Gold is associated with Indian culture for a very long time.
It is seen as a store of value and worshiped as the status symbol of wealth itself. It is almost an unwritten tradition that every household in India holds a tiny bit of gold.
But it’s not just in India; there is a huge population around the world that fixates on gold. The standard argument everyone puts forth is that,
Gold is a hedge against economic collapse.
Gold is a safe bet; it never goes bankrupt.
People view it as a safe space to store value because it was used as a currency for thousands of years. That history and the global appeal as a commodity, coupled with its rarity, makes people invest in it.
But is gold totally risk-free?
Let us find out.
Undoubtedly gold tends to generate returns in times of economic crisis; however, such returns are profitable only in times of uncertainty.
On the cover, you may see gold as a glittering investment that is free of risk.
But like every other investment, gold investments too come attached with their kind of risks. To put light on that, I have listed five significant risks every gold investor must know.
5 Risks Involved In Gold Investment
Gold is primarily acquired in its physical form.
Almost 50% of the total gold in the world is used to make jewellery and other personal belongings, 10% is used for scientific purposes, and the other 40% is held for investment purposes.
Physical gold needs to be stored safely.
If you happen to keep it in your house, there is a high risk of theft. Bank lockers may be a better choice, but you have to rush to the bank every time you need to access it. Additionally, there is a storage cost that every bank charges for guarding your asset.
#2 Purity Issues
Gold, in its purest form, is not fit for use.
Every time a bar of gold or a necklace is made, some copper is added. It may not seem like a big deal. Still, there are chances that some giant corporations or even local goldsmiths adulterate it with a higher percentage of other metals. This process steeply reduces its value and preciousness.
Though hallmark testing indicates the metal’s purity, most of the gold in the market goes untested. Also, purity testing, which they call it gold assaying, is a costly affair.
#3 No Ownership Title
Since gold is a free market, anybody can buy and sell gold.
There is no standard procedure or KYC done at the time of its purchase. The lack of documentation leads to the risk of ownership.
For instance, let us say you misplaced your jewellery, and somebody else found it. There is no evidence for you to claim that that jewellery belongs to you. Thus there are no grounds to claim ownership of this asset.
#4 Unreliable Prices
The gold rates are highly volatile and susceptible to uncertainties.
History shows that gold prices tend to rise when the stock market crashes.
On the other side, when the economy booms and the money market strengthens, gold prices start to dip. There is no guarantee that gold prices will always behave in the same pattern.
Also, it is not a common fact that the international market dramatically influences gold prices. Any deterrence in the global economy will impact the gold prices in India as well.
#5 Low Resale Value
At the time of gold purchase, you need to pay additional charges, such as making charges on the jewellery price. Also, you will pay the exact amount for the value of the gold in grams.
Making charges in gold is already a sunk cost.
When it comes to a percentage of the gold cost will also be deducted as wastage charges. The little profit you may earn in the difference in price gets buried into such untraceable costs.
Other forms of gold investments, such as digital gold, Gold ETFs, are available. But they are more expensive than actual gold and are additionally subject to brokerage charges.
Bottom Line: Risk Of Gold Investment
In short, gold does not have a fair price; you can not determine when it is overvalued or undervalued.
Also, the sentimental value of gold that we possess as Indians would prevent us even when the asset is at its best price.
It is not very bad to want to own a bit of this precious metal.
But you need to carefully analyze the price and its trend before jumping the gun.
Suppose you want to invest solely in gold. In that case, you can reconsider and keep it as a small proportion of a well-diversified portfolio.
So Happy Investing !!
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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