Convenience is valued highly, and when the need arises to secure capital in gold many take the quickest route: a brokerage account and units in an ETF, or so-called paper gold. The position appears on screen and appears secure. It is worth understanding what has actually been bought.
Counterparty risk
Buying a physical coin or bar makes the buyer its outright owner. Nothing stands between the owner and the asset. Paper gold — contracts and ETFs — is something else: an obligation of a financial institution to the value of the metal. That introduces counterparty risk into a wealth plan. The holding is secure for as long as the issuer of the paper is secure and solvent.
Why it matters in a crisis
Precious metals are generally acquired as insurance against a serious disruption: a market collapse, a banking panic, a monetary reset. If such an event occurs, the value of a paper claim depends on the issuer’s ability to meet it. Most ETF prospectuses include provisions allowing settlement in cash where market liquidity is absent. At the moment a hard asset is most wanted, what the holder receives is currency.
Two different purposes
If the objective is short-term exposure to the exchange price, an ETF is built for that. If the objective is long-term preservation of what has been built, a virtual substitute does not serve it. Physical gold and silver, stored discreetly in a private safe or an independent Swiss vault, are held free of the solvency of any financial institution.