Should I Invest In Gold Bullion or Gold ETF Stocks?

Dr. Stephen Leeb, PhDLeeb Capital Management

FUN FACT: Gold has been used as a currency since kings and queens. The dollar bill has been around for a mere 200 years… and the United States Federal Reserve has only existed for 100 years!

Gold Bullion vs. Gold ETF Stocks & Mutual Funds

There are a few distinct variables that may make one person feel more comfortable with investing in physical gold bullion, while another feels more comfortable in owning the ETF, otherwise known as an exchange traded fund.

An ETF is essentially a basket of securities. Rather than owning one gold stock, you own a basket of stocks that are backed by physical gold or silver, examples being GLD and SLV. In other words, you don’t literally own the gold. In reality, you own a certificate that says you have “x” amount of gold vis-à-vis whichever ETF you hold shares in.

ETFs have increased in popularity due to their liquidity, transparency and low management fees. Exchange Traded Funds are a type of mutual fund that is traded on a stock exchange, and can be bought and sold, long and short. Unlike traditional stocks, ETFs typically offer investors exposure to a basket of securities, currencies, and of course, gold, silver, and copper.

The biggest gold and silver ETFs are GLD and SLV. These ETFs allow you to invest in gold without having to actually handle or store the physical gold. In the event that gold trends up, they are in a low cost vehicle that could be bought or sold just like a stock. The biggest ETFs, in regard to commodities, are sponsored by the World Gold Council. The WGC genuinely seeks to reflect the price performance of gold by holding gold bars at a vault in London but then in turn, issuing shares backed by their holdings of the physical metal.

The Caveats of Gold ETFs

Although considered the safest and most secure way of owning gold, silver or copper on Wall Street, ETFs do have certain inherent risks and liabilities that owning physical gold does not. To put it simply, an ETF shareholder has no rights of redemption, which means that the investor doesn’t actually own gold. They own an asset that is backed by gold. The gold bullion bars do exist, however an investor cannot touch it or see it.

Furthermore, ETF valuations are often not accurately correlated with the real price of gold, silver or copper. My implication is that Wall Street is notoriously psychologically driven. So, if one person is buying a certain stock and suddenly, millions of people are buying that stock (which is part of an ETF) and the value of the stock goes way up (as does the value of the ETF) it can be monetarily rewarding.

By the same token, it is also artificial and subject to a correction or in layman’s terms: a reality check. Anything bought and sold on paper through Wall Street is subject to being “adjusted” or manipulated.

Direct Physical Gold Bullion Investing

Physical gold bullion, along with silver, platinum, palladium, and copper could all be bought in different ways. The most common ways are by purchasing various coins or bars. There are select coins that have numismatic value but most, quite frankly, do not. Bullion coins and bars are the most easily traded and universally recognized form of physical gold. Direct gold ownership offers the best investment hedge against potential inflation / deflation.

Should I Invest In Physical Gold Bullion or Gold ETF Stocks?

A True Hedge For A Liquidity Crisis

Owning physical gold or silver bullion enables the investor to be in complete control of where their metals are stored. Precious metals can be held in an IRS approved depository or public private vault for secure storage. In regard to a gold-backed IRA or self-directed gold rollover account, metals must be held in an IRS approved depository to be in accordance with United States federal tax laws.

However, if you purchase gold or silver with cash, essentially you could store it at your house in a safe, private vault or wherever you feel the most comfortable. It’s important to insure your precious metals just like you would insure your home, vehicles or expensive jewelry. Lloyd’s of London is a prime example of an insurance agency that is notorious for insuring precious metals; however, there are other agencies which offer comparable coverage.

Precious metals have intrinsic, unhinged value. By investing in physical gold bullion, you limit risk due to the fact that you own a finite commodity that has been recognized as a currency for centuries. And unlike paper gold, its inherent value cannot be manipulated.

What Does It Boil Down To?

Although both ETFs and physical bullion are safe, well respected investments in a sector that has potentially unlimited and unprecedented upside, physical gold offers you much more protection and guaranteed value.

On the other hand, ETFs by design, are set up to be the safest way to buy gold, silver or copper when investing on Wall Street. One thing to take strongly into consideration is that Wall Street is driven by both greed and fear; and will forever be cyclical and highly leveraged.

On Wall Street, fear is the number one motivating factor driving any harsh crash. That’s why people lose their nest egg overnight. An interesting historical observation was that in the bad markets, the big brokers made the most money. Think about that for a moment. It offered them the biggest opportunity to capitalize on the downside leverage. They anticipated a massive crash and had put positions ready to go.

The less “connected” broker’s job is to never, ever let you out of your account or out of the market. Therefore, if the market is down 800 points in one day, maybe it was just a “bad day” and your broker will tell you, “prices are now cheaper, my advice is to buy more”.

Should I Invest In Physical Gold Bullion or Gold ETF Stocks?

”Looking at the bigger picture, maybe it’s indicative of a much more sophisticated, systemic, polarizing issue that transcends anything your broker has any clue about. At the end of the day, your broker makes money by making trades and keeping you in the market. If brokers make money in both good and bad markets, the question remains whether or not they are working in your best interest.”

What it boils down to, I would suggest owning both a mix of ETFs and physical gold.

Although I do see advantages in owning certain ETF positions on Wall Street and certainly recommend being diversified in those holdings, the stock market is cyclical and subject to manipulation. This is something to consider before investing in ETFs.

At the end of the day, if you are willing to incur the annualized cost of both insuring and securely storing gold, then bullion might be the better option for you. Physical metals will not only protect your wealth but as prices continue to surge, and the very nature of money evolves, so will your net worth.

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