January 28, 2013 by Liberty
With countries around the world printing more money and building more debt than ever, it’s no surprise that the price of gold is looking so high. Gold is the classic choice for the investor that’s trying to protect their money from the damage of poor monetary policy. It has a reputation for being hoarded by the pallets of bars by the richest people in the world. It’s one of the most desirable materials and the world and it certainly doesn’t look like that will ever change.
Gold prices have been rising fairly consistently and that can make gold investing look like a really good idea. While, all portfolios are different, gold investing can be a very effective means of making short term profit while protecting your money in the long term. It also comes with a number of different risks that most new investors aren’t prepared to handle.
1. Market Risks of Gold
Just like any other investment on the market. Gold has its own share of market risks. Despite a good record throughout history, the price of gold has gone up and down and it’s not all due to government monetary policy (correlation not causation.) The popularity of gold changes on a regular basis for any of a million different reasons. This affects the price in a way that is not completely predictable.
Bear in mind, the world isn’t run in a completely free market style today. Government intervention can create bubble risks, even in the gold market. Right now, gold is floating high but you can’t count on it staying that way at all time. No amount of government corruption and poor policy can ever guarantee that the price of gold will go up. It will always hold a natural risk.
2. Gold Doesn’t Produce Income
When you’re investing in stocks, or real estate, or just about anything that isn’t a commodity, you’re investing in something that is producing income. This income production is where some of the investments value comes from. This is a natural diversification of the value of your investment.
Gold does not produce an income without market fluctuations. The gold that you buy will sit and do nothing for you unless the market changes.
3. Government Risks
Many people invest in gold because they think that it will be useful if the government around them, having taken all these monetary risks, collapses. If everything collapses then gold can be an effective means of retaining value despite completely useless money.
This is all well and good but you need to understand that government has taken everyone’s gold before and if anything goes too haywire, there is no reason to expect the government not to do the same again. All the gold in the world doesn’t matter if people come to your house with guns to take it away. History has given us enough examples about gold seizure to know that it’s still a possibility for the future.
4. Opportunity Cost
While holding onto gold and waiting for an economic collapse, there are a number of investments that you can use to actually produce income today. The income produced today could be used to buy more gold before everything goes downhill. Or it could be used in a way that’s similarly immune to economic shocks.
You don’t want your gold investing to get in the way of making more money for the long term. There are risks in gold just like any other investment but other investments can also provide a good return on income today, even if it is just for the short term.
5. Costs of Buying
The price above spot on gold can be very expensive. You can end up paying a significant amount of money just to get your hands on the gold before you even get the value of it. Gold investing is a very hot thing right now and many companies can get away charging a ton and still get people to buy it.
There are some cheap options but they often are fly-by-night operations that add plenty of additional risks to the transactions. It’s often a lot better to spend the extra money for a company with a good history of providing the correct amount of gold for the money that you spent. If you’re not an expert then most of the time, you won’t even know if you’ve been taken advantage of.
6. No Practical Value
Short of you having your own major industry, there is little practical value in buying gold. You can’t eat gold. You wouldn’t want to use gold for a tool. You’re able to get a rock to throw at someone for free. There is little practical value in gold for the average person. If everything goes wrong in the economy then gold won’t immediately help you.
While some “underground” gold economy could be built, very few people would actually be looking to get gold. When you need to have food on your table, the value of your gold will be diminished. The stores wouldn’t have to give you a fair rate because the value of practical things like food pose a much more significant benefit in the short term. Gold is something that they might take but it won’t be the average person’s first choice.
7. Holding Risks
Gold is known to have a significant value in small quantities and with that, it is an amazing thing for someone to steal from someone else. It provides a very effective theft bang for their buck. You need to be able to store your gold in a way that has little to no risk of theft. When I say that, you also need to worry about trading gold through paper. Just because a company promises you that you have access to the gold, it doesn’t mean you actually do.
If you’re investing in paper gold investments or physical gold investment you still need to worry about people taking advantage of you.
Should you buy gold?
You might notice that a lot of these risks are inherent in just about anything that you chose to invest in. Whatever you invest in, you need to worry about market risks, holding risks, government intervention, etc. All investments come with certain risks. Gold is not immune to these risks.
I would recommend that everyone have a little bit of precious metal in their investment portfolio. That means it can be gold, silver, platinum, or just about anything that has some practical value in relatively small quantities. If you have the money then you should probably be investing a little bit of money in more than one type of metal. This can diversify your ultimate investment risks significantly and ensure that, no matter what happens, you have an effective means of surviving anything.