# Paper gold, physical gold, and tokenized gold

"Exposure to gold" can mean very different things depending on which instrument you hold. The price performance of these instruments correlates closely most of the time, but the underlying nature of each (what you actually own, what risks attach to it, and what happens in a stress scenario) differs significantly. Regardless of form, the price reference is always the [spot price](/prices/xau-usd) — see [Spot, futures, and settlement: gold prices decoded](/blog/spot-futures-settlement) for how the three benchmark prices relate.

## Physical gold: bullion, coins, and allocated accounts

Physical gold means owning actual metal. This takes a few forms.

**Bullion bars and coins** held directly: you buy the metal, take delivery, store it. No counterparty. If you're holding a 100-gram bar in your own possession, it exists regardless of what happens to any bank or exchange. This is the form of gold ownership with the fewest layers of dependency.

The costs are real, though. Storage is not free. Transport is not free. Insurance matters if the amounts are significant. Liquidity requires a buyer who trusts the provenance and assay of your specific bars. For large institutional amounts, this is manageable; for individual holders, the friction is material.

**Allocated accounts** at banks or custodians: you own specific, numbered bars registered to you and segregated from the custodian's balance sheet. If the custodian fails, your gold should be recoverable as your property. The qualification "should" carries weight — enforceability depends on jurisdiction and documentation. Allocated accounts at major custodians in established jurisdictions have a strong track record, but they add one counterparty layer that pure self-custody does not.

**Unallocated accounts** are different. You have a claim on a gold amount, but no specific bars are assigned to you. Your claim is unsecured if the custodian defaults. Unallocated accounts are convenient and widely used in the professional market, but they carry counterparty risk that allocated accounts and physical possession do not.

## Gold ETFs

A gold ETF holds physical gold and issues shares representing a fractional ownership interest. Shareholders do not own specific bars; they own shares in the fund. The fund owns the gold.

This adds layers: the fund entity, the custodian holding the metal on the fund's behalf, the prime broker, and the exchange through which shares are traded. In ordinary times, these layers are invisible — the ETF share price tracks the gold price closely. In a severe stress scenario, the relevant question is whether each layer holds.

Most large gold ETFs use allocated gold at major custodians with clear custody documentation. But the shareholder's claim is to fund shares, not specific bars. Most retail-class shares cannot be redeemed for physical metal; only large authorized participants can do this.

ETFs offer genuine advantages: low storage cost (typically 0.1–0.4% annually), high liquidity, and easy portfolio integration. For an investor who wants price exposure, they are highly practical. For an investor holding gold specifically because they distrust the financial system, an ETF reintroduces it as the mechanism of ownership. Whether that matters depends on the scenario being hedged against.

## Gold futures

A futures contract is an agreement to buy or sell a specific quantity of gold at a specified price on a specified future date. Most traders close positions before expiry rather than take physical delivery. Futures are used for hedging and speculation.

Advantages: leverage (large notional controlled with a smaller margin deposit), deep liquidity, and defined expiry. A mining company hedging its forward production sells futures to lock in today's price; this is one of the most natural uses.

The counterparty is the exchange's clearing house, which manages margin and stands between buyer and seller. This reduces but does not eliminate counterparty risk. Futures prices converge to spot at expiry; between dates they trade at spot plus the cost of carry (the "basis"), which signals physical tightness when it moves unusually.

## Tokenized gold

Tokenized gold is a newer category: blockchain-based tokens backed by physical gold held in custody. The token represents a claim on a specific quantity of gold (often 1 troy ounce per token or a fraction thereof), and in theory the holder can redeem the token for the underlying metal.

The appeal is combining properties of physical gold (explicit metal backing, fractional amounts, redemption in principle) with the transferability of a digital asset. Tokenized gold can be held in a self-custodied crypto wallet, sent peer-to-peer, and used in decentralized finance protocols as collateral.

The counterparty analysis requires examining each specific token: who custodies the physical gold, whether it's allocated to specific bars, what the redemption terms are, whether the backing is verifiable and audited, and what happens to your claim if the token issuer ceases operations.

Tokenized gold adds a layer (the token issuer and blockchain infrastructure) while potentially removing others (exchange or broker). Whether the net effect suits your situation depends on how much you value digital transferability versus how much you trust the specific custodial arrangements.

## Choosing the right form

For pure price exposure with maximum liquidity and minimum friction: an ETF from a major fund family.

For price exposure with leverage and hedging of future production or purchases: futures.

For ownership that survives financial system stress without depending on any institution: physical bullion in allocated storage or direct possession.

For digital-native transferability combined with gold backing: tokenized gold, with careful attention to the specific issuer's custody arrangements.

These are different instruments serving different purposes. They track the same price most of the time, which makes it easy to assume they're equivalent. Under stress, the differences show. The question of whether gold as a whole hedges inflation — across any of these forms — is addressed in [Does gold actually hedge inflation?](/blog/gold-inflation-hedge)