Physical metal, metal funds, mining shares, and futures compared

What to take away

Physical bullion, exchange-traded products, mining shares, and futures can all respond to precious-metals markets. They do not provide the same exposure. One is a tangible asset, one is a security or trust interest, one is corporate equity, and one is a derivative contract.

This comparison describes structure. It does not recommend a product or strategy.

Ownership and cost at a glance

Physical metal

Direct possession removes dependence on a brokerage record for the object itself. It also makes the owner responsible for theft, loss, insurance, authentication, privacy, transport, and sale. Physical holdings do not produce interest or dividends.

Retail acquisition and resale occur around the metal reference price. Product premium and dealer spread can dominate a small transaction. Divisibility depends on unit sizes, and urgent sales may receive weak quotes.

A 1 oz American Gold Eagle or Canadian Gold Maple Leaf typically carries a 4% to 8% premium over spot, and a dealer may buy it back 2% to 5% below spot.

Metal funds and exchange-traded products

A listed product can be bought and sold through a brokerage during market hours, often without personal storage. That convenience does not reveal its structure. A product may hold allocated metal, use futures, operate as a grantor trust or commodity pool, hold mining companies, or combine instruments.

FINRA's overview of exchange-traded funds and products notes that commodity ETPs may hold physical commodities or futures and that product structures affect risk, tax treatment, investor protection, efficiency, and cost.

The two largest US gold ETPs show the cost range. SPDR Gold Shares (GLD) charges a 0.40% annual expense ratio, and iShares Gold Trust (IAU) charges 0.25%.

If gold rises 10% in a year, a $10,000 holding in the 0.40% fund gains about 9.6%, or $960, before spreads.

Questions include who owns and custodies the metal, whether it is allocated, how holdings are verified, whether ordinary investors can redeem for metal, what fees are charged, and why market price may differ from net asset value.

Mining shares

A mining share is ownership in a company. Its value can respond to metal prices, but also to ore grade, reserves, energy, labor, permitting, tax, financing, management, currency, politics, environmental liabilities, accidents, dilution, and project execution.

A producer can become more profitable when metal prices rise, but cost inflation or operational failure can offset that effect. An explorer may have no producing mine. A royalty company has another business model. A mining fund can diversify company exposure while adding its own fee and methodology.

Newmont (NEM) and Barrick Gold (GOLD) are large producers, and a mining fund often charges 0.40% to 0.60% a year.

Mining shares can pay dividends, but none are guaranteed. They are not a substitute for a specific weight of metal.

Futures

A precious-metals future is a standardized agreement to buy or sell a defined quantity at a future date under exchange rules. Many positions are closed or rolled before delivery, but contract specifications and delivery obligations remain material.

FINRA's guide to futures and commodities distinguishes direct commodity ownership from futures and ETP exposure, and warns that trading on margin can magnify gains and losses. It also describes liquidity and physical-delivery risks when a position cannot be closed as intended.

The standard COMEX gold contract (GC) covers 100 troy ounces. Exchange margin is typically a few percent of contract value, often $8,000 to $12,000 for one GC contract.

A roll example: a $100,000 notional position in front-month COMEX gold rolled each month. If each roll costs 0.08% of notional, twelve rolls cost about 0.96% a year, or $960.

Margin is not the purchase price of the metal. It is collateral supporting a leveraged position. Adverse movement can require additional funds or cause liquidation. Expiry, basis, contango, backwardation, and roll costs can make results differ from spot-price changes.

How to verify each route

Legal claim

Ask whether you own an object, a beneficial interest, corporate equity, or a contract. Identify custodian, issuer, broker, clearinghouse, or storage operator where relevant.

Price behavior

Compare spot metal, product market price, net asset value, share price, and futures price. Do not assume they move one-for-one.

Costs

Physical metal has premium, spread, storage, and insurance, often 4% to 8% in and 2% to 5% out. Funds can have expense ratios of 0.25% to 0.40% for large gold trusts, plus trading spreads and tracking differences.

Shares add company financing and operational economics, with pooled fund fees often 0.40% to 0.60%. Futures add commissions of $2 to $5 per round turn, margin funding, and roll drag of 0.5% to 2% a year.

Liquidity and exit

A standardized bullion coin may have many dealers but still face a wide spread. A listed product may trade quickly but at a poor market price. A small mining share may have thin volume. A futures contract may become hard to exit under stress.

Protection and failure points

Regulatory treatment differs. Consider fraud, issuer failure, custodian failure, brokerage failure, theft, title disputes, company insolvency, and clearing risk. No single label removes all counterparties.

US tax and reporting

Physical bullion and most bullion coins are collectibles, so long-term gains face a maximum 28% rate. Dealers report certain bulk sales on Form 1099-B, including 1 oz Canadian Gold Maple Leaf and Krugerrand sales of 25 coins or more. American Gold Eagles are not on the dealer reporting list.

Gold ETPs such as GLD and IAU are grantor trusts, so they are also taxed as collectibles at up to 28% on long-term gains.

Mining shares are ordinary securities. COMEX gold futures are Section 1256 contracts, marked to market at year end, with 60% long-term and 40% short-term treatment, reported on Form 6781.

Choose questions before products

Common questions

Does a gold-mining share equal gold ownership?

No. It is equity in a business whose results may be influenced by gold and many operating factors.

Can every metal fund be redeemed for bars?

No. Redemption rules vary and may be limited to authorized participants or large units.

Does futures margin limit the loss to the deposit?

Not necessarily. Trading on margin can create losses and margin calls beyond the initial amount posted.

Which route tracks spot price best?

That depends on the specific product, costs, structure, market, and period. Compare measured tracking rather than assuming.