Liquidity is a prized benefit of holding physical gold. But if you’re not familiar with the term “liquidity,” you might be a little confused. Gold itself is solid, but gold is also considered a liquid asset. How can it be both solid and liquid?
What Is a Liquid Asset?
A liquid asset is any asset that you can quickly convert to cash.
Billionaire and Oaktree Capital Management co-founder Howard Marks takes this definition a step further, arguing that “true liquidity is how easily you can sell an asset—and at what price—when you are forced to.”
Cash is the ultimate liquid asset, Forbes notes. Other liquid assets include:
- Treasury bills,
- Treasury bonds,
- Certificates of deposit (CDs),
- Mutual funds, and
- Precious metals.
So what aspect of gold makes it a liquid asset? According to Forbes, “In some states, certain gold and silver coins can be used as currency, meaning it’s hypothetically as liquid as cash. Physical precious metal[s] can also be exchanged for cash via dealers.”
If you’re hoping to liquidate some of your gold, you’ll likely work with a precious metals distributor to sell it rather than trying to use your gold as currency, though.
“A percentage of liquidity reduces the overall risk of a portfolio, acting as an asset class that holds value,” the personal finance website Sapling explains.
Benefits of Liquid Assets
What is the appeal of liquid assets, and how much of your portfolio should be kept “liquid”? It all comes down to diversification and risk reduction.
According to Sapling, “Though liquid assets rarely earn anything but low interest rates, they typically make up for it by maintaining a concrete value and accessibility.”
Should you experience a tragedy or unfortunate financial event, liquid assets can act as a safety net. They can be readily converted to cash to help you stay flexible and financially stable.
The Quality of Gold as a Liquid Asset
In a recent report, the World Gold Council explores consumers’ attraction to gold as a liquid asset.
The report explains that alternative assets—a classification that includes precious metals—are both likely to make up a significant part of a portfolio and often less liquid than exchange-traded assets like stocks and bonds. As a result, portfolio liquidity may decrease as allocation to alternative assets increases. However, this is not the case with all alternative assets.
“Gold is a well-established portfolio diversifier and hedge that has delivered long-term positive returns…. The quality of gold’s liquidity further strengthens the rationale for an allocation to gold as portfolio compositions change,” the report says.
Why Some Assets Are More Liquid Than Others
When looking at the variety of liquid assets, some stand out as being more liquid than others.
Cash is generally considered the cream of the crop when it comes to liquid assets. But when you compare gold with other liquid assets, the precious metal shines. For example:
- If you withdraw money from a CD before the agreed-upon time, you’ll be hit with a financial penalty. By contrast, liquidating physical gold does not result in any similar penalties.
- If you have a 401(k) or an IRA, you’re likely aware that under many circumstances, you face stiff tax penalties if you take money out of these accounts before you’re supposed to. The same does not hold true if you liquidate gold.
The bottom line: Gold may be an excellent choice for those seeking to diversify their portfolios while retaining a high level of liquidity.
The World Gold Council emphasizes that gold is a liquid asset that carries no credit risk and has outperformed government currencies. Furthermore, gold might help offset undervalued or mispriced liquid holdings in your portfolio.
We sell some of history’s most popular gold and silver coins, all backed by the U.S. government for their precious metal content and purity. Call U.S. Money Reserve today to secure more of these liquid diversifiers.