It’s important to understand the difference between owning physical gold and speculating with gold ETF’s. Let’s review the differences between physical gold as a hedge and speculating with gold ETF’s.
Counterparty Risk
The definition of counterparty risk is the likelihood or probability that one of those involved in a transaction might default on its contractual obligation.
If you own a gold ETF, you must rely on a counterparty to make good on your investment. If the fund’s management, structure, chain of custody, operational integrity, regulatory oversight, or delivery protocols break down, your investment is at risk.
There is no counterparty risk when you own physical gold. No one is borrowing or loaning against your precious metal ownership and your investment is beholden to no one.
Gold ETF vs Physical Gold Ownership
An ETF allows an investor to add a paper gold position to their portfolio without purchasing physical bars or coins. While this may be efficient for many investors, some may find it difficult to accept that the ETF shareholders have no rights of redemption. Which means that the investors do not own physical gold, rather a paper asset that is backed by gold. Even though the bars of gold are represented to exist in an ETF, an investor cannot receive gold or verify the gold existence or purity.
When you own physical gold, you own the tangible asset. You can verify purity and product. You know exactly where your physical gold is located. You are the official asset owner and can take physical possession of the asset.
Unlike gold ETF’s, physical gold ownership enables investors to have complete control of their tangible precious metal assets.
Summary
A gold ETF is different from owning physical gold. An ETF offers the ability to trade paper based on the price movements against gold. You never own tangible gold with an ETF, and there are no guarantees with up to 100 paper investment claims per each physical ounce of gold. If you’d like to gamble or speculate, then consider a gold ETF. If you are looking to hedge and stabilize, consider owning physical gold.
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