Investing in Gold or Gold Stocks: Which is a Better Investment?

Gold is always considered a safe haven for investing your money, especially when the financial market is not stable or you don’t expect a stable return from the equity market or interest rates on FDs, bonds and other investable financial instruments are low.

In India, buying gold in the physical format is more popular than in any other country, and that is because household ladies prefer to buy gold usually in the form of jewellery and other ornaments. However, people who buy gold for investment purposes also purchase gold coins and bars on special occasions like Akshaya Tritiya, Dussehra or Diwali.

Nevertheless, investing in Gold has become more convenient due to digitalization, so you can now invest in gold through exchange-traded funds (ETFs) or directly buy the stocks of the listed companies dealing in gold trading or jewellery making and selling business. But the question right here is it better to buy physical gold or gold stocks or ETFs, let’s find out.

Topics Covered :

• What is Physical Gold and How Can You Buy It?
• What are Gold Stocks or ETFs called?
• Is it Better to Buy Physical Gold or Gold Stocks & ETFs?
• Advantages of Investing in Physical Gold:
• Disadvantages of Buying Physical Gold:
• Advantages of Gold ETF or Gold Stocks:
• Disadvantages of Gold Stocks or Gold ETF:
• Conclusion: Is it Better to own Gold or Gold Stocks?

What is Physical Gold and How Can You Buy It?

Physical gold is available in various shapes, sizes, and weights, and you can easily buy it from registered dealers or jewellery shops. You can buy physical gold in the form of gold coins, bars or ornaments. Gold bars and coins are 99.95% pure as they are made from 24-carat gold, and ornaments or jewellery are 75–92% pure as they are made with 18 to 23-carat gold.

What are Gold Stocks or ETFs called?

Gold stocks are the Gold Exchange Traded Funds (ETF) or the shares of those companies directly involved into the gold related businesses like jewellery making and selling or gold finance and loan etc. and listed on the stock exchanges. ETFs and shares of companies mainly in gold business are usually considered gold stocks and they are also called paper gold or digital gold.

You can buy these gold stocks or ETFs from the stock exchanges. The ETFs are traded usually with the price of the value of 1 gram of gold that keeps fluctuating as per the change in the price of physical gold in the market. However, the price of ETF and gold stocks are also influenced by various factors like demand and supply of shares is one of them or the change in the fundamentals of the companies involved in selling such gold ETF or into the gold business.

Recommended Read: Mutual Fund Vs ETF

Is it Better to Buy Physical Gold or Gold Stocks & ETFs?

If you are baffled by these options of investing in gold, you need to know which mode of investment is better or more efficient and cost-effective for you. Investing in physical gold and paper gold is easier in India, but still, both have their own pros and cons. To decide which one is better for the investment you can find below their benefits and drawbacks.

Advantages of Investing in Physical Gold:

Physical Possession:

When you buy gold in the form of gold coins, bars or in the shape of the ornaments you have the physical possession of the same. Hence, investing in physical gold will provide you with the advantage of physical possession that you can carry anywhere, a gift to anyone or can be also liquidated anytime near your jewellery shop.

Sense of Security:

As a tangible asset, physical gold also provides a sense of security, especially in unfavourable economic conditions like financial crises, and economic slowdowns. Gold stocks or ETFs can crash in such financial crises, but the value of the physical gold remains the same, giving you protection from the impact of such economic slowdowns.

Available in Various Forms:

To invest in physical gold you can find varied options available in the market. From gold bars to gold coins or jewellery or gold-made ornaments or antique items, you can buy physical gold in different shapes, sizes and weights.

Price Appreciation:

Another benefit of investing in physical gold is, it also protects your investment from rising inflation and depreciation in the value of the currency. This rise in the price of gold protects your wealth from such monetary impacts.

Disadvantages of Buying Physical Gold:

Cost of Acquisition:

While buying the physical gold you not only pay the price of gold as per its purity or carat, but you might be also charged to pay the making charges or additional taxes and duties imposed on buying the gold in the physical form.

Storage & Maintenance Cost:

Another disadvantage of buying the physical gold is you need a space to store the same safely. You need highly secured lockers or need to pay insurance or annual maintenance changes to keep your gold at the bank’s lockers.

Risk of Theft and Damage:

Keeping the physical gold at your home or at your premises poses the risk of theft and physical damage that can cost you in terms of losing your wealth. Keeping the gold in a safe place is another challenge for the investors.

Liquidity-Related Issue:

Though you can liquidate your gold-made jewellery or ornaments near your jewellery shop anytime you will not get the right price for them. They pay only 65 to 75% of the market price of the gold depending on the purity and your negotiating power. Many jewellers don’t buy gold coins or bars without having proper buying receipts valid source of acquisition or can pay you partially due to lack of money at that point in time.

Advantages of Gold ETF or Gold Stocks:

High Value of Liquidity:

Buying and selling gold stocks or ETFs is very easy and fast providing you with high liquidity in terms of maximum value realized as per the market price of the gold. You can buy or sell gold stocks from anywhere sitting on your computer screen or smartphone and get money directly transferred into your bank account.

No Extra Cost of Holding:

To hold the gold stocks or ETF you just need a demat account, which you might already have if you are investing in financial markets. Except for annual demat charges, you don’t need to pay any other fees or charges to hold digital gold.

Investment Diversification:

When you buy gold stock or ETF, apart from the value of your asset, your investment in digital gold is also exposed to the management and fundamentals of the companies offering such Gold ETFs or into the gold business. Hence your investment is diversified into different types of management and companies.

Disadvantages of Gold Stocks or Gold ETF:

Price Fluctuations:

Usually, the price of gold stocks and ETFs is influenced by the change in the price of the physical gold in the bullion market. However, the Gold stock price or ETF price can be also affected due to other factors like the fundamentals of the company and the demand and supply of the stocks or ETF in the market.

Unsystematic Risk:

Apart from systematic risk, the gold stock price and ETF are also exposed to company-specific various types of risks like incapable management, poor financial performance, operational issues and weak fundamentals of the company.

Buying & Selling Charges:

When you buy and sell the gold stocks or ETF you have to pay the brokerage charges that are shared by your broker and stock exchange against providing you the online trading facility in stocks and other investable instruments. This buying and selling cost can also affect the rate of returns from your investment in gold.

Conclusion: Is it Better to own Gold or Gold Stocks?

While investing in gold, it is totally on you to decide which one is more convenient and affordable for you. Physical gold is available in various shapes, sizes and weights with multiple options to buy the coins, bars or gold jewellery. While, paper gold is available digitally in the form of gold stocks and ETFs that you can buy or sell through the stock exchanges.

Holding physical gold is more costly and risky, while gold stocks and ETFs can be stored digitally in your demat account safely at a nominal cost. Both types of gold prices are influenced by the market price of gold in the bullion market but can be affected as per the demand or supply in the market and due to some internal or gold offering company’s specific factors.

Hence, as per your risk tolerance, affordability and investment goals, you can choose which mode of investing in gold is more suitable for you. In my view, diversifying your investment in both types of gold would be the best option. Yes, you should buy physical gold and also invest in gold stocks and ETFs to diversify your gold investment and get a balanced return.

Recommended Read: ETFs advantages and disadvantages