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Home > Blog > Gold ETFs vs. Gold-Backed Tokens: Deciphering the Difference

Gold ETFs vs. Gold-Backed Tokens: Deciphering the Difference

Updated Nov 29 2023
7 Min
mr slava
Nick Patel
CEO & Founder at Clinq.Gold, Bank of Bullion | Keynote Speaker

Gold is a precious metal with a long history of use as a store of value and an investment instrument. While in old times, people had no other option but to buy golden bars or jewelry, the modern changes in stock market accessibility have changed the rules of this game. Direct investment in gold is still problematic, but traders and investors have access to a long list of gold ETFs: 

  • SPDR Gold Shares (GLD) 
  • iShares Gold Trust (IAU) 
  • GraniteShares Gold Shares (BAR) 
  • VanEck Merk Gold Trust (OUNZ) 
  • ProShares Ultra Gold (UGL) 
  • Invesco DB Precious Metals Fund (DBP) 

These and many other ETFs tied to gold offer a stable, predictable investment tool with a sound YTD ranging from 4% to over 7%. However, things are changing, and DeFi makes its contribution to the gold investment equation. Gold-backed tokens have recently emerged as an alternative investment with many benefits, and here we’ll weigh both options to decipher their distinctions.  

What’s Behind Investing in a Gold ETF? 

Let’s first understand what the investor actually invests in when buying gold ETFs. In fact, it’s not gold ownership per se; it’s the certificate that only represents gold ownership. The ETF’s creator – a fund or a bank – holds some physical gold in a vault and issues fractional certificates for that total amount of precious metal to investors. Ideally, you can exchange the ETF shares you own for physical gold in the fund’s office. Yet, investors rarely do so and mostly prefer to trade their ETF assets for money on the stock exchange. 

Gold-Backed Tokens – An Alternative Investment Tool 

Talking about the relationship of gold-backed tokens with gold, one can see no revolutionary change compared to ETFs. These tokens are also certificates representing ownership of physical gold, tied to the physical gold storage held by the token’s issuer. The tokens can also be exchanged for physical gold if needed. 

The main difference is in the regulation of assets. While ETFs are controlled by the SEC, cryptocurrencies circulate in the blockchain space and are exempt from SEC oversight. The main guarantor of gold-backed tokens’ reliability is the issuer – and the blockchain famous for security, immutability, and transparency. 

Pros and Cons of Gold-Backed Tokens 

So, why should investors take the risks of investing in gold-backed tokens? Here are a couple of advantages these assets offer over traditional investment instruments like ETFs. 

  • Low commissions. The greatest evil of operating with traditional investment instruments is the need to pay commissions to the stock exchange, the ETF fund, and your broker. As a result, the investor’s YTD reduces considerably, thus reducing the overall profitability of their portfolio. Gold-backed tokens are free from those commissions for transactions and fund operations, so you receive all you’ve earned on the appreciation of gold. 
  • Greater control. Investors usually keep their ETF assets in a broker account, which also comes with trading rates, terms, subscription fees, etc. An ETF share owner can’t move them freely from one account to another or store them in a sold wallet, which a gold-backed token allows. 
  • Greater privacy. Owning gold ETFs is the information available to your tax manager, government, stock exchange, broker, and many other parties. Thus, you may opt for more confidential gold investments with crypto tokens pegged to gold, buying and selling which can be done with minimum privacy disclosures. 

Still, you should understand the following downsides of investing in gold-backed tokens before making the final decision: 

  • Loose regulation. The Web3 space is still unregulated and immature, with many hackers preying on user money. Thus, the risks of getting your gold stolen from a loosely protected wallet and the absence of regulatory oversight are a matter of caution. 
  • Technical proficiency. Blockchain is technically complex and not that user-friendly. So, you will need to learn the basics of operating on the blockchain to buy and store your gold tokens safely. 
  • Issuer-related risks. Crypto projects selling gold-backed tokens may be a source of problems as well. As these companies don’t go through licensing or state regulation, some of them may be scams. Therefore, it’s vital to do your due diligence and check the issuer’s authority before buying tokens from it.  

Gold Investments Are Getting Simpler 

Both ETFs and gold-backed tokens offer a healthy opportunity for gold investments. Study the terms of each instrument you’re planning to use, and you’re sure to derive maximum value and profit from this stable investment option. 

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