What Is Paper Gold?
If you’re new to precious metals, you might have read about paper gold and wondered what it is. Paper gold is not physical gold. Paper gold is a piece of paper, or digits on a computer, acting as a substitute for physical gold. Paper gold is usually traded in exchange-traded funds (ETFs) or futures markets. In a futures market, speculators bet on the direction of the gold price. They do not produce gold or use it. They cannot deliver gold to a buyer, nor do they take delivery of the gold. They merely try to profit from a change in the gold price. This mechanism can provide price stability for producers and buyers, but the problem is that there is more paper gold than physical gold in existence. In fact, it is believed for every ounce of physical gold, there are 200 ounces of paper gold. What happens if consumers try to take delivery on more gold than there is in paper existence? Pop goes the weasel!