Paper Gold Vs Physical Gold

You have a lot of alternatives when it comes to protecting your finances. You can invest in stocks, bonds, and other financial instruments. You might also buy physical gold or gold paper.

What is the distinction? Which one is best for you? It is critical to conduct due diligence to understand the benefits and drawbacks of both paper gold and physical gold investments in order to choose which is the best option for you.

What is a paper gold investment?

Paper gold is a way to invest in gold without actually owning any physical gold. When you buy paper gold, you purchase a contract that represents a certain amount of gold.

The most common type of paper gold investment is through exchange-traded funds (ETFs). ETFs are traded on stock exchanges and can be bought and sold like shares of stock. Other types of paper gold investments include gold futures contracts and gold mining stocks.

Gold futures contracts

A gold futures contract is an agreement to buy or sell a specific amount of gold at a given price on a future date. Commodity exchanges are where gold futures contracts are traded.

The current spot price of gold determines a gold futures contract’s cost, plus a modest premium or discount to represent the market’s expectations for the price of gold at the contract’s expiration date.

Investors use gold futures contracts to hedge against inflation or safeguard against the depreciation of paper currencies. They can also be used to predict where gold prices will go in the future.

Gold futures contracts are settled in cash, with actual gold supplied only if the contract is held until expiration and the gold price is higher than the predetermined price. If the price of gold at expiration is less than the specified price, the contract is settled in cash, and the investor does not receive any gold.

Exchange-traded funds (Gold ETFs)

An exchange-traded fund (ETF) is a type of investment fund that holds a basket of assets, such as stocks, bonds, or commodities. ETFs are traded on stock exchanges and can be bought and sold like shares of stock.

Gold ETFs provide investors with exposure to the price movement of gold without the need to own any physical gold. Gold ETFs are backed by physical gold, but the shares represent fractional ownership of the underlying asset.

The most popular gold ETF is the SPDR Gold Trust (GLD). Other gold ETFs include the iShares Gold Trust (IAU) and the Market Vectors Gold Miners ETF (GDX).

Gold certificates

A gold certificate is a type of paper gold representing ownership of physical gold. Governments and central banks once issued gold certificates as a way to store gold in paper form. Today, gold certificates are no longer published, but they can still be traded on the secondary market.

Gold certificates are backed by physical gold stored in vaults. The holder of a gold certificate is entitled to receive the underlying gold from the issuer upon request.

Gold certificates are not as popular as other forms of paper gold, such as ETFs and futures contracts, because they do not expose investors to price movements in the gold market.

The Key Differences Between Physical Gold and Paper Gold

The key difference between physical gold and paper gold is that physical gold is a tangible asset that you can hold in your hand. In contrast, paper gold is an intangible asset that represents ownership of gold but does not involve the actual possession of any physical metal.

Pros and Cons of Physical and Paper Gold

 Top Key Comparison

  • Liquidity: Physical gold is less liquid than paper gold. It can take longer to sell physical gold, and you may have to accept a lower price than the current spot price. On the other hand, paper gold is very liquid and can be sold quickly at the current market price.
  • Storage: Physical gold must be stored in a safe place, such as a bank vault or home safe. Paper gold does not require any storage and can be held electronically.
  • Risk: Physical gold is subject to theft and other risks. Paper gold is not subject to these risks.
  • Cost: Physical gold costs more to buy and sell due to the costs of storage, insurance, and shipping. Paper gold has lower transaction costs.
  • Taxes: Physical gold is subject to capital gains tax when sold. Paper gold is not subject to capital gains tax.

Pros:

Physical Gold

  • You can hold physical gold in your hand, which some people view as a more “real” investment.
  • There is no counterparty risk because you own the gold outright, and it is not dependent on any financial institution.

Paper Gold

  • Paper gold is very liquid and can be sold quickly at the current market price.
  • You do not have to worry about the costs of storage, insurance, and shipping.
  • Paper gold is not subject to capital gains tax.

Cons:

Physical Gold

  • Physical gold is less liquid than paper gold, and it can take longer to sell physical gold.
  • You may have to accept a lower price than the current spot price.
  • Physical gold is subject to theft and other risks.
  • Physical gold costs more to buy and sell due to the costs of storage, insurance, and shipping.

 Paper Gold

  • Paper gold does not provide you with any exposure to price movements in the gold market.
  • Paper gold is dependent on a financial institution, and there is counterparty risk.
  • You cannot hold paper gold in your hand.

Is physical gold a better investment than paper gold?

Presented with the choice, many investors would choose physical gold over paper gold. However, there is no clear-cut answer as to which is the better investment. It depends on each investor’s individual circumstances and preferences. Some factors to consider include liquidity, storage, risk, cost, and taxes.

The Key Risks of Physical Gold vs. Paper Gold

Risks associated with Physical Gold:

  • Physical gold is subject to theft and other risks.
  • Physical gold costs more to buy and sell due to the costs of storage, insurance, and shipping.

Risks associated with Paper Gold:

  • Paper gold is dependent on a financial institution, and there is counterparty risk.

The Bottom Line

There is no clear-cut answer as to whether physical gold or paper gold is better when it comes to investing in gold. It depends on each investor’s individual circumstances and preferences. Some factors to consider include liquidity, storage, risk, cost, and taxes. However, both physical and paper gold can provide investors with a safe haven during times of economic uncertainty.

About the Author

Since 2008, Savary Gold has been one of the world's leading mining exploration & investment resources for gold and precious metals. SavaryGold.com's mission is to provide proven insider knowledge resources about retirement investing to its readers to make informed investment decisions and better manage risk.

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