Gold Funds or Physical Metal?

November 2nd, 2009 by 

The gold fund or physical gold question is one that comes up quite a bit.

One pays a dividend, has enterprise value, and has the potential for growth.  One is a piece of metal long accepted as a store of value.  Which one do you invest in: gold (or silver) mining stocks, or gold (or silver!) itself?

The Case for Physical Gold

Physical gold can go in a chest, gold in a fund can;t.

I bet this could hold physical gold.

In a truly worst case global economic meltdown scenario, gold might become the currency of first resort.  Gold has a natural limit on the amount that exists: the amount of gold in the earth, plus the amount already mined.  This makes the price of gold less susceptible to government interventions.

Physical gold itself is somewhat tedious to store.  Storing gold coins at home leads to a security concern, and you have to pay for the privilege to store your gold elsewhere.  Paying for storage in the form of a physical gold fund (such as GLD) is most likely worth the risk in all but the absolute worst scenarios (some form of martial law, I assume).  The risks of that remain (extremely) low, so it's (most likely) fine to trade for some safety.

The Case for Funds of Gold

Generally, funds will invest in gold miners, refiners, and other stocks with a link to the gold metal.  Continuing the advantages of storing your gold off-site (mainly to prevent theft), gold related stock funds are a decent place to get some gold exposure.  To boot: some small mining stocks may even be undervalued.

While gold stocks do tend to track the price of gold, they do so imperfectly.  Gold stocks have captured about half of the movement of gold (the metal) in recent years.  Gold funds also rely on the stock picking abilities of a fund manager as well as the price of the underlying gold, an interesting caveat which you have to be aware of.  Finally, note that gold stocks are often more volatile than the underlying metal, moving up and down with the whims of the broader market.

The Right Choice?

I've told you before, and I'll state it again:  I am not a financial planner.  Take my recommendations with a grain of salt, but here it is: I prefer the gold miner stocks.  They have the potential to pay dividends, grow (in the form of opening new mines and an increasing share price) and are easier to invest in (sorry Gold ETFs!) than physical metal.  That said, in full disclosure, I invest in a gold fund which holds both physical gold and gold stocks.  How do you invest in gold?

See also our inflation adjusted gold return calculator - we also included inflation adjustments!



PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK is in his mid-30s and lives in New Hampshire with his wife, kids, and dog.

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