Generically, a Gold Certificate is simply a form of documentation that confers ownership rights on the holder to a specified amount of physical gold.
Such an arrangement theoretically gives exposure to physical gold, without incurring the costs and drawbacks of assuming the secure physical storage of the gold themselves.
As later noted, however, the rights to the gold specified on a Gold Certificate are rarely completely unqualified and separate costs are typically assumed in acquiring and transacting them. Nevertheless, Gold Certificates maintain a consistent, if niche, presence in the gold investment market today.
Most of the Gold Certificates issued historically are now invalid in respect of their notional claim on the underlying gold. However, many of these might still be of interest to collectors and some hold a significant numismatic value.
The products described above should not be confused with a certificate of authenticity, or assay card, that is often provided with gold bars and coins as additional proof of specification and origin.
The Origin of Gold Certificates
Gold certificates have a recorded history of some 400 years. In their original form, goldsmiths in both Amsterdam and London issued them as proof of ownership to customers depositing gold into their safekeeping. Thus, these certificates acted as both a specific form of a physical receipt and as a certificate of deposit.
While these early certificates might have been somewhat susceptible to theft, fraud or simple maladministration, their potential as a medium of exchange was soon recognised. It was not long therefore before these ‘gold certificates’ were being used as a currency in their own right. This integration was further supported by the fact that by the 18th Century, many countries had officially adopted or operated a de facto gold standard.
Under these conditions, it is perhaps not surprising that national governments would eventually take an interest in the potential of Gold Certificates. Indeed, the US Treasury in particular eventually became an avid issuer of such instruments.
The 1928 Twenty Dollar Gold Certificate
The US Treasury issued Gold Certificates first in 1865 and, like their forebears, were intended to be simple certificates of deposit. Each certificate gave its holder a claim on a quantity of gold equivalent to the dollar face value of the note at a fixed rate of $20.67 per troy ounce. These first US Gold Certificates soon proved popular for use in gold wholesale markets, with merchants and banks being early adopters.
Between 1865 and 1934 the Treasury issued nine series of notes, most of which were in large denominations. However, there was a trend of increasing use in general commerce. 1907 saw the issue of a $10 Gold Certificate note, while in 1919 Gold Certificates were made US legal tender.
The high watermark for US retail investor adoption arguably came after 1928, when the Treasury issued the first small-size Gold Certificate notes. The $20 denomination proved particularly popular as, at the time, it represented a claim on approximately one troy ounce of gold.
However, the Gold Certificate market suffered an abrupt reversal in 1933 when the US, mired in the Great Depression and facing a banking crisis, was forced off the gold standard. Fearing that gold would be hoarded by the public under these circumstances, the US legislated to make private holdings of gold, or claims on gold such as Gold Certificates, illegal.
Holders were forced to redeem their Certificates at face value in US dollars, rather than the dollar value of the gold, which had by 1934, risen to $35 per troy ounce. It was not until 1964 that the US ban on holding Gold Certificates was lifted.
Gold Certificates Today
Gold certificates can be issued against either allocated or unallocated gold. Allocated Gold Certificates are fully backed by gold inventory and certificates will specify which part of this inventory is the property of the certificate holder. The certificate issuer cannot unilaterally sell or pledge this gold, and in the event of the issuer’s bankruptcy, this gold remains the property of the certificate holder.
Allocated Gold Certificates generally charge higher fees than their unallocated equivalents, much of which goes towards the storage, insurance and administration of the allocated inventory.
Conversely, unallocated (or ‘pooled’) Gold Certificates are not fully backed by a specified gold inventory, but by the certificate issuer’s own gold inventory. Thus, the level of collateral backing unallocated Gold Certificates can vary greatly. Moreover, this unallocated inventory remains the property of the issuer.
Unallocated Gold Certificates are generally less costly than their allocated peers, reflecting both the greater risk assumed and that the issuer is storing its own gold. In practice, the vast majority of gold certificates issued today are issued on an unallocated basis and in a dematerialised (digital) form to enhance security.
Where are Gold Certificates found?
Banks primarily issue Contemporary Gold Certificates in countries such as Germany, Switzerland, France, and even Vietnam. These are usually issued with a prospectus, which details the obligations of the issuer, the benefits and risks to the subscriber and any other legal considerations such as restrictions on subscriber eligibility.
Pool (unallocated) programmes are also operated by investment companies in both the US and Australia, which can be accessed both directly and via brokers. Some mints also issue Gold Certificates.
Historically issued Gold Certificates are collector’s items of varying rarity and value. These can be sourced through much the same routes as collectable coins, such as traditional and online brokers and dealers and private sales through online platforms and public auctions.
This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.
