General, Investment, Stock Market

Paper Gold Vs Physical Gold

paper-gold-vs-physical-gold

Investing in precious metal has been our tradition. Gold is considered as one of the precious metal that can be invested upon. This traditional practice is because of the fact that the price of gold is like positive side of mathematical tangent graph. There is a constant and considerable rise in price of gold that attracts most of the investors. But as the time passed, investors find it difficult to store and safeguard their gold. Hence, investors are heading towards paper gold (gold ETF) instead of physical gold. Now the question arises “what paper gold is?”

PAPER GOLD:

Most of you might be wondering what paper gold is, is it made up of paper, is it a new kind of metal. The answer is NO. Paper gold is not a new type of metal, it is a piece of paper that acts as substitute for the physical gold. In other words, you will own a bond not the physical gold. The main reason one might choose paper gold investment is to avoid storage costs and storage risk. Now comes the question why paper gold investment(ETF) not physical gold.

WHY PAPER GOLD?

The first answer that gets into your mind is, to get rid of storage cost and risk of burglary. If you invest in physical gold you possess a physical gold metal which must be stored in some safe place, obviously not in the house. So, you need to go with some organization that stores your gold safe and securely, for which you need to pay money. By possessing a paper gold, one gets exposed to the gold price without holding the physical part of it. Some examples of paper gold include gold certificates, NYSE listed Exchange Traded Fund(ETF), pool accounts.

The reason why Gold ETF are gaining importance and popularity is the convenience and the ease of trade and for the reason that it cannot be stolen. The ETFs are backed up with physical gold on which shares are issued to various customers. Important fact is that you need not buy an entire ounce, you can buy as small as 1/10 of an ounce, that implies you can invest in very small denominations. Because of such reasons paper gold has gain popularity.

——- Now let us have some serious comparison between PAPER GOLD and PHYSICAL GOLD investments. —–

Paper gold is some kind of bond which says you own something which you do not possess physically. Physical gold is something which you possess physically, is placed securely in lockers.

Paper gold distributes shares so, there will be more bonds than the actual gold that is in circulation. Physical gold does not pose such risk because individual who buy it, possess it.

The problem with paper gold comes in when every individual wants to redeem their bonds, because there may not be sufficient gold to be distributed. You never get such problems with the physical gold because you never need to redeem it.

With paper gold you may not feel secure, because your partner (ETF organization) may fail to fulfil your transaction. Such risks may not be present in possessing physical gold.

With paper gold you need not worry about the purity of the gold. But with physical gold you need to keep an eye on the purity factor.

The most prominent risk that is present in paper gold is that sufficient physical gold may not exist, and you may end up burning your hands. But in the case of physical gold you always own gold for which you pay.

These are some important comparisons that may help you get familiar with what they actually mean.

IS PAPER GOLD SAFE

There are some risks that are involved in paper gold. But if you are investing small portion of amount then you need not worry about it, but when you invest large amount then you need to be bit careful. If the demand for ETF shares increases, then the respective organization releases more number of shares to reduce the price and these extra shares may not be backed up with physical gold.

If you want to get your money from the shares, then the ETF organization should get money to provide you. If it holds physical gold, then it will sell that part of gold to provide you with money. But if the shares are not backed with physical gold then there will be a big issue and organization may not be able to provide you with money. In such cases you will be in loss than gaining profit. These ETFs do not cause any problem until the shares are in circulation. But if ones the demand for ETF declines then they will not be able to provide the money to all shareholders. So, unless the demand for paper gold is good there will be no problem with ETFs.

POINTS TO BE REMEMBERED:

In paper gold we will notice less transparency and some hidden charges levied on investors. If you really want to invest in ETF then invest in those shares which are backed up with physical gold or can be exchanged for money. In paper gold investment there is a risk of losing your share of gold because the organization holding the gold is not responsible if the gold is lost or theft. These investments though look great involves great risks. Same piece of gold can be claimed by hundreds of investors. There may not be enough gold backing up the shares that cause such problems.

When it comes to physical gold it is most transparent and there will be no hidden charges levied on investors. It is more secure and safe to invest in physical gold because you own it and you have it physically existing with you. Once you buy it you need not worry about claiming it and unlike paper gold it involves less risk. Physical gold will be under your control and you can store it any place you wish to and can sell it any point of time. There may be some risks for storing it but when compared to market risks it is negotiable.

We have given a clear understanding of both the investments. Now it is you who need to take a decision. For small investments paper gold may be flexible but when it comes to huge investments you better go with physical gold. Think twice before investing. I hope you have enjoyed reading this article. Have a happy investing.

 

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CA Rachit Jain

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