Be Wary of the Gold Market

Be Wary of the Gold Market

The television is awash with advertisements for buying gold during difficult times in the market. Beware as this is one of the biggest traps. First, gold does go down in price. It is not, as they advertise, “perpetually steady and secure.” Second, gold has not done always as well as stocks during a long period. But the biggest headache is trying to cash in gains if you have invested in precious metals.

The sales process is not as transparent as advertised. Even if the price of gold has risen, it is of limited use if you can’t derive an income from gold or even sell gold at the current advertised price. Many dealers will only buy back their own coins and at a lower price than advertised. Dealers buy and sell at a different price known as a “spread.” This spread can vary for less tradable coins and it can be decreased or increased during times of falling markets. If you have bought bullion in the form of bars or ingots and paid the dealer to store it, it is usually only possible to sell it back through the same dealership. There are also additional fees when selling gold such as a secure and traceable postage service and the cost of insuring the coins or bars yourself.

When you invest in a numismatic coin, you take a huge risk because you move deeply into a hole as soon as you purchase the coin. You are likely to lose anywhere between 30 to 50% of your investment capital. A very good suggestion is that unless you are an expert in numismatic coins, avoid them!

Most of the firms sponsoring advertisements for gold do so at grossly inflated prices. Gold prices can be inflated by as much as 30 to 70%. Fear tactics can also be part of the advertisement as promotors use the skyrocketing National Debt or stock market fluctuations as a reason to protect your money.

My suggestion is that buying gold is not for the average investor and most people buy gold without being aware of many of the downsides.

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Written by
Donald Wittmer