Are Gold Certificates the Same as Owning Gold?
When looking to invest in gold, silver or other precious metals, people face a variety of choices. You can buy gold or silver based ETFs, mining stocks, precious metals certificates, or coins, bars and rounds.
There seem to be a lot of misconceptions out there about what these investments actually mean. While many investors recognize the key differences between owning a gold bar and owning shares of GLD, for example; the lines between owning physical gold or silver and gold or silver certificates seem to be a bit more blurry for many. This quick guide will outline some of the key differences between the two types of investments.
Gold Certificates-What they are and are not
A gold certificate is a piece of paper representing ownership of a specified amount of gold. Gold certificates were formerly used as a paper currency in the United States, and now are used as a way to invest in physical gold without having to store that gold.
Gold certificates could be considered one of the world’s first paper bank notes. These paper certificates began being used in the seventeenth century, when London and Amsterdam-based goldsmiths began issuing them to customers who were depositing gold bullion with them for safe-keeping.
These gold certificates eventually began being exchanged, and since they were proof of gold ownership, the value of the certificate would exchange hands while the gold itself was never moved.
In the mid-19th century, the U.S. Government began issuing gold certificates which could be redeemed for gold from the treasury’s vaults. This form of paper money was utilized until 1933, when the U.S. banned private gold ownership.
Gold certificates are available to this day, and are issued by exchanges, banks and gold pool programs.
Gold certificates are:
- An ownership interest in a specified amount of gold coin or bullion
- A way to own gold without having to store it
Gold certificates are not:
- Gold coin or bullion in your physical possession
- Gold that you control
- Gold that can be used for exchange or bartering
One of the most appealing aspects of owning physical gold bullion is the sense of security that comes along with it. Gold that is in your control, in your physical possession, can be used for any purpose of your choosing.
Let’s look at a simple example to illustrate our point:
Suppose that there is a cyber attack on the global financial system. Farfetched, perhaps? Not these days…
Let’s further suppose that this cyber attack cripples the global monetary exchange apparatus.
Imagine, for a moment, going to your bank in a panic only to find out that capital controls have been put in place and you are unable to withdraw your money…
Now imagine the feeling of despair, of lack of control and worry that may consume you…
How will you feed your family?
How will you buy necessities such as fuel or clothing?
How would you be able to wait out such a scenario?
Needless to say, going down to the local bank branch is not going to help, and a gold certificate, dependent on the bank or exchange that issued it, is not going to do you any good either, as such certificates would likely not be redeemable in such a scenario.The only thing that may be exchangeable in such a situation would be physical precious metals. Gold coins or bars could be traded or exchanged for necessities. They could be used as a means of financial sustenance until the crises is resolved.
They could provide you with some peace of mind while the financial system is in chaos…
While this example may be unlikely (arguably) it is possible in today’s technology advanced world.