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Which is Better: Paper Gold or Physical Gold?

While paper gold has a better liquidity, owning physical gold is less riskier. This is just one differentiating factor between the two. Buzzle article takes up the old financial debate of paper gold vs. physical gold in order to help you make an informed decision.
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Comparison between paper gold and physical gold
Quick Tip
Holders of paper-based instruments should make it a point to know about the annual expense ratio, or they may end up paying a substantial amount of their investment towards it.

Investing in gold is often recommended to investors to diversify and introduce a stable asset for their portfolio. Gold is often treated as an important vehicle of investment because of its ability to provide a hedge when the market conditions are not favorable. While owning physical gold is an all-time favorite of investors, another way of investing in gold, which is fast gaining popularity, is through paper gold. Today, many people do not have the time to go and buy actual gold; hence, they resort to buying paper gold at a button's click or by calling their broker. While proponents of paper gold feel that it is easy to store, transport, and trade, the opponents think that it can be a riskier option. Here are a few points of distinction between the two.

PAPER GOLD PHYSICAL GOLD
Assurance
Paper gold is a promise made by the issuer that you own certain units of money. As you physically own the gold, the assurance quotient is stronger.
Comprises
It includes exchange-traded funds (ETFs), gold futures, gold certificates, pool accounts, and options. It includes gold bullion, bars, coins, and jewelry.
Storage and Safety
As you own gold units electronically, they are safe and do not require special storage arrangement. You will have to make special storage arrangement for physical gold in order to keep it safe from theft.
Storage Cost
It has no storage cost as it exists electronically. You will have to incur the cost of insurance and vaulting.
Liquidity
Paper gold has more liquidity, as you can sell it anytime you want at a button's click or by calling your broker during the market working hours. You will have to find the right kind of buyers, and raising cash instantly may not be possible.
Markups
The inconvenience of markups is absent. The inconvenience of markups is present.
Buyers and Sellers
It is easier to find buyers and sellers. Finding the right buyer or seller who will offer pure gold or fair compensation is slightly difficult.
Making Charges
There are no making charges; only brokerage charges are involved. This has making charges and premiums attached to it, especially if you are investing in jewelry.
Denominations
It's easily available in small denominations, and thus, is affordable to small or medium investors. It may not be available in small denominations.
Purity
With paper gold, there is no question of gold purity as one unit represents one gram of gold with 0.995 purity. When you buy gold from an outlet, you will have to verify its purity by assaying through an external party.
Risk Quotient
High risk is involved as you own the gold on paper, and the firm offering it can undergo systemic failure. As you have the physical ownership of gold, the risk is relatively lower.
Limited Supply
If there is a market crunch in the supply for gold, people with paper gold may not gain as much as people with physical gold will do. Investors who have invested their money in physical gold will earn extremely good profits during a limited supply of gold.
Demand
The demand may decrease due to fund redemptions for paper gold. Physical gold continues to be in demand in India, China, the US, and Europe.
Expense Ratio
You will have to pay the annual fee or the expense ratio which the firm charges you as administrative costs. You do not have an expense ratio in physical gold.
Brokerage Commission
Brokerage commission is on the higher side ($10-25 or more for each trade) for orders placed through automated phones or brokers. If you go and buy gold yourself, you can skip the brokerage commission.
Value
The value is dependent on demand and supply of gold in the market. The value is dependent on the purity and mass of the gold.
Sources
Different gold ETFs are traded in stock exchanges just as shares on major stock exchanges around the world. According to Investopedia.com, you can source it from government mints and privately owned precious metal dealers and jewelers.
Sales Tax and VAT
You can avoid paying sales tax and VAT by purchasing paper gold. In a few countries, purchase of physical gold leads to payment of sales tax and VAT.

Remember, whichever option you choose, you must know the right time to buy and sell gold in order to register profit.

Our Verdict

As both paper and physical gold have their own share of merits and demerits, one must determine which option is better for them, based on certain criteria. For example, if you are going for a long-term investment, opt for physical gold, and paper gold in case of a short-term holding. If you are going to trade frequently in gold and have a storage problem, paper gold is recommended for you. If you are looking at gold as the 'safe haven' investment in your portfolio, you must definitely opt for physical gold, which is bound to be a stable option.
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Published: March 26, 2014
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