Paper gold vs. physical gold

Different types of investment gold

If you want to invest money in gold, you basically have two options: The purchase of actual physical gold or the purchase of paper gold.

In the "classic" purchase of physical investment gold, one buys gold in the form of gold coins or gold bars.

To this end, numerous forms have emerged on the markets to buy gold indirectly, in the form of so-called "paper gold".

What is paper gold?

Paper gold refers to securities that are either backed by physical gold or whose value is based exclusively on the general price of gold on a virtual basis.

The forms of these exchange-traded gold products range from gold certificates, gold derivatives, ETCs and funds to futures and options.

What all these financial products have in common is that the buyer almost never actually holds a piece of gold in his hands.

Gold Certificates & Gold ETCs

Gold certificates are a classic form of paper gold. As an index certificate, these track the gold price in a certain ratio (around 1:10). However, gold certificates are legally only bearer bonds. Actual gold is therefore not bought here.

Types of play such as bonus, discount and leverage certificates also offer financial instruments that are even more suitable for speculation.

Exchange-traded commodities ("ETCs") are a special paper gold product. Like gold certificates, these exchange-traded securities are also based on the gold price. And from a legal point of view, they are also debt securities of the issuers.

Unlike certificates, however, gold ETCs are actually backed by physical gold. As a buyer, you also acquire a delivery claim to a certain amount of this gold when you purchase a gold ETC.

Probably the best known paper gold product in the German-speaking world, namely XETRA-Gold, is such an ETC, which is issued by Deutsche Börse.

Even though XETRA gold is sometimes referred to as the "German gold share," physical gold is actually involved in this bond. Delivery of the XETRA gold is not usually taken up by investors, but is possible in principle - for appropriate fees.

Gold Mining Shares

A special feature of the paper gold market are certainly shares of gold mines. Here, one does not even indirectly buy gold, but classical shares in a company. However, the share prices of mines are strongly dependent on the gold price development.

This is because if the gold price rises, the profit prospects of gold mining companies are also positive.

Gold ETFs

In recent years, the topic of ETFs (exchange-traded funds) has been pushed strongly as an alternative to savings accounts and is now considered an entry-level product for securities. These exchange-traded index funds track certain market indices on a 1:1 basis and score points for their relatively low ancillary costs.

In addition to ETFs that track stock indices, there are also ETFs that track the gold price. These gold ETFs are then also completely (or at least partially) covered with physical gold and can be traded in real time during exchange hours.

However, because exchange-traded index funds in the EU are not allowed to invest exclusively in a single commodity, there are no domestic gold ETFs. Therefore, those who want to invest in pure gold ETFs have to resort to foreign ETFs.

The two largest and most popular gold ETFs are the SPDR Gold Shares and the iShares Gold Trust . However, there are also numerous ETFs that in turn use other gold securities as indices.

Vault Gold

Vault gold can be regarded as an intermediate form. Here, investors acquire ownership of a certain amount of physical gold when they purchase it. However, the purchased vault gold usually remains with the provider and is stored in his vault.

Unlike paper gold, with vault gold you actually own the gold. One advantage is that you do not have to worry about the storage, transport and security of your gold.

However, the disadvantage remains that not only are there ongoing costs for storage and insurance, but high fees and incidental costs are sometimes incurred when buying and selling.

Conclusion

In our view, physical gold and paper gold serve two different purposes:

Physical gold should be bought in any case to hedge assets in the long term. However, it is not suitable for speculation. Physical gold offers the highest level of security. Safely stored, it is accessible at any time, can be traded even in the event of a crisis, and has guaranteed stable value for thousands of years.

Paper gold can also be seen as a long-term investment, but is often used for speculation. Since it can be traded like other securities, investors here also like to use short-term price fluctuations to liquidate or reinvest profits. At the beginning of the Corona crisis, we also saw that the paper gold price had decoupled from the actual commodity price.

Especially in terms of security, paper gold cannot compete with real physical gold. Depending on the specific paper, one has to reckon with more or less high risks: Issuers of securities can go bankrupt, gold mine operators can become insolvent, the delivery claim to gold may have to be enforced in court in the event of a crisis, and so on.

When buying investment gold in physical form, on the other hand, you actually hold your gold stes in your hands, so you have immediate access and also the risk of a total loss is excluded.