Risk Management: How to Minimize Gold Investment Losses


Natural catastrophe insurance is a common practice among homeowners. People who drive vehicles insure them against crashes and property damage. So why don’t more people buy insurance to protect their retirement funds from a market decline?

People do, in fact, lessen risk in many facets of their lives. Your life’s savings are valuable enough to get the same attention. Investing in precious metals, which may act as a hedge against inflation and market declines, is one strategy to help safeguard your retirement assets. (Full disclosure: I own stakes in actual bullion of gold and silver.)

When conventional asset values decline, gold and silver often hold up well. However, that isn’t always the case. When investors choose to invest in gold and silver, they often ignore the hazards associated with doing so. I’ve briefly discussed a few of the major risk considerations that you can’t overlook if you want to begin investing in precious metals below.

Risk 1: Cost of Opportunity

Metals from the platinum group, including gold, silver, and palladium, all have trade-offs. The first is the opportunity cost. Every dollar invested in precious metals might be put to use in dividend- or interest-paying passive investments. Although you may want to think about balancing your allocations in precious metals with dividend-paying equities to keep your portfolio in check, this does not imply that they are not viable investments.

Risk 2: A tax risk

If you don’t exercise caution when choosing a precious metals supplier, you might find yourself breaking IRS storage rules involving reliable third parties. The maximum long-term capital gains rate for precious metals bullion and the majority of exchange-traded funds (ETFs) is 28% since the IRS classifies these investments as “collectibles.”

Include precious metal assets in a 401(k) plan or an individual retirement account (IRA) to postpone capital gains on such investments. To qualify for inclusion in a tax-advantaged retirement savings account, they must be vaulted and kept by reputable third-party custodians.

Risk 3: The Risk of Liquidity

Not all countries recognise gold and silver as legal money. Vaulted precious metals must be removed, examined, and sold on the open market separately from stocks. In contrast to typical paper assets, this procedure might take days or weeks.

By selecting a precious metals provider that provides online storage accounts for rapid liquidity, you can reduce the dangers of liquidity. Your money may often be distributed from an online storage account one to three days after the transaction has been completed.

Risk 4: Storage Issues

You run the danger of theft, loss, or having your assets locked up in the financial system if you keep precious metals in a safe deposit box or bank vault. Make sure your gold or silver custodian provides complete FDIC insurance on the metals held in their custody, and confirm that the vendor uses a third-party nonbank trustee who has been authorised by the IRS to reduce storage risk. If you do want to store your precious metals at home, keep the number of individuals who know about them as low as possible.

Risk 5: Counterparty Risk

You run the danger of counterparty risk if you don’t invest in actual gold and silver. In other words, the possibility that one party to a contract won’t carry out their end of the bargain You enter into a contract with a supplier or brokerage when you buy mining stocks or precious metals ETFs, two popular methods to invest in precious metals without actually owning bullion. Even though not having to worry about storage is one of the benefits of this kind of exposure to precious metals, it also carries the danger of default. Gold stocks and ETFs are both your assets and someone else’s liabilities, so you might lose them if the other parties go under. Bullion made of gold and silver, on the other hand, has no counterparty risk. In fact, one of the few asset classes that is free of this specific risk is real precious metals.

How to Minimize Gold Investment Losses

There are actions you can take to reduce risk and emerge with a more stable and shock-resistant portfolio if you decide to invest in precious metals. Buying real bullion kept by insured, IRS-approved third-party custodians is the first step.

Although you won’t get a dividend from owning actual gold and silver, they may provide you with peace of mind and a more stable portfolio that will hold more of their value during economic downturns.

This material is not intended to be tax, financial, or investment advice. For guidance on your particular circumstance, you should speak with a qualified specialist.

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