At a glance, Paper Gold is essentially an asset which directly resembled the price of gold, though it is not actually physical gold. It’s also worth bearing in mind that it isn’t backed by any real metal, which means it is technically considered to be only paper.
An individual who holds paper gold has some exposure to the price of gold, yet they don’t physically possess any gold bullion. In a certain light paper, gold is considered more useful for trading purposes than it is for long-term investments. There are different types of paper gold including gold certificates, pool accounts, and gold futures accounts, as well as exchange-traded funds.
Understanding The Benefits of Paper Gold Over Physical Gold
There are several factors that play into the overall benefits and value of paper gold, compared to physical gold. The first and perhaps most obvious is that paper gold doesn’t have the security and storage concerns of physical gold.
Investors who possess a significant amount of physical gold bullion are uncomfortable keeping it in their home. Which means there’s an added expense of paying a custodian, arranging for secure transport and all the high insurance costs that come with it. All these things effectively diminish your returns on the physical gold.
When you possess paper gold, you essentially get a paper document that closely reflects the price of gold without all the costs and storage problems.
At the same time, paper gold allows you to essentially invest in gold even if you don’t have sufficient liquid capital to buy a full ounce of gold. This is due to ETF shares, and similar modes of investment which usually reflect a price that is less than an ounce of gold. Most of these investment options tend to be based on a tenth of an ounce of gold. This is one of the many reasons why Gold ETF’s are a popular option with individual investors.
How Safe Is Paper Gold?
Anything of value that you physically possess comes with some level of risk or at least basic concerns about its security. This isn’t so much of an issue with paper gold, as you don’t technically hold the metal yourself, which means there is a small amount of counterparty risk.
This makes it a little easier and safer to shift a small portion of your investment capital into paper gold Which might be especially profitable if projections start showing an upcoming shift in value. However, it could be problematic if a large amount of your capital is locked up in a long-term investment strategy.
In contrast, were you to invest in a gold ETF share, you get a document that trades roughly in the same direction as gold’s price per ounce. An ETF can also be sold to another investor just like a standard stock. Yet you should still keep in mind that most ETFs don’t allow redemptions in gold. This means if you do sell your ETF shares, you will not be able to receive physical gold for them.
EFTs attempt to make their price closely reflect the trading price of god without making a direct connection with the demand for the physical shares. If a large number of investors are interested in purchasing shares of specific ETF the price of those shares will tend to go up.
In a scenario like this, the ETF and any of its partner funds will issue additional share to slightly weaken the price pressure as well as back the new shares with some form of physical gold. This most often comes in the form of a futures contract.
This typically results in increased demand for shares of the ETF rather than an increase in the number of shares or the surge in the overall price per share. At the same time, should demand for the shares start to trend low, as the price pulls down, the ETF and its partner funds will likely sell a small portion of their physical holdings. They will then use the new capital to redeem their existing shares, which will again start to drive the price back up.
This type of strategy is important to understand as some savvy investors may become concerned that the ETF may not possess the full amount of physical gold to back their shares. In a case like this, it could mean that the overall value of the ETF’s shares technically exceeds the value of gold! While this might not seem relevant at first, as you can always exchange your shares for gold. However, if this trend happens frequently, it could be unsettling and potentially affect investor confidence in the future.
The primary reason for this is that when you want to sell ETF’s for their value the ETF, as well as its partners, need to obtain the cash to redeem your specific share. An ETF that holds physical bullion may simply opt to sell off the appropriate portion of its holdings to meet your request.
So long as demand for the ETF’s shares are sound and you retain the ability to sell or trade them to other investors, the ETF will remain out of default. In the case of a default in the gold derivatives or a situation where the price of gold suffers a swift decline, the demand for these shares will also fall significantly. In some of these scenarios, it may turn out that gold ETFs are unable to redeem all of their shares. The less physical gold the fund actually holds, the higher the probability that in an extreme situation you may find yourself out on a fragile limb.
Purposeful Gold Market Manipulation
Gold price manipulation, which is also sometimes referred to as Gold Market Manipulation is generally thought of as a purposeful effort to affect or even control gold prices. This type of strategy does indeed exist in financial markets when traders try to influence the market.
While It might be responsible for some short-term changes in the price of assets like gold, it rarely has a long-term effect. It’s also worth noting, that the United States Securities and Exchange Commission, sees manipulation as intentional conduct designed to deceive investors by artificially controlling the market for a security. This includes several different financial mechanics including things like rigging quotes, prices or trades in order to create a false perception of the demand for that particular security.