Does it make more sense to invest in physical gold or in gold bonds or ETFs?

I am considering including gold in my long-term investment portfolio and am finding it difficult to decide whether to invest in gold-based investment products (derivatives, bonds, ETFs) or in physical gold. There seem to be good arguments on both sides. Does anyone have experience with this (particularly with regards to costs, tax benefits and long-term wealth preservation)?

Hi there,

Whether you should invest in actual gold or in gold derivatives depends on what you are trying to achieve.

Gold derivatives are a practical option if you hope to achieve short-term gains through fluctuations in gold prices. These can be traded electronically within seconds or phsically (using gold certificates) without having to physically deliver real gold. You also avoid the (possible) costs of safe storage and transportation. The downside of this type of investment is that - with the exception of numbered gold certificates - you do not own actual gold. You only own debt instruments based on the price of gold. If the issuer of the instrument goes bankrupt, the derivative may become worthless. Additionally, you may need a broker and custodian bank to hold and exchange these, which generates fees and charges.

Physical gold provides an affordable way to store wealth over the long term in a commodity which is accepted as currency in most of the world. Physical gold can also be traded directly between two parties without the need for an exchange or broker. However, trading in physical gold on a very frequent basis is not practical. Other possible considerations are the cost of safe storage (in a safe deposit box or bonded warehouse, for example) if you do not have your own. Secure transportation may also pose a possible cost. Lastly, you may also want to insure your gold, which adds another cost.

Verdict: Gold derivatives are a better choice for short-term investment. Physical gold is a more secure investment vehicle for long-term wealth preservation.