Physical gold costs significantly more than the spot price. Dealers typically charge 3-10% over spot for coins and bars, then another 3-8% under spot when you sell. That 6-18% round-trip cost means gold needs to appreciate substantially just for you to break even. Compare that to GLD or IAU, the major gold ETFs, which charge 0.4% annually and can be bought and sold instantly at prices within pennies of the actual gold value.
The case for physical gold centers on control and worst-case scenarios. You hold the asset directly with no counterparty risk - if the financial system collapses, ETF shares might become worthless while physical gold retains value. For this reason, many investors keep a small allocation of physical gold (5-10% of their precious metals holdings) as true disaster insurance, with the bulk in ETFs for efficiency.
Storage and security for physical gold creates ongoing costs and risks. A safe deposit box runs $60-$200 annually but isn't insured for precious metals. Home storage requires a quality safe ($500-$2,000) plus insurance riders that cost 1-2% of value annually. When you factor in these costs over 10 years, ETFs often end up cheaper despite their management fees.
Tax treatment favors ETFs in most situations. Physical gold is taxed as a collectible at a maximum 28% rate. Gold ETFs receive the same treatment, but the practical difference comes in reporting and documentation. ETFs generate simple 1099 forms, while physical gold sales require detailed cost basis records that many investors don't maintain properly, leading to overpayment.
The optimal approach for most investors is a hybrid strategy. Hold the majority of your gold allocation in low-cost ETFs for liquidity and efficiency. Keep a small position in physical gold stored securely at home for emergency situations where you might need to barter or where the financial system isn't functioning. This combination provides both practical investment exposure and worst-case protection.