Unlike physical gold, ETFs can be purchased as stocks on a stock exchange. ETFs allow investors to access gold and, at the same time, avoid the costs and inconveniences associated with profit margins, storage costs and the security risks of holding physical gold. While gold ETFs can be a good investment, they carry a great deal of counterparty risk inherent to their chain of custody. And this risk will only increase proportionally with systemic uncertainties.
Gold and silver ETFs allow investors to invest in gold without having to manipulate or store physical gold. Therefore, when gold starts to trend upwards, they allow exposure to gold in a low-cost vehicle that can be bought or sold intraday, such as a stock. There are also problems that can arise with a gold ETF. Although they are more liquid, they are also more at risk.
An ETF does not usually have direct exposure to gold, which means that you cannot withdraw your gold holdings per se, but rather in cash. Even if it's possible to convert your ETF shares into gold, chain of custody can be a problem. In the case of ornaments or jewelry, the purity of gold is always in question, but gold ETFs refer to a gold purity of 99.5%. Once you buy gold bars, it's yours and doesn't require the backing of any bank, government, or brokerage firm.
If you are an investor who is not planning to accept delivery and are comfortable with a higher degree of risk, GLD may be a good way to expose yourself to the price of gold. However, there are many hidden dangers inherent to the structure and operation of gold ETFs that few investors are aware of, and these risks are more pronounced than ever, since the threat of another financial crisis is always around the corner. If you want to invest in gold but consider that the disadvantages of ETFs are excessive, physical gold may be more attractive. Investors are predominantly looking for gold coins because the value of the currency has a direct correlation with the spot price of gold.
Even though gold bars exist, an investor cannot simply knock on the door and get their gold; only “authorized participants” can do so. The value of gold in the vaults is likely to be much higher than what this limited policy would cover. Imagine if, instead of buying expensive gold coins or ingots, you could invest in a smaller amount of gold without the hassle of storage. However, trustees do not insure gold in the event of gross negligence; they leave it in the hands of the custodian, who guarantees limited general insurance coverage for the contents of the vaults.
Like the ETF, direct ownership of gold provides an investment hedge against inflation and rising rates, but it goes one step further. The ETF allows investors to allocate gold to their portfolio without buying physical ingots or coins. Locked in a safe and in its possession, gold is a tangible asset with which investors can do whatever they want. ETFs are cheaper investment options than physical gold, making them more attractive to some investors.