Physical Vs Paper Gold

January 3, 2023


Gold has always been a commodity of attraction in every civilization because of its aesthetic and economic value. The intrinsic value of Gold has cemented its place as a haven for financial stability and a hedge against inflation.

Traditionally, Gold was stored in bars, coins, or jewelry. However, with the establishment of modern-day exchanges and the nuances of trades, gold now trades in equities commonly referred to as paper gold.

With the instability of equities, investors look towards gold to safely secure their finances. However, many investors face a dilemma in deciding whether to go for physical or paper gold.

Physical Gold

Physical gold includes all the tangible forms of gold. It includes gold bars and coins which can be stored at home, in banks, or in a depository.

Physical can be purchased from precious metal dealers, government, and private mints. The value of physical gold is directly related to its mass and purity, which is one of its advantages over gold traded in equities.

Physical gold can be owned privately or can form a part of a self-directed IRA, which a custodian handles. Particular costs such as storage, insurance, and transaction fee could add to the price of physical gold.

Paper Gold

Paper gold or stock gold refers to gold back assets other than physical gold. Their values trade differently from real gold, and are subject to movements of the equity market.

They include

  • Gold mining stocks
  • Gold ETFs
  • Gold Certificates

Gold mining stocks invest in companies involved in gold mining. Gold ETFs consist of several companies engaged in gold mining or own gold-backed assets.

A gold certificate is the least common form of paper gold, and it is a certificate issued by a company for ownership of a certain quantity of gold. It has become quite unpopular due to its enormous counterparty risk.

ETFs attract several investors because of the ease of trading, and elimination of the problems of storage and theft. However, there are several reasons why ETFs do not make the best investment options when you consider owning gold.

Disadvantages of owning Paper Gold

Counterparty risk

The first risk encountered when dealing with paper gold is the counterparty risk. Your paper gold is mediated by third parties, such as banks, investment companies, and other brokers. These companies are not liable for any loss incurred in your investment process.

This means that your investment is subject to whatever adverse outcomes suffered by these parties, including bankruptcy. In the economic meltdown of 2008, several companies dealing in paper gold filed for bankruptcy and subjected investors to massive losses.

High Volatility

Paper gold, unlike physical gold, moves with trends in the equity market. This is because many gold ETFs and mining stocks have little of their value in real gold, with most being in other equities.

These fluctuations in prices make them unfit as an inflation hedge.

Not true value

As earlier said, the chances are that your paper gold investment is mainly backed by other investment commodities, with a few parts being real gold. Also, you likely cannot make a case to receive any physical value of gold for your paper gold.

Because of this, the value of paper gold trades differently from those of real gold, incurring losses in the equity market during an economic downturn.

Expense ratio and commissions

While you may avoid storage costs and other transaction fees associated with physical gold, there is an annual expense made on paper gold known as the expense ratio. Also, your broker would take a particular commission when you trade your gold ETFs.

Little involvement in selection

Gold exists in the form of monoliths and these can come in various sizes and purity that differ in value. When you purchase an ETF, you do not get to select the kind of gold commodity that might be purchased in your portfolio meaning the value of your investment might vary depending on the purity and mass of gold.

Why you should hold Physical Gold

Real value

Holding physical gold is what it is – holding the real thing. When you purchase a bullion of gold, you have the same store of value as the price of pure gold. Furthermore, you get to store your gold yourself as long as you want.

Inflation hedge

Physical gold has been used as a store of value across civilizations. This is why it has been the go-to hedge against inflation by nations. The Central banks of nations and other financial institutions use gold to back their economy and currency against tough economic times.

Universally accepted

The value of a bullion of gold is the same everywhere. The same quantity of gold is the same over a long period of time. These universal qualities make gold accepted and sought everywhere. Its malleability means that gold can be made into other forms that are sought after and can be sold.

Direct selection

Another perk of physical gold is that you get to select the forms that you desire to store your gold and the level of purity you want. You get a lot of control that prevents you from counterparty risks.

Higher Value

Gold exists in two prices, the gold spot price and the physical gold price. The gold spot price refers to the price paper gold trades on the equity market. Due to its scarcity and relative stability, the physical gold price is always higher than the spot gold price.

In times of market volatility such as the market crash of 2008, the physical gold price could trade for as high as 25% of the spot gold price.

The worry over physical gold includes the problem of theft, cost of storage and other transaction costs. However, these are covered by the existence of strong depositories, affordable dealers and a massive value for cost.


The volatility of the equity market has got investors looking for an inflation hedge in gold. Many investors have a hard time deciding what form of gold to go for. Even with the ease of transacting, lack of storage needs, paper gold holds several risks that makes physical gold more attractive and better as a good inflation hedge. Contact a Precious Metals Specialist today by filling the form out on the right or by calling 888-503-1553.