Is investing in gold risky?

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When is comes to investing in gold and other precious metals there are many questions and uncertainties investors face, especially regarding the risk involved in gold investments, especially when it comes to physical gold, So is investing in Gold Risky?

Investing in physical gold comes with risk, and sometimes more than just the risk of the changes in price, you also must also deal with the risk of loss, and while gold is often considered a “safe haven” investment, there are costs and financial risks involved in investing in these metals.

That’s what we will cover in this article, the risks involved in investing in gold be it physical or in financial securities, including costs, price changes, loss risks and other risks.

Risks of investing in physical gold

The first thing investors should know when investing in physical gold is that direct investment in gold and other precious metals are not covered by the Securities Investor Protection Corporation (SIPC).

That is why whenever you think of investing directly in physical gold through buying gold bullion you should consider getting insurance for your gold to mitigate part of (if not all) the risk investing in physical gold.


Storage Costs

There are many costs involved in investing in physical gold, one of them are storage costs and depending on whether you store the gold yourself in a vault of your own or store your gold in a banks’ private storage vault the cost of storage and the risk involved can vary a lot.

For example, these would be the storage fees if you were to purchase gold and store it in GoldSilver (a private precious metal storage company):

Account SizeMonthly Allocated Storage Fee
$6,666$4 minimum

Gold Purity Risks

The actual value of gold lies in its purity, and this is measured using the ‘Carat Scale’ with 24k being the purest form of gold available.

Purity concerns can be avoided If you purchase gold from a reputable and trustworthy gold dealer, but let’s say you got a really good deal on some gold bullion bars you are being offered by a random third party, but you are not sure if the bar they are selling you is actual gold or maybe they’re lying about the purity.

The best way to ensure you are not being scammed by a third party that’s not an official gold broker then would be to do a simple gold purity test.

We have an extensive article on how to know if your gold is pure. It shows you how to test for gold purity at home easily so you might want to check it out, just follow this link

How to test gold purity

Here is how you can test gold for purity at home with some vinegar: Place your jewelry on a table or hold it in your hand, pour some white vinegar on the metal directly (a dropper can also be used) if the metal of the jewelry changes its color, it is not pure gold and if it keeps shining then you have real gold in your hand.

Furthermore, you don’t have to stress about purity concerns if you invest in gold securities like ETFs that track the price of the underlying asset which in this case, is gold.

Price Changes

Gold is affected by many different factors but above all the Fed’s interest rates have the most power over gold price action.

But although gold is vulnerable to more corrective moves when the Fed tightens its monetary policy especially due to inflation, geopolitical tensions and global slowdown concerns might affect global gold prices.

Other metrics like the US consumer prices and supply and demand do affect prices and the risk might be higher when there is an oversupply, and the stock market is booming.


Another risk when it comes to investing in gold is liquidity and while gold is indeed one of the most if not the most liquid commodity there is on the market, dealing with physical gold can sometimes become an issue when it comes to selling it for a profit.

But even then, your gold can easily convert to cash if you sell if through an online broker or through your local pawn shop or jeweler.

We do have a dedicated article on How to turn gold into cash if you are looking for details methods on how to sell your gold.

Not a Passive income asset

This is another downside of investing in gold be it in bullion or through an ETF: Gold isn’t an income-generating asset that generates interest or dividends.

One thing to keep in mind as well is that there are costs associated with storing gold like we’ve discussed above.

The Broker

When dealing with gold dealers you always want to buy your gold coins or gold bullion from a reputable and certified gold dealer.

Sometimes, acquiring physical gold from a third party can be subject to risk if said party is not certified meaning they don’t hold the legal requirements to buy and sell gold. This can cause problems for you because these parties omit reporting to the IRS.

Be especially careful when dealing with non-official gold brokers as you don’t want to find yourself dealing with black market gold.

We have a detailed article on the most trusted gold dealers online if you want to take a look at it.


Risk of investing in gold securities

Buying and selling gold stocks through a brokerage firm can be a good option if you want to mitigate the risks involved in buying and selling this asset.

But even when dealing with non-physical gold, be advised there are still some risks you are exposed to.

Market risk of Investing in gold

One of the risks investing in companies that extract gold is that gold can experience high volatility. When choosing a gold mining company to invest in keep in mind these key factors that will affect your exposure to risk:

  • Historical performance
  • Dividend-paying or non-dividend paying
  • Stock’s PE ratio
  • Dividend Payout ratio

When analyzing these key factors you can determine whether the security is worth investing in or not.

A company’s ability to sustain healthy dividend payouts is generally seen when the company has low debt and strong cash flows, meaning the historical trend of the company’s performance shows steadily improving debt and cash flow figures.

Now, since a company goes through growth and expansion cycles when it takes on more debt and has a lower cash on hand balance, it’s key to analyze its long-term figures rather than focusing on a short-term financial timeframe.

Things do change however while investing in gold during a recession because of the mere market volatility there is. Invest with caution while in recessions or expansion cycles.

Leverage risk

If you are a more advanced investor, you can of course leverage your investments in gold either through leverage or through derivates such as options and other financial instruments.

The risk here of course it’s the leverage itself as investing with leverage amplifies your potential losses and you could even lose more money than you have available thus triggering a margin call.

For example, if you use margin to double your purchasing power, you double all your gains and losses. That means that if for example a gold ETF you buy with 2x leverage loses 50% of its value, you’ll lose more than 100% of the cash you had available to invest.

NOTE: If you fail to deposit sufficient funds to meet a margin call, your broker may forcibly sell some of your securities to pay itself back, sometimes without a notification. Your broker also decides which securities to sell and has the right to increase margin requirements any time when necessary.

Fees for gold investments


How to lower the risk when investing in gold

Here are a few tips you can use to lower your risk when investing in gold either physically or digitally:

  • Analyze the market
  • Consider your risks
  • Take your costs into account

If you follow these tips, you can have more success if you want to allocate some of your hard-earned money into an investment like gold.

We have made more extensive article that covers how to lower your risk when investing in gold be it physically through gold bullion or digital by buying gold ETFs and stocks, we suggest you check it out through this link to get more detailed information.

Bottom line

But be patient, investing in gold is not a get rich quick formula, as it is in all other major financial markets, it can take time to see your gains accumulate so be patient and consider the risks before you make a decision.

We hope this article helped you, for more information on investing in gold or other precious metals, commodities, and jewelry we kindly ask you consider visiting our home page.

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