Wall Street barons loves to argue that gold investment is risky but they carefully select and distort specific elements of risk to make their case. Posted by James Randolph on December 29, 2010
A look at the risks in gold investing.
December 29, 2010 – Wall Street barons loves to argue that gold investment is risky but they carefully select and distort specific elements of risk to make their case. Investment risk comes in many forms and all must be considered together to reach any logical conclusion.
One major risk factor is illiquidity. Real estate and money market instruments are very illiquid for obvious reasons. Restrictions on transaction sizes make gold ETFs illiquid for all but the biggest investors. Even the liquidity of publicly traded stocks is dependent on there being sufficient bidders. Physically held gold, however, is extremely liquid because it can be instantly sold worldwide at the going market rate.
An investment’s relationship to currency is another source of risk. International stocks, especially in mines and real estate holdings, are tightly bound to local economies and are particularly vulnerable to currency fluctuations. Gold, however, is independent of all currencies.
Another concern is liability. Corporations can default on their bonds and stocks can become worthless virtually overnight when corporations collapse. Physical gold, however, is 100% free of liability to any corporation or government.
Market risks are most commonly used to cast aspersion on gold investment. Of those volatility is most often cited because in terms of standard deviation (the most common risk measurement) the Dow is marginally superior to gold. But considering that the annual returns for the Dow was less than zero over the past decade while gold produced 14%, the slightly higher risk is well justified. Furthermore, gold was superior to every Dow component in both risk and returns.
Market risks also include social-political upheaval and catastrophic events that initially impact all asset classes equally. But in their aftermath gold has proven to have no equal for wealth preservation.
The key to minimizing all market risks is diversification, and gold investments alone have the time tested ability to protect the entire portfolio.
Senior Staff Writer – Certified Gold Exchange