Gold is our safe haven asset in our portfolio, but there are many ways to invest in it. We analyze the advantages and disadvantages of investing in physical gold, rather than through an ETF.
- Gold products you can invest in
- Advantages of investing in physical gold
- Disadvantages of investing in physical gold
- Places to buy physical gold
Adding some gold to your investment portfolio can be one of the best decisions you make. There are many reasons why it is advisable to invest in gold. And we must decide how to do it.
In this post we will talk about the advantages and disadvantages of investing in physical gold over doing so through financial instruments such as ETFs, ETPs or even gold mining stocks.
There are things you should consider before investing in physical gold, as that offers advantages and disadvantages.
Gold products you can invest in
If you want to buy physical gold, it is advisable to invest in gold coins and bars.
The most popular coins are one-ounce coins (31.1035 grams). There are also smaller and larger sizes. However, the appeal of one-ounce coins is that they are very common. It is easy to compare available one-ounce coins to select the best prices.
Keep in mind that gold coins smaller than an ounce are usually somewhat more expensive. This means you will receive less gold for your money. It is worth checking how much you are paying for each gram or ounce of gold.
The other option is to buy gold bars. When we hear the word bar, we immediately think of a giant ingot. But there are many sizes of gold bars, even as small as one gram.
The most popular sizes for gold bars are one ounce (31.1035 grams) and 100 grams. The larger ones (of a kilo or more) are usually the ones with the best price per gram.
Advantages of investing in physical gold
Let us start by discussing the advantages of investing in physical gold:
No counterparty risk (they are outside the financial system)
One of the best things of owning physical gold is that it is an asset outside of the financial system. As a result, there is no counterparty risk. No one determines whether you access your gold or not.
This is in contrast with most other assets, which are someone’s liability: money in the bank, bonds, mortgages, and even stocks.
At the same time, gold ETFs have some degree of counterparty risk. Your asset (the ETF shares) is the liability of the fund manager (who has the gold in storage). By buying physical gold we avoid that counterparty risk.
Insurance against financial, economic, and monetary crises
Because investing in physical gold carries no counterparty risk, it is not exposed to financial, economic, or monetary crises. It does not matter what happens to the economy, in the banking system, or what the reaction of central banks is. The gold is in our hands and no one else has access to it.
Another advantage of investing in physical gold is the increased advantage over doing it through an ETF. Unless your government forces you to report the gold you own, no one has to know you have it.
Regardless of whether you have it in your premises, like at home, or in a vault with a specialized company, privacy can be very valuable. Especially in the event of an economic, monetary or political crisis.
No VAT when buying gold
Gold coins and bars are considered investment products. As a result, these products are exempt from VAT in most countries. This is important, as we would not be able to recover the VAT paid if we want to sell our gold later on.
The purchase of physical gold contrasts with the purchase of physical silver. In many countries, silver investment products are often taxed at the general VAT rate. Therefore, it we would have to pay around 20% in taxes that could never be recovered.
In some countries, especially those that mint gold and silver coins, these coins are considered legal tender. Theoretically we could buy things with them. In practice, this would not make any sense since the value of the metal is much higher than the nominal face value of the coin.
However, these currencies can have significant tax advantages. Because they are legal tender, any profits we make with them are exempt from taxes. For example, the United Kingdom does not tax profits resulting from having bought and sold Royal Mint gold and silver coins.
Pleasure of holding gold in your hand
Many readers may think this is not important. But I would venture to say that these people have never had the pleasure of holding gold bullion in their hands. The truth is that it is a very pleasurable experience.
Of course, if you own a significant amount of gold bullion, it is advisable to store in a safe vault.
Disadvantages of investing in physical gold
Now that we have seen the advantages of investing in physical gold, let us also talk about its disadvantages. This is why many investors prefer the convenience of an ETF gold:
Higher purchase prices
When we look at what the official price of precious metals, we see spot prices. Those are prices for people who buy the product in bulk.
The spot price is also the price at which we can usually sell our gold. However, if we want to buy physical gold as private investors, the final price will be slightly higher.
That difference is because there are costs associated with minting coins or producing bars, and commercializing and shipping them. It is perfectly normal.
The additional price over spot is usually around 4-6%. That means that $10,000 worth of gold bullion would cost us between $10,400 and $10,600. It is possible to pay less than that, but we would need to buy very large quantities.
Need to find a place to store the gold
The other big disadvantage of buying physical gold is that we are responsible for storing it. There are two options we can do this.
The first option is to keep the gold in our house. It is easy but not recommended. There is probably no problem in having a couple of gold coins at home, but keeping a significant amount ourselves would be irresponsible due to the risk of burglary.
That is when we would have to look for a place to store. There are specialized companies that offer this service. They allow us to store our precious metals in a vault and have them insured.
Another benefit of using these storage companies is that they allow us to keep our gold in different parts of the world (for example, in London, Zurich or Singapore).
By keeping the gold in different jurisdictions, we can reduce the political risk of having gold in a certain country if we believe there may be problems in the future. One of the most famous precious metals storage companies is Brinks.
It should be mentioned that some precious metals retailers and dealers offer the possibility of sending the products you buy directly to one of these companies. And they can deal with the logistics if you decide to sell at some point.
That means that both the purchase and the sale can be done without having to receive the gold at home. Obviously, we would have to pay for their storage services, but the costs are very moderate.
Places to buy physical gold
Finally, if you are asking yourself where to buy physical gold, you can search for bullion dealers on Google. Pay attention to what the offer and the reviews they have online. Most businesses will be legit but not all of them may offer great customer service.
Check out what people say about responsiveness of their customer representatives as well as delivery times. One good option is CoinInvest.
I hope you learned the main advantages and disadvantages of investing in physical gold. The yellow metal is one of the most interesting assets out there. Combined with stocks and other asset classes, it is a great diversifier.
Remember that the alternative to investing in physical gold is to buy a gold ETF. If you want to learn about the advantages and disadvantages of that, check out this link:
Investing in a Gold ETF – Advantages and Disadvantages
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