Why Physical Gold Over Paper Gold?
Gold products can be broken down into two major categories that are physical gold and paper gold. As financial assets, both categories can vary in terms of their distinct financial properties like yield expectations, risk level, security, and liquidity.
What is Paper Gold?
A piece of paper is used as substitute of physical gold. In this case, the paper gold means that one has a promise to receive the physical gold.
Nonetheless, with paper gold, one does not necessarily own the gold, but a promise to receive the physical gold. This means that one becomes a creditor to the one issuing the paper gold, where there are counter-party risks involved.
There are various examples of paper gold as exemplified below.
Gold Certificate
With gold certificates, one could redeem physical gold as legal tender. Each certificate has a corresponding value of gold bullion or coins.
With these certificates, the gold owner does not need to physically carry or move the gold around.
Gold Pool Accounts
Gold pool accounts are part of the gold paper, and almost like gold certificates. Nonetheless, the value of the money kept in pool accounts is dependent on the value of gold at a given period. More so, this may differ depending on the strategy the managing firm has adopted and the type of account.
Gold pool accounts are in two types, which are allocated accounts that are fully backed by gold, and un-allocated accounts which are partially backed by gold.
Gold Futures Accounts
This is where an account is opened and a deal is made between traders to trade gold, where the prices and the amount is decided in the present, but delivery to be made in the future.
Therefore, payment and delivery do not need to be made in the present, but within the timeframe set by the seller and buyer. In this case, a future trader uses the delay to speculate the value of the gold traded.
Gold ETFs (Exchange Traded Funds)
This is a commodity exchange traded fund, where gold is the principal asset. These are almost like individual stocks traded on an exchange. Here, the fund hold contracts that are backed by gold.
Nonetheless, investment in gold ETFs does not mean that one will own physical gold. More so, while redeeming a gold ETF, one does not receive the physical gold, but cash, which is equivalent to the gold traded.
Physical Gold over Paper Gold
Owning physical gold has no substitute, which includes cash money. Physical ownership of gold against paper gold provides a hedge against possible banking or monetary crisis. More so, paper gold investment methods can experience system failure.
Additionally, the cost of physical gold and its transactions are very transparent. This includes insurance, all manner of transactions, and storage. In the event of system failures or a major financial crisis, physical gold does not change, but paper gold can be reduced to just a piece of paper.
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