7 Worrying Disadvantages of Investing In Gold
Investors around the world believe gold to be one of the safest investments, but many fail to realize that gold is not the only available investment option that is ideal. Financial analysts worldwide have noticed that gold has either given negative returns or no returns during the past few years at all. This shows how gold has failed badly to live up to its title of 'Safe Haven Assets' and 'Hedge against Inflation' during times of uncertainty.
During the Lehman Brothers Financial Crisis, gold was known to provide high returns, so the demand for gold surged, and financial investors liquidated their shares to invest in gold. But it is also seen that gold investments have only been preferred during uncertain economic conditions. These investments have been converted to other forms when the economic conditions have improved.
See also: Palladium Vs Gold
Drawbacks of Gold
While the value of gold is determined through the changes in the bullion market and the gold demand in the market, some disadvantages of investing in gold have been listed below.
1. Storage Charges
Investing in physical gold brings with it a major issue of storage. Since the metal holds high value, it cannot be kept in drawers or shelves like other assets and must be stored safely in specialized secure storage. Obtaining a high level of security from banks or gold investment companies requires the payment of maintenance fees. This protection fee may be huge if the gold is stored for a long term. Storing gold coins or jewelry in a bank locker would also require the hassle of rushing to the bank whenever you need your gold. Another issue is that if gold investors select bank deposits, they receive the recent returns depending on the tenure.
2. Difficult Transactions
When planning to transact your gold investment, besides paying a transaction cost, investors have to face three major challenges:
Searching for a genuine buyer.Proving your genuineness as a seller.Confirming that you own the physical gold.
The most significant challenge among these is to prove that you are a genuine seller.
While both gold's buying and selling processes require immense paperwork, investors must complete the documentation at the time of investment properly to have a hassle-free selling process.
3. No steady returns
While advantages of gold investments include benefits to investors who hold the assets for longer terms through capital gain when selling the assets, even though a capital gains tax has to be paid. Unlike CODs, real estate, mutual funds, and stock exchange, holding gold investments does not provide holders with a steady income or returns in dividends or rent. This means gold is not the right type of investment if investors aim to increase their wealth periodically.
4. Huge Investment
One of the major disadvantages of exposure to gold is that it requires a huge amount of capital since it is a precious metal and holds great value. Investing in gold means that an investor may have to invest his entire earnings or liquidate other assets to invest in gold. While other assets bring a steady return, gold investments only benefit at the time of selling if the price of the asset has appreciated.
Some families also have sentiments attached to gold which is why there are liquidity problems, and the entire purpose of investing in gold is negated.
Another problem is that investors have to pay a higher price than the actual market price when buying or selling gold through investment companies or gold dealers. This commission reduces the investor's profit and makes gold an unsuitable option.
6. Gold Jewelry
Gold jewelry is not an ideal investment since the making and wastage charges that an investor pays when the jeweler does not consider buying jewelry at the time of sale. Another drawback is that the investor has to pay design charges which change according to the design chosen by the investor.
7. Physical Gold Coin & ETF
Investing in gold bars or bullion gold coins initially results in a loss for the investor since they will receive a lesser price of gold than that paid at the investment time. Additionally, banks do not purchase gold bars and coins after being sold.
On the other hand, Gold Exchange-Traded Funds cost more than other physical forms of gold due to the additional management fees that have to be paid to a fund house and the brokerage fee for holding Gold ETFs.
- Which Country Has the Most Gold? - World's Global Gold Reserves
- Investing in Gold: Your Options
- What is a Gold Bar Worth?
- Can you Buy Gold Anonymously?
- Difference Between Bullion and Gold
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Disclaimer: Content on this website is not intended to be used as financial advice. It is not to be used as a recommendation to buy, sell, or trade an asset that requires a licensed broker. Consult a financial advisor.