In our modern society, and with the development of finance in recent decades, "immaterial" gold, also known as "paper gold", has emerged. For investors, this is an asset that allows them to gain exposure to the price of gold without the constraints of physical ownership.

But these gold-backed financial instruments seem to be losing ground today, even though the price of gold continues to rise month by month (doubling in just two years).

This is due to persistent inflation, economic uncertainty and recurring banking crises. This raises a legitimate question: is paper gold on its way out? Or at the very least, is it still worth investing in paper gold?

In the following lines, we will attempt to answer this question in the light of recent market developments, the structural limits of paper gold, and the prospects for investors wishing to secure their assets.

ARTICLE SUMMARY :

• 1) A reminder of what paper gold is
• 2) Comparison of paper gold and physical gold
• 3) The structural limits of paper gold
• 4) Current signs of a decline in paper gold
• 5) Should we still invest in paper gold?

1) A reminder of what paper gold is

Paper gold refers to gold-backed financial instruments. Unlike physical gold, held in the form of bars or coins, paper gold is based on a promise of delivery (rarely fulfilled in practice).

These assets can be found in the following main forms:

• Gold ETFs (Exchange Traded Funds)
• Gold futures
• Gold options
• Gold-indexed certificates
• Shares in gold mining companies

2) Comparing paper gold and physical gold

From this comparison, it's easy to see why paper gold has been so attractive to investors. Paper gold offers several advantages:

- Ease of access, since no logistics are required to buy a gold ETF via a securities account/PEA.

- High liquidity on financial markets. These products are easy to trade.

- Low storage costs, as paper gold avoids safe-deposit box or insurance costs.

- Possible leverage. Derivatives enable you to speculate on price variations with limited capital.

3) The structural limits of paper gold

In reality, despite its many advantages, paper gold remains a financial asset with numerous drawbacks and risks.

Indirect ownership offers limited protection

With physical gold, coins and bullion offer tangible, material protection. Paper gold, on the other hand, is subject to :

• Bank failures
• Account freezes or asset seizures
• Currency devaluations

Real counterparty risk

The main risk with paper gold remains that of issuer default. In the case of an ETF or a certificate, there is always a manager, a bank or a broker behind the scenes. The disappearance of the latter can result in the loss of all or part of the investment.

No physical guarantee

In practice, paper gold products are not fully backed by physical gold. In fact, for every ounce of paper gold traded, only a fraction corresponds to an ounce actually held in safekeeping. This system is based on trust, which can falter in the event of a systemic crisis.

Stock market crashes

Paper gold is first and foremost a financial asset. It is therefore exposed to the same vulnerabilities as other stock market instruments (equities, bonds, etc.).

4) Current signals of a pullback in paper gold

Several trends confirm a change in trend in physical and paper gold. These include

• A record rise in demand for physical gold, particularly in the form of bullion.
• Strong development and deployment of private holding platforms for physical gold, independent of banking systems.
• A decline in gold ETF outstandings between 2023 and 2024.

A change in investor behavior confirmed by precious metals flows, import/export data, and official central bank positions.

In addition:

- Global de-dollarization, with many countries( e.g.BRICS ) reducing their dependence on the US dollar by buying physical gold on a massive scale.

This situation is weakening the supremacy of the Western financial system and, consequently, dollar-denominated financial instruments, including paper gold.

- Persistent inflation and a crisis of monetary confidence.

Since 2021, inflation has been accelerating. This favors the search for tangible assets such as gold. As proof, the price of gold has doubled since 2022. Demand for physical gold has grown strongly, particularly in Asia and the Middle East.

5) Should I still invest in paper gold?

As is often the case, the answer ultimately depends on your investor profile and your own objectives. To make the best decision, we can summarize the following points:

Paper gold remains relevant if...

• you don't have a secure storage solution
• You're looking for fast, flexible exposure to the gold price
• You are a short-term gold trader or investor

But physical gold is preferable if...

• You fear a banking or currency crisis
• You prefer direct ownership of your assets
• You are looking for a non-dematerialized, tangible and transferable asset
• You want to protect your assets over the long term

Conclusion

Of course, paper gold is not destined to disappear, but investors now seem to be looking above all for solidity, tangibility and direct control of their assets, especially in a highly uncertain geopolitical, economic and financial context.

If you invest in gold to protect yourself against crises, buying gold coins or bars remains the most prudent strategy today. Don't hesitate to ask our experts, present throughout France, to help you invest in physical gold.