SUMMARY : 

Today, protecting one's wealth is an essential component for all savers and investors. To ensure proper diversification of your assets, it's important to take a close look at the virtues of gold and distinguish between the two main forms of gold investment: physical gold and paper gold.

 

1) What is physical gold?

 

This is gold in its original, material form. An asset that is tangible, palpable and storable. This can take the form of a simple gold nugget, bullion, ingot or, more commonly, coins.

The latter are generally referred to as "bullion" or "collector" coins, for their monetary value and collectability. Examples include the French 20 Franc Napoléon, the Louis d'Or and the 20 Franc Marianne Coq. Abroad, we find the Swiss 20 Francs, the Austrian Ducat d'Or and the South African Krugerrand.

 

2) What is paper gold?

 

Paper gold refers to intangible gold. In concrete terms, it refers to any type of financial instrument used to invest in gold. This may include :

 

- Shares in gold companies. These companies manage the prospecting, extraction and exploitation of gold in mines around the world.

- Gold certificates. These are certificates of ownership corresponding to a certain quantity of gold, usually stored in a bank.

- Trackers or ETFs. The idea is to replicate the real price of gold via an index fund.

- Gold futures (more speculative). These are leveraged derivatives that allow you to "bet" on changes in gold prices, often over a short period.

 

3) Comparing an investment in physical gold and paper gold

 

To better understand the distinction between these two radically different investments, here's a summary comparison table:

 

 

 

Physical gold :

 

 

Paper gold :

 

Type of holding :

Physical possession of this golden metal

 

Possession of an intangible asset

Storage issues :

At home or with a third party (custodian, bank)

 

At a financial institution

Costs and expenses :

Guarding" contracts

at a specialized company or bank safe-deposit box

 

Intermediation fees (transaction, brokerage, management, position keeping, performance...)

Risk (volatility):

Anti-crisis investment (inflation, stock market crash)

Sensitive to market movements, as aggregated in the financial system

 

Liquidity (transaction) :

Physical sales

Almost instant buying and selling on financial markets

 

 

4) Advantages and disadvantages of physical gold 

 

      Many advantages... 

 

Gold has always had the reputation of being a safe-haven asset. Whatever form it takes, physical gold is a universal investment that is recognised internationally and can be exchanged worldwide for the same value. Unlike national currencies, gold does not fluctuate according to monetary policy. It is therefore an ideal tool for investors wishing to diversify and secure their assets internationally. 

Gold is also the ideal asset for protecting against inflation. This golden metal has the ability to preserve its holder's purchasing power. It is an asset that avoids currency erosion, i.e. the decline in the value of fiat currencies during periods of inflation. 

The security provided by physical gold is also apparent in times of economic, financial or geopolitical crisis. In such situations, investors will always reflexively withdraw their capital from the riskiest and most volatile assets first. For example, cryptocurrencies, small caps and technology stocks will be abandoned to secure capital until the financial markets return. Money will therefore be reallocated to safe havens such as the US dollar, the Japanese yen and gold. 

Finally, because it is uncorrelated with the financial system, this asset is not sensitive to the risk of default or counterparty default by a financial institution. 

 

      ... with a few drawbacks 

Like any material asset, physical gold in any form (coins, bars, bullion) needs to be stored, and stored safely. To avoid loss or theft, we strongly recommend that you store it in a bank or specialist company. You can also store your gold at home, but you will need to choose a secure location and safe. 

The additional disadvantage of forced storage is the cost involved. Storage will have a price tag that can be substantial over time. This is something to bear in mind when you decide to buy physical gold in significant quantities. 

Finally, unlike many financial assets, gold has an intrinsic value, but does not generate interest or income during the holding period. Only the capital gain on resale generates a profit. 

5) Advantages and disadvantages of investing in paper gold 

 

      Various advantages... 

Liquidity is the strength of this investment. Because it can be traded on the financial markets, it is very easy to buy or sell paper gold via your broker or banker. 

The fact that it does not have to be physically held is also a major advantage if you want to avoid having to store it securely. No more risk of theft or recurring storage costs with an intermediary. 

Paper gold is available for as little as a few euros, since these financial products can be divided into fractions of units. This makes it even easier to trade on the stock exchanges. 

 

      The disadvantages of paper gold 

As paper gold is not physical, it can only be held virtually by financial intermediaries. This automatically leads to dependence on these financial professionals. 

Even more restrictive is the counterparty risk that can arise when the issuer of a gold-indexed financial product goes bankrupt. The stability of the price of an ounce of gold will not prevent the holder of paper gold from losing some or all of the capital invested. 

An even greater risk is the so-called ‘systemic’ risk. In this extreme case, the financial system could falter in the event of a stock market crash or banking crisis, for example. The safe-haven value par excellence of physical gold will be completely useless if the entire system is paralysed. 

Finally, the cost of investing in paper gold should not be overlooked. Since this financial product is linked to a bank or investment fund, relatively high costs (commissions, transaction costs) and various fees may apply. All these elements can destroy the return on a gold investment over a long period. 

6) What type of gold best suits your investment strategy? 

 

Once the pros and cons have been weighed up, and the strengths and weaknesses of investing in physical or paper gold have been measured, it's time to ask yourself the two crucial questions that will help you make an informed choice: what is my investor profile and what is my investment strategy? 

To answer these questions, investors must first define their investment horizon. They need to know whether they are investing in gold for a few months/years or for the long term, or even for a generation.  

A short-term investor (or speculator) will be looking for a quick return. They will therefore need substantial liquidity to enter and exit their investment. In this case, paper gold is preferable. 

On the other hand, physical gold, beyond the pleasure of owning it, is an asset that can withstand the test of time and crises. For investors seeking protection against economic and financial ups and downs, physical gold is essential.