How Safe is Gold Investing?

Over centuries, gold has remained an asset class that investors can trust. Investors have repeatedly turned to gold during periods of economic uncertainty. Gold is generally seen as a precious metal that generates steady returns over the short term. In recent years, the world has been plagued by economic crises and investors have always turned to gold. A glaring example from the recent past is the highest peak price ever achieved by gold in August 2020, when it touched close to $2,000 per ounce.

However, with all the interest in gold, it is pertinent to find out how safe is gold investing?

How Safe is Gold Investing?
Investors enjoy the safety of gold

Gold as safe haven insurance for investors

In 2011, during the peak of the 2008 financial crisis, gold breached the $1,900 barrier for the first time. At the time, the global recession was also at its highest. The collapse of Lehman Bros was quickly followed by the downfall of many UK banks and investors who lost their confidence in the global economy and capital markets. Clearly, they decided to move their investments to gold as a safe haven. The partial recovery that the global capital markets made since those years was nipped in the bud by renewed economic uncertainty from many factors.Insider's Guide to gold and silver

It was abundantly clear from the gold price trend that investors moved their money to gold in search of a safe haven. Interestingly, as the world plunges once again into a possible economic catastrophe, the spot price of gold has already crossed the $1400 mark.

Brexit created uncertainty across the European economies, while the US-China trade war and a host of other geopolitical factors ensured that the global economy never made a full recovery. This phase was followed by the global pandemic, which came upon us in 2020. By August 2020, gold had once again breached price barriers to reach a new high. Looking back at these events, we can conclude that investors frequently move to gold, due to the safety and security it provides.

Counterparty risks

There are numerous factors that established gold as a safe investment vehicle. The lack of counterparty risk is one of them.  Counterparty risk is present when an investment you make is dependent on fulfilment by a third-party. For example, investing in direct equity implies that you are putting your money into a listed company. To generate returns, that company must perform.

Similarly, when you invest in a gold ETF, the exchange-traded fund needs to perform in the market for you to realise your investment. When that does not happen, the value of your investments can sink to nothing. Almost every market-linked investment vehicle carries counterparty risks. However, when you buy physical gold, you possess a tangible asset that you have taken ownership of. It is not linked to the delivery system of any company or market. Therefore, counterparty risks are non-existent.

How Safe is Gold Investing?

Gold investments are not subject to counterparty risks

The rise and fall of gold prices

The gold price can go down as well as up, depending on supply and demand. Over the short term, there’s the risk that your investment could fall in value. Over the medium to long term, gold has proven to increase in value quicker than the inflation rate, proving to be a reliable store of wealth. Buying in paper form, like ETFs, gold futures or gold shares, poses further risks with leverage and counterparty exposure. Owning gold investment coins and bars negates both of these risks.

It’s important to note that gold prices have never collapsed over the medium to long term. It is a defensive asset class that provides steady, long-term returns. Most asset classes that provide quick returns are risky, on the other hand.

Over the last 10 years, gold prices have never sunk below the $1,000 price point. While equity and debt investments, mutual funds, debentures or derivatives can all be devalued to a point where they are worth next to nothing, gold continues to have an intrinsic value that provides safety.

A quick look at the gold charts reveals that gold is not just a safe investment in times of trouble. The spot price of the yellow metal was under $400 way back in 1996. From these modest prices, it hit an all-time high in 2011 and then settled down to $1600 levels by 2012. An asset class that quadruples in value over a 20-year horizon is certainly a safe investment. Additionally, it is capable of unlocking great value and generating steady returns.

Get in touch with Physical Gold to discuss your gold investments

Physical Gold is one of the U.K.’s most reputed gold dealers. We provide free investment advice about any precious metal investments that you choose to make. We are always happy to discuss your investment plans and identify the best options that can generate optimal returns. Please call us on (020) 7060 9992 or contact us online and our investment team will be in touch with you right away.


Image credits: Marco Verch and Wikimedia Commons

By Daniel Fisher

Daniel Fisher formed physical Gold in 2008, after working in the financial industry for 20 years. He spent much of that time working within the new issue fixed income business at a top tier US bank. In this role, he traded a large book of fixed income securities, raised capital for some of the largest government, financial, and corporate institutions in the world and advised the leading global institutional investors. Daniel is CeFA registered and is a member of the Institute of Financial Planning.

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