Wednesday, June 17, 2009
Political Risk Of Gold Investing
One of the realities of investing is that political unrest or upheaval can pose a risk to your investment. This is true with a variety of investments, including gold investment. This can happen to your investments in foreign countries or at home.
The government and lawmakers can basically do whatever they want, and can change laws in a way that adversely affects your investment. One of the best examples of this in the US is the Gold Reserve Act passed by Franklin D.Roosevelt in 1934, which made private ownership of gold illegal. People were compensated for their gold, but then the dollar was immediately devalued rendering their investments less valuable.
Some people try to avoid this kind of scenario by diversifying their gold investments and having gold stored in various places around the world. This is probably a smart idea. It is best to understand the stability of the country where your investment lies, though. I would much rather have an allocated storage account in Switzerland or Australia than somewhere in South America or Africa, for example.
These political risks also affect companies, which are sometimes nationalized by governments or have their assets expropriated. If you own stocks in a gold mining company, it is important to be aware of these risks. Some countries are obviously risky, such as Venezuela where nationalization seems to be policy. Other countries may seem stable and pro-free market, but the reality could change with a new election or a military coup. Mexico, for example, seems like a safe bet at the moment but there is certainly no guarantee that it will be in the future.
Share prices often drop due to general instability that is not even related to nationalization. Instability inhibits free market activity, so even seemingly unrelated events can cause stock movements. Understanding the political situation
of the country you are invested in will help you navigate all the fluctuations and understand your investment's performance, and take action to minimize the risks when necessary.