Gold bullion or bars are not commonly seen circulating in the public. Though certain countries, like the United States, have abandoned the gold standard, there are still plenty of investments being made into gold around the world.
I may not have the storage for my gold bar, but the bank or exchange from which I am purchasing will gladly store my gold for me. So, if my gold bar is not technically in my possession, how do I prove ownership?
Yes, gold bullion or bars can come with certificates. They are called gold certificates and they act as proof of ownership. They can also be passed from one owner to another as a sort of cash payment without having to ever exchange the physical gold bar and remove it from safekeeping.
However, despite their obvious benefits, it’s not as simple as it sounds. Gold certificates present their own unique challenges to the investor.
There are risks that come with gold certificates as opposed to having the physical gold in my possession. These risks should be understood should I decide not to store my gold myself and hold a gold certificate in its stead.
Gold Bars vs. Gold Certificates
Gold certificates are one way I can invest in gold bars without having the hassle of storing them. They are also exchangeable, which is also convenient in the event that I would want to sell or trade with another investor.
Now that I know what they are, it’s important to also note what they are not.
The challenges of gold certificates come with the understanding of the investor. Once I know what those limitations are I can decide if the benefits of gold certificates are worth the risk.
- The Issue of Reconciliation
- Unallocated Gold
- Redemption Rules
Looking into each one of these topics will give me a better understanding of how gold certificates differ from having physical possession of the gold bar and which option better suits my needs as an investor.
The Issue of Reconciliation
Having a gold certificate is not necessarily an indicator of basic value. Meaning there is no surefire guarantee that all the gold certificates in circulation are backed by the exact equivalent of physical gold.
This is due to several reasons including but not limited to forgeries, good faith duplicate certificates, purposeful over-issue, poor administration, cancellations of previous certificates, and so on.
The only way to ensure that the stock behind the gold certificates is exact and assured is if all gold certificates were surrendered to match. Any of the aforementioned problems can and will decrease the credibility and worth of my gold certificate(s).
This is a risk; investors may be willing to take in exchange for the convenience of trading, storing, and transporting physical gold.
There are exchanges that are using modern technology like audit lists or secure blockchains in order to prove ownership and protect my investment, making the issue of reconciliation less of a disparity.
Unallocated Gold
Typically, gold certificates are associated with unallocated gold, meaning the gold is not apportioned or distributed. Though there is an option for me, as the investor, to allocate, it will most likely be at a cost.
Therefore, if I choose a certificate program that offers the option to allocate and there is a cost to do so, it is typically excessively high and may not be worth the investment.
This price can include fabrication cost, as well as storage cost, which is usually at 1.5% per annum. This exceeds the wholesale rate for insured gold bar storage by more than ten times.
This is a tactic to keep the gold unallocated as investors, like myself, are less likely to allocate considering the costs. As an investor, this leaves me at the mercy of the supplier, who looks at my gold as a liability and may be unable to pay the debt owed to me should I choose to allocate.
This is not always the case, therefore it is essential to do proper research to ensure that where I invest offers certificates that are associated with allocated gold.
Despite the downside of unallocated gold, there are still certificate programs that are popular and respected in their handling of gold certificates.
Again, it simply requires research to know which ones offer reasonable rates should I decide to participate in a certificate program that deals in unallocated gold.
Redemption Rules
Though there are German and Swiss banks that are still offering gold certificates to investors, there are other countries that no longer abide by the gold standard and have a different way of handling gold certificates that I may be looking to redeem.
A prime example of this is the United States which stopped its circulation of gold coins, bars, and certificates in 1933. In fact, at that time citizens were required to hand over their gold to the government in exchange for paper currency. It was then made illegal to retain gold certificates.
According to the United States Department of Treasury FAQ page on their website, they do have an option for investors who may have come across a gold certificate and are looking to redeem.
If I had a gold certificate I could exchange it for the face value of the note, but I could not redeem it for gold. The reason the face value is emphasized is because my certificate could have a “premium” value when dealing with other investors, dealers, or collectors, something to keep in mind when looking to redeem.
Summary
Despite the challenges that gold certificates come with in terms of reconciliation and supplier allocation or redemption, it still may be the better option for investing in gold bullion when considering the benefits of storing, transporting, and/or trading gold.
Investors certainly place a lot of faith in gold certificates and just like with any other commodity, like the physical gold, they are valuable because we deem it so.
