When it comes to investing in gold, you have two main choices: physical gold or gold exchange-traded funds (ETFs). Both can enhance your portfolio’s diversification and provide a sense of financial security during economic uncertainty, but they each come with their own set of benefits and drawbacks.
To make an informed decision on which option suits you best, it’s crucial to grasp the key differences between them. In this blog post, we’ll delve into the details of both physical gold and gold ETFs, comparing the pros and cons of each to help you make an informed investment decision that suits your goals and preferences.
What is physical gold?
Before we compare the differences, let’s recap what physical gold is and why it is such a popular investment. Unlike digital forms of gold, which exist only as an electronic or paper representation, physical gold refers to tangible assets such as:
- Bullion bars: Gold bullion bars or ingots typically contain a purity of 99.99% (24-karat). They are produced by refineries such as Baird & Co., PAMP Suisse and The Royal Mint, and come in various sizes, from small 1g bars to large 1kg bars.
- Coins: Gold coins are minted by governments or private mints, often with a face value. Similar to bars, they have high gold purity (usually 22k or 24k) but are exempt from Capital Gains Tax (CGT) for UK residents. Well-known examples include the Gold Britannia and the Gold Sovereign.
- Jewellery: Gold jewellery combines investment with craftsmanship, often featuring intricate designs and artistic value. However, it usually has a lower purity than bullion due to alloying for durability, commonly 22k, 18k, or 14k.
Each of these assets has a real, intrinsic value due to gold’s rarity, durability and historical significance. Additionally, they can be held, stored, and traded without reliance on third-party institutions or digital platforms—ideal for those who prefer direct ownership of their wealth.
Why invest in physical gold?
But the benefits of physical gold go far beyond simply owning it. From diversifying your portfolio to serving as a hedge against inflation, here’s a closer look at why it remains a trusted investment:
- Hedge against inflation: Physical gold has historically served as a hedge against inflation. When the purchasing power of currencies decreases, the value of gold tends to rise, preserving your wealth.
- A safe haven asset: In times of economic turmoil, political instability, or market crashes, physical gold is often considered a safe-haven asset. Its value tends to remain stable or even increase when other investments decline.
- Portfolio diversification: Adding physical gold to your investment portfolio can help diversify your holdings. Gold’s price often moves independently of stocks and bonds, which can provide a hedge against market volatility.
The risks of physical gold
Despite the advantages physical gold provides, it’s important to be aware of the potential risks involved, from storage costs to security concerns, which can impact your investment strategy.
- Storage costs: The cost of storing physical gold can vary depending on its size, weight, and quantity, often requiring investments in safes, bank vaults, or specialised storage facilities, all of which can be quite expensive. Tip: Browse for competitive prices and insurance rates to minimise costs and guarantee adequate protection.
- Lack of income: Compared to stocks that pay dividends or bonds that earn interest, physical gold does not generate any income as its value relies solely on price appreciation. Tip: Make sure to balance your portfolio with income-producing assets for a steady flow of cash.
- Risk of theft or loss: While having direct access to your physical gold offers convenience, it also makes it vulnerable to theft, loss, or damage, making security a constant concern. Tip: If stored at home, invest in a high-quality safe and keep it hidden in a discreet location.
- Counterfeit issues: It can be difficult to ascertain the purity and authenticity of gold without proper expertise. This opens up the possibility of being sold low-quality or fake gold. Tip: Always purchase gold from well-known and reputable dealers who provide certificates of authenticity.
What are gold ETFs?
Gold ETFs (Exchange-Traded Funds) are investment funds that track the price of gold. Essentially, they allow you to invest in gold without physically owning the precious metal. Some of the main types of gold ETFs include:
- Physically-backed gold ETFs: These ETFs are backed by actual physical gold (e.g. bars or coins) stored in secure vaults. Each share represents a portion of that gold, providing investors with direct exposure to gold’s price movements without the need for storage. Examples in the UK include iShares Physical Gold ETC and WisdomTree Physical Gold ETC.
- Gold mining ETFs: Rather than investing in gold itself, ETFs like VanEck Gold Miners UCITS hold shares in companies involved in gold extraction and production. Their performance depends on both gold prices and the financial health of the mining companies.
- Synthetic gold ETFs: Synthetic ETFs such as Xtrackers Physical Gold ETC (EUR Hedged) track gold prices using financial derivatives like futures contracts or swaps, instead of holding physical gold. However, they can introduce counterparty risk, as it relies on the financial stability of the parties involved in the derivative contracts.
Just like regular stocks, gold ETFs are traded on stock exchanges, making them easy for investors to buy and sell during market hours—avoiding the logistical challenges that come with physical gold ownership.
Why invest in gold ETFs?
Well, demand is clearly on the rise, as Europe saw the largest inflow of gold ETFs since March 2022, according to a recent January 2025 report by the World Gold Council. Here are just some of the benefits of investing in gold ETFs:
- Lower transaction costs: Unlike physical gold, Gold ETFs eliminate costs related to storage, security, and insurance. They also have lower bid-ask spreads and trading fees, making them a more cost-effective investment option.
- Greater transparency and accessibility: Gold ETFs provide clear pricing, daily net asset values, and audited holdings, ensuring transparency. They are also accessible to investors of all sizes, allowing fractional ownership without requiring large capital investments.
- Fractional Investing: Gold ETFs allow investors to buy small units, making investments more accessible without needing large capital. This flexibility enables both beginners and experienced investors to diversify their portfolios affordably.
The risks of gold ETFs
Similar to physical gold, gold ETFs offer strong investment potential but also come with risks, including price fluctuations and fund management fees which can have a negative impact on overall performance.
- Lack of tangible ownership: Gold ETFs provide exposure to gold prices but don’t grant direct ownership of physical gold, which some investors prefer for security reasons. Tip: If owning physical gold is important to you, consider a mix of Gold ETFs and bullion to balance liquidity and asset control.
- High volatility: Gold prices can fluctuate due to market trends, economic conditions, and central bank policies, making Gold ETFs subject to short-term price swings. Tip: Adopt a long-term strategy like index fund investing and diversify your portfolio to reduce the impact of unexpected volatility.
- Potential tracking errors: Some Gold ETFs might not perfectly match actual gold prices due to fund management inefficiencies or derivative use. Tip: Choose well-established, physically-backed Gold ETFs with a strong track record to minimise discrepancies between fund performance and price movements.
- Incur management fees: Gold ETFs charge annual management fees due to the ongoing expenses of running the fund (e.g. marketing, insurance, custodial cost etc.) which can eat into returns over time. Tip: Compare expense ratios and opt for ETFs with lower fees to maximise profits while still benefiting from the convenience of gold exposure.
Physical gold vs ETFs: Key differences
Now that we’ve outlined what physical gold and gold ETFs are, it’s essential to understand the key differences between the two, including factors like cost, liquidity, and purchasing options. Gaining clarity on these distinctions in more detail will help you choose the investment that best suits your financial goals and risk tolerance.
1. Where to buy
Physical Gold: Physical gold, including bars and coins, is typically bought and sold through bullion dealers, jewellery stores, private collectors and banks. You can find reputable dealers like us at Bullion Giant, which specialises in a wide range of LMBA-approved gold products.
Gold ETFs: Gold ETFs are traded on stock exchanges, making them accessible through most brokerage accounts. They offer the convenience of buying and selling shares just like any other stock, meaning you can quickly adjust your investment and take advantage of market opportunities.
2. Cost
Physical Gold: The cost of purchasing physical gold involves not only the price of the gold itself but also premiums over the live spot price, shipping, and insurance. These premiums can vary based on the form of gold and the dealer. Additionally, when selling physical gold, you might face additional fees and lower bid prices.
Gold ETFs: In contrast, ETFs typically have lower upfront costs but come with annual management fees from brokers that can impact long-term returns. These cover the costs of managing the fund and holding the cash equivalent of the gold, and they can vary. However, there are no shipping or insurance costs associated with ETFs, making them a more cost-effective option in this regard.
3. Diversification
Physical Gold: Physical gold is a single asset and doesn’t offer diversification on its own. However, it can be a good addition to an investment portfolio. To achieve diversification, you would need to hold various types of assets, including stocks, bonds, and other commodities, alongside your physical gold.
Gold ETFs: On the other hand, ETFs provide a straightforward way to gain exposure to the price of gold without needing to buy and store the precious metal. Some gold ETFs also offer diversification within the sector, such as those that invest in gold mining stocks. This can spread your risk across multiple assets related to the market.
4. Liquidity
Physical Gold: Physical gold can be less liquid than ETFs. While it is a highly sought-after asset, finding a buyer and getting a fair price can take time, especially if you’re selling large quantities. You also need to consider the logistics of transferring ownership. However, investing in small bars or coins enables you to liquidate your holdings more quickly and in smaller amounts.
Gold ETFs: Since they are traded on stock exchanges, ETFs offer high liquidity. You can buy or sell shares throughout the trading day at market prices, providing you with flexibility and quick access to your funds.
5. Maintenance
Physical Gold: Owning physical gold requires secure storage and insurance to protect against theft or loss and preserve its value, which incurs ongoing costs. However, it offers you complete control over its physical condition and location, benefiting those who value direct ownership and wish to personally safeguard their investment.
Gold ETFs: Gold ETFs require no physical storage or maintenance. The fund manager takes care of all these aspects, and you don’t have to worry about the security of your investment, making them a hassle-free option.
6. Risk
Physical Gold: Physical gold carries some risks related to security and damage. Loss or theft can be devastating, and having proper insurance and storage can mitigate these risks. Moreover, physical gold does not generate income, such as dividends or interest.
Gold ETFs: As mentioned earlier, gold ETFs are subject to market risk, including price volatility and fluctuations in gold prices. They also introduce counterparty risk, as their value depends on the fund manager’s performance, and tracking errors may occur due to fees and operational costs.
7. Taxes
Physical Gold: Taxation on physical gold can be complex, depending on your jurisdiction. In many countries, the sale of physical gold may be subject to Capital Gains Tax and VAT, which can impact your overall returns. To avoid CGT, we advise buying coins, such as Britannia coins, or smaller gold bars (1g, 2g, 5g or 10 gram).
Gold ETFs: Tax treatment for gold ETFs varies but is generally more straightforward. In some cases, gains from ETF investments may be taxed as capital gains, while others may treat them as income. It’s important to consult with a financial professional to understand how the taxation rules apply to your specific situation.
Is it better to buy physical gold or ETFs?
Well, the choice between physical gold and gold ETFs depends on your investment goals, risk tolerance, and personal preferences.
If you value tangible assets, seek a hedge against inflation, and are comfortable with the costs and responsibilities of storage and insurance, physical gold might be the right choice for you. On the other hand, if you prefer liquidity, lower upfront costs, and ease of trading, gold ETFs could be a better fit, especially for those with short-term investment goals.
Looking to invest in physical gold bars and coins?
For those interested in physical gold, purchasing from Bullion Giant can provide you with access to a range of high-quality gold bars and coins.
We offer competitive pricing and ensure that you receive authentic, 99.99% pure gold products backed by industry standards. Whether you’re looking to invest in gold for the first time or expand your existing collection, we are the go-to platform for acquiring physical gold.
Contact us today to enquire about our collection. Our team of experts will be on hand to assist you with any queries.
