Investing in Gold or Gold Stock

Gold is always considered a safe haven for investing, especially when the financial market is not stable, 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. 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.

What is Physical Gold and How Can You Buy It?

Physical gold refers to tangible gold assets in the form of bars, coins, or jewellery. Unlike digital gold, physical gold can be held, touched, and stored physically. It serves as a traditional and reliable investment option, offering a hedge against economic uncertainty and inflation. Investors can purchase physical gold from bullion dealers or jewellers and store it securely in a vault or safe deposit box. physical gold ownership provides a sense of security and ownership, allowing individuals to have direct control over their investments. However, it may require additional costs of storage and insurance. Overall, physical gold remains a popular choice for investors seeking a tangible store of value and a long-term hedge against market volatility.

What are Gold Stocks or ETFs called?

Gold ETF, or Gold Exchange Traded Fund, is a commodity-based Mutual Fund that invests in assets like gold. These exchange-traded funds perform like individual stocks and are traded similarly on the stock exchange.

Exchange-traded funds represent assets, in this case, physical gold, both in dematerialised and paper form. An investor invests in stocks instead of the actual metal, and once it is traded, they are credited with the unit’s equivalent in cash instead of actual gold.

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 ornaments, you have 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 also be 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 also be 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 physical gold is that you need a space to store the same safely. You need highly secured lockers or need to pay insurance or annual maintenance charges to keep your gold in 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 a lack of money then.

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 to the gold business. Hence, your investment is diversified into different types of management and companies.

Disadvantages of Gold Stocks or Gold ETF:

Price Fluctuations:

Price can also be affected due to other factors like the fundamentals of the company and the demand and supply of the stocks or ETFs in the market.

Unsystematic Risk:

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

Buying & Selling Charges:

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

Conclusion:

Investing in gold or gold stocks ultimately depends on an investor’s financial goals and risk tolerance. Physical gold or gold-backed ETFs are often favored for their stability, serving as a hedge against inflation and economic uncertainty. They offer a haven during market volatility but do not provide income or significant growth potential. On the other hand, gold stocks—such as shares in mining companies—can offer higher returns due to their operational leverage and exposure to rising gold prices. However, they also come with greater risks, including market fluctuations, management performance, and operational challenges. Therefore, a balanced approach, potentially including both assets, can provide diversification while aligning with an investor’s risk profile and long-term objectives.