Pros and Cons of Owning Assets Like Gold

Investors like gold as an inflation hedge, but what's the downside?

Gold bars on the floor of a vault
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Gold bullion and coins provide a sense of security for many investors, but as with every investment, there are both potential upsides and potential downsides. 

As an investment advisor, even if your firm doesn't sell gold to investors, some of your clients may be exploring the possibility with gold dealers. Therefore, it helps for you to be conversant in both the pros and cons of buying gold as an investment.

If, on the other hand, you're an investor who's considering the purchase of gold coins or bullion, you should know the potential risks and rewards. Here's a guide for both investment advisors and potential investors themselves.

Why Consider Gold as an Investment?

In the past decade or so, gold has become a trendy investment and has seen numerous price swings (both to the upside and to the downside, with accompanying volatility). Consequently, investors who might not have considered gold previously have become interested in it.

Investors give a variety of reasons for buying gold:

  • It's relatively easy to purchase and then sell coins, such as the Kruggerand.
  • When investors buy gold coins, they have the ability to test the gold content of the coin.
  • Owning and possessing gold can be very satisfying.
  • There's significant potential upside for gold.

The Cons of Buying Gold

However, even given these reasons for buying gold as an investment, there are good reasons not to own it.

Here are five of them:

  • Dealers charge premium prices and fees for gold coins.
  • Gold has large liquidation spreads.
  • It can be challenging to verify old or rare gold coins.
  • Storing and insuring gold coins and bullion can be a hassle ... and expensive.
  • It's not clear how much price appreciation potential gold may have.

    So, You're Set on Buying Gold

    If you or your clients want to consider investing in gold, you should consider these factors:

    • Buying gold for investment purposes differs from collecting gold coins. By purchasing gold from large, reputable dealers, investors receive the best opportunity to liquidate gold if they wish. Knowing about the physical delivery aspects of owning gold coins and bullion requires insurance and a secure vault in which to store it.
    • Individual investors see many televised opportunities to purchase gold coins from a mint. Anyone considering a purchase based on one of these ads should evaluate the premium asked over the current spot price of gold. When the amount differs by more than 10%, the mint coins may not be the best choice.
    • Liquidating gold through the dealer can be expensive. Again, if the commission premium is 10% or higher, clients need to know more about the liquidity of their investment purchase. Krugerrand gold coins from South Africa remain popular. They are plentiful, and more dealers create a market in the coins. The purchase and sales spreads may be narrower because of the sheer numbers of these coins.