Gold has stood the test of time over the years as an asset class that investors turn to during times of economic adversity. Gold has never been seen as an investment vehicle that generates extremely quick returns. Infact, investors need to stay invested for a medium to long-term horizon to book profits. So, the question on everyone’s minds is – how safe is an investment in gold
2011 witnessed the yellow metal achieving its highest peak historically. During that time, the spot price of gold crossed the $1900 barrier. At the time, the global recession was also at its highest. The collapse of Lehman Bros signalled the beginning of this dark phase for the global economy. The demise of several UK banks followed in quick succession. It was abundantly clear from the gold price trend that investors moved their money to gold in search of a safe haven. Interestingly, as the world plunges once again into a possible economic catastrophe, the spot price of gold has already crossed the $1400 mark.
There are numerous factors that established gold as a safe investment vehicle. The lack of counterparty risk is one of them. Counterparty risk is present when an investment you make is dependent on fulfilment by a third-party. For example, investing in direct equity implies that you are putting your money into a listed company. To generate returns, that company must perform.
Similarly, when you invest in a gold ETF, the exchange-traded fund needs to perform in the market for you to realise your investment. When that does not happen, the value of your investments can sink to nothing. Almost every market-linked investment vehicle carries counterparty risks. However, when you buy physical gold, you possess a tangible asset that you have taken ownership of. It is not linked to the delivery system of any company or market. Therefore, counterparty risks are non-existent.
The gold price can go down as well as up, depending on supply and demand. Over the short term, there’s the risk that your investment could fall in value. Over the medium to long term, gold has proven to increase in value quicker than the inflation rate, proving to be a reliable store of wealth. Buying in paper form, like ETFs, gold futures or gold shares, poses further risks with leverage and counterparty exposure. Owning gold investment coins and bars negates both these risks.
It’s important to note that gold prices have never collapsed over the medium to long-term. It is a defensive asset class that provides steady, long-term returns. Most asset classes that provide quick returns are risky, on the other hand. A quick look at the gold charts reveals that gold is not just a safe investment in times of trouble. The spot price of the yellow metal was under $400 way back in 1996. From these modest prices, it hit an all-time high in 2011 and then settled down to $1600 levels by 2012. An asset class that quadruples in value over a 20-year horizon is certainly a safe investment. Additionally, it is capable of unlocking great value and generating steady returns.
Our investment advisors can answer your questions and provide you with unbiased information backed by solid research. All you have to do is to get in touch with us on (020) 7060 9992 or contact us online. Our team looks forward to hearing from you and are happy to answer any questions you may have.
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Daniel Fisher formed physical Gold in 2008, after working in the financial industry for 20 years. He spent much of that time working within the new issue fixed income business at a top tier US bank. In this role, he traded a large book of fixed income securities, raised capital for some of the largest government, financial, and corporate institutions in the world and advised the leading global institutional investors. Daniel is CeFA registered and is a member of the Institute of Financial Planning.