CEO and Founder ofÂ Regal Assets, an international alternative assets firm with offices in Beverly Hills, Toronto, London and Dubai.
Homeowners insure their homes against natural disasters. Drivers insure their cars against collisions and damages. Why, then, don’t more investors insure their retirement savings against a market crash?Â
The fact is, people reduce risk in many aspects of their lives. Something as important as your life’s savings deserves the same treatment. One way to help protect your retirement savings is by including in your portfolio precious metals investments, which are capable of hedging against inflation and market crashes. (Full disclosure: I hold investments in physical gold and silver bullion.)
Gold and silver generally hold strong when traditional asset values go south. But that’s not always the case. There are risks to investing in precious metals that often go overlooked when investors seek exposure in gold and silver. Below, I’ve touched on a few of the key risk factors that can’t be ignored if you want to get started with precious metals investing.
Risk 1: Opportunity Cost
Gold, silver and platinum-group metals come with their share of tradeoffs. First among them is opportunity cost.Â
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Every dollar invested in precious metals could be invested in passive instruments that earn interest or pay dividends. That doesn’t mean they’re not worthwhile investments, but it does mean you might want to consider offsetting your allocations in precious metals with dividend-paying stocks to keep your portfolio balanced.
Risk 2: Tax Risk
If you aren’t discerning about which precious metals vendor to use, you might end up violating IRS storage regulations regarding trusted third parties. Since the IRS classifies precious metals bullion and most precious metals exchange-traded funds (ETFs) as “collectibles,” these assets are subject to a maximum long-term capital gains rate of 28%.
You can defer capital gains on precious metals investments by including them in a 401(k) plan or an individual retirement account (IRA). However, they must be stored and vaulted by trusted third-party custodians to be eligible for inclusion in a tax-advantaged retirement savings account.Â
Risk 3: Liquidity Risk
Gold and silver metals aren’t legal tender everywhere. Unlike a stock, vaulted precious metals take time to withdraw, inspect and sell on the open market. This process can take days or weeks unlike traditional paper assets.Â
You can minimize liquidity risk by choosing a precious metals supplier that offers online storage accounts for instant liquidity. With an online storage account, your funds can generally be dispersed one to three days after the transaction is settled.Â
Risk 4: Storage Risk
When you store precious metals in a safe deposit box or bank vault, you’re exposing yourself to the risk of theft, loss or having your assets tied up in the banking system. To minimize storage risk, make sure your gold or silver custodian offers full FDIC insurance on metals kept in their possession and that the vendor utilizes a third-party nonbank trustee approved by the IRS. If you do decide to stash your precious metals at home, tell as few people as possible and insure your assets privately.Â
Risk 5: Counterparty Risk
Unless you invest in physical gold and silver, you’re exposing yourself to counterparty risk. In other words, the risk that the other party of a contract won’t honor their contractual obligations.Â
When you invest in precious metals ETFs or mining stocks â€” two popular ways of investing in precious metals without actually owning bullion â€” you enter a contract with a vendor or brokerage. While this type of exposure to precious metals has its own advantages, such as not needing to worry about storage, it comes with the risk of default. As much as gold stocks and ETFs are your assets, they’re somebody else’s liability, which means you can lose them if the other parties fail.
Gold and silver bullion, on the other hand, have no counterparty risk. In fact, physical precious metals are one of the few asset types that don’t carry this particular type of risk.
Minimizing Risk While Investing In Precious Metals
If you’re going to invest in precious metals, there are steps you can take to minimize risk and walk away with a more stable and shock-resistant portfolio. It starts with investing in physical bullion held by insured, IRS-approved third-party custodians.Â
Although physical gold and silver won’t pay you a dividend, they can give you peace of mind and a more robust portfolio designed to retain more of its value during economic downturns.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.