It is sometimes suggested that the best way to invest money is by investing in gold. Apart from buying physical gold, there are other ways to invest in gold, like paper gold. If you want to know more about paper gold investment, read on.
What Is Paper Gold?
Paper gold can be described as an asset that reflects the price of gold but is not gold. It's not backed with real metal, so it's just on paper. Owning paper gold allows you to participate in the market value of gold without owning physical gold. It is considered more profitable for trading than as a long-term investment opportunity.
Why Opt for Paper Gold Instead of Physical Gold?
The first reason is that using paper gold saves you money on storage. If you invest most of your money in physical gold, you may not want to keep it at home. You will also need safe and possibly other specialised equipment when you store them away from home. In this case, you ought to hire a custodian, a company that stores the metal.
Of course, storage services are not free, so these costs must be considered, reducing your return on gold. When you buy paper gold, you get a piece of paper that roughly reflects the gold's market value, saving you the cost and hassle of storing it.
If you don't have enough money to buy an ounce of gold, ETFs can be a good option. ETF stocks or comparable alternative investments enable you to invest in less than an ounce of gold. Additionally, paper gold allows you to invest in gold without having the money to buy an ounce. The low cost of ETFs is another reason retail investors prefer paper gold over physical gold.
Is Paper Gold Safe?
When you do not get tangible gold after investing, thoughts like whether investing your money in paper gold is reliable might arise. This is an important consideration because buying paper gold exposes the investor to counterparty risk (the risk that the transaction partner will not be able to fulfil their end of the bargain).
For instance, when you buy a gold ETF share, you get a paper document that trades similarly to gold. In such a case, an ETF (along with its collaborators) issues additional shares to help ease price pressure, with the new shares supported by real gold or a gold derivative (like futures contracts). As a result, increased demand for ETF shares will lead to a rise in the number of shares available instead of a price increase. If insufficient demand for these shares and the price declines, the ETF (and its business partners) will sell a portion of its real assets and use the money raised to redeem existing shares.
However, if it does not own physical gold and runs out of money (for example, due to a futures market collapse), it might not be able to pay you for your gold share, culminating in an ETF default. However, if the gold derivatives fail, the gold price falls, and/or demand for these shares falls significantly, such ETFs may be unable to redeem all their shares. As a result, the less real gold the fund has, the more likely you will be caught off guard in an emergency.
How to Buy Paper Gold
Now that you know how paper gold works, here are some ways to invest in paper gold:
Gold Exchange-traded Funds (ETFs)
Gold Exchange Traded Funds (ETFs) are open-ended mutual funds based on shifting gold prices. Investing in them provides two advantages: investing in gold and having the flexibility to trade stocks. The money invested is at low risk, making it ideal for those who want to diversify their investments. You can buy gold ETFs online because they are flexible and easy to enter and exit. The initial investment is minimal. You can begin with as little as one gram of gold.
Digital Gold
With the advent of digital gold, this metal has become more available, approachable, and operational. Individuals can now purchase coins, bars, and jewellery online. Purchasing digital gold is comparable to purchasing physical gold, except the entire transaction occurs online. It would be like 24-karat gold stored in a vault that a purchaser can obtain at any time via digital platforms. The gold purchased by a person online will be stored in vaults by the seller. It can be purchased or sold via digital platforms.
Sovereign Gold Bonds
Government securities broken down in grams of gold are known as SGBs. The bonds are considered a better alternative to gold in physical form because they reduce the theft risk. To put it simply, they are alternatives for physical gold. The advantage of investing in SGBs is that the amount of gold paid for is protected because the investor receives the current market price at the time of redemption.
Gold Mutual Funds
Gold mutual funds invest in gold ETFs or foreign gold funds. Investors can choose a SIP with these mutual funds to invest in gold regularly and thus reap the benefits of RCA (Rupee Cost Averaging). A Demat account is not required for investors to invest in these funds.
Conclusion
Although there are advantages to investing in paper gold, one must exercise caution before making a final decision. Furthermore, before making a decision, one must also consider the taxation on gains levied on these investment options.
Disclaimer
The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.