Gold certificate

A gold certificate could have two meanings where investors are concerned. The first, and official, meaning is an old document used to prove ownership of gold. They often look very similar to a US banknote. Gold certificates were issued by banks and financial institutions as proof of ownership for gold deposited with them.

As paper proof of ownership, they are easier to exchange and handle than the actual heavy physical metal. Gold certificates are rarely used today, but are sometimes still issued for inter-bank transfers, and very occasionally for consumer use.

Gold Certificate of Authenticity

Investors may also use the term gold certificate to refer to an assay card, or certificate of authenticity. As the name suggests, a gold certificate of authenticity is intended to provide an additional layer of authentication for a gold coin or bar.

This could form part of the packaging of a gold bar, or a separate piece of paper, and is considered an additional proof of the legitimacy of gold. Some refiners will choose to produce a gold certificate with their bars; however, many LBMA-approved refiners choose not to do this given they are subject to stringent checks as part of their membership.

An example of a pre-packaged and loose gold certificate.

In most cases however, a certificate of authenticity is not produced or provided when buying gold bullion. Mints – such as The Royal Mint in the UK – will produce a certificate of authenticity with their gold proof coins to confirm their legitimacy for collectors, as well as provide a number to confirm the limited mintage. Like most other mints however, their bullion coins do not come with a gold certificate.

Bullion coins are mass produced without unique serial numbers like bars, making a certificate fairly ineffective as there would be no way to link the specific coin to the certificate. Mints will instead stamp the gold’s purity onto the coin itself in most cases.

It’s always important that investors do not consider certificates of authenticity a guarantee of a genuine product. It is far easier to produce a fake certificate than fake gold. Testing the metal via something like an XRF machine, and potentially other methods as well, is the only way to truly ascertain the authenticity of a piece of gold, and dealers will always follow this principle, testing metals when buying them rather than trusting to the certificate. A certificate of authenticity is therefore not required when reselling bullion coins or bars and will have no bearing on the value of a bullion item.

What is a gold certificate

Gold and silver certificates were first used in the 17th century by goldsmiths in London and Amsterdam. They were issued as proof of ownership to customers depositing bullion into their safe-keeping. These gold certificates then began to be used like cash; they made it easy to exchange gold without physically moving the metal, which remained securely stored. The new owner of the certificate could then exchange it back to the issuer for the amount of gold specified, if they chose to.

Gold certificates were extensively used in the United States before 1934, and essentially operated as an alternative to normal currency. Very few gold certificates are issued today, having made way for simpler, modernised systems.

The use of gold certificates was possible because before 1934 the US dollar was fixed to a gold standard. A US Dollar bill was then itself exchangeable for a fixed weight of gold bullion, so a gold certificate was seen as just as good in many cases.

Large-sized certificates were used from 1865 to 1928, and a smaller size of notes was used from 1928 to 1934. They look very similar to currency bills, but all bore a gold or red stamp as a sign of validation. They usually had bright orange backs in order to differentiate them further from notes. A gold certificate could range in value, from $10 to $10,000.

By their very nature however, gold certificates did have drawbacks. Accidental double-printing, purposeful over-issue, forgeries, bad administration, and a failure to destroy replaced certificates were some of the problems that plagued gold certificates. Any of these problems could cause a certificate to not really be backed by an equivalent amount gold held somewhere, defeating the whole purpose and devaluing it.

An 1863 US $100 gold certificate, showing a red seal. Image courtesy of the National Museum of American History.

These serial numbered certificates lost their guaranteed worth in dollars when the US Federal Reserve Bank abandoned the gold standard in 1933. From then on, their value rose and fell with the gold price. Consequently, US gold certificates were little used after this date.

1928 twenty dollar gold certificate

When President Franklin D. Roosevelt abandoned the gold standard in 1933, gold certificates were required to be cashed in, but many were instead kept. The surviving certificates are now collectable items, and depending on rarity and condition they can fetch high prices.

A 1928 US twenty dollar gold certificate, showing a gold seal. Image courtesy of the National Museum of American History.

Gold certificates are now sometimes traded by numismatics who study or collect currency, including coins and paper currency. Gold certificates are of particular interest to those numismatics who also collect banknotes. The 1928 twenty dollar gold certificate, despite being a fairly common denomination, is particularly sought after for example.

A 1934 $10,000 gold certificate. As one of the last commonly issued gold certificates, this is a much sought-after numismatic item. Image courtesy of the National Museum of American History.

Uses of gold certificates

Gold certificates fall under the broad category of paper gold. Other paper gold includes Exchange Traded Funds, gold futures and even gold mining stocks. Paper gold is intended to function as an investment in the same way as gold bullion. Owning paper gold has advantages, but also many drawbacks when compared to owning the physical metal.

All paper gold is obviously lightweight and easier to handle than gold metal. The problem of paper gold is that owners rely upon the issuers or fund managers. They must trust them to fulfil their obligations.

In regards to trading today, we would always recommend someone own physical gold rather than a gold certificate. There is always a risk with paper gold that it is not truly allocated or backed by physical gold. In these cases, should the issuer become bankrupt, the certificate could become as worthless as stocks in a dissolved company. Buying physical precious metal means you can hold your investment in your hands, and you know unequivocally how much you personally own.