You don’t often hear the word "hazard" associated with investing in precious metals, but you should know that dabbling in gold and silver can be risky. True, gold and silver are both great hedges against inflation -- particularly if you own bars, jewelry and coins rather than paper futures. There are myriad benefits associated with building your wealth on bedrocks of gold and silver, but it’s wise to be prepared for the risks and hazards you’ll encounter, too.
If you want to invest in the most valuable form of gold, put your money into gold bars -- the bigger, the better. Buy large units without incurring costs associated with processing the gold rather than coins and jewelry. That stated, liquidating gold bars could be problematic if you’re pressed for fast cash. If you’re seeking liquidity, invest in coins; while there’s little chance the metal will lose value dramatically, all it takes is one revolution to put the coin into a precarious and hazardous state of affairs.
When the Federal Reserve announced its intention, in June 2012, to keep backing Operation Twist -- a policy of swapping short-term Treasury bonds for instruments with longer maturity rates -- silver prices plunged 4 percent. A strong industrial demand for silver reported by the Silver Institute in 2011 still makes this precious metal a good bet for profit taking. Problems in Asia, Europe and weak U.S. manufacturing can all affect the value of silver because it’s tied to monetary policies, says Wealth Management LLC’s chief investment officer, Jeffrey Sica.
Supply and demand still drive gold and silver prices, but macroeconomic trends flowing from Europe’s economic woes can top the list of hazards to which both metals will be exposed if countries like Portugal, Greece, Ireland and Spain don’t recover in a timely manner. Both precious metals act as superconductors, thus industrial applications of gold and silver can help boost market demand. Silver, especially, is likely to retain more of its value in an industrial setting than gold since it’s cheaper to buy.
It’s no big secret. Financial institutions, governments and markets openly manipulate the prices of gold and silver, so short-term investments in either precious metal could dramatically affect the amount of margin you make if you seek quick profits. History has shown that long-term gold and silver investments, on the other hand, are more likely to survive the ups and downs of a volatile market, so you can cut your risk by committing to either market for the long haul.
Purchase gold or silver paper, and your hazards could multiply big time. Even if you purchase or rent safety deposit boxes, safes and the like, paper futures can go the way of bank deposits during the Great Depression if global financial markets fail, leaving you with -- well, assets that aren’t worth the paper on which they’re printed. Avoid this hazard by sticking to the metals themselves, even if you’re tempted by graphs in prospectuses showing spectacular gains and clever brokers promising huge yields because they’re adroit at dangling carrots.
Few hazards are as frightening as becoming a target of criminals. The potential for being robbed -- despite state-of-the-art security measures -- increases if you house gold and/or silver on premises. An innocent, overheard conversation, in which you mention the bullion, gold bars, gold Swiss Francs, Krugerrands or stockpiled silver in your home or business might be all it takes to make you a target for theft. Even transport by a reputable service can be highjacked, so keep this in mind if you decide to dive into either market.
You see the signs every day: “We want your gold and silver.” Talk about hazardous: even appraisers staffing high-end jewelry shops aren’t necessarily looking out for your bottom line. Being conned into selling your gold or silver for pennies on the dollar can leave you high, dry and without recourse. Minimize hazards by asking appraisers for credentials and get additional quotes. Ignore -- or at least check out -- infomercials that seem too good to be true and telemarketers pitching “gold” or “silver” commemorative coins that have next to no value.
Gold or silver jewelry bought for investment can become hazardous assets if fashion whims alter the worth of either. Liquidating, for example, Art Deco, Victorian or Rococo jewelry may result in less cash if everyone is wearing Nouveau Modern bracelets, rings and necklaces and nobody wants your period pieces. You might have to melt down beautifully designed jewelry if you originally bought for investment and need cash fast. Of course, everything old is new again, so do what you can to hold onto your jewelry. Styles are sure to return if you wait long enough!
Based in Chicago, Gail Cohen has been a professional writer for more than 30 years. She has authored and co-authored 14 books and penned hundreds of articles in consumer and trade publications, including the Illinois-based "Daily Herald" newspaper. Her newest book, "The Christmas Quilt," was published in December 2011.