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Throughout the years, gold and other precious metals have been popular wealth commodities for investing and portfolio diversification. While physical gold is more commonly known, it’s by no means the only form of investment. This article weighs in on the paper gold vs. physical gold debate, including their fundamental differences, gold investment options, benefits and risks, and more, to give you a balanced view.
Differences Between Physical Gold and Paper Gold
The most obvious difference between physical gold and paper gold is their form. Physical gold bullion is a tangible asset you can hold in your hands; it has intrinsic value that supersedes the price fluctuations of the gold market. The banking system doesn’t determine its value or have any authority for regulation. Conversely, paper gold is an asset that represents a specific amount of gold, meaning you can’t take physical ownership of it.
Examples of physical gold investments include gold bullion bars, coins, and jewelry. Paper gold investments include gold exchange-traded funds (ETFs), gold certificates, gold futures, and gold mining stocks.
What Is Paper Gold?
As we said, paper gold investments represent a certain amount of gold but don’t involve actual ownership. Also, there’s no gold backing. At its core, paper gold is just that: a piece of paper with no real value. The benefit of investing in paper gold is that it familiarizes you with prices without the expense and risk of owning physical gold.
Also, investing in paper gold, like ETFs, is cheaper than buying physical gold. Gold ETFs track gold at a tenth of an ounce, making it a much more affordable option for many investors. Below, we’ll go deeper into the different characteristics of paper gold.
Liquidity
For investors, the high liquidity of paper gold is one of its most attractive qualities. You can buy and sell gold paper assets like ETFs or mining shares through the stock market, online, or with a broker. Buying and selling physical gold requires time and effort put into logistics, including delivery fees, storage considerations, etc.
Volatility
When comparing paper gold to physical gold, most experts agree that paper gold has more volatility than physical assets like gold bars. Generally speaking, when the stock market drops, the price of physical gold rises, and vice versa. However, paper gold, like ETF shares and gold futures, has a volatile nature.
Storage and Security
Physical assets like bullion bars, coins, and other forms of precious metals (e.g., silver, platinum, and palladium) require you to invest money into a safe and secure storage place, which may include annual storage fees, insurance premiums, etc. Paper gold, like ETFs, mutual funds, and gold futures, has electronic storage, making it cheaper to own.
Transaction Cost
Paper gold assets won’t cost you extra for storage or insurance like actual gold, but they still have fees. For instance, if you want to invest in ETFs, you’ll have to pay an expense ratio, which is another term for “annual fee.” Most also have initial investment fees, trading fees, redemption fees, or broker fees.
Supply and Demand
Supply and demand don’t have the same impact on the cost of paper gold as on physical gold. Price fluctuations within the gold market can range widely, and as of March 2023, the price of physical gold was $1,815 per ounce. However, factors like inflation, economic uncertainty, world supply chains, and the value of the US dollar all impact supply and demand.
Tax Implications
The tax implications of paper gold are different from investing in physical gold, silver, and other precious metals. Tradable assets like ETF shares and gold funds have lower tax rates than actual gold because the IRS considers them long-term capital gains — as long as you have physical possession for more than one year. Conversely, you must hold physical gold for over three years to get a lower tax rate.
Investment Options for Physical and Paper Gold
When it comes to investing in physical gold and paper gold, you have plenty of options:
Types of Physical Gold
You can buy gold in several physical forms, including:
Gold bullion: You can buy gold bullion as nuggets, bars, or ingots. Gold bullion exists outside the monetary system, with purity typically between 99.00 and 99.99%.
Gold coins: You can buy gold coins as a form of investment, but most are an alloy of gold, silver, or another metal. Some prefer buying physical gold coins to invest in precious metals, whereas others have more numismatic (i.e., collectible) value.
Gold jewelry: People worldwide covet gold jewelry as a symbol of wealth and beauty. However, once you buy gold jewelry and it enters your possession, the value usually decreases. That’s why it’s not the best form of gold investment for maximizing your capital gains.
Types of Paper Gold Investment
While paper gold doesn’t have the intrinsic value of physical gold, that doesn’t mean it’s not a smart way to build a strong financial future. The most common forms of paper gold investments include:
Gold certificates: You can purchase gold certificates and then redeem them to receive physical gold in return. America used such certificates as money during the Gold Rush. However, there are more certificates than actual gold, making it fairly risky.
Gold exchange-traded funds: ETFs are commodities you can trade, like stocks. They’re much more affordable for investors and allow exposure to the price of gold without owning the actual asset. Other benefits of gold ETFs include their affordability and liquidity, as it’s more expensive to buy physical gold up front.
Gold mining stocks: Gold mining stocks have close ties to the price of physical gold and represent shares of companies that profit from the production, mining, and exploration of gold.
What Are the Benefits of Investing in Physical and Paper Gold?
Whether you choose to invest in physical gold or paper gold, each has its advantages:
Benefits of Investing in Paper Gold
Higher liquidity: With paper gold, you have immediate access to your assets and can easily buy, trade, and sell without the hassle of research, delivery, and storage. All you need is access to a computer to start buying, trading, or selling.
Lower fees: When you buy gold ETFs, funds, certificates, or other paper assets, you don’t have to pay extra fees for storage and insurance.
Smaller upfront investment: Buying physical gold requires you to have enough money to fund a rather large upfront investment, whereas you can purchase paper gold for a much smaller initial cost.
Benefits of Investing in Physical Gold
No counterparty risk: Buying gold bullion and other physical assets doesn’t carry the counterparty risks of paper assets. You own your gold and have direct control over it.
Inflation hedge: Buying physical gold is an excellent hedge against inflation because it doesn’t lose value over time, like paper money.
Intrinsic value: Unlike paper gold, physical gold is a safe haven investment because it has actual value. Paper gold only has hypothetical value.
Are There Risks for Both Investments?
Whether you buy physical gold or paper gold, both carry inherent risks. Paper gold can drop in value according to the stock market and has higher volatility, transaction fees, and a much higher risk due to its non-tangible nature. Gold held as a physical asset also has its risks. For example, you’ll pay extra for storage and insurance, and like other investments, these transactions can have hidden upfront and backend fees. Physical gold isn’t as liquid as paper gold and is much less complicated to buy and sell.
Paper Gold vs. Physical Gold: Which Is Better?
So, which is the better investment: paper gold or physical gold? Well, only you can decide which form of investment is best for your financial situation. For example, will you invest in gold for trading purposes or to have a tangible asset that will hold its value? While many investors consider gold a safe haven, it does have its risks. Consider what you want to use your gold for, how long you plan on holding it, and what type of profit you’d like to gain from it.
For more information on paper gold vs. physical gold and investing in precious metals, visit the Oxford Gold Group blog or give us a call. We offer several forms of precious metal investments, including physical gold and gold IRAs. Call Oxford Gold Group at 833-600-GOLD to get started with your gold investments.
