Gold has existed for thousands of years, always maintaining its value and lustre. Nowadays, many people around the world are interested in gold as a way to protect their wealth. There are three main types of gold investments: physical gold, Exchange Traded Funds (ETF) and derivatives.
Physical gold exists in the form of bars, jewellery or coins. It can easily be bought in local stores and online through companies such as Goldex. Many of these firms were established so that people could invest in physical gold quickly and conveniently, as well as provide top security for your investment.
With Goldex, you have 100% ownership of ethically sourced gold, fully reserved. We operate an ethical business model, so we act as your agent, not a gold trader. Because we don’t have a vested interest in inflating prices. We simply connect you to the world’s biggest gold markets and make certain you always get the best price for your trade, no matter the size. The ethical pricing saves you, on average 8-12%: this is what we call best execution.
It could be argued there are two main reasons behind a person’s decision to buy physical gold: fear and greed. The goal of a physical gold investor is not only to exploit rising gold prices but also to benefit from gold ownership.
There are other benefits to owning physical gold. It protects you from any disruptions in the financial system (globally, nationally and personally) and against an array of financial, economic, political catastrophes or minor disturbances.
Gold ETFs allow you to hold physical gold in shares. This type of gold ownership has risen in popularity due to convenience. Today, you can easily trade with them and you do not need to store the gold securely at home. ETFs are also attractive because they cannot be stolen from you, unlike physical gold.
When purchasing a gold ETF, the investor only acquires a ‘pass-through’ ownership. In order to take full possession of the gold, an investor would have to sell off the gold ETF shares. Then use the proceeds to buy physical gold, which is a cumbersome and expensive set of at least two different transactions. This isn’t the most cost-effective exercise.
Gold derivatives are contractual agreements associated with the development of gold price in the market. Therefore, derivatives are not physical gold but a claim against a counterparty (either a bank or broker), and the claim depends on the solvency of the counterparty. In case of bankruptcy, investors calculate total loss, so it may not be wise to invest in derivatives as a long-term strategy.
Differences in gold investments
- Ownership and risks: ETF investors own nothing more than a stock symbol in their portfolio, shareholders don’t own title to the metal, therefore it is nearly impossible for retail investors to take delivery of the ounces of gold or silver that they think they own through ETFs. Simply put, ETFs don’t insulate clients from the risks inherent in the financial system, and so there is counterparty risk.
With derivatives, you get to own gold shares with the counterparty. However, the risk is high in case the counterparty goes bankrupt.
Physical gold, instead, is pure gold. It belongs to you. It has no counterparty risk.
- Commissions: even if investors can overcome the fear of the significant systemic risks, they are still burdened with management fees for the ownership of ETFs. These fees will continually cause the ETF price to negatively diverge from the bullion price over time. Obviously, commission dealing charges vary according to the stockbroker.
Derivatives earn a commission as long as the counterparty is doing well financially. The contract stipulates how much one can earn depending on the amount invested and the period.
Physical gold ownership involves a number of costs, including storage and insurance costs, and the transaction fees and markups associated. It is important to find the best provider and the fairest prices.
- Underlying proof of ownership: periodically a bar list is produced by the ETF itself and published on the internet. An undertaking is provided that the total number of units in issue matches the bars in the vault. No reconciliation to individual holders is provided.
With derivatives, you get to have a contract that shows how much gold shares you have and the period the contract will be active.
What you buy through Goldex is always investment-grade gold, of the highest purity. It’s ethically sourced and LBMA approved. You have 100% ownership of gold bars. These are securely stored in various, world-class international vaults, fully insured and held in trust, legally safe from creditors. It’s the smart way to buy gold.
Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this it does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.