Gold certificates were the first way of investing in gold that didn’t involve buying and storing it in a physical form. Gold certificates are securities that acknowledge gold ownership and don’t involve physical storage.
Historically, banknotes were the first gold certificates. The first ones were issued in 17th century England and Holland by goldsmiths, who stored gold in their safes. They enabled them to trade gold without having to exchange it in a physical form. They also acted as money – exchanging banknotes was virtually equal to exchanging gold coins.
In the past U.S. dollars were also examples of gold certificates. From 1882 until 1933 the United States used the so-called gold standard, which meant that every banknote, de facto a gold certificate, could be exchanged for an equivalent number of gold coins, with value equal to its nominal value. In 1933 the United States went off the gold standard and until 1964 owning banknotes that were earlier in circulation was illegal. In 1964 this ban was ended, however these banknotes could not be exchanged for gold. Today the main value of banknotes issued before 1933 is collector value.
The main advantage of gold certificates is that they allow buyers to avoid the risks and costs associated with transporting and storing physical gold. Thanks to these certificates, investors are not exposed to the risk of theft and do not have to incur the costs of bid and offer spreads that gold bars or coins involve. The price of a gold certificate very closely follows the price of gold on the world market. They are very liquid and can very easily and quickly be bought or sold.
On the other hand, buying gold certificates involves having to bear other costs and risks, like commissions and fees. Banks and other firms issuing them often charge a fee for storing gold in their safes. And buying gold certificates involves credit risk – the risk of bank default and loss of invested money. Certificates acknowledge ownership rights to gold bars or coins. If something happens to these bars or coins, if they are stolen or destroyed, they become worthless. Their value depends entirely on the value of the gold they represent. Buying certificates also involves the risk that the bars or coins they are supposed to represent in reality do not exist. Buying gold in a physical form does not involve this risk.
Investing in gold certificates entails the risk that the issuer may invest money entrusted to them in financial instruments other than gold and pay its clients only the return they would earn on gold. If these investments are successful this is not a big problem. However, if these investments make the issuer lose money, they may ultimately lead to its bankruptcy. If it did not have the gold bars or coins, it may mean loss of invested money for the clients.
There are two types of gold certificates: allocated and unallocated. Allocated gold certificates are fully backed by gold. They are issued on specific gold bars or coins. When buying these types of gold certificates we can be sure that our bars or coins will in no way be used by the bank. As their owner we can sell or move them any time.
With unallocated certificates, just as with allocated ones, we are the owners of gold. However we cannot technically section it off in the pool of gold covered by the issuer. Quite often unallocated certificates are only partially backed by gold, which means that if all the investors wanted at the same time to exchange their certificates for bars or coins (a so-called run on the issuer), it might be possible to exchange only some part of the money invested. Gold covered by the issuer may be in a sorted or unsorted form. The former means that gold has a specified form, like bars or Krugerrands. The latter means that for physical delivery we can receive it in various forms. It will of course have the weight and purity we paid for, but it can be delivered in coins and/or bars. Unallocated gold certificates are usually cheaper than allocated ones – they do not involve production, storage or insurance costs.
Gold certificates are issued by banks and other financial institutions. They are also issued by German and Swiss commercial banks. Certificates issued by Perth Mint enjoy a lot of popularity. They are considered to be very secure since they are guaranteed by the Government of West Australia. They are also insured by Lloyds of London. Perth Mint was rated AAA by Standards & Poor’s and Moody’s. The minimum value of an investment is 5,000 AUD. Unallocated certificates issued by Perth Mint do not involve any insurance or storage costs. On the other hand, they are costlier than the vast majority of other gold certificates. Buying or selling them involves relatively high commissions. Perth Mint also offers allocated gold certificates, but this involves storage and production fees.
Where can you buy gold certificates in the United States?
Gold certificates are offered by the following dealer firms operating in the US:
- Asset Strategies International
- Euro Pacific Capital
It seems that gold certificates are not very popular in the United States. Since they are only issued during a so-called subscription period, gold accounts enjoy more popularity.
In internet auctions one can find gold certificates issued before 1933 in the form of US banknotes. They cannot, however, be exchanged for gold and today their main value is collector value.Back