As the price of gold continues pulling back due to talk of the government increasing interest rates, you would think some investors would use this information to cut their gold positions. However, some gold investments have seen total increases. This is because there are different types of gold assets. Two main categories stand out: gold-backed investments and paper gold. They have sharply diverged since May, when the pullback began.
What Exactly is Paper Gold?
Paper gold, simply described, gives an investor the right to a simple piece of paper. This is not a gold claim, but rather a holding that is merely trading with the price of gold. There is not any gold that is backing up the asset. The investor also does not have a promise that they will ever hold the rights to any physical gold. A paper gold owner is merely a creditor to the group that is providing the paper gold certificates or accounts.
As such, investors holding this kind of position are assuming the risk should the investment be liquidated in a bankruptcy scenario. Investors who like to speculate on the short-term price movements of gold are likely to hold a paper gold investment.
Both positions backed by gold and physical gold do, however, attract people who invest in precious metals for the long term as well. Investors holding positions for an extended period believe in the long-term value of gold, as an inflation hedge, increasing both value and security position.
There are many different examples of investment instruments backed by gold that some investors may not even be aware of. These include:
- Gold futures contracts and accounts
- Gold certificates that are mint or bank issued
- Accounts in gold pools
- Gold accounts in passbooks
Physical gold holdings will not go bankrupt and do not depend on organizations maintaining their obligations. That is why these holdings are so much better for a long-term position rather than a short-term one.
Paper Gold Bows to Physical Gold in May
Physical gold put its strength on display in May as investors added to positions when gold prices substantially pulled back. This is when speculators quickly shed positions in paper gold by more than $7 million.
Investors who owned gold-backed positions also added greatly to their net positions. Since the start of last month, SPDR Gold Shares (NYSE:GLD) increased gold reserves so that additional shares were backed up by an incredible 43.72 tons, representing the biggest boost of its kind since January.
Those who have long-term investments in gold are not usually spooked by the volatile nature of gold prices. While the speculators typically sell their positions on a pricing drop, physical gold investors continue to buy and hold. This demonstrates the strength of gold-backed investments.