Physical Vs Paper Gold and Silver

Gold and silver are increasingly becoming mainstream investment options. This rise has been steady over the years but has accelerated after the recent financial crisis because investors all over the world were looking for safe investment assets to park their money. Thus gold and silver became an integral part of every investment portfolio.

There are fundamentally two different modes of investment in precious metals.

•    Physical Form: This involves buying and selling of physical gold and silver. The best way is in the form of coins and bars. Both gold and silver coins can be bought in the market from any reputed dealer.

•    Paper Form: This mainly involves a futures contract that can be bought or sold on the market. Thus one might invest in a given weight of gold or silver for a fixed period of time, after which, the contract can again be sold on the market. Of late, gold and silver ETFs are also becoming popular with investors.

Both these methods of investment are good and investors can choose either depending on their own preferences.

The main advantage of physical metal is that there can be no defaulting on it, since one has the physical commodity at hand. Many investors who think that banks and other financial institutions cannot cover their contracts with physical metals worry that these will simply default on their contracts and thus render paper gold and silver worthless when it happens. Physical metal is free from this disadvantage. In addition, physical metal usually sells at a premium when compared to the market price. This means if you have a silver coin of 1oz and the market price for silver is $19, you can expect to get anywhere from $21-$25 for the coin. Finally, physical silver and gold can be used for many other purposes like gifts that paper contracts cannot be used for. It is therefore not surprising that the world is seeing a rapid increase in the consumption of gold and silver.

The main disadvantages of physical gold and silver revolve around purity and storage. One needs to be sure of the purity and many ordinary investors are not able to distinguish between pure and adulterated coins and bars. It is thus important to buy them from a reputed seller or jeweler. Also, one needs to make sure that the gold and silver is stored carefully.

On the other hand, contracts of gold and silver are much easier to buy and sell on the market. Therefore for people who are looking for day-trading in metals, this is almost the only option. There is no need to take any physical delivery. ETFs are also convenient as they can be bought and sold just like any stock on the market, and investors are usually familiar with the stock market. However, one needs to understand that storage fees and market expectations can eat away at the profits in the long run, and therefore these are not very well suited for long term investments, say a few years.