The Main Risks Of Gold Investment
While deemed as low risk, gold investment isn’t completely risk-free. If buying paper gold, there are further risks, such as possible leveraging of the asset and counterparty risk. Here we discuss possible risks associated with gold investing.
1. Capital At Risk
The first risk is that the gold price could move 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. It may sound obvious that the gold price can move down as well as up, but it’s important to highlight when considering your appetite for various risk types.
Some investment assets provide ‘capital protection’, meaning you can’t lose the money you put into the asset. A common example would be a Cash ISA or bank savings account. In theory, while interest on these accounts is small, at least there’s no risk of losing your initial deposit. However, with banks becoming less stable over the past decade, many savers feel their capital is no longer fully protected when leaving cash in a bank savings account.
While selling your gold at a lower level than your purchase price will lead to some capital loss, focussing on physical gold assets like coins or bars will mean the value can never fall to zero.
Many other capital-at-risk assets pose this very stark risk. Very popular paper assets including shares in companies can become completely worthless if the company goes into administration. Physical gold coins and bars hold an intrinsic value due to gold’s scarcity, limiting the risk of capital loss.
