There are many different ways to invest in gold, many ways to buy, hold, sell and exchange this commodity. In this article we will look at the main differences between physical gold and paper gold, giving a brief overview of the many options available to gold investors and seeking to point you in the direction of the best ones.
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Physical Gold
When it comes to physical gold, the obvious advantage is that you can touch and feel the gold, and if you consider yourself as more of a collector than an investor, then this is important.
Physical gold is also worth the same as any other kind of gold, and as it is in your possession, there no concerns regarding whether or not your investment is backed by real bullion.
However, there are many drawbacks to this, including:
- Price: Physical gold often carries a premium, as dealers need to offset the costs of hiring staff, operating websites, paying rent, etc., You may also lose money on shipping costs, although dealers like JM Bullion offer free shipping throughout the US.
- Counterfeit Concerns: A lot of collectors buy from eBay and from individuals, which means there is also a concern about whether the product is genuine or not. There are ways to check this, but the only ones that are fool proof, require you to damage or tarnish your gold.
- Taxes: If you purchase physical gold, you may be liable for sales taxes or VAT, depending on your location.
- Storage: Unless you use a storage company like GoldBroker (in which case, high shipping costs and taxes are not an issue), then you will need to store the gold in your home, which means there is a high risk of theft and damage.
Gold Stocks
Simply put, by investing in gold stocks you are investing in a publicly listed company that relies heavily on the gold markets. Such is the case with gold mining companies, where you profit and loose in similar ways to other investment methods. That’s because if the price of gold increases, then they will benefit and you will benefit, but if it drops, then they will suffer and your investment will suffer.
Some popular gold mining stocks include:
- Goldcorp Inc.
- Barrick Gold
- Newmont Mining
- AngloGold
Gold Futures
A gold future is a speculation trade, and one that is based on the current and future price of gold. These are popular with gold mining companies, who use them as a hedge, and with investors, who speculate for a profit. For example, a gold mining company can take a “short” option, which is essentially an agreement whereby the buyer pays a specific price and agrees to sell it in the future, profiting only when the price of gold drops.
This way, if the price of gold drops and their profits drop as well, they can use this contract to unlock some profit and they can use that profit to offset loses. If the price of gold increases, then this contract will lose them money, but the increased profits they make from production will offset this.
Investors are only required to pay a fraction of the actual price of the gold they purchase in order to own the contract. As an example, $100,000 worth of gold may only require a payment of $5,000. If that contract loses more than $5,000, they will be forced to pay more money or give-up the contract, and if it earns more than $5,000, then they will receive a profit.
Gold futures are backed by real gold, and investors can request delivery in the form of Good Delivery bars. However, they must jump through several hoops in order to do so, and they must also complete full payment.
There are many benefits to gold futures, not least of which is the fact that you can trade in large volumes without a large capital. However, it is very easy to lose a lot of money this way, especially if you do not know what you are doing.
More Paper Gold Options
There are other ways to invest in what is known as “Paper Gold”, but in all cases, you need to ensure that your investment is backed by the real thing. This is the case with gold futures, and it is also the case with trading companies like BullionVault and with storage companies like GoldBroker. However, some will simply give you a certificate that is nothing more than a promise.
With BullionVault, you can trade quickly and at a low-cost. You don’t need to pay fees, you don’t need to receive your gold and you can profit as soon as the price increases. However, like gold futures, you’re still trading on promises, and it’s not the best option for long-term investments or for someone looking for a tangible fund.
Conclusion on Main Differences between Physical Gold and Paper Gold (Stocks, Futures, ETF,…)
There are positives to all of the methods mentioned above, but there are just as many negatives to most of them. Of course, the extent of these positives and negatives will be dictated by where you live, how much you plan to buy, and a number of other factors. For instance, buying physical bullion is great if you purchase from JM Bullion, reside in the United States and do not need to pay tax, whereas gold futures are perfect if you live in an area with high taxes, don’t want to hold the gold yourself, and understand the protocols of online trading.
It is all about understanding what works best for you, and then playing to those strengths and those preferences.