Liquidity is a valued benefit of holding physical investmentsgold. But if you're not familiar with the term "liquidity," you might be a little confused. Gold itself is solid, but gold is also considered a liquid asset. How can it be both solid and liquid?
What is a liquid asset?
A liquid asset is any asset that you can quickly convert into cash.
Billionaire and Oaktree Capital Management co-founder Howard Marks takes this definition one step further:rowthat “true liquidity is how easily you can sell an asset – and at what price – if you are forced to do so.”
Cash is the ultimate liquid asset,Forbes to note.Other liquid assets include:
- treasury bills,
- government bonds,
- Certificates of Deposit (CDs),
- Shares,
- bonds,
- Investment funds, and
- Precious metals.
So what aspect of gold makes it a liquid asset? According to Forbes, "In some states, certain gold and silver coins can be used as currency, meaning it is hypothetically as liquid as cash. Physical precious metals can also be exchanged for cash through dealers."
If you want to liquidate some of your gold, you'll probably want to work with a bullion distributor to sell it rather than trying to use your gold as currency.
“A percentage of cash reduces the overall risk of a portfolio because it acts as an asset class that holds value,” says personal finance website Sapling.explains.
Advantages of liquid assets
What is the appeal of liquid assets and how much of your portfolio should be kept 'liquid'? It's all about diversification and risk reduction.
According to Sapling, “While liquid assets rarely yield anything other than low interest rates, they typically compensate by retaining tangible value and availability.”
Should you experience a tragedy or unfortunate financial event, liquid assets can act as a safety net. They can be easily converted into cash, keeping you flexible and financially stable.
The quality of gold as a liquid asset
In a recent onerapportthe World Gold Council examines the appeal of gold as a liquid asset for consumers.
The report explains thisalternative assets– a classification that includes precious metals – is likely to be both a significant part of a portfolio and often less liquid than exchange-traded assets such as stocks and bonds. As a result, portfolio liquidity may decrease as the allocation to alternative assets increases. However, this is not the case with all alternative assets.
"Gold is an established asset for portfolio diversification and hedging and has delivered positive returns over the long term. Gold's liquidity quality further strengthens the case for an allocation to gold as portfolio composition changes," the report said .
Why some assets are more liquid than others
When we look at the variety of liquid assets, some stand out as more liquid than others.
Cash is generally considered the cream of the crop when it comes to liquid assets. But when you compare gold to other liquid assets, the precious metal shines. For example:
- If you withdraw money from a CD before the agreed time, you risk a financial penalty. In contrast, the liquidation of physical gold does not result in similar penalties.
- If you have a 401(k) or aIRA, you are probably aware that in many circ*mstances you will face heavy tax penalties if you withdraw money from these accounts before you need to. The same does not apply if you liquidate gold.
It comes down to:Gold can be an excellent choice for those looking to diversify their portfolios while maintaining high levels of liquidity.
World Gold Councilemphasizesthat gold is a liquid asset that has no credit risk and has outperformed sovereign currencies. Additionally, gold can help offset undervalued or mispriced liquid investments in your portfolio.
We sell some of the most popular in historygold and silver coins, all backed by the U.S. government for their precious metal content and purity. Call US Money Reserve today to secure more of these liquid diversifiers.
