There are two ways to invest directly in gold: Gold and Gold ETFs. Gold mining stocks are an indirect way to do so.

Why invest in gold?

Gold is considered a safety asset. That is, it is expected to hold its value reasonably well through different economic scenarios. In general it does so. It is not a perfect hedge, but nothing is. As demonstrated over many centuries, it is the best imperfect hedge.

In a world where fiat currency is theoretically infinite, gold is a hedge against the government theft known as inflation. Over the long history of civilization, gold has always been used for such purpose and generally performed properly. It is also used to hedge against economic or geopolitical uncertainties.

ETFs

Gold ETFs, of which GLD is the largest and best known, make it easy for investors to trade or invest in gold. ETFs trade like stocks and can be bought and sold intra-day. Gold ETFs provide convenience and easy liquidity for investors relative to the physical metal itself.

Physical Gold

Physical gold requires delivery (for true safety) which can take a number of days or even weeks. This inconvenience is compounded by the need for secure storage. Physical gold must be put somewhere and protected. Small amounts, say $100,000, can easily be hidden in the average home or easily fit into a safety deposit box. Neither alternative is without risk. Theft is possible in both cases. (Gold in safety deposit boxes was confiscated by the government during the Roosevelt Administration.) Larger amounts require more costly storage, which carries additional costs and likely risk.

Risk Differences

It is easy to see the benefits of gold ETFs. The convenience gained, however, adds additional risks not present with physical gold and not known to most ETF gold investors.

Ultimately these additional risks are tied to the health of the financial system itself. One of the primary purposes of physical gold is to protect against the collapse of currencies, financial institutions and economies themselves. A gold ETF, for all its convenience, is apt to fail to protect against these severe events.

Gold ETFs are great for short- and intermediate-term traders. Physical gold is better for investors seeking protection against economic calamities. If you are using gold as an economic hedge against rare economic calamities, it is likely better to hold physical. If you are trading gold for short or intermediate term profits, ETFs might be more appropriate.

Anyone investing in Gold ETFs should be aware of the unique risks associated. This article appeared on ZeroHedge and was written by Jan Nieusenhuijs. It is an excellent discussion of these “extra” risks associated with gold ETFs.