Physical Gold Or Gold ETF – Which is Right for You?

In the closing lines of my article about Best Gold ETF in India I told why Gold Investment is what I personally prefer and so here I tell why?

I purchased my first Gold bar on 20th January 2007 from my HDFC Bank for a price of 10700 per 10gm. My investment was mainly for long term and it is just today I realized that I am 3 year into the investment and so If I sale I make double the amount and all will be tax free for me. 😀

Now coming back to the topic of Gold ETF Vs Gold Bar let me share positives and negatives of investing in gold bars over gold ETFs but before that let me tell you why you should be investing in gold.

Why Gold Investment?

• Excellent way to diversifying portfolio.
• Requires no ongoing maintenance.
• Gold does not rely on growth prospect of any country.
• Used in times of high inflation to protect wealth.

Benefits of investing in Gold ETF over Gold Bars

Low cost

No matter which bank you buy the Gold from you have to pay a bit higher than the pure gold price. When I purchased from HDFC bank I purchased at the price of 10,700 Rs per 10 gm but market rate was below 10k and if I remember it correctly was 9800.

Tax benefit

ETF is like a stock where if you remain invested for 1 year+ time you don’t pay any tax on the gains but for Gold it is 3 years.

Gold Bars selling issue

Banks don’t buy back gold bars and so you can have issues selling the bars. You have to sell them to your local goldsmith and so you may not get the right price for selling it.

Benefits of Investing in Gold bars over Gold ETF

Changing NAV without Net Asset

I don’t understand the concept of trading ETF. This may be because of my non-finance background but I still cannot understand the concept of an ETF.

Let me give you an example of what I don’t understand.

Let’s say you have a Gold ETF with Net Asset Value calculated as value of total gold + cash. For the sake of argument let us make the NAV for ETF as 2000. Now as per my understanding your asset pricing can go higher or lower depending on the how your asset value unfolds. Isn’t it?

ETFs are actually traded in the market like stocks and what if no one is willing to sell the ETF at the NAV value of 2000. For argument’s sake, say people are ready to sell at 2010. If you are willing to buy the same ETF you have to be buying it at a price of 2010 which is not the real NAV of the ETF but higher than the net asset of the fund. It is better to be paying the bank the fees than paying higher or lower than NAV for the ETF.

You may argue that stock pricing is not equal to the actual Net Asset of the company but for stock at times you purchase on how things will perform in the future giving them premium but don’t understand why ETFs should be trading at a premium.

So instead of investing in ETF I prefer Gold Mutual funds even.

Not All Your Investment is in Pure Gold

ETF needs to remain liquid and so they cannot invest everything into GOLD and so you are actually not investing in 100% gold.

Final Thoughts

If you are looking to opt for short term trade based on Gold pricing you should opt for ETF or else go with physical gold. Keep in mind that when trading in ETFs, you are trading against the underlying basket of gold as an asset and not in gold.