Physical Metals vs. Futures/ETFs: Which Investment Strategy is Best?
The age-old debate between physical precious metal bullion and gold futures
As with almost all types of investments, there’s more than one way to buy precious metals. Many investors prefer to keep their money in physical metals. Some, however, prefer instruments known as futures and ETFs.
In the article below, we’ll discuss some important factors that all beginning metal investors should know about, along with two different methods of investing and how they compare to one another.
Physical Metals Investing
Investing in physical metals, as one might expect, involves buying and holding physical amounts of one or more precious metals. Generally, these metals are purchased in the form of rounds, coins, or bars. In some cases, however, raw metals that haven’t been processed into such forms are purchased for investment purposes.
Jewelry is another popular medium of precious metal investment, especially in India, though many pieces of jewelry are actually made from alloys rather than pure precious metals.
Often, collector value becomes intertwined with bullion value in physical metal investments. Some common examples of investments that may have a mix of collector and bullion value include antique pieces of jewelry and rare gold or silver coins.
Futures and ETFs Investing
Though futures and ETFs (exchange-traded funds) are still based on precious metals, they don’t involve actually holding real quantities of those metals. Futures are contracts based on the predicted future value of a given precious metal commodity.
ETFs, by contrast, are funds that trade publicly and hold precious metals as their main store of value. Investors can buy shares in ETFs, which then appreciate or depreciate based on the overall value of the fund. Be aware, though, that there are many types of ETFs and that not all are based in precious metals.
Pros and Cons of Each
The advantages of physical metal investments mostly stem from the fact that they are predictable, consistent, and relatively low-risk. When you own a coin or a bar of precious metal, you have a reliable asset that you can always liquidate for some amount of cash value. The main disadvantage of holding your investments in physical form comes from the fact that you will need to carry proportionate insurance on them. In the event of a fire, flood, or burglary, a good insurance policy can keep you from potentially losing your investment altogether.
Futures and ETFs both have their advantages. The most obvious is that neither futures contracts nor shares in an ETF require you to store gold, silver, or platinum. However, because their values aren’t entirely based on the actual spot prices of precious metals, they can be somewhat more volatile. This can make them more profitable in the short run, but also introduces more risk into an investment portfolio over time.
Which is Better?
As with most investment comparisons, there isn’t an absolute, one-size-fits-all answer to this question. In the vast majority of cases, however, holding physical metals will be the better long-term investment strategy. Because of their lower levels of volatility, physical metal holdings are better at retaining their value through economic downturns. Futures and ETFs, unfortunately, can become subject to the short-term whims of the market, making their value uncertain.
If you’re considering an investment in physical metal, we invite you to explore our gold bullion and silver bullion offerings. Many of our products are IRA approved, allowing you to leverage the stability of precious metals to invest in your future.