What Are the Risks of Investing in Gold?

The curiosity around gold investments—including Gold IRAs—has increased recently, especially with the current state of the economy. Investors are seeking potential ways to hedge against inflation and diversify their portfolios. Investing in gold offers a real opportunity to do just that. 

At Advantage Gold, we believe wholeheartedly in the value of investing in gold and other precious metals. But we also understand that there is an element of risk to Gold IRAs and similar investments. Risk is a reality with all investments, after all.  

Informed investment decisions require understanding both the pros and cons. A keen knowledge of the risks involved goes a long way toward ensuring you make the right choices. 

Let’s walk through some potential risks of gold investments and how Advantage Gold can help address those concerns. 

Potential Risks of Gold Investments

Is gold a risky investment? 

The short answer: potentially. Even though gold offers significant advantages, investors face exposure to several possible risks. The risks mount if they’re not fully informed about how gold investments differ from traditional ones like stocks or bonds.  

Whether you’re purchasing physical gold to store on your own or plan on placing those assets in a custodian-managed Gold IRA, consider the following risks: 

Inflation

While many investors purchase gold to hedge against inflation, there’s no guarantee that gold prices will increase along with the rate of inflation. What is true, however, is that gold prices have traditionally gone up as inflationary pressures increase. Owing to the rich history of gold as a trade material and currency, we have no reason to believe this trend will stop any time soon. 

Price Volatility

Gold prices are sometimes volatile and can fluctuate significantly over short periods. While this can be good if the price goes up significantly and you’re looking to sell, it can backfire if you need to liquidate your gold during a period when prices have fallen. Gold will always have value in the technology, industrial, and jewelry sectors, however, which means you’re likely to find a willing buyer. 

Fear-Based Investments

In some cases, individuals invest in gold out of fear rather than because they believe it’s an opportunity. This is because gold helps preserve wealth and hedges against financial uncertainty. It’s also a static asset. Instead of earning interest or dividends, gold’s value is derived from its current sale price.  

Too many investors speculatively turning to gold during uncertain times can artificially drive up its price, creating a price bubble that bursts and results in losses for investors. Further, investing in gold out of fear and ignoring other investment opportunities can throw your portfolio out of balance. The result: You miss out on potential gains from other investments. 

Insurance and Storage Fees

One of the most significant drawbacks to physical gold investment is paying for insurance and storage on those coins and bars. While these fees do add to the cost of gold investment, they are generally low compared with the benefits or potential gains of Gold IRAs. 

Counterparty Risk

Counterparty risk is a significant concern for those who invest in gold exchange-traded funds (ETFs) or other derivative-based exposures. These types of investments depend on another party’s ability to fulfill their obligations. When you buy a gold ETF, you’re not buying physical gold. Instead, you’re buying a share of an entity that owns the gold. If the ETF’s issuer defaults, you might lose your investment. This is counterparty risk. 

For many reasons, we suggest physical gold bars and coin investments through a Gold IRA over ETFs. Physical gold investment is free of counterparty risk. 

Counterfeit Gold

Ownership of physical gold carries the risk of inadvertently buying counterfeit goods, especially coins. That’s why it’s essential to buy gold assets from reputable dealers. Trust in the person selling you coins or bars is essential to making safe investments. Advantage Gold helps reduce this risk by connecting you with reputable dealers and helping facilitate purchases you can trust. 

Political Risk

Gold investment can be subject to several different political risks. For one, governments may change their policies regarding mining, export, and import of gold. That could change taxes or royalties on gold production, making it more difficult or expensive to mine. In addition, governments may nationalize gold mines and take control of them, often without compensating companies. This could lead to major losses. 

Finally, even though gold is a safe-haven asset, disruptions to gold production and supply changes could cause price spikes. These spikes may make it difficult to buy gold (or find willing buyers if you’re looking to sell).  

Economic Factors

Gold’s value as an investment is tied specifically to its value as a commodity. That does come with some drawbacks: 

• Interest rates: Gold doesn’t offer interest or dividends. As interest rates rise, other investment options like bonds or savings accounts become more lucrative (and more popular). This could lead to lower gold prices. 
• Inflation: Most of the time, investors view gold as a hedge against inflation. But if inflation rates are lower than expected, gold demand can decrease. 
• Economic growth: Economic growth is generally good for consumer confidence and riskier investments. That could reduce the demand for gold. 
• Currency fluctuations: Because gold is priced in U.S. dollars, a stronger dollar might make gold more expensive for investors using other currencies. That may also reduce demand. 
• Investor sentiment: The perceived value of gold is subject to the influence of investor views on the economy. Poor consumer confidence or weak job reports might drive investors away from gold. 

Benefits of Investing in Gold

Even with its potential risks, gold investment is still a worthwhile pursuit for many. Buying physical gold offers many benefits, including: 

• Protection against currency fluctuations: Gold is a store of value during inflation. When the value of currency decreases, the price of gold usually increases. 
• Portfolio diversification: Adding gold to your portfolio can insulate you against risk. Because gold moves independently of stocks and bonds, a downturn in the market has less chance of impacting your gold investments. 
• Tangible assets: With gold, you have something you can hold in your hand. That’s a sense of security stocks and bonds don’t offer. Because there’s no counterparty risk, another party defaulting won’t impact your gold investment. 
• Safe-haven assets: During times of economic uncertainty, gold is a safe-haven asset. It typically maintains its value even as other investments perform poorly. As a bonus, you can use some gold coins as legal tender or sell them to others. 

Are Gold Investments Right for You?

The decision to buy physical gold—either as part of an IRA or to collect and store at home—is a personal one. Consider the pros and cons before investing. In many cases, you’ll find that physical ownership of gold and other precious metals can provide peace of mind and tangible benefits that other investments may not. 

If you’re ready to buy physical gold for your portfolio, Advantage Gold can help. We can walk you through setting up your Gold IRA and rolling over funds from another retirement account. Or we can help you procure the physical gold you want for your collection. 

To learn more, request a free information packet or call us today for more details.