Gold IRA vs Gold ETF

Physical Gold vs paper Gold

To address the topic of “Gold IRA vs Gold ETF,” we can focus on the important difference between paper Investments and Investments in tangible goods. With an Investment in a Gold IRA you own physical Gold, while an Investment in a Gold ETF only gives you exposure to the price of Gold on paper.

Both Investments have a role to play in a diversified Investment Portfolio but only one of them accomplishes these objectives:

Diversifies your Portfolio away from paper assets (Stocks, Bonds, Mutual funds, ETFs) and into physical assets (Precious metals)
Allows you to invest in assets that have zero counter-party risk

Physical Gold vs Gold ETF

It is possible to own physical Gold without opening a Gold IRA account, obviously. Just take some money to your local Coin shop or online dealer and they will gladly sell you some of the yellow metal.

Whether we are talking about “Gold IRA vs Gold ETF” or “Physical Gold vs Gold ETF,” we are basically discussing ways for you to invest in physical Gold. There are, however, significant differences to be aware of:

The type of money being used to purchase the physical Gold.
Where the Gold is stored.
Your ability to take possession of the Gold.

Type of money

A Gold IRA allows you to invest in physical Gold using your tax-advantaged retirement savings. When you purchase Gold at a Coin shop or online dealer you will use after-tax money from your savings or current income.

It’s important to note that a Gold IRA is the only way you can protect your tax-advantaged Investment accounts with physical Gold. There are no other Investment vehicles that allow you to put your hard-earned money into physical Gold while also gaining the tax benefits that the IRS allows for retirement savings.

It is also possible to invest in Gold ETFs and Gold Trusts using either tax-advantaged money or after-tax money. With a traditional IRA or Roth IRA you can purchase shares in a Gold ETF or Gold Trust and get all of the tax benefits inherent in IRA accounts. With after-tax money you can purchase Gold ETF or Gold Trust shares through a brokerage account like Schwab or Fidelity.

Where the Gold is stored

The IRS requires that a third-party Custodian stores the assets in an IRA. This is true for traditional IRAs holding paper assets (Stocks, Bonds, Mutual funds, ETFs) and for Gold IRAs holding physical Gold.

In both cases, the Custodian securely holds the assets in your name and ensures that all IRS regulations are followed.

That means the Precious metals in your Gold IRA account will be stored by a Custodian and you will not have immediate access to the metal. When you retire and start taking distributions from your IRA, you can choose to take possession of the physical Gold or you can sell the Gold and take cash distributions.

If your objective is to own physical Gold that you can immediately access, your only option is to purchase the Gold with after-tax money.

With a Gold ETF or Gold Trust, the physical Gold is stored with a Custodian designated by the managers of the ETF or Trust. In most cases, you will never be able to take possession of this Gold so where it is stored is not a significant factor to consider.

Ability to take possession

The IRS requires that a third-party Custodian holds the physical Gold in a Gold IRA account. When you take distributions from the Gold IRA you have two options:

Distribute the physical Gold and have the Custodian send it to you.
Sell the physical Gold inside the IRA account and then have the Custodian send you cash.

Of relevance to this discussion is the fact that you can take possession of the Gold that you purchase in a Gold IRA account. Doing so, however, requires that you wait until you reach retirement age and start taking distributions (or face the tax consequences of taking early withdrawals).

When you invest in a Gold ETF or Gold Trust, it is very unlikely that you will ever take possession of physical Gold. As we will see in the next section, there are two significant hurdles that must be overcome before it is possible to take possession from a Gold ETF or Gold Trust.

Recap

This table summarizes the differences we just discussed:

Gold IRA vs Gold ETF recap

Gold IRA vs Gold ETF - presentation - Satori Traders

Gold ETF vs physical Gold

Is it better to buy physical Gold or Gold ETF

Now that we have clarified the different ways of owning physical Gold, let’s focus on the “vs ETF” side of the equation.

To start with, it is important to understand some common misconceptions about Gold ETFs and Gold Trusts:

Although the term “Gold ETF” is commonly used, these Gold-backed Investment vehicles are usually Trusts, not ETFs.
Gold-backed ETFs and Gold-backed Trusts do not give you a claim on physical Gold. Owning shares in one of these vehicles provides you with a claim on the ETF or Trust, but not the assets of the Trust (i.e., the Gold itself).
It is not possible for most investors to redeem shares of a Gold-backed ETF or Gold-backed Trust and take possession of physical Gold. There are two reasons for this:

In most of the ETFs and Trusts, (e.g., the SPDR Gold Trust GLD), redemption for physical metal is limited to “authorized participants” (typically, large banks and Investment firms). The Sprott Physical Gold Trust (NYSE Arca: PHYS) is an exception, however, and it does allow ‘mom & pop’ investors to redeem shares for physical.
Shares can only be redeemed for physical Gold in large blocks. This table shows the minimum redemption amount for two of the most common Gold-backed Investment vehicles (based on 10/11/2024 closing prices):

Minimum redemption amounts

Now we can see why a Gold ETF or Gold Trust only gives you exposure to the price of Gold, not ownership of physical Gold. Because of the restrictive policies for redeeming shares and taking possession of physical metal, it is very unlikely that the typical investor will ever acquire physical Gold by owning shares of a Gold ETF or Gold Trust.

If your Investment objective is to benefit from a potential increase in the price of Gold, the Gold ETFs and Gold Trusts will let you accomplish this objective

If you want to have ownership of physical Gold, the ETFs and Trusts are not a viable option.

Becoming clear on your Investment objectives will let you answer the question, “Is it better to buy physical Gold or Gold ETF?”

Physical Gold vs Gold Mutual fund

Gold Mutual funds are another way of gaining exposure to the price of Gold without actually owning physical Gold. These Investment vehicles, however, are even further removed from physical Gold than the Gold ETFs and Gold Trusts.

Most of the common Gold Mutual funds hold shares of stock in companies that mine Precious metals. The Mutual funds do not hold physical Gold like the Gold ETFs and Gold Trusts.

While the value of Precious metals mining companies tends to increase when the price of Gold increases, this correlation is not guaranteed. There are numerous factors that affect the price of a mining company’s stock so the value of a Gold Mutual fund could remain flat or even decline at the same time that physical Gold is rising in price.

Unless it is your only option for investing in the Gold sector, stay away from Gold Mutual funds. If you have a 401(k) account and you are trying to diversify your Portfolio with Precious metals, a Gold Mutual fund may, however, be your only choice. Another 401(k) option may be a Commodity Mutual fund that includes exposure to physical Gold or Gold mining companies.

Paper Gold vs Physical Gold

‘Paper Gold’ seems like an odd name for Gold ETFs, Gold Trusts, and Gold Mutual funds, but this moniker emphasizes the non-tangible nature of these Investment vehicles.

We’ve already covered this point but it is worth repeating: these Investments give you exposure to the price of Gold but they do not give you ownership of physical Gold.

This is important to understand because some of the verbiage used to describe these paper Gold Investments is intentionally misleading. The companies offering these vehicles, and the Financial advisors who recommend them, want you to believe that you are investing in physical Gold.

Understand that Financial advisors make money when you buy shares of a Gold ETF or Gold Mutual fund but, in most cases, they do not make money if you place your hard-earned savings into physical Precious metals.

Because they are compensated based on their ability to sell paper Investments, it is unlikely these Financial advisors will ever recommend alternative Investments like physical Precious metals or rental Real Estate.

Gold IRA pros and cons

Pros

A Gold IRA account is the only way to protect your tax-advantaged retirement savings with physical Precious metals.
A Gold IRA account allows you to diversify your retirement Portfolio away from traditional Investments (Stocks, Bonds, Mutual funds, ETFs) and into physical Precious metals (Gold, Silver, Platinum, Palladium).
A Gold IRA account provides all the same tax benefits as a traditional IRA.
Physical Gold and physical Silver have a well-established history as both circulating Currencies and as stores of value.
Based on the stagflation-ary conditions of the 1970s, Gold and Silver have the potential to increase in price by 20x when economic conditions become adverse.
When you withdraw from the Gold IRA you can take distributions in physical metal or in cash.
Precious metals in a Gold IRA are stored in a secured and insured manner.

Cons

The IRS requires that a third-party Custodian holds the assets in any IRA account. (The ideal way to own physical Precious metals is to purchase with after-tax money and take direct possession.)
There are Gold IRA fees related to the secure vaulting and insurance of the Precious metals being held. These fees do not occur in tax-advantaged accounts (IRAs, 401ks) investing in paper Investments like Stocks, Bonds, Mutual funds, and ETFs.
There are brokerage fees for buying and selling physical Precious metals. This is another fee that does not occur in paper Investments.
Already-owned Gold cannot be moved into a Gold IRA. Based on IRS regulations, all metal within a Gold IRA account must be purchased within the account.

Conclusions

There are three primary factors to consider when purchasing physical Gold:

What type of money are you going to use to purchase physical Precious metals: tax-advantaged or after-tax?

How will you hold the Precious metals: securely vaulted with a third-party Custodian or securely stored in a location of your choosing.

Do you intend to take possession of the physical Gold?

The answers to these questions will determine the Gold Investment that makes the most sense for you.

If you want more information on Gold IRA accounts, contact Augusta Precious Metals and obtain their free Ethics Checklist. This tool will be useful as you compare different Gold IRA companies.

If you have questions about investing in Precious metals, please reach out to me personally. I can't give you financial advice but I'll do my best to answer your questions - just drop me a line at: bryan@satoritraders.com.

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