3 Disadvantages to Buying Gold

by Investing School on February 8, 2010

Gold is a solid investment product, but not everything is rosy when you make that sort of decision. Like with most things in the financial world, there are some disadvantages that need to be considered, as well. The American economy is one built on trade offs and this is especially true for investment ideas.

If there is something positive about it that makes people want to purchase gold in droves, then there are going to be some negatives that make you think twice, too. These things are real concerns, though most people agree that the advantages outweigh the negatives and they purchase gold anyway. Three disadvantages are listed below.

1. Massive growth potential is curtailed right now

Gold has seen a near meteoric rise in value over the last decade, but that has mostly been exhausted. People who make this investment now are doing it because they like the privacy of gold investment and they enjoy having something tangible in their portfolio. These people are more trying to diversify and make sure that they have covered all bases than anything else. What that means to potential investors is that gold has many strengths, but massive growth potential is not one of them. For people seeking this type of investment, it is better to look at small cap stocks or some of the high-yield funds out there.

The problem for gold in growth terms is that the market itself is highly evaluated. Everyone knows the value of investing in gold and that takes away a lot of the opportunity. In other markets, there are opportunities and sectors where people still have not discovered the potential that exists. The value of gold is likely to rise slowly in the coming years, but you will not get rich by investing in coins, bullion, or some of the biggest gold funds out there.

2. A lack of constant revenue from dividends

With many investment types, like real estate or stocks, investors can reap the rewards of their investment without having to sell their asset. This happens with dividends, which comes each month from stocks and come in the form of rent payments when you own a real estate property. The nice thing about dividend earnings is that you can take the money from those items and reinvest right back in the investment. Real estate owners take their money and put it back into the property, adding value. Stock investors typically just reinvest their dividends automatically in order to purchase more stock.

Gold does not offer any dividends. When you purchase coins, bars, or bullion, you own those items and the value is derived when you sell them to someone else. This is a downside that investors have to consider, because many of them depend upon the residuals to power further investments. Though gold provides a nice, steady, stable investment type, it does not offer this extra “perk” that is often seen a staple of the financial world.

3. Must provide physical storage space for gold

One of the things that many gold investors cite as a positive can be considered a negative by others. People who buy gold typically like to have it in hand. They do this because the entire point of gold is to have something tangible in case the system itself fails miserably. Though investors can have certificates to account for their gold ownership, this defeats the purpose of investing in gold in the first place. With that in mind, if you own actual, physical gold, you have to have somewhere safe to store it. Because gold coins are small and can be easily stolen, you cannot just leave them laying around. You have to have space in a safe and if you don’t have that, then it can be dangerous to keep gold around your home.

Most people like to have the bulk of their assets in something that is protected. This is why banks exist and it’s why people choose to invest their dollars with those banks. Keeping money and gold around the house can make many people feel uneasy, because they would stand to lose a significant amount of their investment in the case of a home invasion or robbery.

These things are disadvantages, but they can be overcome by gold investors. Most people know these things and they invest anyway, since gold provides so many other positives that are desirable in the current economy. Knowing all of the advantages and disadvantages, it is easy to assess gold’s place in a solid portfolio.

About the Author: Shaun Connell is obsessed with collecting coins — especially golden ones. To learn more, browse his gold coins blog. If you’re new to investing in gold, check out How to Buy Gold Coins.

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{ 2 comments… read them below or add one }

mike February 10, 2010 at 7:34 am

You completely forgot to mention that gold is pretty to look at and that alone is enough to negate these disadvantages!

But seriously, I am amazed at the rationale for many people’s zealous obsession with gold. When I tell them it’s probably over bought and has limited upside potential at the moment, I am greeted with scorn.

I am told that it’s a beautiful precious metal and, as such, has intrinsic value and that when the world currencies come crashing down and the world is in Armageddon it will be the only currency worth anything.

I tell them that I never said gold had no value, simply that it was overvalued at today’s levels. And as far as the currency of the post-apocalypse goes, you’d be much better off investing in guns and ammunition. 😉


Gold Investor June 2, 2011 at 8:41 am

You always need a good reason to do something, especially when you are thinking about where to put your hard earned money. Investing in precious metals is great and it has a lot of advantages compared to other assets.


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