Gold ETFs are subject to market risk
Gold ETFs are subject to market risk. Market risk is the risk that the price of a security will fluctuate over time. Gold ETFs are also subject to capital gains taxes. When you sell a gold ETF, you may have to pay capital gains taxes on any profits.
Gold ETFs are subject to counterparty risk
Gold ETFs are subject to counterparty risk. For example, if you invest in an ETF that tracks the price of gold and the financial institution that issued the ETF goes bankrupt, you may lose all or part of your investment. The value of your investment in a gold ETF depends on the creditworthiness of the financial institution that issued the ETF.
Gold ETFs are subject to liquidity risk
During periods of high market volatility or panic selling, finding buyers for your gold ETF shares may take work. For example, amid the 2008 financial crisis, the SPDR Gold Trust (GLD) traded at a discount to its net asset value (NAV) – in other words, it was hard to find buyers willing to pay full price for the ETF.
This liquidity risk is one reason investors choose to hold physical gold instead of gold ETFs. Physical gold can be sold more easily in market turmoil since buyers will always be willing to pay cash for it.
Gold ETFs are subject to storage risk
Gold ETFs are subject to storage risk. This is the risk that the gold will be lost or stolen while it is being stored. One way to mitigate this risk is to invest in a gold ETF backed by physical gold, which means that the gold will be stored on your behalf by the fund manager. However, this does not eliminate storage risk, as there is still the risk that the fund manager may lose or misplace the gold.