Gold has been one of the hottest investment product in today's volatile climate. The influx of various Gold products have resulted in gold prices shooting through the roof. One of the million dollar question in investors' minds are, which is better: paper or Physical Gold investment?

In my opinion, owning Physical bullion beats owning paper hands down. However, investors have been led to believe that ETFs such as the popular GLD and SLV do not really have any metal backing the paper investment. For the records, these ETFs do own the physcial bullion necessary to back the investment. Critics have pointed out that that these bullions are being held in a complicated and complex system of layers of custodians and sub custodians that could be a target for fraud. In addition, these ETFs are just like any other shares held in a brokerage and appear as a line item in the account statement report. If a major financial crisis were to implode, then having these shares would not do you much good. The custodians might have the physical gold but you as the investor in these ETFs might have difficulty getting your hands in them. Favoring real bullion instead of paper promises is exactly the right way if you believe a serious systemic meltdown is to happen.

Now that we have establish some of the dangers of investing in these ETFs, not even accounting for the tracking error involved in such investments, let us proceed to some of the pitfalls of investing in "physical" gold products.

Usually the sales pitch for an investment in physical gold products comes in the form of certificates which are "redeemable on demand for physical gold". Isnt our goal to avoid paper promises in favor of real bullion in the first place? Why should we be paying any commission for such certificates over that of ETFs? The sales pitch will proceed with the dealer's argument that such certificates are fully backed by physical gold bullion and they can be redeemable anytime. This is similar to that of the ETFs which is backed by physical gold held by the custodians. How is fraud any different from "physcial bullion" certificate as it is with an ETF? However, in the real world, dealers often succeed in convincing investors not to invest in one form of "paper gold" and to put them in another form of "paper gold", often disguised by the false moniker of "physical" gold.

It is amazing how investors plough in large sums of their hard earn savings without first considering the risk involved in such investments.