While investing in gold has very few disadvantages, there may be some risks. This Answer will break down some of the most common risks and provide initial steps to mitigate them.
For centuries, the warm glow of gold has been seen as a light in the dark acting as a hedge against inflation, but what about the risks associated with investing in gold? Some of the factors to be aware of when considering a gold investment include price volatility, income potential, and storage costs.
Risks Associated with Investing in Gold
Gold Price Volatility
Volatility around the price of gold and other precious metals is subject to the impact of speculative activity. Speculative investing can have short term influences on the gold spot price based on factors like geopolitical events, market sentiment, and economic news.
While gold is subject to these influences and others that may exert short term influences on its spot price, it is more stable than most other assets during economic crisis. This is due to its perception as a hedge against inflation. As more investors turn to gold in times of uncertainty, its price tends to stabilize.
Mitigating price volatility may involve multiple strategies, and each of these can carry its own risk, though most of these additional risks are minute. Dollar-cost averaging (DCA) helps mitigate pricing fluctuations by investing a set amount of dollars at a regular frequency.
It is worth remembering that factors like market sentiment can impact the gold price and to avoid making investment decisions based on emotions of the day. By setting a dollar amount and frequency, doll-cost averaging helps investors take full advantage of market fluctuations without giving in to emotional purchasing.
Gold Storage Fees
Storing gold at home increases the risk of theft. Some may argue that storing gold at home invites theft if anyone is aware of your portfolio. Mitigating this risk involves third-party storage options or an insurance policy fraught with complexity and high costs.
Paying to store gold is not free, and it is rarely cheap. Some businesses charge upwards of 0.7% per year to store gold, which may be prohibitively expensive for many investors.
There are ways to beat that price point with organizations like OneGold, which only charges 0.12% annually for gold storage. This would incur $120 per year for a $100,000 gold portfolio.
Counterparty Risks
One of the risks of storing gold and precious metals with a third party is that presented by counterparties. If a third-party storage facility closes, is not compliant with laws, or has poor operational history, it may not be able to safely store your gold. Mitigating this risk can be simple but requires thorough attention to detail and due diligence.
Read user reviews and ask questions about regulations, compliance, and insurance to mitigate this risk.
Gold Income Potential
One of the final risks of investing in gold is that gold does not generate earnings the way stocks and bonds do. Gold returns can be highly profitable, but the price must rise, and gold must be sold to generate those returns. Since the price of gold tends to grow slowly, there is potential for a lag in its price performance compared to other assets. If your goal is to maximize your returns over a short timeline, gold may not be able to meet your needs.
Adding gold to an investment portfolio can help diversify risk since gold does not always move in the same direction as other assets like stocks and bonds. As gold is considered a tier one asset, it is in the most stable category of investment classes.
