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Diversifying your investment portfolio with a low-risk asset is how you protect your wealth amid economic uncertainty. If you’re considering investing in gold but are unsure of its portfolio risk level, you’ve come to the right place. While gold may have the reputation of being a safe haven investment asset class, we will explore whether or not this is true below.
Like other investment classes, you can invest in numerous types of gold with varying risk levels. This article will explore the risks associated with investing in gold in general, physical gold products, gold ETFs, and gold amid economic uncertainty. While you may use this information for educational purposes, please speak with your financial advisor if you’re seeking investment advice.
What Are the Primary Risks With Gold and Other Precious Metals?
Gold, silver, platinum, palladium, and other precious metals are typically a safer asset class because they’re intrinsically rare, high in demand, and low in supply because of mining limitations. Of all the precious metals, gold has the longest history of steadily rising with only short-term, temporary price dips.
On January 1, 1970, an ounce of gold was worth $35, while at the beginning of January 2023, the price was over $1,870 per ounce. During this 50-year period, gold prices may have occasionally dipped, though they generally trended upward with minimal price volatility.
While gold may be a generally low-risk precious metal to invest in, owning gold may still come with a few risks. If you’re thinking about a gold investment, you should consider the following:
- Opportunity cost: If the primary aim of your investment portfolio is to secure a potential hedge against inflation and protect your buying power with an asset that may not appreciate in the short term but offer long-term gains, you may be satisfied with a gold investment. Conversely, your risks may be higher if you want to make a lot of cash as soon as possible by taking your chances with price fluctuations.
- Taxes: The IRS considers physical gold and many gold ETFs and gold stocks to be collectible assets, meaning investors must pay the capital gains tax of a maximum of 28%. Some investors invest in gold through IRAs and 401(k)s to minimize these tax risks.
- Liquidity: Gold coins are not legal tender everywhere, so when you’re ready to use your wealth, you’ll have to pull out your investment and sell it for the gold market spot price, which can take some time. Some investors buy gold from suppliers to expedite this process, which often includes storage and instant liquidity upon withdrawal.
What Are the Storage and Security Risks of Investing in Physical Gold?
Physical gold investments allow you to invest in a tangible asset, which reduces the counterparty risk from other organizations but creates additional storage complications. The primary risks associated with physical gold investments include the following:
- Storage risks: Gold bars, coins, and other types of gold bullion are typically worth a lot of money, so you must store them properly to reduce theft, vandalism, and damage risks. You can pay for vaulting services that secure your gold coins and gold bars for you, but you’ll have to assume the monthly or annual fees. If you store your gold investment at home, a simple break-in could destroy your wealth.
- IRS requirements: When using gold assets in an IRA or similar tax-advantaged account, you must adhere to various IRS storage requirements. For example, investors must use an IRS-approved vaulting facility and depository, which will likely be making charges on a monthly or annual basis.
- Insurance costs: To protect your gold investments, you may purchase insurance, or it may be included with whatever vaulting service you choose. Be prepared for these companies to make charges when you buy gold.
How To Store Gold Coins To Reduce Risks
If you want to reduce the risks associated with your physical gold investments, you can take a few steps to protect your bullion. First, you should only invest in gold through a certified provider that may also offer storage options upon purchase. After buying gold, choose an IRS-approved storage facility that includes insurance on your investment value.
Investors may choose to store smaller gold investments at home. If you do so, you should keep items in a locked and secured safe. Be sure to select companies that provide insured, secured, and discreet gold deliveries to your home.
Risks of Investing in Gold ETFs and Other Non-Physical Assets
If you don’t want to deal with a physical gold investment, you have quite a few other options to choose between, including the following:
- Exchange-traded funds (gold ETFs): Gold ETFs invest in the gold asset class market without needing to physically store or handle the yellow metal. Some ETFs work like paper gold, tracking the current price of gold, while others invest in gold-mining companies.
- Sovereign gold bonds: Sovereign gold bonds are securities issued by the government in gram denominations that can also essentially work like paper gold.
- Gold mutual funds: Gold mutual funds allow investors to invest in gold reserves. With a gold mutual fund, you’re typically placing your investment in a gold-producing company. Often, mutual funds work like stocks.
- Mining stocks: Mining stocks also allow investors to place bets on publicly traded mining companies rather than the actual price of gold, which can have the appeal of paying dividends.
The primary concern with all of the above investments is counterparty risk. Rather than solely focusing on the price of gold, retail investors must also worry about risks associated with the involved companies, the stock market, geopolitical risks influencing prices, and more.
Is Investing in Physical Gold Riskier Than Other Gold Investments?
While physical gold may have storage risks, you can easily overcome them by choosing a secure vaulting facility. Physical gold prices are historically more reliable, less volatile, and lower risk than other assets like mining company stocks. For example, a simple controversy with a mining company’s CEO could sink your investment value, though it wouldn’t impact rising gold prices.
How Gold Prices Respond to Market Uncertainty
The price of gold typically increases with rising inflation and poor economic conditions. As the economy fails, investors seek low-risk assets to protect the value of their money. Unlike other assets that typically fail when the market crashes, the price of gold thrives during inflation and other poor economic periods as the demand skyrockets.
For example, the Great Recession began in December 2007 when gold was approximately $798 per ounce. By August 2011, the gold price per ounce reached $1,770, displaying a 121% price increase in just under four years.
Using Gold as an Inflation Hedge
Inflation occurs when the value of money decreases. If you place your money in a basic account, it becomes less valuable with high inflation rates. Investors use things like gold to hedge against inflation because it gains value over time, allowing it to exceed the depreciation rate of inflation.
Essentially, when you invest in gold and its price increases over time, the value of your money can combat rising inflation. Gold as an inflation hedge is one of its primary appeals. Investors typically don’t use gold for immediate wins, as they might with risky cryptos or stocks; instead, they use it to protect the value of their cash.
Is Gold a Good Long-term Investment?
Whether gold is a good or bad investment is something you should consult your financial advisor about. Many investors consider gold to be less risky than other investment options. Gold tends to gain value over time without high volatility or price fluctuations.
Gold performs best in the long term. Investors can typically yield the highest returns by carrying their investment for multiple years rather than a few months.
The Advantages of Investing in Gold
Investing in gold offers the following advantages:
- Decades of gold price history on record
- Numerous investment options
- Security when the economy fails
- Long-term gains
- Reliable demand levels from numerous industries
- Ample educational resources available online
- Access to certified sellers
- IRS-approved tax-advantaged retirement accounts
Diversify Your Portfolio With Oxford Gold Group Today
If you’ve decided that gold is the right move for your investment portfolio, you’ve come to the right place. At Oxford Gold Group, we provide various gold products and accounts, including physical gold bullion, IRS-approved gold-funded retirement accounts, and more. We provide numerous precious metal options, including gold, silver, platinum, and palladium, allowing you to invest in your future with a safe, reliable, and tangible asset.