Instead of filling their safes or underground bunkers with gold bullion, many investors instead buy gold certificates. While certificates offer certain benefits there are certain risks to be considered when investing in gold certificates.
When an investor buys gold certificates, the metal backing the certificates is going to be stored somewhere and the cost of storage is going to detract from the value of the certificate. There will also be commissions to the sellers and holders of the certificates and there could also be credit risks involved among the sellers. If the certificates are shared with other investors, with each investor holding a portion of the value equal to their investment, the expenses are shared among the buyers, but the risks remain the same.
Bars of gold are numbered and when purchasing gold certificates, the numbers on the bars represented by the certificate should be noted. It can however, be difficult to see if a bank or trader is allocating the same bar to more than one certificate holder. Unallocated gold certificates are those that do not track the gold bar numbers on the certificates represented to investors. Certificate holders of allocated gold can, in essence, trade in their certificates for the physical acquisition of the bars represented on their certificates.
Similar to other openly traded commodities, gold investing is more than buying gold bars and holding them until their value increases and selling them for a profit. Futures markets, derivatives and other options combine to make trading in gold as confusing to new gold investors as stocks and shares on the over-the-counter market. This is likely the reason that those investing in gold will take physical custody of their gold and arrange the safe storage to protect their investment.
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