The Case Against Physical Gold

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Includes: AGOL, GLD, PHYS, SGOL
by: Plan B Economics

This article is probably going to draw a lot of heat. Regardless, I feel it is only fair to present both sides of the argument when it comes to owning physical gold.

I agree that there are many benefits to owning physical gold, such as:

  • Limited derivative risk
  • Limited credit/counterparty risk
  • Accessible (provided it's not locked up in a bank vault)
  • Harder to trace and confiscate
  • You can see and count what you own

However, there's no such thing as a free lunch, and with these benefits come additional costs.

1. Price: When you buy gold bullion you pay a marked-up price relative to spot. In some cases (depending on the size and type of the purchase), markups are typically 3%-5%. For some coins of smaller denominations, markups can be in the double digits.

2. Shipping: Unless you pick up gold directly from a dealer, you will have to pay for insured shipping. This could add 2%-3% to the spot price, depending on the size of the order.

3. Storage: Some people keep their gold in a box buried in their backyard. However, many are uncomfortable with the idea of storing their life savings within the reach of robbers and opt to store their physical gold in a bank vault or safety deposit box. This, of course, comes with the added cost of storage facilities charging up to 1% per year.

4. Selling: If you decide to sell physical gold, you may be required to obtain an appraisal, which is an added cost. Even then, the price received for gold delivered to a dealer will likely be at some discount to spot.

In comparison, a number of ETFs can provide investors quick, inexpensive access to gold. By pooling the funds of many smaller individual investors, ETFs posses a lot of bargaining power, which minimizes the spread vs. spot, shipping cost and storage cost. Moreover, the costs that remain are spread across a larger asset base, reducing the impact to the individual unitholder.

While I believe physical bullion has its place in a personal wealth-preservation strategy (particularly for when the "stuff" hits the fan), for those seeking quick inexpensive access to gold, I think an ETF may make more sense. With an expense ratio of 0.40%, SPDR Gold Trust (NYSEARCA:GLD) is often the first gold ETF investors think of. However, below I have listed a couple of additional ETFs that provide access to physical bullion in ETF form:

  • ETFS Physical Gold Swiss Shares (NYSEARCA:SGOL)
  • ETFS Physical Gold Asian Shares (NYSEARCA:AGOL)
  • Sprott Physical Gold Trust (NYSEARCA:PHYS)

Disclosure: I am long SGOL.

Disclaimer: This is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.