Gold Futures vs. Physical Gold vs. Gold ETFs

Jun 08, 2012

When looking at investing in gold, you must decide whether you should trade gold futures, invest in gold ETFs, or buy physical gold. Below we will look at factors to consider before making your decision and why, at Paragon, we believe trading gold futures is the best decision.

When looking at investing in gold, you must decide whether you should trade gold futures, invest in gold ETFs, or buy physical gold. Below we will look at factors to consider before making your decision and why, at Paragon, we believe trading gold futures is the best decision.

The price of gold futures and gold ETFs follows the market price of gold. There is a minimal brokerage fee with gold futures and a management fee with gold ETFs. Although gold ETFs follow the market price of gold, pricing may be different depending on whether the ETF is invested in physical gold, a gold refinery, or a gold holding company. Physical gold also follows the market price of gold but a premium is charged on top of the market price depending on whether you have gold bullion or gold coins, the purity of the gold, and the weight in ounces. Also with physical gold you are dependent on the market makers interest in selling gold to you or buying gold from you. If the price of gold is falling the market maker has no incentive to buy your gold when he knows he can get it later for a better price.

Affordability:

Although you can most commonly buy physical gold in weights from 1 gram to 10 ounces, you only get as much as you can afford. With gold futures and gold ETFs you can leverage your investment and get the value of a larger quantity of gold, for a smaller price. For example if you had $10,000 and gold was priced at $1600/oz, you could get about 6.25oz of gold, ignoring premiums. On the other had you could buy one gold futures contract and have the value of 100oz, which would cost $160,000 if in physical gold. With a $50 increase in the price of gold, the physical gold would have seen a $312.5 increase in value while the gold futures contract would have seen a $5000 increase in value.

Gold futures and gold ETFs can be bought and sold very fast. Both are freely traded in their respectable markets and can be traded anytime the market is open with just a phone call to your broker or a few clicks of your mouse. To buy or sell physical gold you have to make the transaction with the market maker in your area.

ETF gold and physical gold are considered collectables by the IRS and if held for more than one year are taxed at a higher rate, 28%, than the normal capital gain rate, 15%. ETF gold and physical gold that is held less than a year is short term capital gain and taxed at normal income rates. Gold futures are not considered collectables and are taxed at a blended rate of 60% long term rates (15%), 40% short term rates (normal income rates). Gold futures that are held longer than a year are taxed at the years end based on the closing market price of the last day. Gold futures that are held less than a year are taxed at the blended rate when the trade is executed.

What We Think:

Here at Paragon we believe that the method you choose to trade gold should match the goals you have set. We think that gold futures offer the most advantages to the trader. Gold futures reflect the current market price of gold without added premiums. They are very liquid, allowing easy market entry and exit, and offer tax advantages vs physical gold or gold ETFs. This allows you to leverage your investment and get more value than you could have with a similar investment in physical gold.

If you have any questions or comments, free to call us anytime, toll free at (888) 452-8751 or email us at paragon.info@piitrader.com