In short
- Physical gold or silver is metal you can hold, or a particular bar kept for you as your own.
- Paper gold is a share, a fund unit or a contract linked to gold, not a bar of your own.
- The law treats them differently: buying bullion directly is not making a financial investment, while pooled metal and gold funds may be financial products.
- One question sorts them: if you asked for it, would a bar come to you?
If you are drawn to gold or silver because you want something real, know which kind you are being offered. Some of it is metal. Some of it is a claim about metal.
What physical means
Physical gold is a bar or coin in your hand, in your safe, or in a vault that keeps that particular bar for you as your own. The same goes for silver.
Buying bullion directly is not making a financial investment under Australian law, so the purchase is not a financial product under that part of the law. A particular bar kept for you as your own property (the law calls this bailment) is unlikely to be one either.
What paper means
Paper gold is anything that gives you a claim on gold, or a stake in its price, without a particular bar being yours. There are three common kinds.
A share of a pooled pile. You own a quantity of metal held with other people’s, not a bar with a number on it. Pooled metal may be an interest in a managed investment scheme, which is a financial product.
A gold fund. You own units in a fund that tracks gold. Gold funds listed on a stock exchange may be financial products too. For example, the Global X Gold Bullion ETF is a registered managed investment scheme.
A futures-based fund or contract. Here the link to gold is a contract about its price. One United States fund, the Simplify Gold Strategy ETF, gets its gold exposure through COMEX futures, with no delivery of gold. Its units are not metal you own.
In the United States, futures on gold and silver are overseen by the Commodity Futures Trading Commission. Its stated mission is to promote the integrity, resilience and vibrancy of the US derivatives markets through sound regulation.
| What you hold | A particular bar yours? | A financial product? |
|---|---|---|
| Bar or coin at home | Yes | Buying it is not a financial investment |
| Bar kept for you as yours | Yes | Unlikely |
| Share of a pooled pile | No | May be |
| Units in a gold fund | No | May be |
| Futures-based fund | No, no delivery of gold | Units, not metal |
In words: a bar or coin you hold at home is metal you own, and buying it directly is not making a financial investment. A bar kept for you as yours is still your bar, and is unlikely to be a financial product. A share of a pooled pile is not a particular bar, and it may be a financial product. Units in a gold fund are not a bar either, and they may be a financial product. A futures-based fund gives you units, not metal, with no delivery of gold.
Metal, or a claim
With a bar, what you have is the metal. With paper, what you have is a claim: on a dealer, a fund or the other side of a contract. A claim is only as good as whoever stands behind it, and how the metal is held.
Some claims are backed by a government. The Western Australian Government, through its Treasurer, guarantees payment of the cash equivalent of gold the Perth Mint owes under its Act. The guarantee is on what the Mint owes; it is not a guarantee on bars or coins you already hold.
Paper has its uses. It can be easy to buy and sell, and there is nothing to store. Metal asks more of you: a safe place, insurance and a way to sell. Neither is right for everyone. Know which one you hold.
Silver works the same way
The same split applies to silver. A silver bar you own is metal. A unit in a silver fund, or a contract on the silver price, is paper.
Tax at the counter follows the same line. In Australia, buying investment gold (99.5% pure), silver (99.9%) or platinum (99%) as bars, wafers or bullion coins from a dealer carries no GST. That line is about metal you buy, not fund units.
My own view
My own view is that paper contracts have played a large part in how gold and silver are priced, and that this will come to light in time. I also think silver has more upside than gold, because so much of it is used in technology. I could be wrong. It’s just an opinion, and you don’t have to agree with it.
What comes next
The next lesson will look at allocated and pooled metal more closely: what a vault holds for you, and what to read before you sign up to one.
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Nicholas holds some of the assets discussed in this article.
Education only, not personal or financial advice.