Lack of Liquidity and Transaction Costs
Gold is a precious metal, so it is not surprising that many consider it a good investment opportunity. Many investors seek to invest in gold because it is seen as an opportunity to diversify one’s portfolio. Unfortunately, the fact that gold is one of the most ideal investments or one that never depreciates is only a myth.
So, to address this myth, this post will discuss some of the disadvantages of investing in gold and what you should look out for when you want to invest.
Cons of Investing in Gold
Storage Problems
Physical gold needs to be stored. Unlike other forms of investments or alternative forms of gold investments like gold ETFs, physical gold needs to be stored because it is a tangible asset. And that can come with a lot of hassle.
Gold is usually stored in a private safe at home, a private vault or a safety deposit box at a bank. A private vault service or deposit box is more likely safer than keeping it at home, but they don’t come without their challenges. One challenge is that they require additional costs, which can add up.
For instance, you would need to pay for the services of storing it in a private vault or deposit box. There are also insurance fees to cover for damage or theft, as well as the cost of transportation when you need to access them. All these costs add up and may end up reducing your returns.
Unstable Gold Prices
There is a belief that gold always appreciates; this is a myth. Like all investments, it has its own risks and can be impacted by market volatility. Unfortunately, gold prices are not free from external factors, such as global economic downturns, competitive market prices and the financial system.
The global economy is almost always volatile, and a sudden change can sometimes affect the market for precious metals, including gold.
Jewelers setting competitive prices can also affect gold prices. When different jewelers set more affordable prices to attract customers, it can reduce the value of gold in the market.
Additionally, the financial system is known to be unstable, which in turn influences the value of gold. For instance, the volatility of the US dollar, the demand and supply of gold and even the stock market have been known to affect the prices of gold.
Lack of Regular Income
Gold investment is probably not ideal for investors seeking passive income. It doesn’t provide steady income like other investment opportunities. For instance, stocks and bonds give you dividends, and you could get rent from investing in real estate.
But with gold investment, income doesn’t come as regularly. If you prioritize steady income, gold might not be the right form of investment for you.
Fees and Expenses
As mentioned earlier, gold does attract fees and expenses that could eat into your returns when they add up. One such expense is the transaction fees that are usually required when buying or selling gold from dealers.
Besides that, purchasing paper gold, such as gold ETFs and shares, may attract brokerage fees from brokers. And, as already mentioned, you would probably need to pay for storage services as well as insurance fees.
Liquidity Issues
Another disadvantage is the liquidity issue. If you are an experienced investor, you likely already know that the liquidity of an asset affects the value of said asset because it means there are buyers and sellers of such asset.
However, gold is only one of the liquid assets out there. Many people keep gold as a fashionable item rather than one to trade, reducing its liquidity and value.
No Bank Interest
Bank accounts usually attract interest. Even savings accounts, which are the least financially valuable accounts, get a little interest. Gold, on the other hand, doesn’t attract any interest whatsoever. Banks do not offer interest on gold saved with them, and you get none if you save it at home or in a private vault. Instead, it incurs additional costs.
Dos and Don’ts of Investing in Gold
This does not mean that investing in gold is all bad. There are still certain advantages. For instance, it is indeed a good way to diversify your portfolio if you already invest in other assets. Plus, it never rusts, so it can be kept and sold anytime. However, you need to pay attention to the dos and don’ts below to safeguard you against the potential risks of investing in gold.
Dos
Research: You should always conduct extensive research before investing in any asset. Read up on the potential risks of investing in gold and conduct research on reputable dealers to avoid falling into the wrong hands.
Compare prices: You want to make sure to get the best deal when buying gold. So, don’t just buy with the first dealer you come across. Compare the prices of different dealers before you make a purchase.
Find secure storage and insure gold coins: Gold is valuable and prone to be stolen. So, before you consider buying, find the best and most secure storage for your gold coins. You should also insure your coins against damage or theft.
Don’ts
Buy physical gold if you have no storage: Continuing from the above, it is not advisable to buy physical gold if you don’t have a secure place to save it. Instead, you can opt for a gold ETF or mutual fund. In this case, you invest in funds that invest in gold or mining companies. Or you could buy the stocks of mining companies. Of course, in each case, make sure you do extensive research before going ahead.
Invest without understanding the market: You should never invest in what you don’t understand. Make sure you understand all the terms and financial jargon that come up before putting in your money.
Invest more than you can afford to lose: Investment is not a get-rich-quick scheme; it is always a risk. So, don’t invest money you cannot afford to lose. Only invest money you are keeping aside and have no immediate use for or wouldn’t drive you into depression if you lose.
Conclusion
Investing in gold is less worthwhile than it looks on the surface; it has a lot of challenges. However, if you do decide to invest, make sure to invest smartly.