Precious Metals

Investing in 'physical' gold

Some investors may confuse possession of gold-mining equities, exchange traded funds and other “paper” gold products with ownership of “physical” gold, such as this 2012 American Eagle 1-ounce gold bullion coin.

Images courtesy of U.S. Mint.

I believe most investors and savers should hold up to 10 percent of their investable assets and personal savings in physical gold — and for some investors, a greater percentage allocation to gold may be appropriate.

Many investors, however, confuse the term “gold” with gold-mining equities, gold exchange-traded funds and other “paper” gold investment products.

But when I recommend that someone invest in gold, I’m speaking of “physical” gold — bullion bars and bullion coins — that investors can actually hold and store on their own or with a safe deposit facility of their own choosing.

As well, I refer to long-term holdings of physical gold — holdings that one might wish to sell only as a last resort. If you wish to actively trade gold, speculate in short-term price movements or bet on gold-mining shares, go ahead, but understand that these positions should be in addition to — not instead of — your “core” gold percentage.

One of the main reasons to own physical gold is risk reduction — to reduce or avoid the risks that threaten ordinary investments and savings including equities, bonds, mutual funds, gold ETFs and foreign currencies.

Gold-mining equities, unlike physical gold, do not lower risk but actually subject the investor to a myriad of risks not associated with ownership of the physical metal. These include management risk, exchange or stock market risk, political and country risk, labor issues, and tax or regulatory risks.

As well, despite the popularity of gold ETFs, it is important for investors to understand that investing in an ETF is not the same thing as owning the physical metal. With ETFs one does not actually own the physical metal. Unless you are a large institutional investor, you cannot take delivery of the physical metal.

Like other equities, there are risks inherent in ETF ownership that are not shared by bullion bars and coins held under one’s personal control. Consider that ETFs are subject to exchange risk and their liquidity is dependent upon the exchange operating without interruption. In addition, ETFs are dependent on transfer agents, depositories and custodians all functioning honestly and as expected.

Moreover, ETFs do not provide the anonymity that accompanies ownership of physical bullion bars and coins.

Jeffrey Nichols is a recognized expert on the economics of precious metals markets. He is managing director of American Precious Metals Advisors ( and also serves as senior economic advisor to Rosland Capital LLC (, a retail dealer of precious metals investments and numismatic coins. Follow Jeff Nichols on Twitter @ NicholsOnGold.

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