Physical Gold vs. Gold ETFs: Control and Storage Against Convenience and Liquidity

Gold investing splits into two broad camps: the metal you can hold, and the paper or digital version of it. Fortune's explainer sets the two side by side, with the most popular paper option, the gold exchange-traded fund, on one side and bullion on the other, and asks which one fits an investor's goals.

Start with what counts as physical gold. It means bars, rounds, and government-minted coins, most of which meet the usual investment-grade threshold of 99.5% purity, though there are exceptions. Jewelry can be an investment of a kind, but most pieces fall below that purity level, and that matters at sale time. Dealers prefer investment-grade metal because its value is easy to read, which a 14-karat pendant is not. Jewelry also tends to carry a high markup for design and labor, and a dealer will usually quote a price based on melt value. Anyone who wants gold inside an IRA will need to meet strict investment-grade standards.

A gold ETF is, in the article's framing, a way to own gold without touching it. There are two main kinds. Physical gold ETFs generally hold bullion in a vault and divide it into shares sold through a brokerage account, so you get the metal's exposure without storing it. Gold mining ETFs hold stocks of companies that mine and produce gold. That is a different bet: you are wagering on the companies rather than purely on the metal's price. It is riskier and may have more upside, and the fund spreads the risk across several companies. Neither type automatically lets you take delivery of the gold. You could sell your shares and buy metal separately.

On cost, physical gold comes out worse. Dealers sell above the spot price to cover expenses and profit. Insurance may or may not be covered by an existing policy, and if it is not, the ongoing premium can be considerable. Shipping charges often fall on the buyer or seller, and storage, whether in a home safe, a bank safety deposit box, or with a custodian, adds more. ETFs skip most of that, though buyers pay a small spread on each trade and an annual expense ratio for as long as the account stays open.

Liquidity is the other big divide. Selling physical gold means finding a buyer, getting a quote, and agreeing on a price, with possible shipping delays. Someone who needs cash quickly may not be able to shop around and could settle for a price well below spot. An ETF trades like a stock and can be sold in seconds while the market is open, with a much narrower gap between bid and ask prices.

Storage and security is where physical gold gets credit. Holding the metal yourself means you are not relying on any company to stay solvent. The tradeoff is the inconvenience of safekeeping and the risk of a break-in. With an ETF there is no storage cost and no burglary risk, but you depend on the fund's custodian and your brokerage, and fraud, mismanagement, or a market disruption could hurt the investment badly.

The article's guidance follows from that. Physical gold suits people who want an off-the-grid holding that a company misstep or bank run cannot undermine, who accept the extra costs and slower sales, and who plan to hold for the long term. ETFs suit those who want exposure without handling, storing, shipping, or insuring metal, who want to buy and sell instantly, or who want gold inside a brokerage or retirement account. Active traders will prefer them.

Its FAQ adds that ETFs are not automatically safer, since they carry middleman risk while physical gold carries theft risk. Both track the price of gold, so performance is generally similar, with differences coming from fees and spreads. For beginners, the ETF involves less friction. The two are not mutually exclusive, and an investor can hold both. The one caution: experts typically recommend that precious metals make up no more than 15% of a portfolio.