A Not So Golden Opportunity: The Disadvantages of Investing in Gold


There are a lot of advantages to investing in gold, but that doesn't mean it's a sure bet. A savvy investor makes sure they're aware of both sides of the coin. Everyone's aware of how sought after this precious metal is, and its undeniable value, but is it the best choice to invest in?

Thinking of gold as the most reliable investment might be a mistake, and one that's easily avoided. Rather than blindly following the advice of others, it pays to do your research.

If you're considering your investment options carefully and are wondering about the disadvantages of investing in gold, this is the article for you. Read on to find out more.

Gold Prices

If the idea of investing in anything is to make a profit, paying close attention to the history of what you're considering purchasing is the first step. While the price of gold has been steadily increasing over time, in the short term, there's no denying its volatility.

Governments around the world have taken an interest in accruing gold as a foundation for their wealth, among other assets. This means it has become a geopolitical tool, and its value may be swayed depending on unpredictable political strategy. The investor on the ground floor has no idea which way the wind will blow in this regard, leaving the future price of gold uncertain.

The most important attribute of investment opportunities is how reliable they are. Investing is often thought of as gambling, but it all depends on your choice of investment. Gold is no longer the bastion of dependability it once was, and many investors are beginning to look elsewhere.

Lack of Income

Many people purchase gold as a hedge against the financial ruin of the economy. The thought process follows the logic that if the economy crashes, numbers on a screen aren't going to be worth anything. They may not even exist at all in some scenarios.

Investing in gold means having something solid and real you can hold in your hands. No matter what direction the economy or stock market takes, gold is gold and will always be a reliable token to trade with. The flip side of this is that gold doesn't accrue interest like stocks, bonds, or money in the bank.

Due to the lack of passive income, people who choose to invest in gold are relying on it continuing to appreciate. This puts them at the mercy of the market as a whole, and the value it assigns to your gold. You can't rent your gold, and it doesn't pay dividends, despite the many positive attributes it does have.

Gold is also thought of as a commodity, which is a raw material bought and sold at market price. For this reason, the trade of gold is usually subject to a capital gains tax, which is another negative to be aware of.

Lack of Transparency

The gold market is particularly difficult to predict for individual investors because they're unlikely to be privy to important information regarding its price. The price of gold is the result of a culmination of so many different factors that certainty is hard to find. These factors, such as inflation, market sentiment, and rumor, all play a part in dictating its value.

Due to the mercurial nature of the many moving parts that affect its perceived market value, it's all but impossible for anybody to make an informed decision. All investors can do for the most part is trust that historical trends will continue, and cross their fingers in the face of an opaque future.

The lifeblood of investment and trading is often information, and finding yourself in a position to make the most of it. The trouble with gold, even if you have a lot of it, is knowing when to sell. Due to the lack of transparency, the rug may be pulled from under you, leaving you with a pile of gold worth significantly less than what you originally paid for it.

Remembering that the end goal of any investment is to make money is important. While gold appears steady and reliable, the adage "What goes up must come down" is worth giving some thought to. The very nature of the secure consensus surrounding gold and the lack of transparency surrounding it may well lure investors into being overconfident.

Currency Movements

Gold is priced in dollars due to the general dominance of the US currency in gold trading. This means that the value of the dollar has a direct influence on the price of gold. This relationship is inversely proportional, meaning that if the dollar decreases in value, gold will increase in value.

This is an issue concerning the market volatility of gold because of the recent trend of the US government printing money, and their national debt. Some say the US economy is poised to crash, causing a financial crisis much like the one seen in 2007. If such a crash were to occur, the price of gold would likely become wildly unstable.

Despite the inverse nature of the relationship between gold and the dollar, the dollar crashing doesn't necessarily mean that gold would increase in value. If other currencies stay strong and retain their purchasing power, there's no telling where the value of gold could go in such a scenario. While a market crash may seem unlikely, they usually do until we're in the midst of one.

Physical Storage

Keeping gold safe is a worry, especially when it's so desirable and effectively untraceable. Gold is usually minted with various stamps to keep track of purity and origin, but nothing is stopping an enterprising thief from melting it down. An investment in gold begs the question of storage and security.

Even a small amount of gold is incredibly valuable. Any significant investment in gold is going to require safe storage unless you're happy to dig a hole in the ground and hope for the best. Safe deposit boxes aren't cheap, so not only does gold not net you any interest, but you're likely to lose money paying to keep it safe.

Insuring gold is another costly expense that anyone with a large amount will be forced to consider. Finally, it can be a problem to transport without arousing suspicion, even if the gold is rightfully yours. If you have a significant amount, you run the risk of confiscation depending on where you're traveling to and from.

Counterfeit Gold

Even once you've carefully weighed the pros and cons of investing in gold, there's another pitfall to avoid if you decide it's for you. There are plenty of unscrupulous people who trick investors into buying fake bullion, for example. Their techniques are advanced, and they've developed methods to fool even the scrutiny of professionals.

This brings a certain level of anxiety to the table before you've even begun investing. Time must be spent doing background checks on sellers, and online gold retailers. The equipment and expertise necessary to verify the purity of gold doesn't come cheap, either.

Gold must be bought from reputable sellers only, but even they're fooled into reselling what they believe to be gold occasionally. Discovering your gold is fraudulent opens a can of worms when it comes to legal proceedings, lawsuits, and even being believed. A cursory Google search proves how often this happens and how careful prospective buyers of gold must be to avoid being swindled.

Black Swan Events

Within the investment sphere, there will always be the fear of losing everything due to unforeseen circumstances. There's a certain amount of confidence to be had after doing your research, but relying completely on anything short of a magic crystal ball is foolhardy.

All the due diligence in the world isn't enough to protect even the best investors from black swan events. These are events that are completely unpredictable and aren't possible to factor into any kind of meaningful investment road plan. A good example of this would be the destruction of the World Trade Center in 2001.

Gold has a reputation for being a rock-solid return on investment, a foundational bet that can't possibly go wrong. All it takes is to buy gold and wait, and your returns are sure to be healthy. This outlook is dangerous, just as all investments ultimately are.

A failure to pay attention to portfolio diversification may end in disaster, even though a strong position in gold may seem a sure thing. This kind of false confidence in a commodity has brought people to ruin in the past, and it will surely do so again.

The Disadvantages of Investing in Gold

If the disadvantages of investing in gold are more numerous than you expected, this speaks to the nature of investing as a whole. Forewarned is forearmed, and that's where we come in.

At FinTok, we understand the importance of smart, simple investing and want to provide everyone with the tools to invest with confidence. To get the ball rolling for new investors, your first five stock analyses are on us! If you'd like to learn more about our services and investor insights, start your free trial today.