What are the disadvantages of investing in gold?- 7 Hidden Risks You Must Know Before You Buy -

Is Gold a Safe Investment? Understanding the Disadvantages of Investing in Gold

Introduction: Gold has been a safe-haven asset for a long time now and it brings stability during uncertain economic times. Because it is a popular investment vehicle, gold is also an asset, like all assets, that has drawbacks. With a clear understanding of the disadvantages of gold, you should have a solid understanding of whether to have gold as an investment in your portfolio.Before adding gold to your portfolio, it is important to understand some of the shortcomings of gold, including price volatility, no passive income and storage costs. This article will emphasize the specific disadvantages of investing in gold, so that when the time comes to make a financial decision, you are fully informed.

1. Investing in Gold Jewellery: Costly Mistake?

Many financial experts have stressed that gold jewellery should never be considered an investment since it is unlike gold bars or coins which you can purchase and sell as pure gold. Gold jewellery has fees that cut into your return such as, making charges and wastage tumbling your price for resale. The making and wastage fees depend on the complexity of the work done, which can highly inflate the price, and thus when sold at a later date will be less profitable to you. Most of the gold is 22k gold and when you dispose of your jewellery, the jeweller will also knock off making and wastage fees and will provide you with no allowance for the actual gold value. Gold jewellery is more an ornamental purchase than a wise investment.

2. Gold ETFs: More Expensive than Physical Gold?

Gold ETFs have a number of other cost structures in addition to the cost of the physical gold that you acquire. Beyond the cost of gold, you are now also burdened with fees associated with fund management (fund management fees charged by the asset management company) and brokerage fees when you buy and sell. All of these fees can add up to a little more cost per unit of a Gold ETF, so it is important for investors to understand all of these costs prior to investing in one.

3. Are Coins and Bars a Good Investment?

Gold coins and gold bars may seem like a safe investment but it can have drawbacks that investors often don’t think about or realize until they want to sell. In most cases, they will be sold for a lower price than what the investor originally paid. This is due to various factors including dealer margins and the underlying gold price change. Banks do not buy back gold coins and gold bars, which would lead to overwhelming paperwork or challenges when trying to sell the items. Therefore, with the lack of liquidity and loss of value, gold coins and gold bars will generally tend to be poor investment opportunities for expected returns.

4. Gold Lacks Steady Income Compared to Other Investments

In contrast to the aforementioned, beneficial investments like mutual funds, real estate, or stocks, gold does not provide passive income. A mutual fund generates passive income for a user through a share of its dividends, real estate generates passive income through rent collection, and stocks generate passive income through dividends paid by a company generating profits. Gold just instead remains dormant waiting (as a user) to benefit from only price appreciation, making it unattractive to an investor who is being strategic while wanting returns on investment.

5. Gold Prices in India are Related to Market Prices

Most investors do not know that gold prices in India are based on international market price shifts. International gold market demand, political issues, currency and amount of currency (US dollar) all impact the amount of gold is worth on India’s market, and thus creates price shifts..

6. The Emotional Attachment to Gold Affects the Liquidity of Gold

In India, gold is usually purchased for cultural reasons or for sentimental value, and not exclusively at times as an investment. However, the emotional attachment can act as a barrier when selling gold during a financial emergency, and can restrict its usefulness as an instantly liquid asset.

7. Issues with Storing Physical Gold

There is a unique challenge with owning physical gold, and that is storage. With it being so valuable, storing gold is difficult to do in a safe and secure manner. Storing it at home poses a security risk and renting a bank safe deposit for storage once or twice a year also involves an annual maintenance fee and limited access to your gold. In fact, the storage of gold is perhaps one of the more inconvenient and up-front costs of investing in gold, compared to other financial assets.

FAQs on Gold Investment

No, gold does not generate passive income like stocks or bonds. The only way to profit from gold is by selling it when the market price rises.

No, Indian banks do not buy back gold coins and bars once sold. These assets can only be resold to jewellers or private gold dealers.

Yes, gold prices in India fluctuate based on global market trends. A stronger US dollar or major international economic shifts can impact domestic gold rates.

Gold is a non-productive asset, meaning it does not generate any returns until sold. Its value growth depends solely on future buyers willing to pay a higher price, making it less attractive than income-generating investments.