share is that unlike buying physical gold coins or bars, you don’t actually own physical gold by owning a gold ETF share.  Yes, you own shares in gold, but not the gold itself.  Is that a problem?  Well yes and no.  It’s not a problem at all if all you’re wanting to do is profit from price movements in gold.  In fact buying a physical gold ETF is perfect for capitalizing on gold price movements since like all ETFs, it’s simply a stock traded on a major stock exchange which can be bought and sold easily.  However, if your primary reason for buying gold is to hedge yourself from a large wide-scale monetary crises, you would be wise to consider buying physical gold bullion rather than the ETF, or at least in addition to it.

The reason I say this is because if there was a large scale monetary crises in the US, let alone worldwide, it’s very possible the banking institutions that are controlling these Gold Bullion ETFs could become bankrupt or insolvent.  As a result they would likely end up liquidating the ETF and you would end up with no gold bullion and very little cash for your shares, if any.

Now I’m not saying this is likely to happen, but if you’re a gold bug, you have to consider why you are wanting to own gold and I’m sure one of the main reasons is to hedge your risk from fiat currencies.

So now that you understand the distinction between owning gold bullion and owning a gold ETF, here are the main gold bullion ETFs available on the market:

StreetTRACKS SPDR Gold Trust (NYSE: GLD) – By far the most liquid gold ETF available on the US market.

iShares COMEX Gold Trust (NYSE: IAU) – Another good alternative gold ETF investment vehicle.

ETFS Physical Swiss Gold Shares (NYSE: SGOL) – A newly launched (Sept, 2009) gold ETF that distinguishes itself from the others by holding it’s physical gold in Switzerland.

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9 Responses to “Gold Bullion ETF vs. Physical Gold Bullion”

  1. Matthew on April 8th, 2010 3:38 am

    Thank you for all the valuable information. If I were to purchase gold bullion or physical gold, where and how would you suggest that be accomplished?

  2. admin on April 8th, 2010 5:11 pm

    Hi Matthew,

    Probably the easiest way to buy physical bullion is by purchasing gold coins and gold bars from a local bullion exchange. A lot of foreign exchange offices sell gold bullion as well. Then you’ll just need to store it in a safe place like a safety deposit box that you can rent at your local bank.

  3. Joe Atkins on October 5th, 2010 7:24 pm

    To be perfectly safe in the event of bank closures due to any national or global fiduciary emergency, you would not have access to your safe deposit box.
    It would be best to store your coins or bullion in a very secret, private location, possibly in or near your home, perhaps buried or in a private safe that is solidly anchored to your foundation, floors, etc.

  4. John on October 6th, 2010 3:04 pm

    I just saw your excellent blog. One question I’ve always had about owning physical gold is how safe the asset conversion process is. If, as your blog mentions, a widespread monetary crisis is liable to bankrupt banks and other institutions storing gold for me, where would I go to liquidate small quantities of bullion I physically own? Surely, the “local bullion exchange”, normally a small business, would also be in dire straits if a meltdown occurred.

    Somehow, these local firms, looking more like pawn shops than solid institutions, would also dry up and blow away, wouldn’t they? Similarly, the outfits that propose to sell gold bullion via TV commercials, almost never make mention of the buying side of the equation.

    Great blog.

  5. admin on October 14th, 2010 8:18 pm

    Hi John,

    Thanks for your comment. I was actually referring to the fund institutions that control these Gold Bullion ETFs may become bankrupt, not major banks, though I suppose anything is possible depending on the magnitude of the financial crises.

    I wouldn’t let this be a reason for not holding physical gold however. If you possess physical gold bullion in such a crises, you’ll be far better off and more financially stable than someone who doesn’t. Also, keep in mind gold is money so you shouldn’t ever have any trouble finding a person or institution willing to purchase it from you.

  6. IndianInvestor on December 16th, 2010 6:32 pm

    Given so much derivative fraud around and possible fractional nature of ETF I prefer to own physical gold than paper ETF gold.

    I have a suspicion that they do not have enough gold to cover all deliveries in case all ETF shares were convertible to gold. A real gold investor does not buy/sell PHYSICAL gold on daily basis.

    I buy coins and stock it in a safe place (and ofc that can’t be bank )

  7. rohin on December 17th, 2010 3:52 pm

    Great Blog

    I have a question. Is there a difference between investing in a US Gold/Silver ETF or a indian ETF. I guess both are tied up to gold prices right? Also i have noticed different stock values for different ETFS. is that something a new investor like me should consider.

  8. David on December 17th, 2010 4:30 pm

    Well the main difference is that the US gold ETFs trade on the American stock exchanges whereas an Indian gold ETF trades on Indian stock exchanges. Also as outlined in my Indian gold ETF post, these ETFs typically also have higher expense ratios.

  9. Justin on August 18th, 2011 10:52 pm

    I surely appreciate your thorough analysis.
    By owning GTU, am I as well protecting myself against the drop in US currency? I always thought that the sliding US dollar would offset gains in Gold if I bought a US ETF.
    Your comments would be appreciated