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Common Mistake #4 – Physical Gold And ETFs Are The Same

Many investors, especially those new to precious metals, make the critical error of thinking that owning an Exchange Traded Fund (ETF )that invests in gold, such as GLD, is the same as owning the physical gold itself.  This mistake is born of a common misunderstanding.  While ETFs do buy some physical gold, there are many differences between owning shares of an ETF and owning physical gold.There are many differences you should be aware of that make ETFs significantly more risky, as an investment, than owning and storing the physical precious metal yourself.

For thousands of years, gold and silver have been highly desirable and recognizable commodities that are easily bought, sold and exchanged for goods on local and world markets. You can take physical gold from New York to Zimbabwe and everyone will immediately recognize the inherent value in the metal itself. In essence, you can use physical gold or silver in lieu of, or for exchange of cash all over the world.

As the owner of a gold ETF, you ultimately only own a piece of paper,a promissory note, showing how many shares of the fund you own; however you do not own any actual physical gold. The ETF owns the gold and you own a promise from the fund managers to pay back the value of the shares you have purchased in the ETF. The ETF certificate that you own is something that is not universally traded on the world markets, nor is it widely recognized or easily exchangeable for currency. You would have a very difficult time trying to trade paper certificates for goods or services the same way you will physical gold.

Many newcomers to precious metals investing ask, “Aren’t gold ETFs the best way to take advantage of the rising gold prices?” “Probably not,” is the most accurate answer. ETFs do not always accurately reflect the current price of gold. That is because you are trying to compare a physical precious metal product to a piece of paper. In the past five years, the premiums on the spot price of gold have grown 10-40%, which may not be accurately reflected in the price per share of a gold ETF.

Also, if you read the language of an ETF prospectus carefully, you will see that your investment in the ETF could possibly drop to $0 in value. This highlights two critical factors to consider about ETFs: 1)you are trusting someone else to establish the value of the gold possessed by the ETF, and 2) you are trusting that the fund managers actually have enough physical gold to cover your investment and all of the other shares invested as well.

These two concerns are negated when you consider physically possessing gold. First, the value of your investment is determined by the market, not by a fund manager or by the popularity of the shares of a given ETF. Second, since you physically possess the gold, you know exactly what it is worth at any moment in time and are not dependent on another person or entity to tell you what you have. The chance of physical gold becoming worthless is virtually impossible, given that gold and silver have always had, and should always have value. While the value of gold may fluctuate depending on a given currency or during any given day,there will always be some value associated with these precious metals due to the fact that precious metals are rare elements, cannot be“manufactured” and have a myriad of industrial uses.

Yet another major concern surrounding ETFs is the increased possibility of counterfeiting. You may have read articles documenting the recent discovery of counterfeit gold bars, which have a core made of tungsten, which has almost the exact same weight and density of gold.Counterfeiters primarily target the 400 oz. size bars that all ETFs purchase because of the time and expense in the counterfeiting process,and the massive return on their counterfeiting investment. These bars are the only size bars that an ETF purchases, often purchased sight unseen, and they are rarely, if ever, critically audited. In fact, 400oz. bars are typically only used by institutions, ETFs and world governments. Once again, in the language of the prospectus, you will find that if the ETF were to discover that they were holding counterfeit bars, the loss of value would result in a loss of value for the shareholders of the fund, not the ETF managers who purchased and accepted counterfeit bars in the first place.

At APMEX,we have highly-trained experts who can detect counterfeit products of any type. All of the gold coins and bars that we offer were manufactured by government-owned or well-known private mints, making these product seven more resistant to tampering. The vast majority of coins and bars wesell are smaller in size, making them much more difficult and less profitable to counterfeit as well. Because of these three simple facts,you can be confident that the physical precious metals you purchase from APMEX are genuine.

Finally, there is a question of security. Some people are concerned about holding physical gold in their households and find that the idea of having shares of a precious metal ETF is quite appealing. When you consider the potential losses that could be sustained by investing in an ETF, the prospect of securing your gold coins or bars in a bank safety deposit box or even in a simple household safe is negligible at best. Many homes today are equipped with high-tech alarm systems, locks and other security measures. Installing a simple gun safe, wall safe or floor safe is an inexpensive and effective way to protect your precious metals.

This chapter has identified the advantages of owning a physical precious metal versus owning a paper ETF. When making your investment choices, you should always do your homework, always read the fine print and always understand what you are purchasing.

Disclaimer

The American Precious Metals Exchange, Inc. (APMEX)is not a registered investment advisor. Readers are advised that the material contained herein should be used solely for informational purposes. It is not the intention of APMEX to tell or suggest which precious metals investments members or readers should buy or sell for themselves. Site users should always conduct their own research and due diligence and obtain professional advice before making any investment decision. APMEX will not be liable for any loss or damage caused by areader’s reliance on information obtained in any of our newsletters,special reports, email correspondence or on our website.Our readers are solely responsible for their own investment decisions.

The information contained herein does not constitute a representation by the publisher or a solicitation for the purchase or sale of investments. Our opinions and analyses are based on sources believed to be reliable and are written in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. All information contained in our publications or on our website should be independently verified with the companies mentioned. The editor and publisher are not responsible for errors or omissions.

Any opinions expressed are subject to change without notice. Owners,employees and writers may hold positions in the investments that are discussed in this publication.

[The Economic Survivor has no affiliation with APMEX and does not endorse them in any way]