Physical vs “Paper” Gold

Many people who want to diversify into precious metals buy gold ETFs, mining stocks or gold certificates instead of real gold. Unfortunately, these alternatives do not offer the same benefits as physical gold. They also come with some additional risks.

For example, gold ETFs are trusts that own gold. The gold is handled by a trustee, usually a bank. The trust is not liable for any loss, damage, theft, or fraud that may affect the shares they market and sell. Furthermore, shares in a gold ETF can almost never be used to redeem any gold. Gold ETF shares are simply a digital version of gold, not gold itself.

Mining stocks benefit from higher spot prices of gold and silver, but are also affected by the company’s infrastructure, debt loads and foreign governments. Ultimately, mining stocks tend to reflect the broader movements of the stock market more than the movements in the precious metals markets.

In the gold certificate market, there is not enough registered gold backing the certificates that are currently being sold and traded. In 2012, there were about 20 claims on COMEX on every one ounce of physical gold in its registered inventories. Four years later, in 2016, the number for COMEX ballooned to 550 paper ounces outstanding for every physical ounce of gold.

Physical gold, on the other hand, carries none of these risks. Once you buy it, it is yours. It can be stored in the location of your choosing. It can be used as a currency and is very liquid. Any breakdowns in the stock market or paper gold market may increase the value of your physical holdings.