Physical Gold and Paper Gold

Physical Gold and Paper Gold

Owning anything in physical form and owning a piece of paper that you own something physical is never the same! The difference between owning physical gold and paper gold is akin to that with the only difference being that these pieces of paper that state you own a certain amount of gold are not backed by gold bullion at all, as a gold ETF is basically a promise of gold delivery or the equivalent in cash with the latter being the most common option used.

Golden price concept chart with calculator and gold bars. 3D rendering

In other words when an investor buys gold ETFs (otherwise known as a gold share) they are not actually buying gold, instead they are actually buying a proxy for gold, which we all know can lead to a variety of complicated issues. This situation has created a different paradigm in pertaining to gold investments as two values for the precious metal has been inadvertently created, one for actual gold (physical gold) and the other for paper gold and the prices on both platforms actually do affect each other and cause them to go out of whack.

The fact is that the value of paper gold can actually shift drastically based on the trade volumes without having any correlation with gold production or demand allowing plenty of opportunity for bigger market players to have leverage over smaller players. The moral of the story here is not to trade gold ETFs or even physical gold for that matter if the driving factor behind it is to make short term gains – why? It is because the probability of the average individual losing in this game is 90 %.

The best way to invest in gold is to actually buy gold bullion bars gradually when prices are low and hoarding them up in a hole in your kitchen wall for over a period of 10 or 15 years, and when the time is right, sell gold and buy property instead with an aim to rent it out in order to have passive income of some sort.

Most who do this will discover that the inflation that followed them through the years and surround them at the moment of sale would be neutralised instantly. Inflation is the primary reason for paper currencies to lose value as most Governments approach to ‘Quantitative Easing’ involves the printing of vast amounts of new cash and as we all know when something is available in abundance, its value becomes lesser and as gold becomes even more scarcer due to population increase, the value of gold offsets the impact of inflation quite effectively.

What all this means in short is, gold is not to be seen as an investment that brings returns, instead it should be viewed as a method of protecting your purchasing power well into the future, meaning if you convert your hundred dollar bill that could buy you a good pair of jeans into a 2 mg grain of gold today, that 2 mg grain of gold would still be able to buy you that pair of jeans a decade later (your 100 dollar bill will not be able to do the same as the jeans will definitely be priced much higher).

Kenneth Smith

Kenneth Smith lives in Adelaide, Australia and is full time trader. Kenneth offers you his many trading tips in his articles. All the information presented in his posts are based on extensive experience gleaned from years of working with many trading platforms.