stack of gold bars

Would you like to have a few examples describing what paper gold is?

This is very different from any type of physical gold because it exists only on paper, often referred to as a promise for the gold itself. This means that there is a form of allocation involved, representing gold that is set aside, which can be used to fulfill that promise.

Some experts would state, that during troubling times if people were to pursue obtaining the gold using these promissory notes, they may not receive what they are promised.

Here are three examples referencing paper gold that people will often purchase: gold certificates, gold EFTs, and mining stocks.

Gold ETFs

This is a form of gold that is part of a fund, a literal share of this asset. Those that invest in gold EFTs track the performance of the gold – specifically, they are looking at price trends – without needing to pay any type of premium for the product.

Price fluctuations in gold are quite common, and a gold EFT is a commodity. On the other hand, people that are more focused on the mining industry, and trends related to it, will look at this as more of an industry EFT.

People that trade in gold might find this to be valuable if it is leveraged, something called an inverse commodity EFT – this depends on what the trends are when you start to track them. Gold bullion, as well as gold futures EFTs, could be performing well, and this is representative of the potential for success when looking at the performance of gold.

Mining stocks

This is exactly what you would expect it to be – similar to having shares of a company that you have invested in – they are representative of higher stock prices referencing silver and gold, ones that are affected by the infrastructure of the company, foreign government, or even an amount of debt.

There are a couple of different types of mining stocks that you can hold: juniors and majors. Majors are referencing well-established mining companies, those that have a very strong performance history. It can be easy to pick mining stocks that are doing very well, and if they are reliable, there is very little risk – yet that also means very little room for any type of sizable reward.

Junior mining stocks have not yet created a performance history. If you don’t have a lot of cash, you may want to consider Junior mining stocks instead because they are similar to start-up operations. By watching the daily performance of these mining stocks, you will notice that it has very little to do with the gold industry itself, and are more about the company’s operations, and trends and all of this will affect their value.

Any type of mining stock will tend to reflect broader movements, usually in the stock market, and these will focus upon precious metal markets.

Gold certificates

Gold certificates are redeemable for gold and are represented by a piece of paper.

The gold certificate market usually does not have enough registered gold that can accurately represent the certificates that are being traded or sold. For example, back in 2012, a total of 20 claims in the COMEX marketplace were representative of 1 ounce of physical gold. Fast forward to 2016, this market bloomed, leading to 550 paper ounces for every physical ounce of gold.

Why would you get physical gold as an investment over paper gold?

This is something that has already been presented regarding the way that gold certificates can be somewhat risky if there is not enough gold to represent every certificate that is issued. You can also encounter other potential risks, but can you bypass these problems if you invest in paper gold?

Counterparty risk – Counterparty risk simply means that there is the probability that people going through a transaction may default on their obligation that needs to be fulfilled. This can be representative of a risky investment, or it may be similar to EFTs, and gold certificates, where there are multiple people involved.

Zero liability – EFTs may include a note that is in the paperwork which will exempt these individuals from any form of liability if the shares will not be distributed. Although this is a loose interpretation, it is better represented by the words damage or loss.

Market risk – if you decide to purchase physical gold, you will have a tangible item, whereas paper gold is more about speculation, especially on the part of the object or entity that is going to be susceptible to market fluctuations regarding its worth. At times, you may not be purchasing something in the gold market, especially when dealing with mining stocks, whose performance levels are representative of how to value the certificates will be, and the performance that can be affected by independent trends. An example of this would be investing in mining stocks, and suddenly the government decides to change the rules on how gold mining companies can function, leading to mining stock prices that will not be representative of the actual price of gold.

Poor capital allocation – if you were to buy a portion of a business, you would be beholden to the decisions of management, which could lead to either a good or bad performance rating. When looking at a mining company, and the way that it is managed, this may result in changes in the performance of gold – and this could affect or alter how much each share is worth. Mining companies could suddenly decide to spend more money, focusing their attention and cash flow on second-tier mining operations which could cost much more to manage.

Diminishing value of shares – purchasing shares can be risky as the value of each one has the potential for diminishing over time, rendering each one to be of a lower value. You would then be in the precarious position of having overspent on the shares. Many experts have shown that gold EFTs can be leveraged as many as three times more than their value. Therefore, those that have made this investment would need to sell up to three times more EFT shares to get the same value as the gold.

Lack of insurance coverage – if you decide to purchase gold, and leave this gold with a designated custodian, or perhaps a precious metals dealer, it is going to be covered by the insurance policy that you have taken out which is actually between a contract and the custodian. When looking at EFT is, along with the custodian and the contract, these situations can become very confusing. This is because an EFT is not a direct beneficiary as stated within the policy, providing them with no ability to control the insurance terms; the custodian will then obtain token insurance policies which will only cover a bare minimum, yet they will still claim that they offer insurance. By doing so, the full value of your gold may not even be covered by the plan that you have taken out.

No choice when it comes to buying gold – as we all know, gold can be represented in many different forms including numismatic coins, proof, bullion, and even gold bars. You could see different rates of return depending upon the type of investment you have made; this is something that you may want to explore. With paper gold, this will not be an option for you.  To learn more about where to buy the best gold bullion, check out this SD Bullion review.

Loss of taxable income control – there is a certain risk that you will find when dealing with EFTs. In most cases, individuals can sell shares to have what is called tax-loss harvesting, plus they can do so to reduce capital gains which will help them save money on taxes. Individuals that do have shares of gold via EFTs really can’t do the same thing; the trustees that are involved are going to determine how to make adjustments to the portfolio, and individuals may be the ones that will have the option to see the entire lot of shares that they currently own.