Whether you’re purchasing gold coins or setting up a gold Individual Retirement Account (IRA) to prepare for retirement, you’ll find it’s important to consider the risks of buying gold. As one of the oldest commodities still traded today, gold remains popular for many reasons—risk reduction among them—but however relatively small the risks, gold does have some. Below is information to help you better understand how gold might fit into your portfolio, especially for those looking toward retirement.
Is Buying Gold High-Risk?
As with all assets, gold has risks and benefits.
While gold is one of the world’s oldest traded commodities, perceptions of gold’s worth relative to other commodities and market forces that can affect gold prices have both dramatically changed in recent years. The price of gold stayed relatively flat throughout the 20th century because of some version of the gold standard, but during and after the 1970s, gold prices became more volatile and market-driven. At that time, the United States went off the gold standard for the dollar, which was used to back most countries’ currencies. In response, gold’s appeal grew as a safe-haven commodity during times of economic instability, and gold prices increased.
In 1970, the average gold price was $36/oz. By 2020, it had soared as high as $2,072.50/oz.—an increase of nearly 5,660%. This occurred mostly because of a series of financial crises, including the stagflation of the 1970s, the Financial Crisis of 2007–2008, and the COVID-19 pandemic.
Another factor affecting gold prices is the Washington Agreement on Gold from 1996. Signed during an International Monetary Fund (IMF) annual meeting, this nonbinding agreement was the first in a series that put a cap on how much gold individual governments agreed to sell each year. Essentially, the agreement keeps governments from dumping their gold to raise cash because government volumes are so large that it would distort the gold market.
As the price of gold has increased over the past 50 years, there have been spikes and troughs in its price. These can be caused by a number of factors, from increases in gold mining production costs to natural disasters to the discovery of new deposits, all of which may affect global supply and demand and increase or lower the cost of gold. However, gold does remain a popular choice for those preparing for retirement.
Though, as with any asset, there is always a risk that prices could go down, gold has one clear advantage as an alternative to assets like stocks or bonds: Unlike stocks (Lehman Brothers) and bonds (Greece) that can see their market prices drop to zero, gold will never be worth zero.
What Are the Risks of Buying Gold?
When it comes to building capital either in the long or short term with gold, there are some risks involved. However, the level of risk you experience may depend on how you choose to buy your gold.
Market and Price Fluctuations
As with all other assets, the price of gold can fluctuate. While short-term prices have done more of this over the past three decades, long-term prices have historically risen.
Multiple factors have pushed the price of gold up since the 1970s. As mentioned above, economic instability during that decade began to position gold as a reliable commodity, while macroprudential measures in the 1990s and 2000s artificially tightened supplies, driving up the price of gold.
Some other factors that can affect the gold market include:
- Stronger economic conditions, which tend to see a decrease in the price of gold
- Weaker market conditions, which often lead to greater gold demand
- Central banks looking to offload some of their gold when their economies are doing well because gold is a non-yielding asset
- Currency fluctuations because gold is traded in USD across international markets
- Geopolitics—civil unrest, war, mass migration, climate change—which can impact the price of gold
For those purchasing physical gold, such as gold coins and gold bullion, theft is a risk, but a small one that can be easily managed.
For example, people who purchase physical gold often store it in safe deposit boxes, personal safes, or, in the case of precious metals IRAs, IRS-approved depositories.
Still, you may wish to consider insurance and storage costs for your physical gold when building your precious metals portfolio.
There are scams that target purchasers of physical gold, as well as other precious metals commodities. The best way to protect yourself from scams is to equip yourself with knowledge on what to look out for when you buy gold. This includes purity, weight, design of a coin, country or mint of origin, and price.
You may also wish to ensure that you purchase your gold from reputable distributors. For example, U.S. Money Reserve maintains an A+ rating from the Better Business Bureau.
Some common forms of scams around gold include:
- Fake gold/documentation: a very popular scam, where the gold is not provided as advertised or is not gold at all.
- Partial delivery—receiving just a portion of gold to “prove” the validity of a distributor, only for them to stop communicating after you send full payment.
- Fake holdings—a fraudster promises to keep your gold “safe” for you in their own security deposit box, but the gold never existed in the first place.
Is it Better to Have Gold or Cash?
This depends on your situation, so it’s best to speak with an accredited financial advisor before making any changes to your financial plans.
In a high-inflationary economic environment, paper currency’s purchasing power can decrease. It can be hard to look into the crystal ball to know where inflation rates may be in the future, but it’s necessary to research global economic and geopolitical trends that might impact inflation so you have a better idea of where the purchasing power of cash might go. Economists spend their careers trying to forecast these trends, so the best approach is to seek a diversity of opinions from leading economists and strategists to arrive at your own decision.
Historically, gold has risen, especially during economic downturns and periods of inflation, but it can take time for it to recover from major dips. Following a fall from its peak in late 2011, the price of gold took nearly a decade to reach the same price.
Your financial advisor may recommend diversifying your holdings with a balance of cash and gold, among other assets. This is because the relative stability of gold and its potential to grow during inflationary periods can hedge against larger economic factors.
Is Buying Gold a Good Idea for Retirement?
Gold Is a Counter-Cyclical Asset.
Once they retire, many people look for assets and places in which to hold capital that offer less risk. This is especially true during economic downturns. Gold is an option for those in retirement because it can provide some protection against economic downturns. This is because, as a counter-cyclical asset, gold has historically performed well during these periods.
Gold Is a Diversifying Purchase.
Having gold in your portfolio can provide some protection from market fluctuations. As a general principle, many financial advisors might recommend diversifying as a way to build strength, as well as mitigation against risk, into your asset portfolio.
Check out our useful portfolio diversity quiz to get an overview of your overall risk exposure.
Gold Is Easy to Liquidate.
While it’s less likely that gold can act as a source of cash flow during retirement, it can be liquidated (sold/traded) relatively quickly, just like other physical assets (boats, cars, real estate).
Where to Get Started When Buying Gold
A great first step if you’re considering buying gold, from gold bars to gold coins and everything in between, is to download U.S. Money Reserve’s “Gold 101” report.
This report gives valuable insights into how to get started when buying gold.
Some analysts see long-term inflation and other economic conditions pointing to a continued rise in the price of gold and other precious metals. This is why it’s important to look at forecasts from a wide range of sources. One place to start is with the U.S. Money Reserve’s online resource library.
What Is the Best Option for Buying Gold?
There are three main ways you can purchase gold as an asset during retirement.
You can open a gold IRA through a broker-dealer or custodian, which is typically a bank or brokerage firm. Your physical gold is stored in an IRS-approved depository for secure holding. You can also include gold stocks (gold ETFs, gold stocks, gold mutual funds) in your gold IRA. Some fees may apply. The main benefits of a gold IRA revolve around your level of control over your asset mix, as well as a gold IRA being a long-term savings option over many decades in preparation for retirement.
Personal gold holdings
As mentioned above, keeping physical gold (e.g., bullion, coins) comes with risks of fraud or theft as well as the costs of storing it safely. However, these risks are easily managed by some simple steps (mentioned above), and personal gold holdings can be relatively easy to liquidate.
Gold stocks, gold ETFs, and gold mutual funds are ways of “buying gold” indirectly—say by purchasing holdings in a gold mining company. This option can be a way to further diversify your gold purchases while potentially deriving higher immediate returns. However, buying gold stocks or ETFs does not mean you actually own any physical gold, and paper gold as an asset may be higher-risk because of potential impacts on gold mining companies (e.g., civil unrest or policy shifts in their country of operation or origin, quality of management). Paper gold is also further tied to the volatility of the stock market, while physical gold has historically acted inversely to market fluctuations.
If you are interested in learning more about adding gold to your retirement portfolio, request a free Gold IRA Information Kit from U.S. Money Reserve.