Gold ETF vs Physical Gold vs Gold Bonds

A gold ETF gives you a share in a fund that owns bullion. Physical gold gives you the metal. A gold bond gives you a government IOU priced in grams. All three track the gold price. They differ on what you own, what it costs to keep, how quickly you can get out, and who is left holding the problem if something fails.

That last question is the one most comparisons skip, so this post leads with it.

This is a structural comparison, not a recommendation. GGP does not give investment advice, and which structure suits you depends on facts about your situation that this page cannot know.

What you actually own in each

Gold ETF

A unit in a fund. The fund holds bullion, usually in allocated form with a custodian, and your unit represents a pro-rata claim on that pool. You cannot walk in and collect a bar. For most retail unit sizes, redemption in metal is not available at all — it is a mechanism for large authorised participants.

Physical gold

The metal. A coin or bar in your possession is not anyone's liability. Nobody has to stay solvent for it to keep being gold. That is the entire argument for it, and everything else about physical — cost, storage, insurance, the spread when you sell — is the price of that one property.

Gold bonds

A government security denominated in grams. India's Sovereign Gold Bond is the best-known example, though it has been closed to new issues since February 2024. You hold a claim that settles in cash at the gold price on a set date. No metal is ever allocated to you.

What each one costs to hold

Costs show up in different places, which makes headline comparisons misleading. Ranking them by the fee you can see is the wrong exercise.

• ETF: an annual expense ratio, deducted continuously from the fund's assets. You never write a cheque for it, which is why it is easy to forget it compounds against you.
• Physical: a dealer spread on the way in and again on the way out, plus storage and insurance if you do not keep it at home, plus fabrication costs on anything that has been worked. On jewellery, making charges can dwarf the metal value.
• Gold bonds: negative running cost, in the SGB case — the 2.50% coupon paid you to hold. That was unusual and it is not on offer to new buyers any more.

The purity point is worth isolating, because it is where retail buyers lose the most money without noticing. A 22K chain is 91.67% gold, so the metal in it is worth 91.67% of the 24K price — before the jeweller's margin. Our karat pricing primer sets out the arithmetic, and the gold unit converter will price any karat, weight and currency combination against the same snapshot.

How fast you can get out

Liquidity is where the three genuinely diverge, and the gap widens exactly when it matters.

1. ETF: sells in seconds during market hours at a price within a hair of the underlying. The most liquid of the three by a wide margin.
2. Physical: sells in days, to a dealer, at a spread. A bar or a recognised bullion coin sells near spot. Jewellery frequently does not, because the buyer discounts for purity uncertainty and refining.
3. Gold bonds: the SGB's designed exit was the fifth anniversary. Before that, the secondary market existed but often traded thin and below the underlying gold value.

A structure that is liquid in calm conditions is not automatically liquid in stressed ones. Dealer spreads on physical widen sharply when retail demand spikes, which tends to be precisely when people want to transact.

Who you are exposed to

Rank the three by counterparty risk and the order roughly inverts the liquidity ranking.

• Physical in your own possession: no counterparty. Your risks are theft, loss and being wrong about what you bought.
• ETF: the fund, its custodian and its sub-custodians. A well-run fund holding allocated metal with a major custodian is a low risk, not a zero one.
• Gold bond: the issuing government. For a sovereign bond that is usually the lowest credit risk available in that currency — but note it is the same government whose currency you may be hedging.

Vaulted and digital gold products sit outside this list and need a separate check, because the label rarely tells you whether specific metal is legally yours. That distinction is covered in allocated vs unallocated gold.

Which structure fits which situation

Matching structure to purpose is more useful than ranking them.

• Rebalancing a portfolio on a schedule: an ETF. Low friction and fast execution are the whole requirement, and the expense ratio is small relative to the trading costs of the alternatives.
• Insurance against a systemic failure: physical, held yourself. The point of the position is that it does not depend on a functioning intermediary, so holding it through one defeats the purpose.
• A long, untouched holding with a fixed horizon: this is the case SGBs were built for, and it is the one now least well served.
• Gifting or cultural purchase: jewellery, with eyes open about making charges. It is a consumption decision with a resale value attached, not the other way round.

When none of these is the right answer

Some honest cases where the answer is to not buy gold in any wrapper:

• You need the money within a couple of years. Gold's drawdowns are real and have lasted years. It went nowhere in nominal terms for long stretches of the 1980s and 1990s.
• You are buying because the price has been rising. Momentum is not a thesis, and the structure question above is irrelevant if the timing is the problem.
• You want income. Gold produces none. The SGB coupon was a feature of that specific bond, funded by a government, not a property of the metal.
• You have not compared it to the alternative. Our gold vs S&P 500 and gold vs inflation pages chart twenty years of both so the comparison is at least in front of you.

Where the underlying price comes from

Whichever wrapper you pick, all three settle against the same underlying. The benchmark most of the market references is the LBMA Gold Price, set twice each London business day in an electronic auction administered by ICE Benchmark Administration, quoted in US dollars per troy ounce for 995 fine gold. The World Gold Council publishes the demand-side data behind it. Our live gold price page carries a timestamped snapshot and says exactly when it was captured.