What is paper gold?
Paper gold refers to gold purchased in the form of exchange-traded contracts. These financial products are designed to replicate the performance ofphysical gold in stock market indices, enabling indirect speculation in the yellow metal.
The different types of paper gold
Paper gold can be bought in several forms. You can choose between gold futures, shares in gold companies or trackers and certificates.
Gold futures
Paper goldfutures are best reserved for professionals, as they are complex and can be risky. They define the time, product and price of the transaction, as well as the precise future delivery date. They are among the most widely traded financial products in the world, and therefore benefit from a highly liquid market. However, futures contracts are used for speculative purposes and are notoriously unstable. What's more, since they are highly leveraged, both profits and losses are possible. Finally gold futures issued are not representative of the asset and are therefore not based on a physical stock.
Gold mining shares
You can buypaper gold in the form of gold funds with SICAV (Société d'Investissement à Capital Variable) or FCP (Fonds Commun de Placement). These areshares in gold companies that operate gold mines and sell their output on the market. Like all other shares, those of gold mines or specialized funds vary according to the company's performance indices. However, gold mining is a high-risk business, requiring large investments and subject to numerous political and technical uncertainties.
Les ETFs ou « trackers »
In theory, gold trackers are backed by physical gold. They are therefore supposed to replicate the performance of the gold price, which makes them safe. However, it is possible that the tracker's assets, i.e. its stock of physical gold, become too dissociated from its liabilities, i.e. its subscriptions. Indeed, issuers of this type of product can take liberties with counterparties. The risk is the creation of a bubble which, if it bursts, could cause you to lose your investment. It's important to find out about their practices before investing.
Certificates
Gold certificates, on the other hand, simply reproduce the value of an ounce in dollars or euros. No tangible asset guarantees the value of the certificate. In the event of the issuer's bankruptcy, the investor who has purchased a certificate runs the risk of losing his or her stake.
The advantages of paper gold
Thanks to these derivatives, it's possible for anyone to play the upside as well as the downside of the gold price, making paper gold the ideal instrument for speculating on the underlying instantly, whatever the price configuration.
As with any stock market asset, paper gold is aimed at investors seeking short-term returns.
The risks of paper gold
Trading in paper gold, on the other hand, requires good judgment and constant attention to timing.
What's more, paper gold presents the same risks as any stock or index (Dow Jones, CAC 40...): volatility, risk of default by the company issuing the contracts... This is what happened in September 2008, when the American insurer AIG went bankrupt, despite being the world's leading issuer of gold-backed certificates.
What's more, there is only a very small percentage of real gold in exchange for these promises to sell. As it is a replication of an index (the gold price), the gold contract does not need to be fully backed by a physical underlying.
In other words, for every 200 gold futures contracts or certificates, there would be only one real, available and deliverable ounce of gold. And even these estimates may be underestimates... What could be easier to manipulate than contracts based on promises?
Paper gold is an instrument reserved for an informed public who should not expect to find the same interest as physical gold, with the added bonus of liquidity.
Taxation of paper gold
Taxation
Paper gold is taxed in the same way as income and capital gains from the sale of securities. Thus, capital gains generated with paper gold have been taxed under the Prélèvement Forfaitaire Unique (PFU) of 30% since January 1, 2018.
However, you can choose to be taxed under the Impôt sur le Revenu (IR) system. Under this system, your gains are taxed at your Marginal Tax Rate (TMI). Social security contributions (17.2%) are due from the first euro of earnings.
Paper gold and the PEA
The PEA (Plan d'Épargne en Actions) is a highly attractive tax wrapper. However, gold mining shares eligible for the PEA are very rare. It is not possible to acquire trackers or gold certificates within the framework of the PEA.
