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Physical Gold vs. Exchange-Traded Funds

2/24/2010 03:06:00 PM, Posted by APMEX, One Comment

A lot of investors are confused about the differences between owning physical gold and owning a gold Exchange-Traded Fund (ex: GLD ETF). Hopefully the following points from the traders here at APMEX will help to clear things up:

  • Universally traded: Gold and silver are highly recognized and can easily be traded for goods and services anywhere in the world.
  • Less credit risk: Actually owning the metals significantly minimizes investors’ exposure to credit risk.
  • Not the same: Investing in the GLD ETF is not the same as investing in physical gold. This is partly because the GLD ETF fails to accurately reflect the price of gold. The premiums on physical gold products have grown from 10% to 40% over the spot price of gold over the past five years. This is not reflected in the price of the GLD ETF.
  • Deviation from spot values: ETFs that track gold prices using futures contracts will track the spot price of bullion, but may deviate occasionally.
  • ETF can drop to zero: Like stocks, bonds and mutual funds, GLD allows for unsuspecting investors to potentially lose all of their money. Actual physical gold price has never gone down to zero.
  • No promise: The GLD ETF does not promise that any physical gold is actually held within the ETF Trust.
  • No physical possession: A Gold ETF shareholder can never take physical possession of any of the gold, unless the shareholder owns 100,000 or more shares.
  • No actual gold: Owning GLD is not an investment in actual gold; it is an investment in a paper security.
  • Counterfeit risk: 400-ounce gold bars are the only gold bars purchased by ETFs. Because they are rarely inspected by experts for authenticity, counterfeit bars can end up in the fund. If one or more are found to be counterfeit, the value is deducted from the fund, effectively decreasing the value of individual shares.

We hope this provides some insight into the major differences between physical and paper gold. If you have any other questions, please feel free to contact our trading department at (800) 375-9006 or visit

One Comment

Bull Source @ February 24, 2010 at 4:59 PM

Good post. I would also add the risk of the audits on the holdings of an ETF (like GLD) being falsely conducted and the ETF not accurately possessing all the gold it claims to.

If this happens, investors risk serious losses. Of course, this risk is eliminated by owning physical gold over an ETF.