Paper Gold vs. Physical Gold | Making the Right Investment Decision in 2023

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Avishek Gupta

Paper Gold vs. Physical Gold
Paper Gold vs. Physical Gold | Making the Right Investment Decision                                                         (Image courtesy: canva)

Paper gold a financial instrument that has grown from zero to around $200-$300 trillion.

Paper gold refers to a category of financial instruments that serve as the ownership or exposure to the gold, without physically owning it. These instruments are primarily utilized within the realm of financial markets and investment strategies, offering individuals and entities an indirect means of participating in the gold market without the need for physical possession of the precious metal.

Is investing in paper gold a better option?

Yes, if you are looking at it from an investment perspective, investing in paper gold is a better option than owning physical gold.

Let me tell you why:

1) Tax:

No matter how long you hold physical gold, it does not offer you tax exemptions. In contrast, paper gold, in most cases, can provide tax exemptions on capital gain tax and even indexation benefits.

2) Security:

Having physical gold at home may not provide peace of mind, especially when leaving home or during events. Owning physical gold can raise security concerns. In contrast, paper gold is securely stored in a vault, either by the government or under government regulations.

3) Liquidity:

Paper gold is highly liquid compared to physical gold, allowing you to access cash more quickly.

4) Fair Valuation:

Estimating the value of physical gold can be challenging, and you may fall into the trap of inaccurate valuations by jewelers. In the case of paper gold, there is a fixed price based on the current price of physical gold, ensuring fair valuation.

Overview | common forms of paper gold

Now let’s look upon some common forms of paper gold include:

1) Gold Exchange-Traded Funds (ETFs):

Gold Exchange-Traded Funds (ETFs) are investment funds that hold physical gold as assets and are traded on stock exchanges. Each share typically represents a fraction of an ounce of gold.

2) Gold Futures Contracts:

Gold futures are standardized contracts traded on commodities exchanges, stipulating that the buyer is obliged to purchase, and the seller is obliged to sell a specified quantity of gold at a predetermined future date and price. Or in simple words, Gold futures contracts are like a agreement to buy or sell gold at a set price on a specific date in a future.

3) Gold Certificates:

Gold certificates are issued by banks or financial institutions and represent ownership of a certain amount of gold. Holders can buy and sell these certificates without physically handling the gold.

4) Gold Options:

Gold options are financial agreements/derivatives that give the holder the right, but not the obligation, to buy or sell gold at a specific price on or before a specified date.

5) Gold Mining Stocks:

Investing in gold mining companies/stocks can also be considered a form of paper gold since their stock prices are often correlated with the price of gold.

Paper Gold vs. Physical Gold
Paper Gold vs. Physical Gold | Making the Right Investment Decision in 2023                                          (Image courtesy: canva)

Suitability

However, paper gold may not be right for everyone. When it comes to paper gold and some of the financial instruments, an investor’s personal financial goals, risk appetite as well as his future financial needs must be put into consideration.

Financial objectives: What is the investor aiming at? Are they seeking preservation of their capital, current income generation or growth for future prosperity? All these objectives make paper gold a suitable choice for any investor. Yet, when selecting paper gold investment, the appropriate type should be chosen according to individual preferences.

Risk tolerance: Paper gold is a safer form of investment with some risks which should also be taken into account. Such as gold price which can swing, this could cost an investor some funds. Since there are different levels of risk in investing in paper gold; an investor should settle for one commensurate to his risk appetite.

Time horizon: At the same time, before purchasing paper gold, investors should bear in mind their time horizon. Generally, people consider gold an investment for the long run. The exposure of investors that plan to sell off their short-term investment is higher as compared to others.

Alternatives

There are a number of alternatives to paper gold, including:

1.Physical gold: In physical forms one can possess bars, coins or jewelry made of this precious item. Direct ownership is achieved with physical gold that an investor may opt for. Nevertheless, one must take into account the expenses on security and storage when possessing the real gold.

2.Gold mining stocks: An investor can achieve this by investing in stocks at the mine level which represent ownership stake in the company that is involved in the production of gold, without need to possess the actual yellow metal. Paper gold may not have that same level of unpredictability involved in it as in investing to stocks of gold mining; however, they may pay off to the great extent.

3.Gold mutual funds and ETFs: There is no better way to invest in gold than through gold mutual funds and ETFs. Investments by these funds usually include some combination of gold stocks, gold futures as well as gold bullion. Investing in gold mutual funds or ETFs presents an all-inclusive, affordable, and effortless investment route for gold seeking clients.

Performance

In the long run, gold has performed better than other asset classes. But we should not forget the fact that yesterday does not mean tomorrow. However, gold prices are highly volatile and an investor may lose his/her money in such investments.

Over the last decade, gold recorded a compound annual growth of 14%. This is however; this performance is very fluctuating. For instance, gold prices dropped massively in 2013 plunging down by more than thirty percent.

Comparing Gold’s Performance against Stock and Bond Indicators- Investors ought to look at how gold performs relative to other types of asset prior to deciding whether or not they want to buy it. However, stocks are known to have performed better than gold in the longer run; but at the same time, this is also where their weakness lies. There is a belief that bonds are riskier than gold; however, a number of investments may provide even lower returns.

In Conclusion

Investing in gold has been a great option. Investors invest in gold to hedge against market uncertainties. Most investors consider gold as an investment asset to safeguard our wealth and not as a wealth creating asset. Gold has shown an average growth rate 14 % in ten years. An investing in paper gold is more likely investing in real gold.

Paper gold instruments are valued for their convenience and flexibility, as they eliminate the logistical complexities associated with the storage and security of physical gold. However, it is essential to recognize that these financial instruments carry their own set of risks and may not always precisely mirror the movements in the price of physical gold due to factors such as fees, tracking discrepancies, and market dynamics. Therefore, individuals engaging in paper gold investments should exercise due diligence and consider their specific financial objectives and risk tolerance.

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