Comment by _heimdall

The concept of "paper" assets isn't specifically about whether you hold physical custody of the asset, its whether the asset exists at all.

If the US holds 100 tons of gold on behalf of another country and possesses that full amount, it isn't paper gold.

Derivatives are where paper assets come into play. You buy the right to own 100 tons, for example, and whoever owes you that either owns only a fraction of their total liability or plans to buy it when delivery is requested. That's an over simplification of a much more complex market, but the key is that "paper gold" owed doesn't exist in the full amount.