Gold ETF vs Coins?

In a previous post, I talked about investing in physical gold (coins or bars). This resulted in few mails/comment(s) about the advantages of investing through Gold ETFs. It is common to see people advising in favour of Gold ETFs. ETFs seem to have all the advantages and hence appear to be the preferred choice of investment. I don’t necessarily see it that way. Though there might be some fundamental risks/costs associated with investment in physical gold, it still has it’s own set of advantages.
The following chart shows you the often quoted advantages of ETFs over physical gold.

Now lets try to see if the picture is really all that rosy for the Gold ETFs.

Now that we can see that ETFs are not the holy grail of gold investment, lets try to see the effective charges of ETF vs coins over a long period. When you invest in physical gold, you typically pay 1% VAT, ~4% overhead charges and some fixed charges, in all say 6% as charges. The same charge for ETFs is around 1% (or less) in terms of transaction charge. You will also pay a fixed fee (say 1000/- per year) for storing your gold coins/bars in the bank locker. For ETFs, you will pay ~1% of the total investment as expense. If you plot the cost of investing (and holding) in gold for long term (say 10-20 years), you will see ETFs are not that cheap. The following graph show that over 10-12 years, gold coins become cheaper investment option in comparison to ETFs. This may come as surprise, but the main reason for ETFs losing in long term is the expense ratio of 1-1.25%

Even with a 4% selling overhead (not always), investment in physical gold proves to be cheaper to ETF over long term (18-20 years). For a common investor, the relative lack of ease in selling gold coin may prove to be beneficial as it would resist the non-so-rare urge to sell to cover common expenses.
Keeping in mind that gold by nature is a long term investment, it may not be that bad to buy gold coins every year.

Note : If you have a demat account &  you use (and intend to use it for long) it, I would still suggest you to invest thru gold ETFs unless you prefer the good old way of buying gold.