What Risks are Involved in Gold Investment

Gold is one of the world’s oldest asset classes that investors have always depended upon. It is seen as a generally safe asset class that acts as insurance for your investment portfolio. The yellow metal provides safety and security for investors and generates steady returns over the short term. Due to these attributes, investors have repeatedly turned to gold during times of economic uncertainty. Many investors consider gold as removing risk from their lives. The price of gold also beats inflation and protects the value of an investor’s portfolio from depleting. So, we need to understand the risks of gold investment. How do investors perceive these risks and what are they

The risk of gold investments

While deemed as low risk, gold investment isn’t completely risk-free. The first risk is that the gold price moves lower in the time you hold the gold, known as market risk. This becomes less likely over the medium term, as any market volatility is ironed out. If buying paper gold, there are further risks such as possible leveraging of the asset and counterparty risk.

Counterparty risk

When you invest in physical gold bars and coins, you are free from counterparty risk. This is a risk generally associated with investments that are dependent on the fulfilment of a transaction by a third party. If there is a crisis in the market or the company that has issued you the paper gold performs poorly, the value of your investments could erode. In such cases, the value may drop to zero, in a worst-case scenario. However, the market price of gold has never fallen drastically over the last 20 years. Gold is an asset class that is free from counterparty risks and holds an intrinsic value.

Market risks of gold

The price of gold can rise or fall due to market demand. Gold is traded in the international markets at a daily price, known as the spot price. The spot price of gold is calculated in US dollars per Troy ounce. There may be price fluctuations over the short term, however, gold has always posted healthy returns over the medium to long term. The price of gold rises in value faster than the inflation rate over the medium to long-term horizon. Therefore, investors view gold as a dependable store of wealth. If we look at price charts of gold over the last 10 years, we can see that the price of gold has never gone below $1,000 per ounce during this time.

Gold price movements

During the mid-1990s, the price of gold was quite different from what it is now. In 1996, the gold price was around $400 per ounce. Then, it rose steadily due to demand from investors. Over the next 20 years, the price of gold escalated by four times its price in the mid-90s. The price of gold started moving up around 2005. It reached the $1,000 mark in 2009. By this time, the world was in the middle of the 2008 financial crisis. Investors were moving their money to gold. In August 2011, it crossed the $1,900 mark. At the time, it was the highest peak. Then, in 2020, gold breached the $2,000 mark and is currently priced at $1,780 per ounce.

Talk to the experts at Physical Gold about gold investments

Physical Gold is one of the nation’s most trusted gold dealers. We are always proud to serve our customers and our advisors would be happy to discuss your investment plans. Call us on (020) 7060 9992 or reach out to us online via our website.

Image credits: Marco Verch and Jeremy Schultz

DANIEL FISHER

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.