Risk of gold derivatives

The potential reward and the risk of gold derivatives come from the same reason. These investments can be highly leveraged. When the price of gold moves in the direction the investor in gold derivatives hopes there can be substantial profits. When the gold market moves in the contrary direction the investor may see his or her investment capital evaporate.

The point of owning physical gold is that it is not a paper investment. Physical gold investment is used to hedge risk of the stock market and the risk of persistent devaluation of the national, paper, currency. Much of the reason for the severity of the recent stock market collapse was, in fact, that many were so heavily invested in various derivatives.

When the value of the underlying gold, falls, owners of gold derivative investments can see the value of their investments decrease rapidly. Traders in gold futures could see their margin be exceeded leaving them with the choice of adding money at a margin call and staying with a sinking investment or losing their investment capital. In cases where there is a rapid drop in prices investors in some forms of derivatives often find no buyers for their contracts and can be financially ruined in an afternoon.

This sort of bleak prospect is why many investors buy debt-free, physical gold. Gold quadrupled in price over the last decade. Gold also went up and down along the way. Those with physical gold never saw their wealth disappear and, with time, profited very well from the rise of gold prices. Owning physical gold protects the investor from ten or twenty percent yearly fluctuations in the gold market. The risk of gold derivatives is that a twenty percent chance in price may be disastrous.

Another concern in derivatives such as gold funds is unallocated storage. If the investor has gold allocated to him or her backing up his investment there is a level of security. It could be difficult to recover on assets of if a fund has financial problems when gold is not allocated to individual investors.

For sound advice and honest information on physical gold investments contact one of our gold dealers at 1-800-300-0715.