Investing In Precious Metal: Pros & Cons Of Buying Physical Gold Vs Paper Gold

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Gold is one of the most recognised and highly valued assets that has been around since the beginning of civilisation. Though we use gold far lesser these days to transact as a form of currency, it still acts as a long-term inflation hedge and an instrument to retain and grow our wealth over time.

During periods of high inflation caused by an expansion of the money supply, real assets like precious metals can retain their security of value and would cost more to purchase. Furthermore, gold usually has a negative correlation with other assets such as stocks and bonds, making it a good diversifier to have in your portfolio. It could help to balance out market fluctuations and risks. For these reasons, portfolio managers would recommend holding a small percentage of your portfolio in precious metals like gold.

There are two common forms of holding gold, or any other precious metal that you want to invest in such as silver. One is the traditional ownership of physical bullion, and two, in paper form like gold exchange-traded funds (ETFs) or gold savings account. But what exactly are the pros and cons of these two forms of holdings?

Investing In Physical Gold

Most of us are used to holding some form of gold through jewellery like rings, chains, and bracelets. But when it comes to investment-grade gold or physical bullion, it usually comes in the form of coins and bars.

Singapore, which has exempted Investment Precious Metals (IPM) from goods and service tax (GST) since October 2012, has become the go-to place for high-net-worth individuals and companies for purchasing and storing gold.

Here are some of the pros of investing in physical gold.

Tangible And Portable Asset

Physical gold is real and tangible. You can’t make duplicates or produce more of it because it’s a limited resource that takes years (and costs) to mine and sell. This gives gold an inherent value that guarantees it against complete loss.

Gold, which is a real and hard asset, is also portable. For example, with Silver Bullion, you can buy gold coins and bars ranging from one gramme (0.03 oz) to one kilogramme (32.15 oz) from popular mints such as the Royal Canadian Mint (RCM), the US Mint (USA), and Johnson Matthey (London).

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This makes it theoretically possible to carry your investment-grade gold anywhere you go.

No Counterparty Risk

When you have physical possession of your precious metal, you have full control over it. As such, there’s no counterparty or default risk with physical gold as opposed to holding it in paper or with a custodian.

Remains Outside Of The Financial System

Proponents of physical bullion would point out that owning physical is one way of keeping your assets outside of the financial system. If you own paper gold, chances are that the value of your gold is held by a company or custodian that is within the financial system. If anything threatens the financial system (e.g. war), you may be worried.

You do not have to worry about hacking or phishing attacks that might be a concern with digital assets. You could also keep your physical bullion secure and private.

It remains one of the best ways to protect your wealth from the financial system and the money printing that debases the value of fiat (currency).

High Desirability

Physical gold is a recognisable asset and is widely accepted as a global currency, even though it is used less for such reasons.

Aside from the investment and retail-use applications, physical gold can be re-melted for various industrial applications in industries like medical, electronics, automotive, defense, and aerospace. Since there is a limited amount of gold ore and it is hard to mine for it, the demand for physical gold will continue to be high as our population grows.

Allows For Flexible (Smaller) Investment Size

Given the availability of different weights of bullion, the size of your investment can be as large as in kilogrammes or as small as in grammes. However, when purchasing paper gold, such as gold exchange-traded funds (ETFs), you would not have the same level of flexibility. Your minimum investment would be equal to the minimum board lot size, which is one share for a SPDR gold ETF.

For example, assuming the spot gold price is SGD$2,400/oz, then one share of GLD could cost around SGD$225, while the smallest-sized physical bullion (1 gramme of gold) may cost around $80.

What Are Some Of The Cons Of Holding Physical Gold?

May Need To Pay Price Premium

One disadvantage of buying physical bullion is that you may need to pay more than the spot price. This is called the price premium. It basically reflects the minting costs and the physical market demand and supply fluctuations.

For example, if the supply is more abundant than demand, the premium will be smaller compared to when there’s higher demand and low supply. Different mints would have different premiums for the coins and bars. Naturally, the premium to spot is higher for smaller weights or ounces than it is for bigger ones.

When buying from a dealer like Silver Bullion, both the buy and sell prices are transparently stated, which includes the premium or discount to spot prices. This makes it easier for you to make an informed decision when selecting amongst the different types of products. Such information may not be readily available with other dealers.

Physical Space Is Required And Transportation Costs Apply

Another factor to consider when owning bullion is the need for physical space to store it. Depending on the amount of physical bullion that you may have, storing it at home could be neither safe nor feasible. As such, you may need to store it in safe deposits or secure vaults for safekeeping, which may incur recurring costs.

If you purchase from Silver Bullion, you can use their S.T.A.R storage – which is in Singapore’s jurisdiction – to hold both precious metal and electric vehicle metal parcels. Their annual storage fees are charged at a fixed fee per troy ounce. For example, they charge $9.8550 per troy ounce for gold storage, which is 0.41% (if gold is USD$1,720), 0.20% (if gold is USD$3,440), and 0.14% (if gold is USD$5,160). Assuming that gold will rise in value in the future, it will be less expensive to store with Silver Bullion than with other dealers, who may charge based on the investment value of the bullion.

Lastly, you will incur transport costs whenever you need to transfer your physical bullion. This could be high if a secured transport arrangement is required to move a large amount of bullion.

Investing In Paper Gold

You can invest in paper gold via a Gold ETF or a gold savings account. For such gold investments, you don’t take any physical delivery of the gold that you invest in. Rather, you own shares or certificates under your name, which gives you price exposure to gold.

Here are some of the pros and cons of investing in gold using an ETF or a gold savings account.

Quicker, Easier And Cheaper To Purchase

Paper gold, like a gold ETF, can be bought and sold easily on stock exchanges similar to listed company shares using a stock brokerage account or through an investment app.

There is no additional premium on top of the spread between the bid/ask price for buying and selling paper gold. The price you pay is usually reflective of the fund price, which tracks the spot gold price. However, the spread may widen depending on the liquidity of trading on the ETF.

When compared to physical bullion, a gold ETF allows you to gain quick exposure to gold because the trade can be completed in a matter of minutes.

Potential Third-Party (Counterparty) Risk

While you may save on the physical space requirements that are typically associated with physical bullion, it is also paper gold’s biggest disadvantage.

When you do not have physical ownership, you are subjected to counterparty risk. For the Gold ETF, this comes in the form of market risk, management risk, custody risk, liquidity risk, and regulatory risk, to name a few.

Tracking Error

Depending on the gold ETF that you invest in, the fund may not accurately track the movement of the broader spot gold prices or other precious metals. Also, the prices of ETFs can be affected by market forces or “fat finger” algorithmic mistakes, which can make the prices of funds not match the prices of the physical spot.

High Fees

The purchase of paper gold can be similar to, if not more expensive than, physical gold bullion. When you trade paper gold through a traditional brokerage account, you may have to pay a commission of at least 0.28%, or $25.

Furthermore, unlike physical bullion, which may offer better pricing, particularly from bullion dealers like Silver Bullion, which offer tiered pricing when you purchase more, paper gold does not offer such bulk discounts. This could lead to higher costs incurred if your investment amount is large.

Lastly, despite the lack of a need for physical storage by the individual, the gold ETF still incurs an expense at the fund level, which is shared by all shareholders. GLD, the largest gold ETF, charges an annual expense ratio of 0.40% based on the daily net asset value (NAV) of the trust. This means, the higher the value of gold (or the NAV of the trust), the higher the cost of expenses will be.

How Can You Buy Physical Gold In Singapore?

A physical bullion holding could complement your current portfolio and exposure to precious metals. It can also be part of your plans for leaving a legacy or a gift to your loved ones.

Established since 2009, Silver Bullion, a Singapore company, is a trusted bullion dealer that offers a range of precious metals – silver, gold, platinum, and palladium; and electric vehicle metals like Class 1 Nickel and cobalt.

Image Source: Silver Bullion

You can purchase popular precious metals like silver and gold at Silver Bullion’s retail store at 9 Raffles Boulevard #01-108, Millenia Walk, Singapore 039596, or on their online website. The website offers transparent pricing and tiered discounts on your accumulated purchases from them.

Image Source: Silver Bullion

You also have the choice of taking personal delivery or storing it with Silver Bullion’s S.T.A.R storage program, which also allows you to sell back your bullion. Otherwise, you could also do-it-yourself by taking up a safe deposit box (The Safe House).

Check out the latest pricing on your favourite bullion at Silver Bullion today!

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