The term 'Gold Certificate' is included in the Investments edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Choose your edition here...
A Gold Certificate refers to the world’s original paper bank notes. Beginning back in the 1600s, such certificates based on gold became first issued by various goldsmiths in both London and Amsterdam to their customers who would deposit their gold bullion with them for safe keeping. Such gold certificates became proof of the ownership of gold. After some time elapsed, such certificates became passed from one hand to the next in transactions much like cash. It avoided the inconvenience of needing to withdraw and physically transfer over the gold bullion which was bulky and expensive to ship and protect.
By the middle of the 1800s, the U.S. Treasury started offering gold certificates which people might then exchange with them for gold from within the Treasury vaults. They actually circulated as legal tender in the United States all the way through 1933. At this point, the American federal government outlawed the ownership of private gold within the U.S.
Even though they are no longer legal tender anywhere in the world nowadays, gold certificates still exist today. A few Swiss and German banks keep issuing them. Gold pool investment programs in the United States and Australia also issue such certificates. As in the earliest days of the certificates, the gold certificates today represent an ownership stake in a specific amount of gold bullion coins or bars in a vault. The gold owner receives the certificates and is then able to avoid the very considerable costs of gold trading, delivery, insurance, and storage.
Investors seem to have an ongoing love affair with gold certificates four hundred years later after they first appeared. They provide a feeling of comfort from an expensive piece of paper that stands for something of actual tangible value. Yet the critics of the concept abound. They claim that there can be many issues with such certificates. The issuer might have mistakenly issued a duplicate certificate or over issued them by accident. There are also hard to tell fakes and forgeries, poor administration, elimination of older certificates, changes of address issues, and more which can cause them to be worthless or contested.
In their defense, such certificates are now mostly also updated online in accessible databases as the gold pool publishes a daily list of gold owners which is easily accessible via the Internet and proves who owns what from the gold vault hoard. This method often utilizes nicknames to maintain the privacy and anonymity of gold ownership, which is extremely important to many holders of gold today.
The problem with gold certificates nowadays is that they represent unallocated gold claims to convert real gold into ownership through physical allocation when the investor surrenders the certificate and pays the considerable costs of transfer. Many investors and analysts do not like unallocated gold because of these limitations. Those who own unallocated gold are actually creditors to the gold pool since the gold ownership is merely a balance sheet item when all is said and done. This exposes the certificate holders to the potential insolvency of the company which owns and manages the actual gold pool over the longer term.
This is not to say that some government-guaranteed gold pools do not issue good gold certificates which investors can bank on today. The best known, most respected, and safest of these is undoubtedly the Perth Mint Certificate Program. They issue good certificates for gold coins and bullion bars which are actually there inventoried and audited independently in the vault and can be claimed upon demand and surrendering of the appropriate certificates.