Confusing Investing with Wealth Protection – The Risks of Paper Gold vs Physical Gold in 2024

Gold and silver are starting to gain a little more attention. As a result more new people are coming into the market. So we think it’s timely to post some warnings about the significant differences between physical gold and paper gold.

Estimated reading time: 8 minutes

A New Zealand Example Of the Danger of Paper Gold

The case of Bullion Buyer which emerged here in New Zealand in 2011 when gold and silver were soaring, demonstrates the danger of investing in the wrong type of gold. A Serious Fraud Office investigation revealed the company owed investors around $2.7 million. Clients thought they’d handed over funds to be invested in leveraged gold options with the firm.

“This meant they bought gold and borrowed against that investment to buy more, hoping the profits from its sale would be more than the interest payable.”

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However in 2015 the sentencing judge found that “the scheme was ponzi-like and developed into a series of untruths, false statements and misappropriated funds.”

Physical Bullion in Your Possession…

This very unfortunate case really drives home the importance of buying and taking delivery yourself of physical bullion, as opposed to paper gold and silver.  

If these people had, they wouldn’t have been faced the losses they now have.  And that’s without even getting into the subject of handing over hundreds of thousands of dollars to a relative stranger to trade options on your behalf in what can be a volatile market.

But the abdication of responsibility for managing ones wealth is these days not uncommon, as we have seen with losses in finance companies here in the past. There’s also likely an element of greed involved, as people get on board with these schemes after hearing about how much other people are making.

The Dangers of Paper Gold

There are many other examples of the dangers of paper gold both abroad and in New Zealand…

Paper Gold in US – MF Global

The troubles in the US back in 2011 with MF Global really bring this point home.  We discussed at the time the dangers of holding paper gold, and how investors in the gold futures markets lost out during the MF Global collapse.

Then there is the more recent fraud by Argent Asset Group LLC (Argent) and First State Depository Company, LLC. They conducted a fraudulent silver leasing scheme between 2014 and 2022. The companies were meant to be holding physical gold and silver and paying owners of silver coins a lease fee in exchange for Argent’s use of the commodity.

“The payments were on a “scale” and would increase or decrease depending on how many of their coins the client was willing to offer.

The coins were either already owned by the customers, or could supposedly be purchased through Argent, and were apparently in storage at a vault owned by First State Depository Company in Delaware.

Customers were also told their investments were guaranteed and fully insured.”

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But in the end only a fraction of the coins there should have been were actually in storage.

Paper Gold in Canada – Barret Capital Management

There’s also been a somewhat similar situation in Canada between 2009 and 2011.  Customers of Barret Capital Management thought they were buying physical gold and silver and storing it with the company. When in fact, Barret Capital was actually using clients money and trading it for their own account in a manner reminiscent of MF Global. It appears they used some clients funds in order to pay other clients and cover up losses – the very definition of a ponzi scheme. They were fined and closed down in 2012.

Paper Gold in China in 2024

With real estate and stock market troubles in China, gold has been very popular over the past year. But here’s another warning about the dangers of trusting paper gold:

$400 Million in Gold Vanishes, Sparking Social Panic, Multiple State-Run Gold Shops Abscond

(Editors Note: It was actually $400 million Yuan which is more like around US$55 Million.)

“As gold prices surged, the disappearance of several affiliated stores under China National Gold Group Corporation (also known as China Gold) and Shandong Gold Group in Beijing have led to a staggering loss of 400 million yuan worth of gold for customers, sparking widespread shock and panic across various sectors. Victims, left with no recourse, total 50 and more.”

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Again, customers had left their gold with the retailer on the promise of a return. One customer was told she would be receiving an annual return of 10 gram of gold per 400 gram deposited over 6 years. So instead of paying for storage she was effectively promised a 2.5% annual return. The old adage of if it sounds too good to be true – it probably is.

More Paper Gold in New Zealand – Gold Corp

The Ray Smith owned Gold Corp here in New Zealand back in the 1980’s was another situation where customers may have chosen the right path. But then got on board the wrong vehicle. Gold that customers thought was stored by Gold Corp turned out to not actually exist. A good deal of money was lost. >> Learn more: Paper Gold vs Physical Gold – What Should You Buy?

Another “Gold Trading” Scheme in New Zealand

A more recent case is that of businessman Steven Robertson. He was jailed in 2019 over $10 million taken from investors between 2009 until his company went into liquidation in December 2015.

He took $10 million from investors in his share and gold trading companies, but instead he spent the money on himself and his business expenses.

“Robertson, who owned PTT Limited (Prosper Through Trading), allegedly promised 22 investors big returns on investments made in share gold and commodities, but instead used their money to buy , jewellery, cars, dining out and renovations, as well as paying his mortgage and business expenses”.

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From what we’ve read there wasn’t any physical gold involved here at all. Robertson was meant to be trading on behalf of clients in shares and commodities. But again best case this was only paper being traded. In reality it too was just a ponzi scheme.

What are the Common Factors in All These Gold Frauds?

Two commonalities stand out when you look at past frauds that have occurred in gold:

1. They often seem to arise later in the cycle when there is heightened interest. This is when the price rises the most, so ponzi schemes are easier to run as profits keep mounting.
2. They also have always occurred when dealing in paper gold. Such as options, futures or gold stored with the retailer.

What’s Your Purpose in Buying Gold or Silver?

All the above situations actually trace back to an important initial consideration that the victims likely never bothered to ask themselves…

What is that?

It is simply: “What is my purpose in buying gold (or silver)?”

You see all these examples talk about “investors” losing money.  While we may use the word investing here and there, we don’t really see the purchase of gold and silver as an investment.  

Rather, buying physical gold and silver is simply wealth protection.  Gold and silver are the only assets that have no counter party risk. As long as (and this is crucial!) you take delivery yourself.

Why Buffet is Wrong About Gold

So we’d say don’t confuse investing with wealth protection even if famed investor Warren buffet does. He’s had many negative comments to say about gold before. Such as this edited version of his yearly letter to shareholders printed in Fortune Magazine. Buffet compared owning gold to owning productive assets such as farmland or Exxon Mobil…

Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers — whether jewelry and industrial users, frightened individuals, or speculators — must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops — and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Don’t Compare Apples with Oranges Like Buffet Does

But Buffet is not comparing apples with apples.  In the current monetary paradigm, gold is the “anti-dollar” and that is what he should compare it to.  He states of gold supply: “Buyers — whether jewelry and industrial users, frightened individuals, or speculators — must continually absorb this additional supply to merely maintain an equilibrium at present prices.”

Well this is the very same argument as to why it is foolish to hold dollars in the current environment!  As dollar holders too “must continually absorb the additional supply” that Central Banks create every year without fail.  Only this extra supply of dollars is much greater than the additional (and very constant) supply of gold that is mined each year. This is why we choose to hold gold in this environment.

For more on Buffett and gold see: Why Buffett is (Still) Wrong About Gold – But How He Loves Silver

Gold: The Only Form of Financial Insurance

So we wouldn’t say buy gold instead of farmland or oil companies but rather buy gold instead of holding dollars!

We don’t say to not invest but rather we choose not to invest everything!

We take a portion of our wealth “off the table” in this rigged casino and hold it in the form of gold and silver until “the house” changes the rules (or is forced to change them) to be more in our favour.

So if you are considering buying gold and silver our parting advice (take from it what you will) is it pays to ask yourself “why?”  

If you merely see it as a short term “investment” then buying an ETF or options in miners or gold futures may be the way to go.  But these come with the obvious risks of other parties involved.

However, if you see gold as the only form of financial insurance against paper currency loss of value (like we do), then physical gold and silver that you take delivery of yourself is the only way to go.  Is this 100% risk free? No, in life there are no guarantees (except the cliched death and taxes).  There is some risk in terms of how you store the precious metals. But at least these are under your control and you can “spread your eggs” so to speak.

Storage options in New Zealand

We’re happy to give our thoughts on various storage options around NZ. Just give us a call on 0800 888 465, or use our contact form.  Let us know your rough location and we’ll give you our thoughts on a storage facility or facilities near you.

Note: We could be accused of “talking our book” as we do make a small profit from people who buy gold and silver via us.  But then again so could Buffet! As we’re sure he’d rather people put money into the stock market which will benefit the companies he owns in Berkshire Hathaway. Rather than remove it from the financial system by buying gold.

Read more: Why Gold Bullion is Your Financial Insurance

Editors Note: This article was first published 14 February 2012. Last updated 27 May 2024 to include latest reports of paper gold troubles including in China.