Ways of investing in gold and silver: the vehicles compared

“Owning gold” can mean very different things. A coin in a drawer, a bar in a vault, a line on a bank statement, a fund unit in a brokerage account, a share in a mining company and a futures contract all give exposure to the price of gold or silver, but they differ in what you actually own, what it costs and, above all, whose promise you rely on. This page compares the main vehicles. It is general information, not advice.

Physical metal at home

Coins and bars bought from a dealer and kept by the owner, at home or in a personal safe-deposit box.

• What you own: specific pieces of metal, outright.
• Strengths: no intermediary once the metal is in hand; full control; no ongoing management fees.
• Weaknesses: theft and loss risk; insurance may be limited; premiums on purchase and spreads on sale; selling requires physically moving the metal.

Vaulted allocated metal

Metal bought through a dealer or bank and stored in a professional vault, with specific bars or coins identified (often by serial number) and held in the owner’s name.

• What you own: specific, segregated or identified metal; the vault acts as custodian.
• Strengths: professional security and insurance; the metal should remain the owner’s property even if the storage company fails, provided the contract is properly drafted; easy to sell back without moving the metal.
• Weaknesses: storage fees every year; reliance on the custodian’s honesty and audit regime; withdrawal may involve fees and delays.

Unallocated accounts

An account with a bank or dealer showing a quantity of metal owed to the holder, without specific bars being set aside.

• What you own: a claim on the provider for an amount of metal. The provider owns the metal itself and may use it in its business.
• Strengths: low or no storage fees; easy to buy and sell in small amounts; often tight spreads.
• Weaknesses: if the provider fails, the holder is generally an unsecured creditor rather than the owner of metal. This is the key difference from allocated storage.

Exchange-traded products backed by metal

Funds or notes traded on stock exchanges that hold, or claim to hold, physical gold or silver in vaults, with each unit representing a fraction of that metal.

• What you own: units of a fund or a note, not metal directly. Most investors cannot take delivery of bars.
• Strengths: bought and sold in seconds through a brokerage account during market hours; low trading costs; no storage worries for the investor.
• Weaknesses: annual management fees; reliance on the fund’s structure, its custodian and, for some notes, the issuer’s credit; tracking may differ slightly from the metal price. Read the prospectus to see whether the product is physically backed or synthetic.

Mining shares

Shares in companies that explore for, develop or produce gold and silver, held directly or through funds.

• What you own: part of a business, not metal.
• Strengths: potential dividends; profits can rise faster than the metal price when prices climb, because costs are partly fixed.
• Weaknesses: company-specific risks (management, costs, accidents, political risk in mining countries); shares can fall even when metal rises, and they move with the stock market as a whole. Volatility is usually higher than for the metal.

Futures and options

Exchange-traded contracts to buy or sell metal at a set price on a future date (futures), or the right but not the obligation to do so (options).

• What you own: a contract, generally settled or rolled before delivery.
• Strengths: precise, liquid exposure for professional users; low cost per unit of exposure.
• Weaknesses: leverage magnifies gains and losses, and losses can exceed the initial outlay on futures or on options sold; margin calls; contracts expire and must be rolled, at a cost. These instruments are designed for professionals and hedgers, not for long-term holding by most private savers.

The vehicles side by side

Who carries which risk

The single most useful question for any vehicle is: if the intermediary disappeared tomorrow, what would the holder be left with?

• With physical metal at home, the owner carries all the risk of theft, loss and verification, and no one else.
• With allocated storage, the owner keeps title; the custodian carries operational risk and should be insured.
• With unallocated accounts, the provider’s solvency becomes the holder’s risk.
• With exchange-traded products, the holder relies on the fund structure, its custodian and, for notes, the issuer.
• With mining shares, the holder carries business risk on top of metal price risk.
• With futures and options, the holder carries leverage and margin risk, and relies on the exchange and broker.

Price risk, of course, applies to all of them.

Taxes and practicalities

Tax treatment differs by vehicle and by country. For physical metal, investment gold is VAT-exempt in the EU and UK, while silver bars are generally subject to VAT there; US sales-tax treatment varies by state. Funds, shares and derivatives follow their own rules.

For the reasons to hold bullion at all, see investing in gold and silver bullion. For buying physical metal, our guide to where to buy gold bullion coins and bars compares the channels, and precious metals investing gives an overview of the four metals.

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