Physical Gold and Silver Vs Precious Metals Exchange Traded Funds

Legendary investor Warren Buffet once derided the idea of owning gold, strictly rely on the basis of “the greater fool theory“. As in, since gold doesn’t literally pay you, then the only way you could ever see a profit from owning it is if you were able to sell it for a higher price than the person who sold it to you. However, it only takes a pandemic to realize that there is no traditional asset class in which to hide. The dollar amount of bonds worldwide carrying negative interest rates are now in multiple trillions in what is essentially a race to hell. The beloved stock market has fallen from all-time highs to bear market in record time. Add to this the U.S. Federal Reserve bringing out their bazooka to try to stem the tide, and it certainly makes one wonder whether our betters are even good.

In times like these, people gravitate towards hard assets. Ones that can store value. Ones that are impervious to the deflationary policies of meddling bureaucrats. There seems to be an inherent human quality which recognizes that gold is imminently valuable – at least back to the ancient Egyptians.

However, there are at least two reasons why owning the physical asset is an inferior option to owning an Exchange Traded Fund (ETF) that holds the physical asset for you.


So if you elect to store physical gold, the immediate question becomes “Where?”. Will you bury it in your backyard? Mildred is always standing at the window with binoculars and will see you do it. Think you can dodge her by doing it in the cover of night? That’s why she got the dog to begin with. Will you hold it in your house? The trick becomes hiding it well enough that thieves and your nosy mother-in-law can’t find it, but not well enough that your spouse and heirs can’t. Will you hold it in a vault or safe-deposit box? Now, not only do you have to pay the storage fees (thus eating into your potential return on investment), but you have to hope that the zombie apocalypse occurs during normal business hours.

The Catch

Those who advocate holding physical gold usually paint the following scenario: stores and banks are either closed or empty. The grid is down so cards and digital payments are nonfunctional. In such an environment, the fact that you have physical gold automatically moves you to the front of the line. As if any merchant in such a scenario sees the bullion, pulls out a butler’s towel and says, “Right this way, sir!”

In such a scenario, this is not how it would work at all. Despite the currency being used, the seller of the scarce product in desperate need always has the upper hand. As a result, don’t expect the seller to be aware or care what the spot price of gold is. It simply won’t matter.

ETFs > Physical Asset

As a result, it makes more sense for many people to hold their gold in ETFs. ETFs are far more liquid than their physical counterparts, and they immediately solve the problem of storage. The question then becomes “which one”?

While it may be tempting to buy a piece of a gold miners’ ETF – such as the Van Eck Vectors Gold Miners ETF (GDX) or the Sprott Junior Miners Gold ETF (SGDJ), both of these offer a significant caveat. Over and above the negative side of any sector ETF (you own the also-rans as well as the best-of-breed), gold companies are notoriously more volatile than the asset itself.

Instead, you should focus your attention on those ETFs that seek to buy and sell physical gold and mirror the spot price (less expenses). For the sake of name recognition, there’s the iShares Gold Trust (IAU), holder of 12 million ounces at an expense ratio of 0.25%. There’s the cutesy-symboled GraniteShares Gold Trust (BAR), which since August of 2017 has amassed $700 million assets under management, charging an expense ratio of 0.1749%. However, for the stingiest goldbugs, the cheapest ETF now belongs to the Aberdeen Swiss Physical Gold Shares (SGOL), who after recently lowering their expense ratio (from 0.39% to 0.17%), offers the closest possible mirror of the physical asset.