What are the Disadvantages of Investing in Gold
If you’ve been tracking the value of your IRA and following the IRA market in general, you probably know that gold IRAs are a popular retirement investment these days.
They’re generally viewed as a great hedge against inflation and a growth investment in a down market, and there are now dozens of gold companies competing for the attention and dollars of would-be investors.
But not all that glitters is gold when it comes to investing in this particular precious metal. There are some disadvantages of investing in gold and things you need to know about the risk/reward equation, so let’s dive in and delve into some of those.
The Capital Equation
If you’re looking for low-level investments that could pay off big, the gold market probably isn’t for you. There’s no such thing as penny stocks in the gold investment world, nor can you open a small gold-based savings account and watch your money slowly grow.
Gold is a high-value commodity, so you’ll need to bring some bucks to the table to be a player. If you’ve got an IRA or are looking to start a new one, that’s probably the best way to get in on the ground floor with gold, but beyond that there isn’t a lot of difference between the basic investment level to get established in gold, bonds, stocks or mutual funds.
The Storage Issue
If you’re buying gold bars or coins as part of your IRA, you’ll need to pay for storage, and this is a little more complex than just heading down to your local bank or self-storage shop.
Basically, you’ll have to deal with the IRS when you go to meet your storage needs if you’re doing a gold IRA. They have a list of approved depositories, and there is a fee to keep your gold there.
The other option where storage comes into play would be smaller-scale investments in gold jewelry, but these come with an entirely different level of risk. You can store it at home if you really want to, but in reality you’re playing in a very different market that’s far more speculative.
Like any other market commodity, the value of gold is determined by supply and demand. And while gold is viewed as a stable investment that’s ideal as a hedge of inflation in a down economy, there are also times when it’s a losing proposition (e.g., possibly during a strong bull market when other investment vehicles are far more lucrative).
In addition, gold generally doesn’t provide any kind of direct yield. The chances of getting dividends for a gold-based investment are limited, at best, so while the value of your gold IRA might grow significantly, you can only realize it fully when you cash out.
In addition, there are other competitive market forces that may actually decrease the value of gold. Cryptocurrency is one these days, and other digital assets are currently getting a lot of high-end play in the market as well.
The Liquidity Issue
If you need to be light on your feet when making your market investments, keep in mind that gold is definitely a heavy metal when it comes to liquidity.
Physical gold needs to be stored and transported, and generally speaking you’ll be paying higher transaction fees than you would if you were dealing in stocks that can be electronically traded.
Finally, if there is a minor or major collapse in the financial system, you’ll face the same liquidity issues as every other investor. It’s obviously a remote possibility given the general stability of gold over the years, but it is something that has to be taken into account in your investment plans.
The Stock Comparison
For many investors, the ultimate downside to investing in gold comes when you start comparing the return to that of stocks.
As good as gold is in a down market, if you look at the long-term numbers, it gets consistently outperformed by stocks by a wide margin, so if the economy rebounds suddenly and you’ve stashed a lot of your capital in gold, you could take a serious hit when it comes to potential yield.
While these negative may present a gloom-and-doom picture when it comes to investing in gold, it’s important to point out that we’re only considering one side of the ledger here. There are just as many pluses to gold investment, especially in today’s economic climate, and the reality is that gold can be a useful part of any portfolio strategy.