Is it Risky to Invest in Gold? | 2024 Gold Volatility Analysis

Posted - May 1, 2024
is it risky to invest in gold

At a Glance: 

    • Gold is generally considered a safe investment, but it is not without risk. 
    • Precious metals tend to be volatile in the short term, and gold is no exception. 
    • Using gold as a long-term investment is a solid strategy for portfolio risk diversification.

 

Is it Risky to Invest in Gold? 

Despite its reputation as a safe asset, investing in gold can be risky. Investing in any commodity comes with inherent risk, and investors should know that gold is no exception. Precious metals like gold are characterized by short term volatility, unpredictable key indicators, and hidden maintenance costs. 

While new investors should understand the risks associated with gold, precious metals nevertheless remain a consistent way to diversify and improve the strength of your portfolio. Gold is often considered a reliable, safe investment in the long term. Gold coins and bars also come with a different degree of risk than traditional assets, which can help investors diversify the risk profile of their portfolios. 

On this page, we’re covering everything you need to know about the risks associated with investing in gold

Gold Vs. Stocks – What’s the Riskier Investment? 

As a general rule, traditional stocks are riskier than gold. The truth is a little bit more complicated, though. The term “stocks” refers to a number of different assets. Some stocks are extremely reliable, while other stocks offer exceptional risk. When we talk about traditional stocks, we could be referring to any number of different investments – each with their own risk profile and potential for profit. 

“Gold” refers to a single commodity. Gold coins and bars are two different ways to invest in gold, but each product type is made of the same underlying metal. When the value of gold increases, both gold coins and gold bars become more valuable. Unlike stocks, whose risk depends on the specific asset we’re talking about, risk profiles are relatively consistent across the gold investing market. 

All of this is a complicated way to say that gold is less risky than some stocks. Occasionally, gold is more volatile (and risky) than many steady, historically low-risk stocks. Gold is unlikely to ever become more risky than the most high-risk stocks on the market. 

Risks to Investing in Gold 

Chances are, someone has told you that gold is the ultimate safe haven investment. Safe haven investments tend to be steady and consistent, even during times of economic turmoil. Although gold is an excellent safe haven asset, it still comes with several inherent risks. No investment is perfect, and gold bullion is no exception to this rule. 

Is it Risky to Invest in Gold? | 2024 Gold Volatility Analysis
Gold Bars Are a Great Way to Diversify Your Portfolio

Gold investments are risky for three main reasons: 

  • Short Term Volatility 
  • Unpredictability 
  • Premiums, Storage, and Maintenance Costs

Smart investors find ways to mitigate their gold investing risks. Gold also plays an important role in a diversified investment portfolio, even considering its risks. Risk profile diversification is a vital aspect of smart investing, and gold has always been an exceptional tool for diversifying. 

Short Term Volatility 

One big risk to investing in gold is its short term volatility. Some financial advisors say that gold is the safest investment money can buy. In reality, gold is an excellent long term investment but very risky in the short term. Gold’s risk comes from its short term volatility, which is used to describe how wildly gold’s price can swing during a small period of time. 

Gold is volatile in the short term. When political or economic conditions take a turn, gold’s price can swing wildly. Over the course of several years, gold prices tend to settle. This is why gold is a far better long term than a short term investment. 

Gold – The Ideal Long Term Investment 

Despite short term volatility, gold is an excellent investment for the long term. Gold price charts demonstrate gold’s short and long term riskiness. During crazy markets, gold can lose – or gain – hundreds of dollars in just a couple of weeks. But over the course of several years or decades, gold tends to appreciate at a slow but steady pace. 

Is it risky to invest in gold? All investments come with inherent risk, but gold is far riskier in the short term than it is as a long term investment. If you pair gold’s short term volatility with the tax implications of short term capital gains on gold, you should get a pretty good idea of why it is best to invest in gold for the long haul. 

Unpredictability 

Compared to traditional stocks, gold can also be unpredictable. Gold is a non-correlated asset, which means that traditional key indicators are not usually effective tools to predict how gold prices will move. In fact, gold sometimes moves counter to the performance of the traditional stock market. Gold is often more expensive during times of economic crisis or geopolitical instability. 

Since gold prices are dependent on a number of different factors and can run opposite to the performance of traditional stocks, gold values can be tough to predict. This risk of investing in gold is easy to mitigate for well-researched investors, though. 

How to Forecast the Price of Gold 

Gold prices are difficult to predict, but not impossible. Concrete geopolitical and economic indicators like interest rates and global conflict can directly influence gold prices. This year, two major news developments impacted the spot price of gold. Easing Iran-Israel tensions caused gold prices to dip last month, and rumors of interest rate cuts continue to drive gold’s record-breaking year. 

It can be risky to invest in gold because of the metal’s unpredictability. By employing a long-term time horizon and keeping an eye on key indicators, investors can safely put their money into the world’s oldest safe haven investment. 

Premiums, Storage, and Maintenance Costs

Hidden premium, storage, and maintenance costs constitute one of the main risks of investing in gold. Unlike stocks, gold comes with an additional fee over its risk called a “premium.” To complicate matters even more, investors must consider storage and maintenance costs to determine the total price of investing in gold. These factors don’t necessarily make gold a bad investment, but they help to illustrate how different gold is from more traditional assets. 

2024 1 oz American Gold Eagle Coin
2024 1 oz American Gold Eagle Coin – A Classic

Through careful research, investors can mitigate storage and maintenance costs in order to minimize the financial risk of investing in gold. Premiums vary from product to product, but some gold items come with lower premiums over spot price than others. Researching the right product can help you cut down on costs when investing in gold. 

Defining Gold’s Volatility 

Volatility is a method used to represent how likely an asset is to quickly lose or gain value. Highly volatile investments can skyrocket in value within just a few days – and they can crash just as quickly. Since gold has intrinsic value, it is impossible for gold to ever become completely worthless. However, gold is still volatile in the short term and far more consistent over a long time horizon. 

Short Vs. Long Term Volatility 

Time horizon refers to how long someone plans to hold a given investment before selling. The time horizon for your investment assets should depend on a few factors. In particular, expect your age, risk tolerance, and investment objectives to play roles in the time horizon you should target for your next investment. 

For gold, the ideal time horizon is far in the future. Gold’s volatility in the short term makes it a poor investment for day traders. But for collectors who plan to hold onto their portfolio for a long time, gold is an excellent choice. To illustrate gold’s short vs. long term volatility, let’s take a look at gold’s yearly highs vs. lows since 1969. 

Is it Risky to Invest in Gold? | 2024 Gold Volatility Analysis
Gold Volatility – Yearly Highs Vs. Lows (1969-2024)

As you can see, some years are highly volatile for gold. The metal’s volatility cools down on a much longer time horizon, though. Someone who bought and sold gold within a year during 1980, for example, would have either lost or made a lot of money. If the same investor bought and held onto their gold for 20 years starting in 1980, they’d see a slow burn of steady gains. 

Is Gold a Safe Investment? 

Is it risky to invest in gold? Gold is a risky investment in the short term due to its volatility. In the long term, though, gold tends to appreciate at a slow and steady pace. In other words, gold is very safe as an investment if you’re willing to hold onto your metal for a long period of time. It is also important to realize the role gold plays in portfolio diversification. Because of gold’s consistent long-term appreciation, it can function as an excellent counterweight to riskier investments with more short term time horizons. 

Is Gold a Good Investment? 

Though gold might not be the risk-free investment some analysts believe it to be, gold is a great option for most investors. Gold does not have a place in every portfolio, but the vast majority of investment portfolios can benefit from the diversification benefits afforded by pure gold bullion. 

2024 1 oz Canadian Gold Maple Leaf Coin
Canadian Gold Coins are One of Many Ways to Invest in Gold

Factors to Consider

Three factors can help investors decide whether or not gold is a good investment for them: risk tolerance, investment time horizon, and investor age. Gold’s risks make it an ideal choice for investors with low risk tolerance, a long time horizon, and advanced age. Even if you do not fall into these categories, gold can be combined with other, riskier investments to create a properly diversified portfolio. 

Risk Tolerance 

Risk tolerance is one of the most important concepts in investment management. If you have a high risk tolerance, you are willing to take substantial risk when investing in new commodities and assets. Gold is ideal for investors with a low risk tolerance and a long investment time horizon. Investors can also use gold’s minimal long term risk as a counterbalance to riskier investments, like cryptocurrency. 

Investment Time Horizon 

Gold is best for investors with a long time horizon. In the short term, gold prices can shift drastically. Capital gains taxes can also be devastating for short term gold investors, so it’s best to consider gold an investment for the long haul. The earlier you’re able to start buying gold, the better your portfolio is likely to perform over the next few years – or decades. 

Investor Age

Around 57% of the gold buying population is over the age of 40. This makes sense, considering gold’s reputation as a low risk investment. As we age, it is generally recommended to decrease the risk profile of our portfolios. The last thing any investor wants is to have one of their assets collapse in value as they near retirement. 

Because gold’s risk profile is lower than most other investments and it cannot collapse in value entirely, it is ideal for investors who are older. Old investors are not the only class of investor who can benefit from buying gold, though. The low long-term investing risk of gold makes it an ideal candidate for diversifying younger portfolios. 

Final Thoughts: Is Gold Risky or Safe? 

Gold is risky in the short term and safer in the long term. Gold’s unpredictability and short term volatility make it difficult to forecast for short-term swing traders. But for investors who are truly in it for the long haul, gold plays a vital role in portfolio diversification and has won its reputation as one of the safest investments on the market. 

You might also be interested in: 

About The Author

Michael Roets is a writer and journalist for Hero Bullion. His work explores precious metals news, guides, and commentary.