Physical Gold Vs. Gold Mutual Funds

By Brendan Gilmore


When choosing to invest in physical gold or gold mutual funds, investors take into consideration the advantages and risks involved in both types of investment instruments. Physical gold, for example, is in demand and demand for gold is increasing. Gold is also known as an inflation-proof investment vehicle. Some argue that in contrast to paper currencies, stocks, and bonds, gold will not lose intrinsic value. Gold does not lose value due to natural disasters or political and social upheavals. Moreover, it is a liquid and tangible asset, considered a true international currency. The most secure and safest way to invest in gold is to buy physical gold. Finally, investing in gold is a good way to diversify one's portfolio.

There are more benefits to investing in physical gold. With the currency risk in mind, there is a good correlation between gold and the market price of gold. Bars and coins can be purchased by private investors, choosing to invest in large or small amounts. There is not counterparty risk in that the investment does not rely on the promise of third parties or them staying in business. There are some downsides to investing in physical gold as well. Production costs can go up as high as to reach the market cost. Moreover, investors may have to visit a dealer and should think of arranging and securing transport. Other considerations are insurance, adding to the purchase price, and a safe place for storage. Transaction costs can be high, and selling gold is not possible in all cases. You cannot offer half a bar or coin for sale, for instance.

For these reasons, some investors prefer to invest in gold mutual funds. Mutual funds have a wide range of bullion and equity investments and work through professional managers. Stock market indexes usually have no bearing on funds' performance.

Generally, mutual funds invest in mining companies specializing in extraction, processing, and distribution of metals. Up to 35 percent of assets of gold mutual funds may be invested in equity securities of mining companies deriving some portion of their gross revenues, indirectly or directly, from mining, fabricating, processing, and otherwise specializing in platinum, silver, gold, or other natural resources. Funds may additionally invest a portion of their pool of money in the securities of growth companies or governments.

According to experts, five to fifteen percent of one's investment portfolio should go toward investing in gold mutual funds, thus achieving diversification. Of course how much to invest in gold mutual funds depends on the level of risk one is willing to take. Five percent is the absolute minimum. Why do experts recommend investing in these funds? Gold is a separate class of asset. Thus, it has a low correlation with bonds, stocks, and other investment instruments, offered on the financial markets.




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