Home Money Why Gold ETFs Aren’t Really Gold

Why Gold ETFs Aren’t Really Gold

by Jeremy Holcombe

Investing in gold is always an excellent way to contribute to your investment portfolio and reduce its volatility. You can also invest in gold in order to make a profit and it is also a sound hedge against economic risk. Gold can be bought in the form of jewelry and coins – for personal use as well as for gifting purposes. Many people also choose to invest in gold stocks and gold ETFs (exchange traded funds). But how do you choose whether to invest in gold stocks, physical gold, or gold ETFs?

Gold Stock

Gold stocks include mutual funds and stocks which consist of firms that search for gold to invest in. Many of these firms have been earning fabulous returns throughout the years due to the rise in the prices for valuable and precious metals. Though investing in gold stocks provides such attractive returns, they are certainly not the same as investing in the real stuff.

Basically, how investing in gold stocks works is that investors gamble on the firm’s ability to make a profit despite the current price of gold on the market. The thing that you have to remember while investing in gold stocks is that companies can make a profit only if the price of gold is down and their operating costs are also low. If their expenses should increase while the price of gold is also high, there are little to no chances of them making any gains.

Gold ETFs

Gold Exchange Traded Funds or ETFs share some similarities with mutual funds because they too track assets or an index of assets. Since the turn of the century, people have been finding exchange traded funds more convenient and they seem to have become quite popular. Gold ETFs can hold several different types of gold assets, gold reserves, as well as mining company stocks.


  • Can buy in small quantitiesYou can invest in as little as 0.5 grams of gold through an exchange traded fund and this will lie in your trading account. With ETFs, you don’t have to worry about the purity of the gold you have purchased unlike when buying physical gold. If you want to purchase pure physical gold instead, you will incur additional costs.
  • Easy to sellYou can keep buying small amounts as and when you have the necessary funds and you can easily sell these gold ETFs or exchange traded funds if you decide you want physical gold instead. They have a very high fluidity in trading.
  • Convenient and secureAll you have to do is click a mouse and electronically transfer the funds required to purchase your gold ETFs and you will have just invested in gold which is a secure form of investment. When buying physical gold, you will face the problem of security issues during the transit period and inadequate safety even if you are using bank lockers and so on. Do you own a gun? Have a dog? A safe? These are things to consider.
  • No incessant travel costs Unlike physical gold, these gold ETFs won’t require you to keep making several trips to the banker or the jeweler.
  • Useful tool for heavy duty tradersGold Exchange Traded Funds or ETFs are very popular amongst frequent traders and move into or out of positions several times a day.
  • No need for physical ownershipPeople are given an opportunity to invest in the precious metal market through ETFs without the need for physical ownership of the metal.


  • Not so beneficial to long-term investment tradersETFs or exchange traded funds are useful for short term investors but don’t really work for long term investors because they offer opportunities for intraday trading which do not fit the strategies of long term investors.
  • No physical possession of gold Gold exchange traded funds can be redeemed for cash and involve derivatives and contracts, but you won’t ever have something physical like a gold bullion bar or a gold coin in your possession.
  • Low volume of tradeExchange traded funds or ETFs have very low trading volumes and this vastly reduces the advantage of investing in them.(4) It is generally better to invest in equity or a futures contract because they have better trading volumes.
  • Fund management charges If you have invested in ETFs, then you have to pay fund management charges, which is about 0.5-1 percent per annum of the gold value. When gold market prices increase, fund management expenses also increase.

ETFs may be convenient, but there are plenty of risks involved in such investment and they are not as advantageous, for many people, as owning the real thing – real gold.


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